SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10/A
Amendment No. 2 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.
(to be renamed Quest Diagnostics Incorporated)
(Exact name of registrant as specified in its charter)
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)
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:
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
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 19, 1996, of Corning
Incorporated. Selected pages of the Information Statement which are related
to the Registrant and the securities being registered hereunder (the "Quest
Diagnostics 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 Quest Diagnostics," "Business of Quest
Diagnostics" and "The Relationship Among Corning, Quest Diagnostics and
Covance After the Distributions" of the Quest Diagnostics 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 Quest Diagnostics," "Pro Forma Financial Information of
Quest Diagnostics," "Selected Historical Financial Data of Quest Diagnostics"
and "Management's Discussion and Analysis of Financial Condition and Results
of Operations of Quest Diagnostics" of the Quest Diagnostics 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 Quest Diagnostics--Properties" of the Quest Diagnostics
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 Quest
Diagnostics" of the Quest Diagnostics 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 Quest Diagnostics" of the Quest Diagnostics 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 Quest Diagnostics" of the Quest Diagnostics 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 Quest Diagnostics" of the Quest Diagnostics 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 Quest Diagnostics--Government Investigations and Related
Claims" and "--Legal Proceedings" of the Quest Diagnostics Information and
such sections are incorporated herein by reference.
2
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Item 9. Market Price of and Dividends on the Registrant's Common Equity and
Related Stockholder Matters
The information required by this item is contained under the sections
"Risk Factors--Risks Relating to Quest Diagnostics--Absence of Dividends;
Restrictions Imposed on Dividends by the Indenture and the Quest Diagnostics
Credit Facility," "Risk Factors--Risks Relating to Quest Diagnostics--Absence
of Prior Public Market," "Risk Factors--Risks Relating to Quest
Diagnostics--Potential Volatility of Stock Price," "Description of Quest
Diagnostics Capital Stock--Quest Diagnostics Common Stock--Dividend Policy,"
"--Quest Diagnostics Common Stock--Listing and Trading" and "Management of
Quest Diagnostics" of the Quest Diagnostics 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 Quest Diagnostics Capital Stock" and "Antitakeover Effects of
Certain Provisions of the Quest Diagnostics Certificate of Incorporation and
By-Laws" of the Quest Diagnostics 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 Quest
Diagnostics" of the Quest Diagnostics 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 Quest Diagnostics," "Pro Forma Financial Information of
Quest Diagnostics," "Selected Historical Financial Data of Quest
Diagnostics," "Management's Discussion and Analysis of Financial Condition
and Results of Operations of Quest Diagnostics" and "Financial Statements of
Corning Clinical Laboratories Inc." of the Quest Diagnostics 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 Quest Diagnostics Incorporated" of the Quest
Diagnostics Information and such section is incorporated herein by reference.
(b) Exhibits
3
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<TABLE>
<CAPTION>
<S> <C>
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 Harris Trust
and Savings Bank, dated December 31, 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. Employees 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 Laboratories Inc. Directors' Restricted Stock Plan
10.12* Form of Employment Agreement between Kenneth W. Freeman and Corning Clinical
Laboratories Inc.
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; 28-107; F-1-F-28)
</TABLE>
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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 19, 1996 By: /s/ Kenneth W. Freeman
Kenneth W. Freeman, President
and Chief Executive Officer
5
S&S DRAFT
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TRANSACTION AGREEMENT
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dated as of __________, 1996
by and among
CORNING INCORPORATED,
CORNING LIFE SCIENCES INC.,
CORNING CLINICAL LABORATORIES INC.
and
COVANCE INC.
<PAGE>
TABLE OF CONTENTS
Page
ARTICLE I
DEFINITIONS
SECTION 1.01. General................................................. 2
SECTION 1.02. References; Interpretation.............................. 7
ARTICLE II
DISTRIBUTIONS AND OTHER TRANSACTIONS; CERTAIN COVENANTS
SECTION 2.01. Conditions Precedent.................................... 7
SECTION 2.02. The Distributions and Other Transactions................ 8
SECTION 2.03. Treatment of Fractional Shares.......................... 12
SECTION 2.04. Certain Intercompany Financial and Other Arrangements... 12
SECTION 2.05. Certain Indebtedness and Capital Structure.............. 13
SECTION 2.06. Further Assurances...................................... 13
SECTION 2.07. No Representations or Warranties........................ 13
SECTION 2.08. Guarantees.............................................. 13
SECTION 2.09. Certain Transactions.................................... 14
SECTION 2.10. Insurance............................................... 14
ARTICLE III
INDEMNIFICATION
SECTION 3.01. Indemnification by Corning.............................. 14
SECTION 3.02. Indemnification by CCL.................................. 19
SECTION 3.03. Indemnification by Covance.............................. 19
SECTION 3.04. Adjustments for Indemnification Obligations............. 19
SECTION 3.05. Procedures for Indemnification - Third Party Claims..... 19
SECTION 3.06. Survival of Indemnities................................. 21
SECTION 3.07. Payments................................................ 21
ARTICLE IV
ACCESS TO INFORMATION
SECTION 4.01. Provision of Corporate Records.......................... 21
SECTION 4.02. Access to Information................................... 22
SECTION 4.03. Reimbursement........................................... 22
SECTION 4.04. Confidentiality......................................... 22
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ii
ARTICLE V
DISPUTE RESOLUTION
SECTION 5.01. Good Faith Negotiations................................. 23
SECTION 5.02. Procedure............................................... 23
ARTICLE VI
GENERAL PROVISIONS
SECTION 6.01. Expenses................................................ 24
SECTION 6.02. Notices................................................. 24
SECTION 6.03. Complete Agreement; Construction........................ 25
SECTION 6.04. Ancillary Agreements.................................... 25
SECTION 6.05. Counterparts............................................ 25
SECTION 6.06. Survival of Agreements.................................. 25
SECTION 6.07. Waiver.................................................. 25
SECTION 6.08. Amendments.............................................. 26
SECTION 6.09. Assignment.............................................. 26
SECTION 6.10. Successors and Assigns.................................. 26
SECTION 6.11. Termination............................................. 26
SECTION 6.12. Subsidiaries............................................ 26
SECTION 6.13. Third Party Beneficiaries............................... 26
SECTION 6.14. Headings................................................ 27
SECTION 6.15. Specific Performance.................................... 27
SECTION 6.16. Governing Law........................................... 27
SECTION 6.17. Public Announcements.................................... 27
SECTION 6.18. Severability............................................ 27
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iii
SCHEDULES
Schedule 2.08 Guarantees
EXHIBITS
Exhibit A Forms of Contribution Agreement, Liabilities Undertaking,
Bill of Sale and Assignment and Instrument of Assignment
and Assumption
Exhibit B Form of Plan of Liquidation and Dissolution of CLSI
Exhibit C Certificate of Ownership and Merger and Certificate of Merger,
with attached Agreement and Plan of Merger and Complete
Liquidation (CBI into Covance)
Exhibit D Form of Insurance Agreement
Exhibit E Form of Services Agreement
Exhibit F Form of Spin-off Tax Indemnification Agreements
Exhibit G Form of Tax Sharing Agreement
Exhibit H Forms of Amended Charter and By-Laws of CCL
Exhibit I Forms of Amended Charter and By-Laws of Covance
<PAGE>
TRANSACTION AGREEMENT dated as of November __, 1996, by and
among CORNING INCORPORATED, a New York corporation ("Corning"), CORNING LIFE
SCIENCES INC., a Delaware corporation ("CLSI"), CORNING CLINICAL LABORATORIES
INC., a Delaware corporation ("CCL"), and COVANCE INC., a Delaware corporation
("Covance").
W I T N E S S E T H:
WHEREAS, Corning is the common parent of a consolidated group
which includes CLSI, CCL and Covance;
WHEREAS, the Board of Directors of Corning has determined that
it is appropriate and desirable to distribute to the holders of shares of common
stock, par value $0.50 per share, of Corning (the "Corning Common Shares") all
the outstanding shares of common stock of CCL (the "CCL Common Stock") and,
immediately following such distribution, for CCL to distribute to the holders of
CCL Common Stock all the outstanding shares of common stock of Covance (the
"Covance Common Stock");
WHEREAS, each of Corning, CCL and Covance has determined that
it is necessary and desirable to set forth the principal corporate transactions
required to effect such distribution and to set forth other agreements that will
govern certain other matters following the distribution;
WHEREAS, each of Corning, CCL and Covance has determined that
it is necessary and desirable to allocate and assign responsibility for those
liabilities in respect of the activities of the businesses of such entities on
the Distribution Date (as defined herein) and those liabilities in respect of
other businesses and activities of Corning and its former subsidiaries and other
matters;
WHEREAS, Corning currently owns 100% of the stock of CLSI;
WHEREAS, CLSI currently owns 100% of the stock of CCL;
WHEREAS, CCL currently owns 100% of the stock of Covance;
WHEREAS, Covance currently owns 100% of the stock of Corning
Besselaar, Inc. ("CBI"); and
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2
WHEREAS, prior to the Distribution Date, CLSI will contribute
to CCL substantially all of its assets other than the stock of CCL in exchange
for additional shares of CCL Common Stock and shares of nonvoting preferred
stock of CCL and Corning will cause CLSI to dissolve and CBI to be merged with
and into Covance.
NOW, THEREFORE, in consideration of the mutual agreements,
provisions and covenants contained in this Agreement, the parties hereby agree
as follows:
ARTICLE I
DEFINITIONS
SECTION 1.01. General. As used in this Agreement, the
following terms shall have the following meanings (such meanings to be equally
applicable to both the singular and plural forms of the terms defined):
"Action" shall mean any action, suit, arbitration, inquiry,
proceeding or investigation by or before any court, any governmental or other
regulatory or administrative agency, body or commission or any arbitration
tribunal.
"Affiliate" shall mean, when used with respect to a specified
person, another person that directly, or indirectly through one or more
intermediaries, will control or will be controlled by or will be under common
control with the person specified immediately following the Effective Time.
"Agent" shall have the meaning as defined in Section 2.02(g).
"Agreement Disputes" shall have the meaning as defined in
Section 5.01.
"Ancillary Agreements" shall mean the Insurance Agreement, the
Intellectual Property Agreement, the Services Agreement, the Spin-off Tax
Indemnification Agreements and the Tax Sharing Agreement.
"Assignee" shall have the meaning as defined in Section
2.02(i)(ii).
"CCL" shall mean Corning Clinical Laboratories Inc., a
Delaware corporation.
"CCL Business" shall mean all businesses and operations
conducted by (i) CLSI, MRL Nucor, Inc. and all current and former subsidiaries
of CLSI (other than CORNING Bio Inc., Covance and its Subsidiaries,
Pharmaceutical Laboratory Services, Inc., Quanterra Incorporated, California
Analytical Laboratory, Chemical Research Laboratories,
<PAGE>
3
Inc., Enseco Incorporated, ERCO, Rocky Mountain Analytical Laboratory and
Wadsworth/Alert Laboratories, Inc.), including without limitation CCL (but
excluding in any event the environmental testing business previously conducted
by CCL); and (ii) any business entities acquired or established by or for CCL or
any of its Subsidiaries after the date of this Agreement.
"CCL Indemnitees" shall mean CCL, each Affiliate of CCL, each
of their respective directors and officers and each of the heirs, executors,
successors and assigns of any of the foregoing.
"CCL Liabilities" shall mean, collectively, (i) all the
Liabilities of CCL and its Subsidiaries under this Agreement and any of the
Ancillary Agreements, and (ii) all the Liabilities of the parties hereto or
their respective Subsidiaries (whenever arising whether prior to, at or
following the Effective Time) arising out of or in connection with or otherwise
relating to the management or conduct before or after the Effective Time of the
CCL Business.
"CCL Record Holders" shall mean all holders of CCL Common
Stock as of the Distribution Record Date, provided that the CCL Record Holders
shall be deemed to be determined immediately following the distribution of CCL
Common Stock to all Corning Record Holders.
"CLSI" shall mean Corning Life Sciences Inc., a Delaware
corporation.
"Code" shall mean the Internal Revenue Code of 1986, as
amended, and the Treasury regulations promulgated thereunder, including any
successor legislation.
"Commission" mean the Securities and Exchange Commission.
"Company Policies" shall mean all Policies, current or past,
which are or at any time were maintained by or on behalf of or for the benefit
or protection of Corning or any of its predecessors which relate to the Corning
Business, the CCL Business or the Covance Business, or current or past
directors, officers, employees or agents of any of the foregoing Businesses.
"Corning" shall mean Corning Incorporated, a New York
corporation.
"Corning Business" shall mean (i) all businesses and
operations of Corning and its subsidiaries other than the CCL Business and the
Covance Business and (ii) the environmental testing business previously
conducted by CCL and its Subsidiaries, including California Analytical
Laboratory, Chemical Research Laboratories, Inc., Enseco
<PAGE>
4
Incorporated, ERCO, Quanterra Incorporated, Rocky Mountain Analytical Laboratory
and Wadsworth/Alert Laboratories, Inc.
"Corning Indemnitees" shall mean Corning, each Affiliate of
Corning, each of their respective directors and officers and each of the heirs,
executors, successors and assigns of any of the foregoing.
"Corning Liabilities" shall mean all the Liabilities of
Corning and its Subsidiaries under this Agreement and any of the Ancillary
Agreements, and all the Liabilities of Corning and its subsidiaries that are not
CCL Liabilities or Covance Liabilities including, without limitation, all
Liabilities under any employee benefit plans maintained by Corning and any stock
option employment or consulting agreements to which Corning is a party,
including any such benefit plans or agreements covering or with persons who are
or were employees of CCL or Covance and their respective Subsidiaries.
Notwithstanding the foregoing, the remaining payment obligations under the
Agreement dated June 7, 1995 among Corning, CLSI and Ralph H. Thurman and the
Consulting Agreement dated June 7, 1995 among Corning, CLSI and Ralph H. Thurman
shall be CCL Liabilities and not Corning Liabilities.
"Corning Record Holders" shall mean all holders of record of
Corning Common Shares as of the Distribution Record Date.
"Covance" shall mean Corning Pharmaceutical Services Inc., a
Delaware corporation.
"Covance Business" shall mean all businesses and operations
conducted by (i) all current and former subsidiaries of Covance and by CORNING
Bio Inc. and Pharmaceutical Laboratory Services, Inc. prior to the Effective
Time; and (ii) any business entities acquired or established by or for Covance
or any of its Subsidiaries after the date of this Agreement.
"Covance Indemnitees" shall mean Covance, each Affiliate of
Covance, each of their respective directors and officers and each of the heirs,
executors, successors and assigns of any of the foregoing.
"Covance Liabilities" shall mean, collectively, (i) all the
Liabilities of Covance and its Subsidiaries under this Agreement and any of the
Ancillary Agreements, and (ii) all the Liabilities of the parties hereto or
their respective Subsidiaries (whenever arising whether prior to, at or
following the Effective Time) arising out of or in connection with or otherwise
relating to the management or conduct before or after the Effective Time of the
Covance Business.
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5
"Distribution Date" shall mean December 31, 1996 or such later
date as may hereafter be determined by Corning's Board of Directors as the date
as of which the Distributions shall be effected.
"Distribution Record Date" shall mean December 31, 1996 or
such later date as may hereafter be determined by Corning's Board of Directors
as the record date for the Distributions.
"Distributions" shall mean the two consecutive distributions
in the following order on the Distribution Date to (i) all Corning Record
Holders of the CCL Common Stock owned by Corning and (ii) all CCL Record Holders
of the Covance Common Stock owned by CCL.
"Effective Time" shall mean 11:59 p.m., New York time, on the
Distribution Date.
"Exchange Act" shall mean the Securities and Exchange Act of
1934, as amended.
"Indemnifiable Losses" shall mean any and all losses,
liabilities, claims, damages, demands, costs or expenses (including, without
limitation, reasonable attorneys' fees and any and all reasonable and necessary
out-of-pocket expenses) whatsoever, including any and all losses, liabilities,
claims, damages, demands, costs or expenses reasonably incurred in
investigating, preparing for or defending against any Actions or potential
Actions, provided, however, that such Indemnifiable Losses shall not include
Taxes or other amounts indemnified against under the Spin-off Tax
Indemnification Agreements and the Tax Sharing Agreement.
"Indemnifying Party" shall have the meaning as defined in
Section 3.04.
"Indemnitee" shall have the meaning as defined in Section
3.04.
"Information Statement" shall mean the Information Statement
sent to all the Record Holders in connection with the Distributions, including
any amendment or supplement thereto.
"Insurance Agreement" shall mean the Insurance Agreement among
Corning, CCL and Covance, in substantially the form attached hereto as Exhibit
D.
"Intellectual Property Agreement" shall mean the Intellectual
Property and Licensing Agreement among Corning, CCL and Covance, in a form to be
agreed upon by the parties to this Agreement.
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6
"Liabilities" shall mean any and all debts, liabilities and
obligations, absolute or contingent, matured or unmatured, liquidated or
unliquidated, accrued or unaccrued, known or unknown, whenever arising,
including, without limitation, those debts, liabilities and obligations arising
under any law, rule, regulation, Action, threatened Action, order or consent
decree of any court, any governmental or other regulatory or administrative
agency or commission or any award of any arbitration tribunal, and those arising
under any contract, guarantee, commitment or undertaking.
"person" shall mean any natural person, corporation, business
trust, joint venture, association, company, partnership or government, or any
agency or political subdivision thereof.
"Policies" shall mean insurance policies and insurance
contracts of any kind (other than life and benefits policies or contracts),
including, without limitation, primary, excess and umbrella policies,
comprehensive general liability policies, fiduciary liability, automobile,
aircraft, property and casualty, workers' compensation and employee dishonesty
insurance policies, bonds and self-insurance and captive insurance company
arrangements, together with the rights, benefits and privileges thereunder.
"Record Holders" shall mean the CCL Record Holders and the
Corning Record Holders, collectively.
"Records" shall have the meaning as defined in Section 4.01.
"Registration Statements" shall mean the registration
statements on Form 10 in respect of the CCL Common Stock and the Covance Common
Stock required to be filed with the Commission pursuant to Rule 12(b) under the
Exchange Act.
"Rules" shall have the meaning as defined in Section 5.02.
"Services Agreement" shall mean the Services Agreement among
Corning, CCL and Covance, in substantially the form attached hereto as Exhibit
E.
"Spin-off Tax Indemnification Agreement" shall mean each of
the Spin-off Tax Indemnification Agreements between or among two or more of
Corning, CCL and Covance, in substantially the form attached hereto as Exhibit
F.
"Subsidiary" shall mean any corporation, partnership or other
entity of which another entity (i) will own, immediately following the Effective
Time, directly or indirectly, ownership interests sufficient to elect a majority
of the board of directors (or persons performing similar functions)
(irrespective of whether at the time any other class or classes of ownership
interests of such corporation, partnership or other entity shall or might have
<PAGE>
7
such voting power upon the occurrence of any contingency) or (ii) will be,
immediately following the Effective Time, a general partner or an entity
performing similar functions; provided that Bio Imaging Technologies Inc. will
be deemed to be a Subsidiary of Covance and, National Imaging Associates will be
deemed to be a Subsidiary of CCL, in each case, for all purposes of this
Agreement.
"Tax" shall mean all federal, state, local and foreign gross
or net income, gross receipts, withholding, franchise, transfer, estimated or
other tax or similar charges and assessments, including all interest, penalties
and additions imposed with respect to such amounts.
"Tax Sharing Agreement" shall mean the Tax Sharing Agreement
among Corning, CCL and Covance, in substantially the form attached hereto as
Exhibit G.
"Third Party Claim" shall have the meaning as defined in
Section 3.05.
SECTION 1.02. References; Interpretation. References to an
"Exhibit" or to a "Schedule" are, unless otherwise specified, to one of the
Exhibits or Schedules attached to this Agreement, and references to a "Section"
are, unless otherwise specified, to one of the Sections of this Agreement.
ARTICLE II
DISTRIBUTIONS AND OTHER TRANSACTIONS; CERTAIN COVENANTS
SECTION 2.01. Conditions Precedent. Neither the Distributions
nor the related transactions set forth in this Agreement or in the Ancillary
Agreements shall become effective unless the following conditions have been
satisfied or waived by Corning on or before the Effective Time:
(a) The Registration Statements shall have been filed by
CCL and Covance, as applicable, with, and declared
effective by, the Commission and the Information
Statement shall have been mailed in a timely manner
to all holders of Corning Common Shares prior to the
Distribution Date.
(b) Corning shall have received a favorable ruling from
the Internal Revenue Service to the effect that the
Distributions qualify as tax-free distributions under
Section 355 of the Code.
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8
(c) Corning shall have received a favorable response from
the Commission to the "no-action request" letter
describing the Distributions filed by Corning with
the Commission.
(d) The New York Stock Exchange shall have approved the
CCL Common Stock and Covance Common Stock for listing
on its exchange, subject to official notice of
distribution.
(e) The financing arrangements among and between the
parties contemplated in the Information Statement
will have been consummated. CCL and Covance each
shall pay all of the expenses associated with their
respective financings.
SECTION 2.02. The Distributions and Other Transactions. (a)
Certain Transactions. Prior to the Distribution Date:
(i) CBI shall be merged with and into Covance pursuant to the
Certificate of Ownership and Merger between CBI and Covance and the
Certificate of Merger between CBI and Covance, in substantially the
forms attached hereto as Exhibit C, and in accordance with all
applicable filing requirements under the Delaware General Corporation
Law and the New Jersey Business Corporation Act. As a result of the
merger, CBI will cease to exist and Covance will acquire the assets of
CBI and assume (or take the assets of CBI subject to) the liabilities
of CBI.
(ii) CLSI will contribute to CCL all of CLSI's assets other
than the stock of CCL and CLSI's rights under certain agreements that
CLSI agrees to transfer pursuant to Section 2.02(i) in exchange for
200,000 additional shares of CCL Common Stock and 1,000 shares of
nonvoting preferred stock of CCL pursuant to (A) the Contribution
Agreement between CLSI and CCL, (B) the Liabilities Undertaking between
CLSI and CCL (C) the Instrument of Assignment and Assumption between
CLSI and CCL and (D) the Bill of Sale and Assignment between CLSI and
CCL, each in substantially the forms attached hereto as Exhibit A, and
in accordance with all applicable filing requirements under the
Delaware General Corporation Law. As a result of such transactions, CCL
will acquire the assets of CLSI and assume (or take the assets of CLSI
subject to) the liabilities of CLSI other than such obligations and
liabilities for which either Corning or Covance is responsible under
this Agreement or the Ancillary Agreements. Following such contribution
and assumption, CLSI shall adopt a plan of liquidation and dissolve
pursuant to the Plan of Liquidation and Dissolution of CLSI,
substantially in the form attached hereto as Exhibit B, and in
accordance with all applicable filing requirements under the Delaware
General Corporation Law. As a result of such liquidation and
dissolution, CLSI will distribute
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9
to Corning its remaining assets, which will consist largely of the
capital stock of CCL, and CLSI will cease to exist.
(iii) No earlier than one day following the effective date for
the transactions described in Section 2.02(a)(ii), CCL will transfer to
certain of its subsidiaries the following shares of common stock that
CCL will have received from CLSI pursuant to the transactions described
in Section 2.02(a)(ii): (A) the shares of common stock of Corning
Nichols Institute, (B) the shares of common stock of Corning Clinical
Laboratories Inc. (Mass.) and (C) the shares of common stock of Corning
Clinical Laboratories Inc. (MD).
(iv) No earlier than three (3) days following the later of the
effective dates for the transactions described in Sections 2.02(a)(i),
(ii) and (iii), CCL will transfer its Covance Common Stock, its entire
interest in Pharmaceutical Laboratory Services, Inc. and its entire
interest in Corning Bio Inc. to Covance by delivering to Covance stock
certificates representing each of CCL's share interests in such
companies, accompanied by stock powers duly endorsed by CCL and with
all required stock transfer tax stamps affixed. In connection therewith
CCL shall deliver to Covance for cancellation the share certificate
currently held by it representing Covance Common Stock and Covance
shall issue to CCL new certificates representing the total number of
newly-issued shares of Covance Common Stock sufficient in number to
allow for an orderly and pro rata distribution of such Covance Common
Stock to the CCL common shareholders.
(v) No earlier than three (3) days following the later of the
effective dates for the transactions described in Sections 2.02(a)(i),
(ii) and (iii), Corning will transfer its CCL Common Stock and its
entire interest in MRL Nucor, Inc. to CCL by delivering to CCL stock
certificates representing each of Corning's share interests in CCL and
MRL Nucor, Inc., accompanied by stock powers duly endorsed by Corning
and with all required stock transfer tax stamps affixed. In connection
therewith Corning shall deliver to CCL for cancellation the share
certificate then held by it representing CCL Common Stock and shall
receive new certificates representing the total number of newly-issued
shares of CCL Common Stock sufficient in number to allow for an orderly
and pro rata distribution of such CCL Common Stock to the Corning
common shareholders.
(b) Ancillary Agreements. On or prior to the Distribution
Date, each of Corning, CCL and Covance shall have executed and delivered to each
of the others, each of the Ancillary Agreements.
(c) Charters; By-laws. On or prior to the Distribution Date:
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10
(i) All necessary actions shall have been taken to provide for
the amendments of the Articles of Incorporation and By-laws for CCL,
such amendments to be in substantially the forms attached hereto as
Exhibit H.
(ii) All necessary actions shall have been taken to provide
for the amendments of the Articles of Incorporation and By-laws for
Covance, such amendments to be in substantially the forms attached
hereto as Exhibit I.
(d) Benefit Plans. On or prior to the Distribution Date, any
shareholder approvals deemed necessary for employee benefit plans shall have
been obtained.
(e) Directors. On or prior to the Distribution Date, Corning
as the sole shareholder of CCL, and CCL, as the sole shareholder of Covance,
shall have taken all necessary action by written consent on or prior to the
Distribution Date to elect to the Board of Directors of CCL and the Board of
Directors of Covance the individuals identified in the Information Statement as
directors of CCL and Covance, respectively.
(f) Consents. The parties hereto shall use their commercially
reasonable efforts to obtain any required consents to assignment of agreements
hereunder, if applicable.
(g) Delivery of Shares to Agent. Corning shall deliver to
Harris Trust and Savings Bank (the "Agent") the share certificates representing
the CCL Common Stock and CCL shall deliver to the Agent the share certificates
representing the Covance Common Stock and Corning and CCL shall instruct the
Agent to distribute, on or as soon as practicable following the Distribution
Date, such common stock to the Corning Record Holders and the CCL Record
Holders, as the case may be, as further contemplated by the Information
Statement and herein. CCL and Covance shall provide all share certificates that
the Agent shall require in order to effect the Distributions.
(h) Sublease. Corning shall have entered into a sublease
agreement with National Imaging Associates, Inc. with respect to the first floor
of 10 Mountainview Road, Upper Saddle River, New Jersey.
(i) Transfer of Agreements. (i) CLSI hereby agrees that on or
prior to the date on which it is dissolved, subject to the limitations set forth
in this Section 2.02(i), it will assign, transfer and convey to Covance all of
CLSI's rights and obligations under (a) the Capital Contribution Agreement and
Shareholder Agreement dated February 22, 1995 among Corning BioPro Inc., CLSI,
Richard Hawkins, Dr. John Scarlett, Robert F. Amundsen and Dr. Nona Niland, (b)
any and all existing stock option agreements between CLSI, Corning Bio Inc. and
individual employees of Corning Bio Inc., (c) the Registration Agreement dated
as of February 22, 1995 by and between Corning BioPro Inc. and CLSI, (d) the
Joint Escrow Instructions dated February 22, 1995 by and between Corning BioPro
Inc., CLSI,
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11
Robert F. Amundsen and the Escrow Agent named therein, and (e) the Joint Escrow
Instructions dated February 22, 1995 by and between Corning BioPro Inc., CLSI,
Dr. John Scarlett and the Escrow Agent named therein. CLSI hereby further agrees
that on or prior to the date on which it is dissolved, subject to the
limitations set forth in this Section 2.02(i), it will assign, transfer and
convey to Corning all of its rights and obligations under the lease agreement
dated October 5, 1995 between 2154 Trading Corporation and CLSI with respect to
10 Mountainview Road, Upper Saddle River, New Jersey. CCL hereby agrees that on
or prior to the Distribution Date or as soon as reasonably practicable
thereafter, subject to the limitations set forth in this Section 2.02(i), it
will assign, transfer and convey to Corning all of CCL's rights and obligations
under the Asset Transfer Agreement dated as of May 2, 1994, as amended, among
CCL, International Technology Corporation, IT Corporation and Quanterra
Incorporated and the related closing documents thereunder, including without
limitation the General Instrument of Assignment and Assumption dated June 28,
1994 between CCL and Quanterra Incorporated. Corning hereby agrees that on or
prior to the Distribution Date or as soon as reasonably practicable thereafter,
subject to the limitations set forth in this Section 2.02(j), it will assign,
transfer and convey to Covance all of Corning's rights and obligations under
that certain Registration Agreement dated as of February 22, 1995 by and between
Corning, Dr. Nona Niland, Dr. John Scarlett, Robert F. Amundsen and Richard
Hawkins.
(ii) The assignee of any agreement assigned, in whole or in
part, hereunder (an "Assignee") shall assume and agree to pay, perform, and
fully discharge all obligations of the assignor under such agreement or such
Assignee's related portion of such obligations as determined in accordance with
the terms of the relevant agreement, where determinable on the face thereof, and
otherwise as determined in accordance with the practice of the parties prior to
the Distribution.
(iii) Notwithstanding anything in this Agreement to the
contrary, this Agreement shall not constitute an agreement to assign any
agreement, in whole or in part, or any rights thereunder if the agreement to
assign or attempt to assign, without the consent of a third party, would
constitute a breach thereof or in any way adversely affect the rights of the
Assignee thereof. Until such consent is obtained, or if an attempted assignment
thereof would be ineffective or would adversely affect the rights of any party
hereto so that the Assignee would not, in fact, receive all such rights, the
parties will cooperate with each other in any arrangement designed to provide
for the Assignee the benefits of, and to permit the Assignee to assume
liabilities under, any such agreement.
(iv) Corning understands and agrees that approximately 10,968
Corning Common Shares are held to secure certain claims of CCL under that Escrow
Agreement dated as of October 9, 1994 (the "Escrow Agreement") among Corning,
The First National Bank of Boston and former shareholders of Moran Research
Labs, as amended, and will act at CCL's direction and at CCL's expense with
respect to those shares. The remaining
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12
Corning Common Shares held under the Escrow Agreement are being held for the
benefit of Corning.
(j) Other Transactions. On or prior to the Distribution Date,
each of Corning, CCL and Covance shall have consummated those other transactions
in connection with the Distributions that are contemplated by the Information
Statement and the ruling request submission by Corning to the Internal Revenue
Service dated June 17, 1996, as supplemented, and not specifically referred to
in subparagraphs (a)-(i) above.
SECTION 2.03. Treatment of Fractional Shares. As soon as
practicable after the Distribution Date, the Agent shall determine the number of
whole shares and fractional shares of CCL and Covance allocable to each Corning
Record Holder and CCL Record Holder, respectively, as of the Distribution Record
Date, to aggregate all such fractional shares and sell the whole shares obtained
thereby, in open market transactions or otherwise, in each case at then
prevailing trading prices, and to cause to be distributed to each such holder to
which a fractional share shall be allocable such holder's ratable share of the
proceeds of such sale, after making appropriate deductions of the amount
required to be withheld for federal income tax purposes and after deducting an
amount equal to all brokerage charges, commissions and transfer taxes attributed
to such sale. In determining the manner and timing of selling the aggregated
fractional shares, the Agent shall use its independent judgment and shall
neither consult with nor communicate its plans to Corning, CCL or Covance.
SECTION 2.04. Certain Intercompany Financial and Other
Arrangements. (a) Intercompany Accounts. Without limiting the terms of Section
2.05, all intercompany receivables, payables and loans (other than receivables,
payables and loans otherwise specifically provided for in any of the Ancillary
Agreements or hereunder), including, without limitation, in respect of any cash
balances, any cash balances representing deposited checks or drafts for which
only a provisional credit has been allowed or any cash held in any centralized
cash management system, between Corning, CCL, Covance or any of their respective
Subsidiaries, on the one hand, and Corning, CCL, Covance or any of their
respective Subsidiaries, on the other hand, shall, as of the Effective Time, be
settled, contributed to capital or converted into ordinary trade accounts, in
each case as may be agreed in writing prior to the Effective Time by duly
authorized representatives of Corning, CCL or Covance, as applicable.
(b) Operations in Ordinary Course. Each of CCL and Covance
covenants and agrees that, except as otherwise provided in any Ancillary
Agreement, during the period from the date of this Agreement through the
Distribution Date, it will, and will cause any entity that is a Subsidiary of
such party at any time during such period to, conduct its business in a manner
substantially consistent with current and past operating practices and in the
ordinary course, including, without limitation, with respect to the payment and
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13
administration of accounts payable and the administration of accounts
receivable, the purchase of capital assets and equipment and the management of
inventories.
SECTION 2.05. Certain Indebtedness and Capital Structure.
Corning, CCL and Covance each agree to use their respective commercially
reasonable efforts to achieve both an allocation of consolidated indebtedness of
Corning and a capital structure (including cash position) of each of CCL and
Covance so as to substantially reflect the respective capital structures after
the Distributions of CCL and Covance set forth in the Information Statement
under the headings "Capitalization of CCL" and "Capitalization of Covance".
SECTION 2.06. Further Assurances. In case at any time after
the Effective Time any further action is reasonably necessary or desirable to
carry out the purposes of this Agreement and the Ancillary Agreements, the
proper officers of each party to this Agreement shall take all such necessary
action. Without limiting the foregoing, Corning, CCL and Covance shall use their
commercially reasonable efforts to obtain all consents and approvals, to enter
into all amendatory agreements and to make all filings and applications that may
be required for the consummation of the transactions contemplated by this
Agreement and the Ancillary Agreements, including, without limitation, all
applicable governmental and regulatory filings.
SECTION 2.07. No Representations or Warranties. Each of the
parties hereto understands and agrees that, except as otherwise expressly
provided, no party hereto is, in this Agreement, in any Ancillary Agreement or
in any other agreement or document contemplated by this Agreement or otherwise,
making any representation or warranty whatsoever, including, without limitation,
as to title, value or legal sufficiency.
SECTION 2.08. Guarantees. (a) Except as otherwise specified in
any Ancillary Agreement, Corning, CCL and Covance shall use their commercially
reasonable efforts to have, on or prior to the Distribution Date, or as soon as
practicable thereafter, Corning and any of its Subsidiaries removed as guarantor
of or obligor for any CCL Liability or Covance Liability, including, without
limitation, in respect of those guarantees set forth on Schedule 2.08(a), and to
the extent any such guarantee is not removed, CCL or Covance, as the case may
be, will indemnify Corning for all Indemnifiable Losses related to or arising
from such guarantee, in accordance with the procedures set forth in Section 3.05
and will pay Corning a fee reflecting Corning's continuing role as guarantor.
(b) Except as otherwise specified in any Ancillary Agreement,
Corning, CCL and Covance shall use their commercially reasonable efforts to
have, on or prior to the Distribution Date, or as soon as practicable
thereafter, CCL and any of its Subsidiaries removed as guarantor of or obligor
for any Corning Liability or Covance Liability, including, without limitation,
in respect of those guarantees set forth on Schedule 2.08(b), and to the extent
any such guarantee is not removed, Corning or Covance, as the case may
<PAGE>
14
be, will indemnify CCL for all Indemnifiable Losses related to or arising from
such guarantee, in accordance with the procedures set forth in Section 3.05 and
will pay CCL a fee reflecting CCL's continuing role as guarantor.
(c) Except as otherwise specified in any Ancillary Agreement,
Corning, CCL and Covance shall use their commercially reasonable efforts to
have, on or prior to the Distribution Date, or as soon as practicable
thereafter, Covance and any of its Subsidiaries removed as guarantor of or
obligor for any Corning Liability or CCL Liability, including, without
limitation, in respect of those guarantees set forth on Schedule 2.08(c), and to
the extent any such guarantee is not removed, Corning or CCL, as the case may
be, will indemnify Covance for all Indemnifiable Losses related to or arising
from such guarantee, in accordance with the procedures set forth in Section 3.05
and will pay Covance a fee reflecting Covance's continuing role as guarantor.
SECTION 2.09. Certain Transactions. (a) On or prior to the
Distribution Date, and in accordance to Section 2.02(b), Corning, CCL and
Covance shall enter into (i) the Tax Sharing Agreement which shall govern, among
other things, their respective rights and obligations with respect to Taxes of
CCL and Covance and each of their respective Subsidiaries for all periods
through the Distribution Date and certain other tax-related matters; and (ii)
the Spin-off Tax Indemnification Agreements which shall, among other things,
restrict CCL and Covance from engaging in certain activities that might
jeopardize the continuing tax-free treatment of the Distributions.
(b) Following the Distribution Date, Corning, CCL and Covance
shall each comply with and otherwise not take any action inconsistent with each
representation and statement made, or to be made, to the Commission in
connection with the "no-action request" letter describing the Distributions
filed by Corning with the Commission.
SECTION 2.10. Insurance. Except as contemplated by the
Insurance Agreement, any and all coverage of CCL, Covance and their respective
Subsidiaries under Company Policies has terminated or will terminate (and will
not be replaced by Corning) no later than the Effective Time.
ARTICLE III
INDEMNIFICATION
SECTION 3.01. Indemnification by Corning. (a) Except as
otherwise specifically set forth in any provision of this Agreement or of any
Ancillary Agreement, Corning shall indemnify and hold harmless the CCL
Indemnitees and the Covance Indemnitees from and against any and all
Indemnifiable Losses of the CCL Indemnitees and the Covance Indemnitees,
respectively, arising out of, by reason of or otherwise in
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15
connection with (i) the Corning Liabilities or (ii) the breach by Corning of any
provision of this Agreement or any Ancillary Agreement.
(b) Corning shall indemnify and hold harmless CCL and its
Subsidiaries from and against any and all monetary payments by CCL or its
Subsidiaries (other than criminal fines or penalties imposed upon former or
current employees of CCL or its subsidiaries) to the United States government or
one of the States of the United States or any of their respective departments,
branches or agencies arising out of any investigation or claim by or on behalf
of the United States government or one of the States of the United States or any
of their respective departments, branches or agencies, whether criminal, civil
or administrative in nature which investigation or claim has been settled prior
to the Distribution Date or is pending as of the Distribution Date pursuant to
service of subpoena or other notice of such investigation to CCL or its
Subsidiaries, as well as any qui tam proceeding for which a complaint was filed
prior to the Distribution Date whether or not CCL or any Subsidiary of CCL has
been served with such complaint or otherwise been notified of the pendency of
such action, but only to the extent such investigations or claims arise out of
or are related to alleged violations of (i) the federal civil False Claims Act
(31 USC ss. 3729, et seq.) and its criminal counterpart (18 USC ss. 287), (ii)
Medicare and Medicaid fraud (42 USC ss. 1320a-7(b)(a)(1)), (iii) the Civil
Monetary Penalties Law (42 USC ss.ss. 1320a-7a and 1320a-7(b)(b)), (iv) mail
fraud and wire fraud statutes (18 USC ss.ss. 1341 and 1343), (v) false
statements (18 USC ss. 1301), (vi) conspiracy (18 USC ss. 371), (vii) money
laundering (18 USC ss. 1956, et seq.), (viii) RICO (18 USC ss. 1961), (ix) Title
II of the Health Insurance Portability and Accountability Act of 1996, (x) Title
XVIII of the Social Security Act (42 USC ss.ss. 1395- 1395ccc) (the Medicare
statute), (xi) Title XIX of the Social Security Act (42 USC ss.ss. 1396, et
seq.) (the Medicaid statute), (xii) the Programs Fraud Civil Remedies Act (31
USC ss.ss. 3801, et seq.); or (xiii) the federal Anti-Kickback Act (42 USC
ss.ss. 52, et seq.) by reason of the billing or alleged overbilling by CCL or
any past or present subsidiary of CLSI (or any of their predecessors) of any
federal program or agency, or any federally supported state health care program
or agency, or any beneficiary of any of them, for services provided to any such
beneficiary thereof by CCL, any Subsidiary of CCL or any past or present
subsidiary of CLSI (or any of their predecessors).
(c) In the event that CCL or its Subsidiaries make monetary
payments in excess of forty-two million dollars ($42,000,000) within the period
beginning on the Distribution Date and ending five (5) years thereafter in
respect of claims by nongovernmental persons actually relating to or arising out
of the investigations or claims referred to in Section 3.01(b) and alleging
overbillings of such person or any beneficiary of such person by CCL, its
Subsidiaries or any past or present subsidiary of CLSI (or any of their
predecessors) for services provided prior to the Distribution Date to such
person or beneficiary thereof by CCL, its Subsidiaries or any past or present
subsidiary of CLSI (or any of their predecessors), then Corning shall indemnify
and hold harmless CCL and its Subsidiaries from and against fifty percent (50%)
of up to fifty million dollars ($50,000,000)
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16
in the aggregate of such monetary payments actually paid by CCL or any
Subsidiary of CCL in excess of such forty-two million dollars ($42,000,000) in
respect of such alleged overbillings.
(d) (i) All payments made by Corning to CCL, or to another party for
the benefit of CCL, pursuant to Section 3.01(b) and (c) shall be treated as
nontaxable capital contributions by Corning to CCL and the parties shall report
the payments consistent with such treatment for Tax purposes.
(ii) Each amount indemnified against by Corning pursuant to Section
3.01(b) and Section 3.01(c) shall reduced by (1) the product of (x) the amount
of any Tax deduction realized by CCL, any CCL Subsidiary (CCL and the CCL
Subsidiaries shall be referred to in this Section 3.01(d) as the "CCL
Companies") or any combined or consolidated group which has as a member any of
the CCL Companies (the "CCL Group") attributable to the payment or accrual of
the underlying obligation indemnified against by Corning and (y) the maximum
marginal statutory rate at which the Tax to which such deduction relates is
imposed for the taxable year in which the underlying obligation indemnified
against by Corning is paid, and (2) the amount of any other Tax credit, benefit
or other similar item (a "Tax Benefit Item") realized by any CCL Company or the
CCL Group as a result of the payment or accrual of the underlying obligation
indemnified against by Corning.
(iii) For purposes of Section 3.01(d)(ii), a Tax deduction or Tax
Benefit Item resulting from an amount indemnified against is realized when the
calculation of any Tax of any CCL Company or the CCL Group, taking into account
the Tax deduction or Tax Benefit Item, for a Tax year is less than the
calculation of such Tax without taking such deduction or item into account
assuming, in both cases, such Tax were calculated without regard to (1) any
carryover to such year of losses, Tax deductions or Tax Benefit Items of any CCL
Company or the CCL Group, except as provided in Section 3.01(d)(vi), and (2) any
Tax deductions or Tax Benefit Items of any CCL Company or the CCL Group in
respect of any payments described in Section 3.01(b) or Section 3.01(c) that are
not indemnified against by Corning (including, without limitation, monetary
payments up to $42,000,000 which are applied towards the threshold in Section
3.01(c)).
(iv) Corning shall make estimated payments to CCL, or another party for
the benefit of CCL, pursuant to Section 3.01(b) and Section 3.01(c) (the
"Estimated Payments") which shall be calculated by Corning in accordance with
Section 3.02(d)(ii) and without reference to the ordering rules of Section
3.01(d)(iii). Estimated Payments shall be paid by Corning (1) if paid to a CCL
Company, as directed by CCL, within 30 days after written notice from CCL to
Corning indicating that the underlying obligation indemnified against by Corning
has been paid by a CCL Company (which notice shall include any documentation
reasonably requested by Corning establishing the amount and Tax treatment of
such payment) or, (2) if paid directly by Corning for the benefit of a CCL
Company, within 30 days after
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17
written notice from CCL that the obligation has been settled (which notice shall
include to whom such payment should be made, the amount of the settlement, an
executed copy of the settlement or other agreement and any other documentation
reasonably requested by Corning establishing the amount and Tax treatment of
such settlement). Within 90 days following the close of the Tax year in which an
Estimated Payment is made, CCL and Corning shall recompute the amount
indemnified against under Section 3.01(d)(ii) and 3.01(d)(iii) and shall make
any adjusting payment to each other resulting from such recomputation within 30
days of their agreement as to the amount of such adjusting payment.
(v) CCL shall consult with Corning and CCL and Corning shall determine
the Tax treatment by any CCL Company or the CCL Group of any obligation or
payment which is indemnified against by Corning under Section 3.01(b) or Section
3.01(c). The parties shall report the payments consistent with the treatment as
determined for Tax purposes.
(vi) If any payments are made by Corning pursuant to Section 3.01(b) or
Section 3.01(c), and calculated and paid pursuant to this Section 3.01(d), and
the amount payable by Corning pursuant to such sections could have been reduced
if the computation of such indemnification payment were made at a later time
(through the utilization in a subsequent Tax year of Tax deductions or Tax
Benefit Items by any CCL Company or the CCL Group relating to settlement
payments or other amounts indemnified against by Corning but not previously
recognized because of the ordering rules in 3.01(d)(iii) or otherwise), then the
amount of such indemnification shall be recomputed by CCL at such later time by
taking into account and carrying over such previously utilized Tax deductions or
Tax Benefit Items. The amount of reduction, if any, resulting from such
recomputation shall be calculated within 60 days of the filing of any Tax return
by any CCL Company or the CCL Group for the Tax year that causes the
computation. Any amount by which the amount previously paid would be reduced
pursuant to this Section 3.01(d)(vi) shall be paid to Corning within 30 days of
such recomputation together with interest (computed at the rate or rates at
which interest on underpayments of tax is payable to the Internal Revenue
Service under the relevant provisions of the Code in effect for such period)
from the date the Tax return of the CCL Company or the CCL Group, as the case
may be, was due (without extension) for the Tax year giving rise to the
recomputation to the date of payment to Corning.
(vii) Promptly after receipt by any CCL Company of notice of any
demand, claim or circumstances relating to the Tax treatment of an obligation or
payment which gave rise to an indemnification obligation by Corning under
Section 3.01(b) or Section 3.01(c), CCL shall give notice thereof to Corning.
Such notice shall contain factual information (to the extent known to any CCL
Company) describing the asserted tax treatment in reasonable detail and shall
include copies of any notice or other document received from any taxing
authority. At its election, Corning shall control the prosecution and
disposition (through settlement or otherwise) of any audits and any contests in
respect of any claim made by a taxing authority on audit or in a related
administrative or judicial proceeding or in respect of
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18
any refund or credit of taxes, that relates to the tax treatment by any CCL
Company of an obligation or payment which gives rise to an indemnification
obligation by Corning under Section 3.01(b) or Section 3.01(c) or the Tax
treatment of an item determined under Section 3.01(d)(v). CCL may participate in
such audits or contests at CCL's expense to the extent that Corning in its
reasonable discretion shall deem appropriate. If asserted liabilities unrelated
to the matters contemplated herein become grouped with contests arising
hereunder, the parties shall use their respective best efforts to cause the
contest arising hereunder to be the subject of a separate proceeding. With
respect to matters arising hereunder controlled by Corning, and where deemed
necessary by Corning, CCL shall itself, and shall compel any CCL Subsidiary to,
authorize by appropriate powers of attorney such persons as Corning shall
designate to represent CCL, or such CCL Subsidiary, with respect to such
matters. Corning, in its sole discretion, shall have the power to settle,
compromise, or concede such adjustment or claim without prior written notice to
or approval of CCL and any Subsidiary of CCL. If, as a result of the settlement
of or other final decision (which Corning cannot legally or determines in its
sole discretion not to contest) with respect to any audits, contests,
administrative or judicial proceedings described herein, the amount of any
payments made by Corning pursuant to Section 3.01(b) or Section 3.01(c), and
calculated and paid pursuant to this Section 3.01(d), is different from the
amount which would be paid taking into account such settlement of or other final
decision, CCL and Corning shall recompute the amount indemnified against under
this Section 3.01(d) and shall make any adjusting payment to each other
resulting from such recomputation within 30 days of their agreement as to the
amount of such adjusting payment.
(viii) If Corning and CCL are unable to agree on the proper calculation
or treatment of a payment or other obligation, a Tax deduction or Tax Benefit
Item or any other item described in this Section 3.01(d), then such disputed
item or items shall be resolved by a nationally recognized accounting or law
firm chosen and mutually acceptable to both parties. Such accounting or law firm
shall resolve the dispute within 30 days of having the item or items referred to
it and such resolution shall be binding on the parties. The costs, fees and
expenses of the accounting or law firm shall be borne equally by Corning and
CCL. In the event the parties are not able to agree on an accounting or law
firm, each party shall select its own nationally recognized law firm (and bear
the costs, fees and expenses thereof) and such law firms shall select a
nationally recognized accounting or law firm which accounting or law firm shall
be deemed to be mutually acceptable to both parties for the purpose of applying
this provision.
(e) Notwithstanding anything to the contrary in this
agreement, Corning shall not indemnify, defend or hold harmless CCL or any
Subsidiary of CCL against (x) costs and expenses relating to the investigations
or claims referred to in Sections 3.01(b) and (c) (including, without
limitation, fees and expenses of attorneys, consultants and other agents of CCL
or any Subsidiary of CCL), or (y) losses of revenues or profits that may arise
as a consequence of the claims or investigations referred to in Sections 3.01(b)
or 3.01(c) or
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19
the settlements entered into or judgments rendered as a result thereof or as a
consequence of any exclusion from participation in any federal or state health
care program, or (z) any other consequential or incidental damages that may be
incurred by CCL or any Subsidiary of CCL, in each case which relates to the
billing of any person or any beneficiary of such person by CCL, any Subsidiary
of CCL or any past or present subsidiary of CLSI (or any of their predecessors)
for services provided to any such person or beneficiary thereof by CCL, any
Subsidiary of CCL or any past or present subsidiary of CLSI (or any of their
predecessors).
(f) All indemnification obligations of Corning pursuant to
this Section 3.01 may be made or assumed by an Affiliate of Corning to the
extent deemed necessary or desirable by Corning in its sole discretion.
SECTION 3.02. Indemnification by CCL. Except as otherwise
specifically set forth in any provision of this Agreement or of any Ancillary
Agreement, CCL shall indemnify and hold harmless the Corning Indemnitees and the
Covance Indemnitees from and against any and all Indemnifiable Losses of the
Corning Indemnitees and the Covance Indemnitees, respectively, arising out of,
by reason of or otherwise in connection with (i) the CCL Liabilities or (ii) the
breach by CCL of any provision of this Agreement or any Ancillary Agreement;
provided, however, that CCL is under no obligation to indemnify or hold harmless
Corning from and against any Indemnifiable Losses arising out of, or by reason
of or otherwise in connection with any and all monetary payments by Corning in
respect of the investigations or claims referred to in Section 3.01(b).
SECTION 3.03. Indemnification by Covance. Except as otherwise
specifically set forth in any provision of this Agreement or of any Ancillary
Agreement, Covance shall indemnify and hold harmless the Corning Indemnitees and
the CCL Indemnitees from and against any and all Indemnifiable Losses of the
Corning Indemnities and the CCL Indemnitees, respectively, arising out of, by
reason of or otherwise in connection with (i) the Covance Liabilities or (ii)
the breach by Covance of any provision of this Agreement or any Ancillary
Agreement.
SECTION 3.04. Adjustments for Indemnification Obligations. If
the amount that any party (an "Indemnifying Party") is or may be required to pay
to any other person (an "Indemnitee") pursuant to Section 3.01, Section 3.02 or
Section 3.03, as applicable, shall, at any time subsequent to the payment
required by this Agreement, be reduced by insurance or other recovery,
settlement or otherwise, the amount of such reduction, less any expenses
incurred in connection therewith, shall promptly be repaid by the Indemnitee to
the Indemnifying Party, up to the aggregate amount of any payments received from
such Indemnifying Party pursuant to this Agreement in respect of such
Indemnifiable Loss.
SECTION 3.05. Procedures for Indemnification - Third Party
Claims. If a claim or demand is made against an Indemnitee by any person who is
not a party to this Agreement (a "Third Party Claim") as to which such
Indemnitee is entitled to indemnification pursuant to this Agreement, such
Indemnitee shall notify the Indemnifying Party in writing, and in reasonable
detail, of the Third Party Claim promptly (and in any
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20
event within 15 business days) after receipt by such Indemnitee of written
notice of the Third Party Claim; provided, however, that failure to give such
notification shall not affect the indemnification provided hereunder except to
the extent the Indemnifying Party shall have been actually prejudiced as a
result of such failure (except that the Indemnifying Party shall not be liable
for any expenses incurred during the period in which the Indemnitee failed to
give such notice).
If a Third Party Claim is made against an Indemnitee, the
Indemnifying Party shall be entitled to participate in the defense thereof and,
in the case of an Indemnifying Party's obligation to indemnify the Indemnitee
pursuant to Section 3.01(a), Section 3.01(b), Section 3.02 or Section 3.03, if
the Indemnifying Party so chooses and acknowledges in writing its obligation to
indemnify the Indemnitee therefor, to assume the defense thereof with counsel
selected by the Indemnifying Party; provided, however, that such counsel is not
reasonably objected to by the Indemnitee. Should the Indemnifying Party so elect
to assume the defense of a Third Party Claim, the Indemnifying Party shall not
be liable to the Indemnitee for legal or other expenses subsequently incurred by
the Indemnitee in connection with the defense thereof. If the Indemnifying Party
assumes such defense, the Indemnitee shall have the right to participate in the
defense thereof and to employ counsel, at its own expense, separate from the
counsel employed by the Indemnifying Party, it being understood that the
Indemnifying Party shall control such defense. The Indemnifying Party shall be
liable for the fees and expenses of counsel employed by the Indemnitee for any
period during which the Indemnifying Party has failed to assume the defense
thereof. If the Indemnifying Party so elects to assume the defense of any Third
Party Claim, all of the Indemnitees shall cooperate with the Indemnifying Party
in the defense or prosecution thereof.
If the Indemnifying Party acknowledges in writing liability
for a Third Party Claim, then in no event will the Indemnitee admit any
liability with respect to, or settle, compromise or discharge, any Third Party
Claim without the Indemnifying Party's prior written consent; provided, however,
that the Indemnitee shall have the right to settle, compromise or discharge such
Third Party Claim without the consent of the Indemnifying Party if the
Indemnitee releases the Indemnifying Party from its indemnification obligation
hereunder with respect to such Third Party Claim and such settlement, compromise
or discharge would not otherwise adversely affect the Indemnifying Party. If the
Indemnifying Party acknowledges in writing liability for a Third Party Claim,
the Indemnitee will agree to any settlement, compromise or discharge of a Third
Party Claim that the Indemnifying Party may recommend which by its terms (i)
obligates the Indemnifying Party to pay the full amount of its indemnification
obligation in connection with such Third Party Claim and (ii) releases the
Indemnitee completely in connection with such Third Party Claim and which would
not otherwise adversely affect the Indemnitee; and provided further that the
Indemnitee may refuse to agree to any such proposed settlement, compromise or
discharge if the Indemnitee agrees that the Indemnifying Party's indemnification
obligation with respect to such Third Party Claim shall not exceed the amount
that would be required to be paid by or
<PAGE>
21
on behalf of the Indemnifying Party in connection with such proposed settlement,
compromise or discharge.
Notwithstanding the foregoing, the Indemnifying Party shall
not be entitled to assume the defense of any Third Party Claim (and shall be
liable for the fees and expenses of counsel incurred by the Indemnitee in
defending such Third Party Claim) if the Third Party Claim seeks an order,
injunction or other equitable relief or relief for other than money damages
against the Indemnitee which the Indemnitee reasonably determines, after
conferring with its counsel, cannot be separated from any related claim for
money damages. If such equitable relief or other relief portion of the Third
Party Claim can be so separated from that for money damages, the Indemnifying
Party shall be entitled to assume the defense of the portion relating to money
damages.
The provisions contained in Section 3.01(d) shall control in
the situations described particularly in that section.
SECTION 3.06. Survival of Indemnities. The obligations of
Corning, CCL and Covance under this Article III shall survive the sale or other
transfer by any of them of any assets or businesses, with respect to any
Indemnifiable Loss of any Indemnitee related to such assets or businesses.
SECTION 3.07. Payments. All payments under this Agreement
shall be made without gross-up for Taxes.
ARTICLE IV
ACCESS TO INFORMATION
SECTION 4.01. Provision of Corporate Records. From and after
the Distribution Date, upon the prior written request by Corning, CCL or Covance
for specific and identified agreements, documents, books, records or files
(collectively, "Records") relating to or affecting Corning, CCL or Covance, as
applicable, Corning, CCL or Covance, as the case may be, shall arrange, as soon
as reasonably practicable following the receipt of such request, for the
provision of appropriate copies of such Records (or other originals thereof if
the party making the request has a reasonable need for such originals) then in
the possession of Corning, CCL or Covance, as the case may be, or any of their
Subsidiaries, but only to the extent such items are not already in the
possession of the requesting party; provided, however, that nothing in this
Section 4.01 shall obligate a party to retain any records except to the extent
required by law or by an Ancillary Agreement or to provide Records if the party
reasonably determines that such provision of Records would prevent it from
claiming that the Records were privileged or otherwise not subject to disclosure
in any Action.
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22
SECTION 4.02. Access to Information. (a) From and after the
Distribution Date, each of Corning, CCL and Covance shall afford to the other
and its authorized accountants, counsel and other designated representatives
reasonable access during normal business hours, subject to appropriate
restrictions for classified, privileged or confidential information, to the
personnel, properties, books and records of such party and its Subsidiaries
insofar as such access is reasonably required by the other party.
(b) For a period of five years following the Distribution
Date, each of Corning, CCL and Covance shall provide to the other, promptly
following such time at which such documents shall be filed with the Commission,
all documents that shall be filed by it and by any of its respective
Subsidiaries with the Commission pursuant to the periodic and interim reporting
requirements of the Exchange Act, and the rules and regulations of the
Commission promulgated thereunder.
SECTION 4.03. Reimbursement. Except to the extent otherwise
contemplated by any Ancillary Agreement, a party providing Records or access to
information to the other party under this Article IV shall be entitled to
receive from the recipient, upon the presentation of invoices therefor, payments
for such amounts, relating to supplies, disbursement and other out-of-pocket
expenses, as may be reasonably incurred in providing such Records or access to
information.
SECTION 4.04. Confidentiality. (a) Each of (i) Corning and its
Subsidiaries, (ii) CCL and its Subsidiaries and (iii) Covance and its
Subsidiaries shall not use or permit the use of (without the prior written
consent of the other) and shall hold, and shall cause its directors, officers,
employees, agents, consultants and advisors to hold, in strict confidence, all
information concerning the other parties in its possession, its custody or under
its control (except to the extent that (x) such information has been in the
public domain through no fault of such party, (y) such information has been
later lawfully acquired from other sources by such party or (z) this Agreement,
any Ancillary Agreement or any other agreement entered into pursuant hereto
permits the use or disclosure of such information) to the extent such
information (i) was obtained prior to or relates to periods prior to the
Effective Time, (ii) relates to any Ancillary Agreement or (iii) is obtained in
the course of performing services for the other party pursuant to any Ancillary
Agreement, and each party shall not (without the prior written consent of the
other) otherwise release or disclose such information to any other person,
except such party's auditors and attorneys, unless compelled to disclose such
information by judicial or administrative process or unless such disclosure is
required by law and such party has used commercially reasonable efforts to
consult with the other affected party or parties prior to such disclosure.
(b) To the extent that a party hereto is compelled by judicial
or administrative process to disclose otherwise confidential information under
circumstances in which any evidentiary privilege would be available, such party
agrees to assert such privilege
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23
in good faith prior to making such disclosure. Each of the parties hereto agrees
to consult with each relevant other party in connection with any such judicial
or administrative process, including, without limitation, in determining whether
any privilege is available, and further agrees to allow each such relevant party
and its counsel to participate in any hearing or other proceeding (including,
without limitations, any appeal of an initial order to disclose) in respect of
such disclosure and assertion of privilege.
ARTICLE V
DISPUTE RESOLUTION
SECTION 5.01. Good Faith Negotiations. In the event of a
controversy, dispute or claim arising out of, in connection with, or in relation
to the interpretation, performance, nonperformance, validity or breach of this
Agreement or otherwise arising out of, or in any way related to this Agreement,
including, without limitation, any claim based on contract, tort or statute
(collectively, "Agreement Disputes"), the general counsels of the relevant
parties shall negotiate in good faith for a reasonable period of time to settle
such Agreement Dispute.
SECTION 5.02. Procedure. If after such reasonable period such
general counsels are unable to settle such Agreement Dispute (and in any event
after 60 days have elapsed from the time the relevant parties began such
negotiations), such Agreement Dispute shall be determined, at the request of any
relevant party, by arbitration conducted in New York City, before and in
accordance with the then-existing Rules for Commercial Arbitration of the
American Arbitration Association (the "Rules"), and any judgment or award
rendered by the arbitrator shall be final, binding and nonappealable (except
upon grounds specified in 9 U.S.C. ss. 10(a) as in effect on the date hereof),
and judgment may be entered by any state or federal court having jurisdiction
thereof in accordance with Section 6.16 hereof. Unless the arbitrator otherwise
determines, the pre-trial discovery of the then-existing Federal Rules of Civil
Procedure and the then-existing Rules 46 and 47 of the Civil Rules for the
United States District Court for the Southern District of New York shall apply
to any arbitration hereunder. Any controversy concerning whether an Agreement
Dispute is an arbitrable Agreement Dispute, whether arbitration has been waived,
whether an assignee of this Agreement is bound to arbitrate, or as to the
interpretation of enforceability of this Article V shall be determined by the
arbitrator. The arbitrator shall be a retired or former judge of any United
States District Court or Court of Appeals or such other qualified person as the
relevant parties may agree to designate, provided, however, such individual has
had substantial professional experience with regard to settling sophisticated
commercial disputes. The parties intend that the provisions to arbitrate set
forth herein be valid, enforceable and irrevocable. The designation of a situs
or a governing law for this Agreement or the arbitration shall not be deemed an
election to preclude application of the Federal Arbitration Act, if it would be
applicable. In his or her award the arbitrator shall allocate, in his or her
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24
discretion, among the parties to the arbitration all costs of the arbitration,
including, without limitation, the fees and expenses of the arbitrator and
reasonable attorneys' fees, costs and expert witness expenses of the parties.
The undersigned agree to comply with any award made in any such arbitration
proceedings that has become final in accordance with the Rules and agree to the
entry of a judgment in any jurisdiction upon any award rendered in such
proceedings becoming final under the Rules. The arbitrator shall be entitled if
appropriate, to award any remedy in such proceedings, including, without
limitation, monetary damages, specific performance and all other forms of legal
and equitable relief; provided, however, the arbitrator shall not be entitled to
award punitive damages.
ARTICLE VI
GENERAL PROVISIONS
SECTION 6.01. Expenses. Except as otherwise set forth in this
Agreement or any Ancillary Agreement, each of Corning, CCL and Covance shall
bear its own costs and expenses incurred on or prior to the Distribution Date
(whether or not paid on or prior to the Distribution Date) in connection with
the preparation, execution, delivery and implementation of this Agreement and
any Ancillary Agreement, the Information Statement, the Registration Statements
and the Distributions and the consummation of the transactions contemplated
thereby and the parties to this Agreement shall agree on an equitable allocation
of costs and expenses where any item is not clearly allocable to Corning, CCL or
Covance. Except as otherwise set forth in this Agreement or any Ancillary
Agreement, each party shall bear its own costs and expenses incurred after the
Distribution Date.
SECTION 6.02. Notices. All notices, requests, claims, demands
and other communications hereunder shall be in writing and shall be given or
made (and shall be deemed to have been duly given or made upon receipt) by
delivery in person, by courier service, by cable, by telecopy, by telegram, by
telex or by registered or certified mail (postage prepaid, return receipt
requested) to the respective parties at the addresses (or at such other address
for a party as shall be specified in a notice given in accordance with this
Section 6.02) listed below (with copies to Shearman & Sterling at 599 Lexington
Avenue, New York, New York 10022, Attn: Creighton Condon):
(a) To Corning Incorporated:
One Riverfront Plaza
Corning, New York 14831
Telecopy: (607) 974-8656
Attn: General Counsel
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25
(b) To CCL:
One Malcolm Avenue
Teterboro, New Jersey 07608
Telecopy: (201) 462-4795
Attn: General Counsel
(c) To Covance:
210 Carnegie Center
Princeton, New Jersey 08540-6233
Telecopy: (609) 452-9865
Attn: General Counsel
SECTION 6.03. Complete Agreement; Construction. This
Agreement, including the Exhibits and Schedules, and the Ancillary Agreements
shall constitute the entire agreement between the parties hereto with respect to
the subject matter hereof and shall supersede all prior agreements and
undertakings, both written and oral, between the parties with respect to the
subject matter hereof and thereof. In the event of any inconsistency between
this Agreement and any Schedule hereto, the Schedule shall prevail.
Notwithstanding any other provisions in this Agreement to the contrary, in the
event and to the extent that there shall be a conflict between the provisions of
this Agreement and the provisions of any Ancillary Agreement, such Ancillary
Agreement shall control.
SECTION 6.04. Ancillary Agreements. This Agreement is not
intended to address, and should not be interpreted to address, the matters
specifically and expressly covered by the Ancillary Agreements.
SECTION 6.05. Counterparts. This Agreement may be executed in
one or more counterparts, and by the different parties hereto in separate
counterparts, each of which when executed shall be deemed to be an original but
all of which taken together shall constitute one and the same agreement.
SECTION 6.06. Survival of Agreements. Except as otherwise
contemplated by this Agreement, all covenants and agreements of the parties
contained in this Agreement shall survive the Distribution Date.
SECTION 6.07. Waiver. The parties to this Agreement may (a)
extend the time for the performance of any of the obligations or other acts of
the other party or parties, (b) waive any inaccuracies in the representations
and warranties of the other party or parties
<PAGE>
26
contained herein or in any document delivered by the other party or parties
pursuant hereto or (c) waive compliance with any of the agreements or conditions
of the other party or parties contained herein. Any such extension or waiver
shall be valid only if set forth in an instrument in writing signed by the party
to be bound thereby. Any waiver of any term or condition shall not be construed
as a waiver of any subsequent breach or a subsequent waiver of the same term or
condition, or a waiver of any other term or condition, of this Agreement. The
failure of any party to assert any of its rights hereunder shall not constitute
a waiver of any such rights.
SECTION 6.08. Amendments. Subject to the terms of Section 6.11
hereof, this Agreement may not be amended or modified except (a) by an
instrument in writing signed by, or on behalf of, the parties or (b) by a waiver
in accordance with Section 6.07.
SECTION 6.09. Assignment. This Agreement may not be assigned
by operation of law or otherwise without the express written consent of the
other parties (which consent may be granted or withheld in the sole discretion
of the parties), and any attempt to assign any rights or obligations arising
under this Agreement without such consent shall be void.
SECTION 6.10. Successors and Assigns. The provisions of this
Agreement shall be binding upon, inure to the benefit of and be enforceable by
the parties and their respective successors and permitted assigns.
SECTION 6.11. Termination. This Agreement (including, without
limitation, Article III hereof) may be terminated and the Distributions may be
amended, modified or abandoned at any time prior to the Distributions by and in
the sole discretion of Corning without the approval of CCL or Covance or the
shareholders of Corning. In the event of such termination, no party shall have
any liability of any kind to any other party or any other person. After the
Distributions, this Agreement may not be terminated except by an agreement in
writing signed by the parties; provided, however, that Article III shall not be
terminated or amended after the Distributions in respect of the third party
beneficiaries thereto without the consent of such persons.
SECTION 6.12. Subsidiaries. Each of the parties hereto shall
cause to be performed, and hereby guarantees the performance of, all actions,
agreements and obligations set forth herein to be performed by any Subsidiary of
such party or by any entity that is contemplated to be a Subsidiary of such
party on and after the Distribution Date.
SECTION 6.13. Third Party Beneficiaries. Except as provided in
Article III relating to Indemnitees, this Agreement shall be binding upon and
inure solely to the benefit of the parties hereto and their respective
Subsidiaries, Affiliates and assigns and nothing herein, express or implied, is
intended to or shall confer upon any third parties any legal or
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27
equitable right, benefit or remedy of any nature whatsoever under or by reason
of this Agreement.
SECTION 6.14. Headings. The descriptive headings contained in
this Agreement are for convenience of reference only and shall not affect in any
way the meaning or interpretation of this Agreement.
SECTION 6.15. Specific Performance. The parties hereto agree
that irreparable damage would occur in the event any provision of this Agreement
was not performed in accordance with the terms hereof and that the parties shall
be entitled to specific performance of the terms hereof, in addition to any
other remedy at law or equity.
SECTION 6.16. Governing Law. This Agreement shall be governed
by, and construed in accordance with, the laws of the State of New York,
applicable to contracts executed in and to be performed entirely within that
state. Without limiting the provisions of Article V, all actions and proceedings
arising out of or relating to this Agreement shall be heard and determined in
any New York state or federal court sitting in the City of New York.
SECTION 6.17. Public Announcements. (a) Prior to the Effective
Time, neither CCL nor Covance shall make, or cause to be made, any press release
or public announcement in respect of this Agreement or the transactions
contemplated hereby or otherwise communicate with any news media without the
prior written consent of Corning.
(b) Following the Effective Time, no party to this Agreement
shall make, or cause to be made, any press release or public announcement in
respect of this Agreement or the transactions contemplated hereby or otherwise
communicate with any news media without prior consultation with the other
parties, and the parties shall cooperate as to the timing and contents of any
such press release or public announcement.
SECTION 6.18. Severability. If any term or other provision of
this Agreement is invalid, illegal or incapable of being enforced by any law or
public policy, all other terms and provisions of this Agreement shall
nevertheless remain in full force and effect so long as the economic or legal
substance of the transactions contemplated hereby is not affected in any manner
materially adverse to any party. Upon such determination that any term or other
provision is invalid, illegal or incapable of being enforced, the parties hereto
shall negotiate in good faith to modify this Agreement so as to effect the
original intent of the parties as closely as possible in an acceptable manner in
order that the transactions contemplated hereby are consummated as originally
contemplated to the greatest extent possible.
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28
IN WITNESS WHEREOF, the parties have caused this Agreement to
be executed as of the date first written above by their respective officers
thereunto duly authorized.
CORNING INCORPORATED
by________________________________________
Name:
Title:
CORNING LIFE SCIENCES INC.
by________________________________________
Name:
Title:
CORNING CLINICAL LABORATORIES INC.
by________________________________________
Name:
Title:
COVANCE INC.
by________________________________________
Name:
Title:
Exhibit A
RESTATED CERTIFICATE OF INCORPORATION
OF
QUEST DIAGNOSTICS INCORPORATED1
1. Name. The name of the Corporation is Quest Diagnostics Incorporated.
2. Address. The address of the Corporation's registered office in the State of
Delaware is 1209 Orange Street, in the City of Wilmington, County of New Castle.
The name of the Registered Agent at such address is the Corporation Trust
Company.
3. Corporate Purpose. The purpose of the Corporation is (i) to own and operate
medical, clinical, industrial and research laboratories, and (ii) to research,
manufacture design, construct, use, buy, sell, lease, hire and deal in and with
articles and property of all kinds, to render services of all kinds, and (iii)
generally to engage in any lawful act or activity for which corporations may be
organized under the General Corporation Law of Delaware.
4. Capitalization. The total number of shares which the Corporation may
henceforth have is 110,000,000, of which 10,000,000 shares are to have a par
value of $1.00 each and 100,000,000 shares are to have a par value of $0.01
each, which shares shall be classified as follows:
10,000,000 shares, of the par value of $1.00 each, are to be Series
Preferred Stock; and
100,000,000 shares, of the par value of $0.01 each, are to be Common Stock.
The relative voting, dividend, liquidation and other rights, preferences
and limitations of the shares of each class are as follows:
I. The Preferred Stock may be issued from time to time in one or more
series, each such series to have the number of shares and designation, and
the shares of each such series to have such relative rights, preferences or
limitations, as the Board of Directors, subject to the limitations
prescribed by law or provided herein, may from time to time fix, before
issuance, by filing an appropriate certificate ("Certificate of
Designation") with the Secretary of State pursuant to the General
Corporation Law of the State of Delaware. The authority of the Board of
Directors with respect to each series shall include, but not be limited to,
the fixing of the following:
(a) The number of shares to constitute the series and the
distinctive designation thereof;
- --------
1 Effective December 31, 1996. Until December 31, 1996, the Corporation will be
known as Corning Clinical Laboratories Inc.
1
<PAGE>
(b) The dividend rate on the shares of the series; whether
dividends shall be cumulative, and, if so, from what date or
dates;
(c) Whether or not the shares of the series shall be redeemable
and, if redeemable, the terms upon which the shares of the series
may be redeemed and the premium, if any, over and above the par
value thereof and any dividends accrued thereon which the share
of the series shall be entitled to receive upon the redemption
thereof;
(d) Whether or not the shares of the series shall be subject to
the operation of a retirement or sinking fund to be applied to
the purchase or redemption of such shares for retirement and, if
such retirement or sinking fund be established, the annual amount
thereof and the terms and provisions relative to the operation
thereof;
(e) Whether or not the shares of the series shall be convertible
into shares of any class or classes of stock of the Corporation,
with or without par value, or of any other series of the same
class and, if convertible, the conversion price or prices or the
rate at which such conversion may be made and the method, if any,
of adjusting the same;
(f) The rights of the shares of the series in the event of
voluntary or involuntary liquidation, dissolution or winding-up
of the Corporation;
(g) The restrictions, if any, on the payment of dividends upon,
and the making of the distributions to any class of stock ranking
junior to the shares of the series, and the restrictions, if any,
on the purchase or redemption of the shares of any such junior
class;
(h) Whether the series shall have voting rights, in addition to
the voting rights provided by law, and, if so, the terms of such
voting rights; and
(i) Any other relative rights, preferences and limitations of the
series.
II. Holders of shares of Preferred Stock shall be entitled to receive,
when and as declared by the Board of Directors, out of funds legally
available for the payment of dividends, dividends at the rates fixed by the
Board of Directors for the respective series, before any dividends shall be
declared and paid, or set apart for payment, on any other class of stock of
the Corporation ranking junior to the Preferred Stock either as to
dividends or assets, with respect to the same dividend period.
III. Whenever, at any time, dividends on the then outstanding
Preferred Stock as may be required by the terms of the certificate creating
the series representing the shares outstanding shall have been paid or
declared and set apart for payment on the then outstanding Preferred Stock
and after complying with all the provisions with respect to
2
<PAGE>
any retirement or sinking fund or funds for any series of Preferred Stock,
the Board of Directors may, subject to the provisions of any certificate
creating any series of Preferred Stock with respect to the payment of
dividends on any other class or classes of stock, declare and pay dividends
on the Common Stock, and the Preferred Stock shall not be entitled to share
therein.
IV. Upon any liquidation, dissolution or winding-up of the
Corporation, after payment if any is required, shall have been made in full
to the Preferred Stock as provided in any certificate creating any series
thereof, but not prior thereto, the Common Stock shall, subject to the
respective terms and provisions, if any, of any such certificate, be
entitled to receive any and all assets remaining to be paid or distributed,
and the Preferred Stock shall not be entitled to share therein.
V. No holder of Common Stock or any series of Preferred Stock shall,
as such holder, have any preemptive or preferential right of subscription
to any stock of any class of the Corporation or to any obligations
convertible into any such stock or to any right of subscription to, or to
any warrant or option for, the purchase of any stock, other than such, if
any, as the Board of Directors of the Corporation in its discretion may
determine from time to time.
VI. The holders of the Common Stock shall have the right to vote on
all questions to the exclusion of all other classes of stock, except as by
law expressly provided or as otherwise expressly provided with respect to
the holders of any other class or classes of stock.
4A. Voting Cumulative Preferred Stock
(1) Designation and Amount. An aggregate of 1,000 shares of Series
Preferred Stock, with a par value of $1.00 per share, are hereby
constituted as a series designated as 1996 Voting Cumulative Preferred
Stock" (the "Cumulative Preferred Stock"). The maximum number of shares of
Cumulative Preferred Stock shall be 1,000. The Cumulative Preferred Stock
is issuable in whole shares only.
(2) Dividends and Distributions.
(a) Holders of shares of Cumulative Preferred Stock will be entitled
to receive, when, as and if declared by the Board of Directors out of funds
legally available for the purpose, quarterly dividends payable in cash at
the rate of 10.00% (the "Dividend Rate") per annum, provided, however, that
if the Corporation issues senior subordinated notes on or prior to December
31, 1997, the Dividend Rate per annum shall be the greater of (a) 10% and
(b) the yield to maturity of such senior subordinated notes expressed as a
percentage plus 1%. Dividends on the Cumulative Preferred Stock shall be
payable quarterly on the first day of January, April, July and October in
each year, commencing on April 1, 1997.
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<PAGE>
(b) Dividends shall begin to accrue and be cumulative on
outstanding shares of Cumulative Preferred Stock from the date of issue of
such shares. Accrued but unpaid dividends shall not bear interest.
Dividends paid on the shares of Cumulative Preferred Stock in an amount
less than the total amount of such dividends at the time accrued and
payable on such shares shall be allocated pro rata on a share-by-share
basis among all such shares at the time outstanding. The Board of Directors
may fix a record date of the determination of holders of shares of
Cumulative Preferred Stock entitled to receive payment of a dividend or
distribution declared thereon, which record date shall be not more than 60
days prior to the date fixed for the payment thereof.
(3) Voting Rights. (a) The holders of shares of Cumulative Preferred
Stock shall have the right, with holders of shares of Common Stock and any
other capital stock of the Corporation having voting rights (voting
together as one class), to vote on all matters submitted to a vote of the
stockholders of the Corporation. Each holder of shares of 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) The holders of the Cumulative Preferred Stock shall be entitled
to vote as a separate class on any amendment to the Certificate of
Incorporation which adversely affects the rights of the Cumulative
Preferred Stock;
4
<PAGE>
provided, however, that any increase in the amount of authorized 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 adversely affect such rights.
(4) Certain Restrictions.
Whenever quarterly dividends or other dividends or distributions
payable on the Cumulative Preferred Stock as provided in Section 2 are in
arrears, thereafter and until all accrued and unpaid dividends and
distributions, whether or not declared, on shares of Cumulative Preferred
Stock outstanding shall have been paid in full, the Corporation 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 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;
(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 Cumulative Preferred Stock, provided that the
Corporation may at any time redeem, purchase or otherwise
acquire shares of any such junior stock in exchange for
shares of any stock of the Corporation ranking junior
(either as to dividends or upon dissolution, liquidation or
winding-up) to the Cumulative Preferred Stock; or
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<PAGE>
(iv) redeem or purchase or otherwise acquire for
consideration any Parity Preferred Stock except in
accordance with a purchase offer made in writing or by
publication (as determined by the Board of Directors) to all
holders of such shares upon such terms as the Board of
Directors, 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.
The Corporation shall not permit any subsidiary of the
Corporation to purchase or otherwise acquire for consideration any shares
of stock of the Corporation unless the Corporation could, under paragraph
(a) of this Section 4, purchase or otherwise acquire such shares at such
time and in such manner.
(5) Reacquired Shares. Any shares of Cumulative Preferred Stock
purchased or otherwise acquired by the Corporation in any manner whatsoever
shall be retired and canceled promptly after the acquisition thereof. All
such shares shall upon their cancellation become authorized but unissued
shares of Preferred Stock and may be reissued as part of a new series of
Preferred Stock subject to the conditions and restrictions on issuance set
forth herein, in this Certificate of Incorporation, in any Certificate of
Designation establishing a series of Preferred Stock or any similar stock
or as otherwise required by law.
(6) Liquidation Preference. The shares of Cumulative Preferred Stock
shall rank, as to liquidation, dissolution or winding-up of the
Corporation, prior to the shares of Common Stock and any other class of
stock of the Corporation ranking junior to the Cumulative Preferred Stock
as to rights upon liquidation, dissolution or winding-up of the
Corporation, so that in the event of any liquidation, dissolution or
winding-up of the Corporation, whether voluntary or involuntary, the
holders of the Cumulative Preferred Stock shall be entitled to receive out
of the assets of the Corporation available for distribution to its
stockholders, whether from capital, surplus or earnings, before any
distribution is made to holders of shares of Common Stock or any other such
junior stock, an amount equal to $1,000.00 per share (the "Liquidation
Preference" of a share of 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 Cumulative Preferred Stock to the
date of final distribution. The holders of the 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
the Corporation ranking senior to the 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 Cumulative Preferred Stock will not be
entitled to any further participation in any distribution of
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assets by the Corporation. If, upon any liquidation, dissolution or
winding-up of the Corporation, the assets of the Corporation, or proceeds
thereof, distributable among the holders of shares of Cumulative Preferred
Stock and any 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 the Corporation with or into any other
corporation, nor a merger of any other corporation with or into the
Corporation, nor a sale or transfer of all or any part of the Corporation's
assets for cash or securities shall be considered a liquidation,
dissolution or winding-up of the Corporation.
(7) Conversion. The Cumulative Preferred Stock is not convertible into
shares of any other class or series of stock of the Corporation.
(8) Redemption.
(a) Optional Redemption. The shares of the Cumulative Preferred
Stock may be redeemed at the option of the Corporation, as a whole, or from
time to time in part, at any time, up to 1,000 shares of Cumulative
Preferred Stock, out of funds legally available therefor, upon giving a
Redemption Notice as set forth in paragraph 8(c) hereof; provided, however,
that shares of the Cumulative Preferred Stock shall not be redeemable prior
to December 31, 2002. Subject to the foregoing, on or after such date,
shares of the 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:
Year Percentage
2003 .................................... 106.000%
2004 .................................... 104.000%
2005 .................................... 102.000%
2006 and thereafter...................... 100.000%
If the Corporation effects such redemption, it shall do so ratably
according to the number of shares held by each holder of Cumulative
Preferred Stock.
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(b) Mandatory Redemption. On January 1, 2022, the Corporation
shall redeem all of the then outstanding shares of Cumulative Preferred
Stock, out of funds legally available therefor at a redemption price equal
to the Liquidation Preference. The Corporation shall use its best efforts
to cause funds to be legally available therefor. The redemption payment for
each share of Cumulative Preferred Stock shall be the Redemption Amount, in
cash, as of January 1, 2022.
(c) Mechanics of Redemption.
(i) At least 30 days prior to the date fixed for any
redemption pursuant to Section 8(a) or (b) (a "Redemption Date"),
the Corporation shall send a written notice (the "Redemption
Notice") to each holder of shares of Cumulative Preferred Stock
to be redeemed on such date (the "Redemption Shares") stating:
(A) the total number of Redemption Shares; (B) the number of
Redemption Shares held by such holder; (C) the Redemption Date;
(D) the Redemption Amount per share; and (E) the manner in which
and the place at which such holder is to surrender to the
Corporation the certificate or certificates representing its
Redemption Shares.
(ii) Upon surrender to the Corporation, in the manner and at
the place designated, of a certificate or certificates
representing Redemption Shares, the Redemption Amount for such
shares shall be payable to the order of the person whose name
appears on such certificate or certificates as the owner thereof.
All such surrendered certificates shall be canceled.
(iii) If a notice of redemption has been given pursuant to
this Section 8 and if, on or before the date fixed for
redemption, the funds necessary for such redemption shall have
been set aside by the Corporation, separate and apart from its
other funds, in trust for the pro rata benefit of the holders of
the Redemption Shares, then, notwithstanding that any
certificates for such Redemption Shares have not been surrendered
for cancellation, on the Redemption Date dividends shall cease to
accrue on the shares to be redeemed, and at the close of business
on the Redemption Date the holders of such shares shall cease to
be stockholders with respect to such shares and shall have no
interest in or claims against the Corporation by virtue thereof
and shall have no voting or other rights with respect to such
shares, except the right to receive the moneys payable upon
surrender (and endorsement, if required by the Corporation) of
their certificates, and the shares evidenced thereby shall no
longer be outstanding. Subject to applicable escheat laws, any
moneys so set aside by the Corporation and unclaimed at the end
of two years from the Redemption Date shall revert to the general
funds of the Corporation, after which reversion the holders of
such Redemption Shares shall look only to the general funds of
the Corporation for the payment of the amounts
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payable upon such redemption. Any interest accrued on funds so
deposited shall be paid to the Corporation from time to time.
(iv) The Corporation shall not be obligated to pay the
Redemption Amount to any holder of Redemption Shares unless the
certificates evidencing such shares are either delivered to the
Corporation or its transfer agent, or the holder notifies the
Corporation or its transfer agent that such certificates have
been lost, stolen or destroyed and executes an agreement
reasonably satisfactory to the Corporation to indemnify the
Corporation from any loss incurred by it in connection with such
certificates.
(v) A Redemption Notice may provide that it is subject to
the occurrence of any event before the Redemption Date specified
in such notice (a "Conditional Redemption") and such notice of
Conditional Redemption shall be of no effect unless all such
conditions to the redemption have occurred before the Redemption
Date or have been waived by the Corporation.
(9) Authorization and Issuance of Other Securities. No consent of the
holders of the Cumulative Preferred Stock shall be required for (a) the
creation of any indebtedness of any kind of the Corporation, (b) the
creation, or increase or decrease in the amount, of any class or series of
stock of the Corporation ranking on a parity with, senior to or junior to
the Cumulative Preferred Stock as to 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.
(10) Rank. The Cumulative Preferred Stock will rank senior to the
Corporation's Common Stock and the Series A Preferred Stock (as defined in
Section 4B), on a parity with any series of preferred stock ranking on a
parity with the Cumulative Preferred Stock as to the payment of dividends
and amounts upon liquidation, dissolution and winding up ("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 Cumulative Preferred Stock.
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(11) Amendment. The Board of Directors reserves the right by
subsequent amendment of this Certificate of Incorporation from time to time
to increase or decrease the number of shares that constitute the Cumulative
Preferred Stock (but not below the number of shares thereof then
outstanding) and in other respects to change the powers, preferences or
special rights of the Cumulative Preferred Stock within the limitations
provided by law and this Certificate of Incorporation.
4B. Series A Junior Participating Preferred Stock
(1) Designation and Amount. An aggregate of 600,000 shares of Series
Preferred Stock, par value $1.00 of the Corporation are hereby constituted
as a series designated as "Series A Junior Participating Preferred Stock"
(the "Series A Preferred Stock").
(2) Dividends and Distributions.
(a) Subject to the prior and superior rights of the holders of
any shares of any series of Preferred Stock or any similar stock ranking
prior and superior to the Series A Preferred Stock with respect to
dividends, the holders of shares of Series A Preferred Stock, in preference
to the holders of Common Stock of the Corporation, and of any other junior
stock, shall be entitled to receive, when, as and if declared by the Board
of Directors out of funds legally available for the purpose, quarterly
dividends payable in cash on the first day of January, April, July and
October in each year (each such date being referred to herein as a
"Quarterly Dividend Payment Date"), commencing on the first Quarterly
Dividend Payment Date after the first issuance of a share or fraction of a
share of Series A Preferred Stock, in an amount per share (rounded to the
nearest cent) equal to the greater of (a) $10 or (b) subject to the
provision for adjustment hereinafter set forth, 100 times the aggregate per
share amount of all cash dividends, and 100 times the aggregate per share
amount (payable in kind) of all non-cash dividends or other distributions,
other than a dividend payable in shares of Common Stock or a subdivision of
the outstanding shares of Common Stock (by, reclassification or otherwise),
declared
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on the Common Stock since the immediately preceding Quarterly Dividend
Payment Date or, with respect to the first Quarterly Dividend Payment Date,
since the first issuance of any share or fraction of a share of Series A
Preferred Stock. In the event the Corporation shall at any time declare or
pay any dividend on the Common Stock payable in shares of Common Stock, or
effect a subdivision or combination or consolidation of the outstanding
shares of Common Stock (by reclassification or otherwise than by payment of
a dividend in shares of Common Stock) into a greater or lesser number of
shares of Common Stock, then in each such case the amount to which holders
of shares of Series A Preferred Stock were entitled immediately prior to
such event under clause (b) of the preceding sentence shall be adjusted by
multiplying such amount by a fraction, the numerator of which is the number
of shares of Common Stock outstanding immediately after such event and the
denominator of which is the number of shares of Common Stock that were
outstanding immediately prior to such event.
(b) The Corporation shall declare a dividend or distribution on
the Series A Preferred Stock as provided in paragraph (a) of this Section
immediately after it declares a dividend or distribution of the Common
Stock (other than a dividend payable in shares of Common Stock); provided
that, in the event no dividend or distribution shall have been declared on
the Common Stock during the period between any Quarterly Dividend Payment
Date and the next subsequent Quarterly Dividend Payment Date, a dividend of
$10 per share on the Series A Preferred Stock shall nevertheless be payable
on such subsequent Quarterly Dividend Payment Date.
(c) Dividends shall begin to accrue and be cumulative on
outstanding shares of Series A Preferred Stock from the Quarterly Dividend
Payment Date next preceding the date of issue of such shares, unless the
date of issue of such shares is prior to the record date for the first
Quarterly Dividend Payment Date, in which case dividends on such shares
shall begin to accrue from the date of issue of such shares, or unless the
date of issue is a Quarterly Dividend Payment Date or is a date after the
record date for the determination of holders of shares of Series A
Preferred Stock entitled to receive a quarterly dividend and before such
Quarterly Dividend Payment Date, in either of which events such dividends
shall begin to accrue and be cumulative from such Quarterly Dividend
Payment Date. Accrued but unpaid dividends shall not bear interest.
Dividends paid on the shares of Series A Preferred Stock in an amount less
than the total amount of such dividends at the time accrued and payable on
such shares shall be allocated pro rata on a share-by-share basis among all
such shares at the time outstanding. The Board of Directors may fix a
record date for the determination of holders of shares of Series A
Preferred Stock entitled to receive payment of a dividend or distribution
declared thereon, which record date shall be not more than 60 days prior to
the date fixed for the payment thereof.
(3) Voting Rights. The holders of shares of Series A Preferred Stock
shall have the following voting rights.
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(a) Subject to the provision for adjustment hereinafter set
forth, each share of Series A Preferred Stock shall entitle the holder
thereof to 100 votes on all matters submitted to a vote of the stockholders
of the Corporation. In the event the Corporation shall at any time declare
or pay any dividend on the Common Stock payable in shares of Common Stock,
or effect a subdivision or combination or consolidation of the outstanding
shares of Common Stock (by reclassification or otherwise than by payment of
a dividend in shares of Common Stock) into a greater or lesser number of
shares of Common Stock, then in each such case the number of votes per
share to which holders of shares of Series A Preferred Stock were entitled
immediately prior to such event shall be adjusted by multiplying such
number by a fraction, the numerator of which is the number of shares of
Common Stock outstanding immediately after such event and the denominator
of which is the number shares of Common Stock that were outstanding
immediately prior to such event.
(b) Except as otherwise provided herein, in any other certificate
creating a series of Preferred Stock or any similar stock, or by law, the
holders of shares of Series A Preferred Stock and the holders of shares of
Common Stock and any other capital stock of the Corporation having general
voting rights shall vote together as one class on all matters submitted to
a vote of stockholders of the Corporation.
(c) Except as set forth herein, holders of Series A Preferred
Stock shall have no voting rights.
(4) Certain Restrictions.
(a) Whenever quarterly dividends or other dividends or
distributions payable on the Series A Preferred Stock as provided in
Section 2 are in arrears, thereafter and until all accrued and unpaid
dividends and distributions, whether or not declared on shares of Series A
Preferred Stock outstanding shall have been paid in full, the Corporation
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 Series A Preferred Stock;
(ii) declare or pay dividends, or make any other
distributions, on any shares of stock ranking on a parity
(either as to dividends or upon liquidation, dissolution or
winding-up) with the Series A Preferred Stock, except
dividends paid ratably on the Series A Preferred Stock and
all such parity 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;
(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 Series A Preferred Stock, provided that the
Corporation may at
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any time redeem, purchase or otherwise acquire shares of any
such junior stock in exchange for shares of any stock of the
Corporation ranking junior (either as to dividends or upon
dissolution, liquidation or winding-up) to the Series A
Preferred Stock; or
(iv) redeem or purchase or otherwise acquire for
consideration any shares of Series A Preferred Stock, or any
shares of stock ranking on a parity with the Series A
Preferred Stock, except in accordance with a purchase offer
made in writing or by publication (as determined by the
Board of Directors) to all holders of such shares upon such
terms as the Board of Directors, 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.
(b) The Corporation shall not permit any subsidiary of the
Corporation to purchase or otherwise acquire for consideration any shares
of stock of the Corporation unless the Corporation could, under paragraph
(a) of this Section 4, purchase or otherwise acquire such shares at such
time and in such manner.
(5) Reacquired Shares. Any shares of Series A Preferred Stock
purchased or otherwise acquired by the Corporation in any manner whatsoever
shall be retired and canceled promptly after the acquisition thereof. All
such shares shall upon their cancellation become authorized but unissued
shares of Preferred Stock and may be reissued as part of a new series of
Preferred Stock subject to the conditions and restrictions on issuance set
forth in this Certificate of Incorporation, in any other Certificate of
Designation establishing a series of Preferred Stock or any similar stock
or as otherwise required by law.
(6) Liquidation, Dissolution, or Winding-Up. Upon any liquidation,
dissolution or winding-up of the Corporation, no distribution shall be made
(i) to the holder of shares of stock ranking junior (either as to dividends
or upon liquidation, dissolution or winding-up) to the Series A Preferred
Stock unless, prior thereto, the holders of shares of Series A Preferred
Stock shall have received $100 per share, plus an amount equal to accrued
and unpaid dividends and distributions thereon, whether or not declared, to
the date of such payment, provided that the holders of shares of Series A
Preferred Stock shall be entitled to receive an aggregate amount per share,
subject to the provision for adjustment hereinafter set forth, equal to 100
times the aggregate amount to be distributed per share to holders of shares
of Common Stock, or (ii) to the holders of shares of stock ranking on a
parity (either as to dividends or upon liquidation, dissolution or
winding-up) with the Series A Preferred Stock, except distributions made
ratably on the Series A Preferred Stock and all such parity stock in
proportion to the total amounts to which the holders of all such shares are
entitled upon such liquidation, dissolution or wind-up. In the event the
Corporation shall at any time declare or pay any dividend on the Common
Stock payable in shares of Common Stock, or effect a subdivision or
combination or consolidation of the outstanding shares of Common Stock (by
reclassification or otherwise than by
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<PAGE>
payment of a dividend in shares of Common Stock) into a greater or lesser
number of shares of Common Stock, then in each such case the aggregate
amount to which holders of shares of Series A Preferred Stock were entitled
immediately prior to such event under the provision in clause (i) of the
preceding sentence shall be adjusted by multiplying such amount by a
fraction, the numerator of which is the number of shares of Common Stock
outstanding immediately after such event and the denominator of which is
the number of shares of Common Stock that were outstanding immediately
prior to such event.
(7) Consolidation, Merger, etc. In case the Corporation shall enter
into any consolidation, merger, combination or other transaction in which
the shares of Common Stock are exchanged for or changed into other stock or
securities, cash and/or any other property, then in any such case each
share of Series A Preferred Stock shall at the same time be similarly
exchanged or changed into an amount per share, subject to the provision for
adjustment hereinafter set forth, equal to 100 times the aggregate amount
of stock, securities, cash and/or any other property, as the case may be,
into which or for which each share of Common Stock is changed or exchanged.
In the event the Corporation shall at any time declare or pay any dividend
on the Common Stock payable in shares of Common Stock, or effect a
subdivision or combination or consolidation of the outstanding shares of
Common Stock (by reclassification or otherwise than by payment of a
dividend in shares of Common Stock) into a greater or lesser number of
shares of Common Stock, then in each such case the amount set forth in the
preceding sentence with respect to the exchange or change of shares of
Series A Preferred Stock shall be adjusted by multiplying such amount by a
fraction, the numerator of which is the number of shares of Common Stock
outstanding immediately after such event and the denominator of which is
the number of shares of Common Stock that were outstanding immediately
prior to such event.
(8) Redemption. The shares of Series A Preferred Stock shall not be
redeemable.
(9) Rank. The Series A Preferred Stock shall rank junior with respect
to the payment of dividends and the distribution of assets to all series of
any class of Preferred Stock or any similar stock that specifically provide
that they shall rank prior to the Series A Preferred Stock. Nothing herein
shall preclude the Board from creating any series of Preferred Stock or any
similar stock ranking on a parity with or prior to the Series A Preferred
Stock as to the payment of dividends or the distribution of assets.
(10) Amendment. The Certificate of Incorporation of the Corporation
shall not be amended in any manner which would materially alter or change
the powers, preferences or special rights of the Series A Preferred Stock
so as to affect such Series adversely without the affirmative vote of the
holders of at least two-thirds of the outstanding shares of Series A
Preferred Stock, voting together as a single series.
5. Directors. (a) The business and affairs of the Corporation shall be managed
by a Board of Directors consisting of not less than three nor more than twelve
persons. The exact number of directors within the minimum and maximum
limitations specified in the preceding sentence shall
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be fixed from time to time by the Board of Directors pursuant to a resolution
adopted by the affirmative vote of a majority of the entire Board of Directors;
and such exact number shall be _______ unless otherwise determined by a
resolution so adopted by a majority of the entire Board of Directors. As used in
this Certificate of Incorporation, the term "entire Board of Directors" means
the total authorized number of directors which the Corporation would have if
there were no vacancies.
As of the Distribution Date (as defined in the Transaction Agreement dated
as of _______, 1996 among Corning Incorporated, Corning Life Sciences Inc., the
Corporation and Corning Pharmaceutical Services Inc.) (the "Distribution Date"),
the directors shall be divided into three classes, as nearly equal in number as
possible, with the term of office of the first class to expire at the 1998
Annual Meeting of Stockholders, the term of office of the second class to expire
at the 1999 Annual Meeting of Stockholders, and the terms of office of the third
class to expire at the 2000 Annual Meeting of Stockholders. Commencing with the
1998 Annual Meeting of Stockholders, directors elected to succeed those
directors whose terms have thereupon expired shall be elected for a term of
office to expire at the third succeeding Annual Meeting of Stockholders after
their election. If the number of directors is changed, any increase or decrease
shall be apportioned among the classes so as to maintain or attain, if possible,
the equality of the number of directors in each class, but in no case will a
decrease in the number of directors shorten the term of any incumbent director.
If such equality is not possible, the increase or decrease shall be apportioned
among the classes in such a way that the difference in the number of directors
in any two classes shall not exceed one.
(b) Subject to the rights of the holders of any series of Preferred Stock
or any other class of capital stock of the Corporation (other than the Common
Stock) then outstanding, vacancies in any class of directors resulting from a
newly created directorship, death, resignation, retirement, disqualification,
removal from office or other cause shall, if occurring prior to the expiration
of the term of office of such class, be filled only by the affirmative vote of a
majority of the remaining directors of the entire Board of Directors then in
office, although less than a quorum, or by the sole remaining director. Any
director so elected shall hold office until the next election of the class for
which such directors shall have been chosen and until his successor is elected
and qualified. No decrease in the number of directors shall shorten the term of
any incumbent director.
(c) Whenever the holders of any one or more series of Preferred Stock
issued by the Corporation shall have the right, voting separately by series, to
elect directors at an annual or special meeting of stockholders, the election,
term of office, filling of vacancies and other features of such directorships
shall be governed by this Paragraph 5 unless expressly otherwise provided by the
resolution or resolutions providing for the creation of such series.
(d) Subject to the rights of the holders of any series of Preferred Stock
or any other class of capital stock of the Corporation (other than the Common
Stock) then outstanding, (i) any director, or the entire Board of Directors, may
be removed by the stockholders from office at any time prior to the expiration
of his term of office, but only for cause, and only by the affirmative vote of
the holders of record of outstanding shares representing a majority of the
voting power of
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all of the outstanding shares of capital stock of the Corporation entitled to
vote generally in the election of directors, and (ii) any director may be
removed from office by the affirmative vote of a majority of the entire Board of
Directors, at any time prior to the expiration of his term of office, but only
for cause.
(e) Notwithstanding any other provision of this Certificate of
Incorporation and subject to the other provisions of this Paragraph 5, the Board
of Directors shall determine the rules and procedures that shall affect the
Directors' power to manage and direct the business and affairs of the
Corporation. Without limiting the foregoing, the Board of Directors shall
designate and empower committees of the Board of Directors, shall elect and
empower the officers of the Corporation, may appoint and empower other officers
and agents of the Corporation, and shall determine the time and place of, and
the notice requirements for, Board meetings, as well as quorum and voting
requirements for, and the manner of taking, Board actions.
6. Business Combination. (1) Certain Definitions. For the purposes of this
Paragraph 6:
A. "Business Combination" shall mean:
(i) any merger or consolidation of the Corporation or any Subsidiary with
(a) an Interested Stockholder or (b) any other corporation (whether or not
itself an Interested Stockholder) which is, or after such merger or
consolidation would be, an Affiliate or Associate of an Interested Stockholder;
or
(ii) any sale, lease, exchange, mortgage, pledge, transfer or other
disposition (in one transaction or a series of transactions) to or with an
Interested Stockholder or an Affiliate or Associate of an Interested Stockholder
of any assets of the Corporation or any Subsidiary having an aggregate Fair
Market Value of $20,000,000 or more; or
(iii) the issuance or transfer by the Corporation or any Subsidiary (in one
transaction or a series of transactions) of any securities of the Corporation or
any Subsidiary to an interested Stockholder or an Affiliate or Associate of an
Interested Stockholder in exchange for cash, securities or other property (or a
combination thereof) having an aggregate Fair Market Value of $20,000,000 or
more; or
(iv) the adoption of any plan or proposal for the liquidation or
dissolution of the Corporation proposed by or on behalf of an Interested
Stockholder or an Affiliate or Associate of an Interested Stockholder; or
(v) any reclassification of securities (including any reverse stock split),
or recapitalization of the Corporation, or any merger or consolidation of the
corporation with any Subsidiary or any other transaction (whether or not with or
into or otherwise involving an Interested Stockholder) which has the effect,
directly, or indirectly, of increasing the percentage of the outstanding shares
of (a) any class of equity securities of the Corporation or any Subsidiary or
(b) any class of securities of the Corporation or any Subsidiary convertible
into equity securities of the
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Corporation or any Subsidiary, represented by securities of such class which are
directly or indirectly owned by an Interested Stockholder and all of its
Affiliates and Associates; or
(vi) any agreement, contract or other arrangement providing for any one or,
more of the actions specified in clauses (i) through (v) of this Section 1A.
B. "Affiliate" or "Associate" shall have the respective meanings ascribed
to such terms in Rule 12b-2 of the General Rules and Regulations under the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), as in effect
on January 1, 1997.
C. "Beneficial Owner" shall have the meaning ascribed to such term in Rule
13d-3 of the General Rules and Regulations under the Exchange Act, as in effect
on January 1, 1997.
D. "Continuing Director" shall mean (i) any member of the Board of
Directors of the Corporation who (a) is neither the Interested Stockholder
involved in the Business Combination as to which a vote of Continuing Directors
is provided hereunder, nor an Affiliate, Associate, employee, agent, or nominee
of such Interested Stockholder, or the relative of any of the foregoing, and (b)
was a member of the Board of Directors of the Corporation prior to the time that
such Interested Stockholder became an Interested Stockholder, (ii) any successor
of a Continuing Director described in clause (i) who is recommended or elected
to succeed a Continuing Director by the affirmative vote of a majority of
Continuing Directors then on the Board of Directors of the Corporation, and
(iii) any person who is a member of the Board of Directors of the Corporation at
the Distribution Date and any successor thereto who is recommended or elected by
the affirmative vote of a majority of the Continuing Directors then on the Board
of Directors of the Corporation.
E. "Fair Market Value" shall mean: (i) in the case of stock, the highest
closing sale price during the 30 day period immediately preceding the date in
question of a share of such stock on the Composite Tape for New York Stock
Exchange-Listed Stocks, or, if such stock is not reported on the Composite Tape,
on the New York Stock Exchange, or, if such stock is not listed on such
Exchange, on the principal United States securities exchange registered under
the Exchange Act on which such stock is listed, or if such stock is not listed
on any such exchange, the highest closing bid quotation with respect to a share
of such stock during the 30-day period preceding the date in question on the
National Association of Securities Dealers, Inc., Automated Quotations System or
any similar inter-dealer quotation system then in use, or if no such quotation
is available, the fair market value on the date in question of a share of such
stock as determined by a majority of the Continuing Directors in good faith; and
(ii) in the case of property other than cash or stock, the fair market value of
such property on the date in question as determined by a majority of the
Continuing Directors in good faith.
F. "Interested Stockholder" shall mean any Person (other than the
Corporation or any Subsidiary) who or which:
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(i) is, or was at any time within the two-year period immediately prior to
the date in question, the Beneficial Owner of 10% or more of the voting power of
the then outstanding Voting Stock of the Corporation; or
(ii) is an assignee of, or has otherwise succeeded to, any shares of Voting
Stock of the Corporation of which an Interested Stockholder was the Beneficial
Owner at any time within the two-year period immediately prior to the date in
question, if such assignment or succession shall have occurred in the course of
a transaction, or series of transactions, not involving a public offering within
the meaning of the Securities Act of 1933, as amended.
For the purpose of determining whether a Person is an Interested
Stockholder, the outstanding Voting Stock of the Corporation shall include
unissued shares of Voting Stock of the Corporation of which the Interested
Stockholder is the Beneficial Owner but shall not include any other shares of
Voting Stock of the Corporation which may be issuable pursuant to any agreement,
arrangement or understanding, or upon the exercise of conversion rights,
warrants or options, or otherwise, to any Person who is not the Interested
Stockholder.
G. A "Person" shall mean any individual, partnership, firm, corporation,
association, trust, unincorporated organization or other entity, as well as any
syndicate or group deemed to be a person under Section 14(d) (2) of the Exchange
Act.
H. "Subsidiary" shall mean any corporation of which the Corporation owns,
directly or indirectly, (i) a majority of the outstanding shares of equity
securities of such corporation, or (ii) shares having a majority of the voting
power represented by all of the outstanding shares of Voting Stock of such
corporation. For the purpose of determining whether a corporation is a
Subsidiary, the outstanding Voting Stock and shares of equity securities thereof
shall include unissued shares of which the Corporation is the Beneficial Owner
but, except for the purposes of Section 1F, shall not include any other shares
which may be issuable pursuant to any agreement, arrangement or understanding,
or upon the exercise of conversion rights, warrants or options, or otherwise, to
any Person who is not the Corporation.
I. "Voting Stock" shall mean outstanding shares of capital stock of the
relevant corporation entitled to vote generally in the election of directors
(2) Higher Vote for Business Combinations. In addition to any affirmative
vote required by law or by this Certificate of Incorporation, and except as
otherwise expressly provided in Section 3 of this Paragraph 6, any Business
Combination shall require the affirmative vote of the holders of record of
outstanding shares representing at least eighty percent (80%) of the voting
power of the then outstanding shares of the Voting Stock of the Corporation,
voting together as a single class, it being understood that, for purposes of
this Paragraph 6, each share of the Voting Stock of the Corporation shall have
the number of votes granted to it pursuant to Paragraph 4 of this Certificate of
Incorporation. Such affirmative vote shall be required notwithstanding the fact
that no vote may be required, or that a lesser percentage may be specified, by
law or in any agreement with any national securities exchange or otherwise.
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(3) When Higher Vote is Not Required.
The provisions of Section 2 of this Paragraph 6 shall not be applicable to
any particular Business Combination, and such Business Combination shall require
only such affirmative vote, if any, of the stockholders as is required by law
and any other provision of this Certificate of Incorporation, if the conditions
specified in either of the following paragraphs A and B are met:
A. Approval by Continuing Directors. The Business Combination shall have
been approved by the affirmative vote of a majority of the Continuing
Directors, even if the Continuing Directors do not constitute a quorum of
the entire Board of Directors.
B. Form of Consideration, Price and Procedure Requirements. All of the
following conditions shall have been met:
(i) With respect to each share of each class of Voting Stock of
the Corporation (including Common Stock), the holder thereof shall be
entitled to receive on or before the date of the consummation of the
Business Combination (the "Consummation Date"), consideration, in the
form specified in Section 3 (B) (ii) hereof, with an aggregate Fair
Market Value as of the Consummation Date at least equal to the highest
of the following:
(a) the highest per share price (including any brokerage
commissions, transfer taxes and soliciting dealers' fees) paid by
the Interested Stockholder to which the Business Combination
relates, or by any Affiliate or Associate of such Interested
Stockholder, for any shares of such class of Voting Stock
acquired by it (1) within the two-year period immediately prior
to the first public announcement of the proposal of the Business
Combination (the "Announcement Date") or (2) in the transaction
in which it became an Interested Stockholder, whichever is
higher;
(b) the Fair Market Value per share of such class of Voting Stock
of the Corporation on the Announcement Date; and
(c) the highest preferential amount per share, if any, to which
the holders of shares of such class of Voting Stock of the
Corporation are entitled in the event of any voluntary or
involuntary liquidation, dissolution or winding-up of the
Corporation.
(ii) The consideration to be received by holders of a particular
class of outstanding Voting Stock of the Corporation (including Common
Stock) as described in Section 3(B) (i) hereof shall be in cash or if
the consideration previously paid by or on behalf of the Interested
Stockholder in connection with its acquisition of beneficial ownership
of shares of such class of Voting Stock consisted in whole or in part
of consideration other than cash, then in the same
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form as such consideration. If such payment for shares of any class of
Voting Stock of the Corporation has been made with varying forms of
consideration, the form of consideration for such class of Voting
Stock shall be either cash or the form used to acquire the beneficial
ownership of the largest number of shares of such class of Voting
Stock previously acquired by the Interested Stockholder.
(iii) After such Interested Stockholder has become an Interested
Stockholder and prior to the Consummation Date of such Business
Combination: (a) except as approved by the affirmative vote of a
majority of the Continuing Directors, there shall have been no failure
to declare and pay at the regular date therefor any full quarterly
dividends (whether or not cumulative) on the outstanding preferred
stock of the Corporation, if any; (b) there shall have been (1) no
reduction in the annual rate of dividends paid on the Common Stock of
the Corporation (except as necessary to reflect any subdivision of the
Common Stock) except as approved by the affirmative vote of a majority
of the Continuing Directors, and (2) an increase in such annual rate
of dividends as necessary to reflect any reclassification (including
any reverse stock split), recapitalization, reorganization or any
similar transaction which has the effect of reducing the number of
outstanding shares of Common Stock, unless the failure so to increase
such annual rate is approved by the affirmative vote of a majority of
the Continuing Directors; and (c) such Interested Stockholder shall
not have become the Beneficial Owner of any additional shares of
Voting Stock of the Corporation except as part of the transaction
which results in such Interested Stockholder becoming an Interested
Stockholder.
(iv) After such Interested Stockholder has become an Interested
Stockholder, such Interested Stockholder shall not have received the
benefit, directly or indirectly (except proportionately as a
stockholder of the Corporation), of any loans, advances, guarantees,
pledges or other financial assistance or any tax credits or other tax
advantages provided by the Corporation.
(v) A proxy or information statement describing the proposed
Business Combination and complying with the requirements of the
Exchange Act and the General Rules and Regulations thereunder (or any
subsequent provisions replacing such Act, rules or regulations) shall
be mailed to the stockholders of the Corporation at least 45 days
prior to the consummation of such Business Combination (whether or not
such proxy or information statement is required to be mailed pursuant
to such Act or subsequent provisions thereof).
(4) Powers of Continuing Directors. A majority of the Continuing Directors
shall have the power and duty to determine, on the basis of information
known to them after reasonable inquiry, all facts necessary to determine
compliance with this Paragraph 6, including, without limitation, (A)
whether a person is an Interested Stockholder, (B) the number of shares of
Voting Stock of the Corporation beneficially owned by any person, (C)
whether a person is an Affiliate or Associate of another, (D) whether the
requirements
20
<PAGE>
of paragraph B of Section 3 have been met with respect to any Business
Combination, and (E) whether the assets which are the subject of any
Business Combination have, or the consideration to be received for the
issuance or transfer of securities by the Corporation or any Subsidiary in
any Business Combination has, an aggregate Fair Market Value of $20,000,000
or more; and the good faith determination of a majority of the Continuing
Directors on such matters shall be conclusive and binding for all the
purposes of this Paragraph 6.
(5) No Effect on Fiduciary Obligations
A. Nothing contained in this Paragraph 6 shall be construed to relieve
the members of the Board of Directors or an Interested Stockholder from any
fiduciary obligation imposed by law.
B. The fact that any Business Combination complies with the provisions
of Section 3 of this Paragraph 6 shall not be construed to impose any
fiduciary duty, obligation or responsibility on the Board of Directors, or
any member thereof, to approve such Business Combination or recommend its
adoption or approval to the stockholders of the Corporation, nor shall such
compliance limit, prohibit or otherwise restrict in any manner the Board of
Directors, or any member thereof, with respect to evaluations of or actions
and responses taken with respect to such Business Combination.
7. Special Stockholder Meetings. Except as otherwise required by law, special
meetings of the stockholders may be called only by the Board of Directors.
8. Action by Unanimous Written Consent. From and after the Distribution Date,
any action which may be taken at any annual or special meeting of stockholders
may be taken without a meeting without prior notice and without a vote, if
consent in writing, setting forth the action so taken, shall be signed, in
person or by proxy, by the holders of all outstanding stock entitled to vote
thereon and no action by non-unanimous written consent shall be permitted.
9. Bylaws. The Board of Directors shall have the right to make, alter or repeal
the Bylaws of the Corporation, subject to the right of the stockholders of the
Corporation to alter or repeal any Bylaw made by the Board of Directors.
10. Elections. The election of directors of the Corporation need not be by
written ballot, unless the Bylaws of the Corporation otherwise provide.
11. Indemnification. (a) No director of the Corporation shall have any personal
liability to the Corporation or its stockholders for monetary damages for breach
of fiduciary duty as a director, provided that this provision shall not
eliminate or limit the liability of a director (i) for any breach of the
director's duty of loyalty to the Corporation or its stockholders, (ii) for acts
or omissions not in good faith or which involve intentional misconduct or a
knowing violation of law, (iii) under Section 174 of the General Corporation Law
of the State of Delaware, or (iv) for any transaction from which the director
derived an improper personal benefit.
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(b) Each person who was or is made a party or is threatened to be made a
party to or is involved in any action, suit or proceeding, whether civil,
criminal, administrative or investigative (hereinafter a "proceeding"), by
reason of the fact that he or she is or was a director or officer of the
Corporation or is or was serving at the request of the Corporation as a director
or officer of another corporation or of a partnership, joint venture, trust or
other enterprise, including service with respect to employee benefit plans,
whether the basis of such proceeding is alleged action either in an official
capacity as a director or officer or in any other capacity while serving as a
director or officer, shall be indemnified and held harmless by the Corporation
to the fullest extent authorized by the General Corporation Law of the State of
Delaware, as the same exists or may hereafter be amended (but, in the case of
any such amendment, only to the extent that such amendment permits the
Corporation to provide broader indemnification rights than said law permitted
the Corporation to provide prior to such amendment), against all expenses,
liability and loss (including attorneys' fees, judgments, fines, excise taxes
pursuant to the Employee Retirement Income Security Act of 1974, as amended, or
penalties and amounts paid or to be paid in settlement) reasonably incurred or
suffered by such person in connection therewith and such indemnification shall
continue as to a person who has ceased to be a director or officer and shall
inure to the benefit of his or her heirs, executors and administrators;
provided, however, that the Corporation shall indemnify any such person seeking
indemnification in connection with a proceeding (or part thereof) initiated by
such person only if such proceeding (or part thereof) was authorized by the
Board of Directors of the Corporation. The right to be indemnified conferred in
this Paragraph 11 shall be a contract right and shall include the right to be
paid by the Corporation the expenses incurred in defending any such proceeding
in advance of its final disposition; provided, however, that the payment of such
expenses incurred by the director or officer in his or her capacity as a
director or officer (and not in any other capacity in which service was or is to
be rendered by such person while a director or officer, including, without
limitation, service to an employee benefit plan), in advance of the final
disposition of proceeding, shall be made only upon delivery to the Corporation
of an undertaking, by or on behalf of such director or officer, to repay all
amounts so advanced if it shall ultimately be determined that such director or
officer is not entitled to be indemnified under this Paragraph or otherwise. The
Corporation may, by action of its Directors, provide indemnification to
employees and agents of the Corporation with the same scope and effect as the
foregoing indemnification of directors and officers.
(c) The indemnification provided by this Paragraph 11 shall not limit or
exclude any rights, indemnities or limitations of liability to which any person
may be entitled, whether as a matter of law, under the By-Laws of the
Corporation, by agreement, vote of the stockholders or disinterested directors
of the Corporation or otherwise.
(d) If a claim under paragraph (b) of this Paragraph 11 is not paid in full
by the Corporation within sixty (60) days after a written claim has been
received by the Corporation, the claimant may at any time thereafter bring suit
against the Corporation to recover the unpaid amount of the claim and, if
successful in whole or in part, the claimant shall be entitled to be paid also
the expense of prosecuting such claim. It shall be a defense to any such action
(other than an action brought to enforce a claim for expenses incurred in
defending any proceeding in
22
<PAGE>
advance of its final disposition where the required undertaking, if any is
required, has been tendered to the Corporation) that the claimant has not met
the standards of conduct which make it permissible under the General Corporation
Law of the State of Delaware for the Corporation to indemnify the claimant for
the amount claimed, but the burden of proving such defense shall be on the
Corporation. Neither the failure of the Corporation (including its Board,
independent legal counsel, or its stockholders) to have made a determination
prior to the commencement of such action that indemnification of the claimant is
proper in the circumstances because he or she has met the applicable standard or
conduct set forth in the General Corporation Law of the State of Delaware, nor
an actual determination by the Corporation (including its Board, independent
legal counsel, or its stockholders) that the claimant has not met such
applicable standard of conduct, shall create a presumption that the claimant has
not met the applicable standard of conduct.
(e) The Corporation may maintain insurance, at its expense, to protect
itself and any director, officer, employee or agent of the corporation or
another corporation, partnership, joint venture, trust or other enterprise
against any such expense, liability or loss, whether or not the Corporation
would have the power to indemnify such person against such expense, liability or
loss under the General Corporation Law of the State of Delaware.
12. Amendment or Repeal. The affirmative vote of the holders of record of
outstanding shares representing at least eighty percent (80%) of the voting
power of all the outstanding Voting Stock of the Corporation shall be required
to amend, alter or repeal, or adopt any provision or provisions inconsistent
with, any provision of Paragraphs 6, 7 and 8 and this Paragraph 12; provided,
however, that this Paragraph 12 shall not apply to, and such eighty percent
(80%) vote shall not be required for, any amendment, alteration, repeal or
adoption of any inconsistent provision or provisions, declared advisable by the
Board of Directors by the affirmative vote of two-thirds of the entire Board of
Directors and a majority of the Continuing Directors.
23
<PAGE>
CERTIFICATE OF AMENDMENT
OF
CERTIFICATE OF INCORPORATION
OF
CORNING CLINICAL LABORATORIES INC.
Corning Clinical Laboratories Inc. (the "Corporation"), a corporation
organized and existing under and by virtue of the General Corporation Law of the
State of Delaware,
DOES HEREBY CERTIFY:
FIRST: At a meeting of the Board of Directors, resolutions were duly
adopted authorizing the amendment and restatement of the Certificate of
Incorporation of the Corporation as set forth in Exhibit A hereto, declaring
said amendment to be advisable and presenting such amendment to the stockholders
of the Corporation for consideration thereof.
SECOND: That said amendment was approved by the sole stockholder of the
Corporation at a duly convened meeting of the Board of Directors of such sole
stockholder in accordance with the General Corporation Law of the State of
Delaware.
THIRD: That said amendment was duly adopted in accordance with the
provisions of Section 242 of the General Corporation Law of the State of
Delaware.
IN WITNESS WHEREOF, the Corporation has caused this certificate to be signed by
Raymond C. Marier, its Senior Vice President, General Counsel and Secretary and
Leo C. Farrenkopf, Jr. its Assistant Secretary, this ____ day of December, 1996.
By:
------------------------------------------
Raymond C. Marier
Senior Vice President, General Counsel
and Secretary
Attest:
------------------------------------------
Leo C. Farrenkopf, Jr.
Assistant Secretary
24
QUEST DIAGNOSTICS INCORPORATED
A Delaware corporation (formerly known as Corning Clinical Laboratories Inc.,
MetPath Inc. and Corning Lab Services Inc.)
AMENDED AND RESTATED BY-LAWS
Effective December 31, 1996
<PAGE>
QUEST DIAGNOSTICS INCORPORATED
A Delaware corporation
AMENDED AND RESTATED BY-LAWS
TABLE OF CONTENTS
ARTICLE I
STOCKHOLDERS
Page
Section 1.01 Annual Meetings...............................................1
Section 1.02 Special Meetings..............................................1
Section 1.03 Notice of Meetings............................................1
Section 1.04 Business Transacted at Special
Meetings of Stockholders......................................1
Section 1.05 Quorum........................................................1
Section 1.06 Nominations and Stockholder
Business......................................................2
ARTICLE II
BOARD OF DIRECTORS
Section 2.01 General Powers................................................4
Section 2.02 Number and Term of Office.....................................4
Section 2.03 Annual and Regular Meetings...................................4
Section 2.04 Special Meetings; Notice......................................4
Section 2.05 Telephonic Meetings...........................................5
Section 2.06 Quorum and Vote...............................................5
Section 2.07 Action Without a Meeting......................................5
Section 2.08 Manner of Acting..............................................5
Section 2.09 Resignations..................................................5
Section 2.10 Reliance on Accounts and
Reports, etc..................................................5
Section 2.11 Committees....................................................5
ARTICLE III
OFFICERS
Section 3.01 Number and Designation........................................6
Section 3.02 Additional Officers...........................................6
(i)
<PAGE>
Page
Section 3.03 Election......................................................6
Section 3.04 Removal and Vacancies.........................................6
Section 3.05 Duties of the Chairman of
the Board of Directors........................................6
Section 3.06 Duties of the President.......................................6
Section 3.07 Duties of the Vice President .................................7
Section 3.08 Duties of the Secretary.......................................7
Section 3.09 Duties of the Treasurer.......................................7
Section 3.10 Duties of the Controller......................................7
Section 3.11 Duties of the Assistant Secretary.............................7
Section 3.12 Duties of the Assistant Controller............................8
Section 3.13 Duties of the Assistant Treasurer.............................8
ARTICLE IV
EXECUTION OF INSTRUMENTS; DEPOSITS; FINANCES
Section 4.01 General.......................................................8
Section 4.02 Corporate Indebtedness........................................8
Section 4.03 Checks, Drafts, etc...........................................8
Section 4.04 Deposits......................................................9
Section 4.05 Dividends.....................................................9
Section 4.06 Fiscal Year...................................................9
ARTICLE V
CAPITAL STOCK
Section 5.01 Certificates of Stock.........................................9
ARTICLE VI
SEAL; OFFICES
Section 6.01 Seal..........................................................9
Section 6.02 Offices......................................................10
ARTICLE VII
INDEMNIFICATION
Section 7.01 Indemnification..............................................10
ARTICLE VIII
AMENDMENTS
Section 8.01 Amendments...................................................12
(ii)
<PAGE>
AMENDED AND RESTATED BY-LAWS
OF
QUEST DIAGNOSTICS INCORPORATED
ARTICLE I
STOCKHOLDERS
Section 1.01. Annual Meetings. The annual meeting of the stockholders of the
Corporation for the election of directors and for the transaction of such other
business as properly may come before such meeting shall be held at such place
either within or outside the State of Delaware, at such time and date as shall
be fixed from time to time by resolution of the Board of Directors and as set
forth in the notice of the meeting.
Section 1.02. Special Meetings. Special meetings of the stockholders may be
called at any time by the Chairman of the Board of Directors, if any, or by the
President (or, in the absence or disability of the Chairman of the Board and the
President, by any Vice President), or by the Board of Directors. Such special
meetings of the stockholders shall be held at such places, within or outside the
State of Delaware, as shall be specified in the respective notices or waivers of
notice thereof.
Section 1.03. Notice of Meetings. The Secretary or any Assistant Secretary shall
cause written notice of the date, time and place of each meeting of the
stockholders to be given, at least ten but not more than fifty days prior to the
meeting, to each stockholder of record entitled to vote. Such notice shall be
given either personally or by mail or other means of written communication,
addressed to each stockholder at the address of such stockholder appearing on
the books of the Corporation at the time such notice is dispatched. Such further
notice shall be given as may be required by law. Notice of any meeting of
stockholders need not be given to any stockholder who shall sign a waiver of
such notice in writing, whether before or after the time of such meeting. Notice
of any adjourned meeting of the stockholders of the Corporation need not be
given.
Section 1.04. Business Transacted at Special Meetings of Stockholders. Business
transacted at any special meeting of stockholders shall be limited to the
purposes stated in the notice thereof.
Section 1.05 Quorum. Except as at the time otherwise required by statute or by
the Certificate of Incorporation, the presence at any stockholders meeting, in
person or by proxy, of the holders of record of shares of stock (of any class)
entitled to vote at the meeting, aggregating a majority of the total number of
shares of stock of all classes then issued and outstanding and entitled to vote
at the meeting, shall be necessary and sufficient to constitute a quorum for the
transaction of business.
<PAGE>
2
Section 1.06. Nominations and Stockholder Business.
(a) Annual Meeting of Stockholders.
(1) Nominations of persons for election to the Board of Directors of the
Corporation and the proposal of business to be considered by the stockholders
may be made at an annual meeting of stockholders (i) pursuant to the
Corporation's notice of meeting, (ii) by or at the direction of the Board of
Directors or (iii) by any stockholder of the Corporation who was a stockholder
of record at the time of giving of notice provided for in this Section 1.06, who
is entitled to vote at the meeting and who complied with the notice procedures
set forth in this Section 1.06.
(2) For nominations or other business to be properly brought before an annual
meeting by a stockholder pursuant to clause (iii) of paragraph (a)(1) of this
Section 1.06, the stockholder must have given timely notice thereof in writing
to the Secretary of the Corporation. To be timely, a stockholder's notice shall
be delivered to the Secretary at the principal executive offices of the
Corporation not less than 60 days nor more than 90 days prior to the first
anniversary of the preceding year's annual meeting; provided, however, that in
the event that the date of the annual meeting is advanced by more than 30 days
or delayed by more than 60 days from such anniversary date, notice by the
stockholder to be timely must be so delivered not earlier than the 90th day
prior to such annual meeting and not later than the close of business on the
later of the 60th day prior to such annual meeting or the 10th day following the
day on which public announcement of the date of such meeting is first made. Such
stockholder's notice shall set forth (i) as to each person whom the stockholder
proposes to nominate for election or reelection as a director all information
relating to such person that is required to be disclosed in solicitations of
proxies for election of directors, or is otherwise required, in each case
pursuant to Regulation 14A under the Securities Exchange Act of 1934, as amended
(the "Exchange Act") (including such person's written consent to being named in
the proxy statement as a nominee and to serving as a director if elected); (ii)
as to any other business that the stockholder proposes to bring before the
meeting, a brief description of the business desired to be brought before the
meeting, the reasons for conducting such business at the meeting and any
material interest in such business of such stockholder and the beneficial owner,
if any, on whose behalf the proposal is made; and (iii) as to the stockholder
giving the notice and the beneficial owner, if any, on whose behalf the
nomination or proposal is made (A) the name and address of such stockholder, as
they appear on the Corporation's books, and of such beneficial owner and (B) the
class and number of shares of the Corporation which are owned beneficially and
of record by such stockholder and such beneficial owner.
(3) Notwithstanding, anything in the second sentence of paragraph (a)(2) of this
Section 1.06 to the contrary, in the event that the number of directors to be
elected to the Board of Directors of the Corporation is increased and there is
no public announcement naming all of the nominees for Director or specifying the
size of the increased Board of Directors made by the Corporation at least 70
days prior to the first anniversary of the preceding
<PAGE>
3
year's annual meeting,a stockholder's notice required by this Section 1.06 shall
also be considered timely, but only with respect to nominees for any new
position created by such increase, if it shall be delivered to the Secretary at
the principal executive offices of the Corporation not later than the close of
business on the 10th day following the day on which such public announcement is
first made by the Corporation.
(b) Special Meetings of Stockholders. Only such business shall be conducted at a
special meeting of stockholders as shall have been brought before the meeting
pursuant to the Corporation's notice of meeting. Nominations of persons for
election to the Board of Directors may be made at a special meeting of
stockholders at which directors are to be elected pursuant to the Corporation's
notice of meeting (i) by or at the direction of the Board of Directors or (ii)
by any stockholder of the Corporation who is a stockholder of record at the time
of giving of notice provided for in this Section 1.06, who shall be entitled to
vote at the meeting and who complies with the notice procedures set forth in
this Section 1.06. Nominations by stockholders of persons for election to the
Board of Directors may be made at such a special meeting of stockholders if the
stockholder's notice required by paragraph (a)(2) of this Section 1.06 shall be
delivered to the Secretary at the principal executive offices of the Corporation
not earlier than the 90th day prior to such special meeting, and not later than
the close of business on the later of the 60th day prior to such special meeting
or the 10th day following the day on which public announcement is first made of
the date of the special meeting and of the nominees proposed by the Board of
Directors to be elected at such meeting.
(c) General.
(1) Only such persons who are nominated in accordance with the procedures set
forth in this Section 1.06 shall be eligible to serve as directors and only such
business shall be conducted at a meeting of stockholders as shall have been
brought before the meeting in accordance with the procedures set forth in this
Section 1.06. The Chairman of the meeting shall have the power and duty to
determine whether a nomination or any business proposed to be brought before the
meeting, was made in accordance with the procedures set forth in this Section
1.06 and, if any proposed nomination or business is not in compliance with this
Section 1.06, to declare that such defective proposal shall be disregarded.
(2) For purposes of this Section 1.06, "public announcement" shall mean
disclosure in a press release reported by the Dow Jones News Service, Associated
Press or comparable national news service or in a document publicly filed by the
Corporation with the Securities and Exchange Commission pursuant to Section 13,
14 or 15(d) of the Exchange Act.
(3) Notwithstanding the foregoing provisions of this Section 1.06, a stockholder
shall also comply with all applicable requirements of the Exchange Act and the
rules and regulations thereunder with respect to the matters set forth in this
Section 1.06. Nothing in this Section 1.06 shall be deemed to affect any rights
of stockholders to request
<PAGE>
4
inclusion of proposals in the Corporation's proxy statement pursuant to Rule
14a-8 under the Exchange Act.
ARTICLE II
BOARD OF DIRECTORS
Section 2.01 General Powers. The property, affairs and business of the
Corporation shall be managed by the Board of Directors. The Board of Directors
may exercise all the powers of the Corporation, whether derived from law or the
Certificate of Incorporation, except such powers as are, by statute, by the
Certificate of Incorporation or by these By-Laws, vested solely in the
stockholders of the Corporation. No Director need be a stockholder of the
Corporation.
Section 2.02 Number and Term of Office. The Board of Directors shall consist of
such number (but in no event less than three nor more than twelve) of Directors
as may be determined from time to time by resolution adopted by affirmative vote
of a majority of the whole Board of Directors. Each Director (whenever elected)
shall hold office until his or her successor shall have been elected and shall
have qualified, or until his or her death, or until he or she shall have
resigned in the manner provided in Section 2.09 hereof or shall have been
removed in accordance with the Certificate of Incorporation.
Section 2.03 Annual and Regular Meetings. The annual meeting of the Board of
Directors, for the choosing of officers and for the transaction of such other
business as may come before the meeting, shall be held in each year as soon as
possible after the annual meeting of the stockholders at the place of such
annual meeting of the stockholders, and notice of such annual meeting of the
Board of Directors shall not be required to be given. The Board of Directors
from time to time may provide by resolution for the holding of regular meetings
and fix the time and place (which may be within or outside the State of
Delaware) thereof. Notice of such regular meetings need not be given; provided,
however, that in case the Board of Directors shall fix or change the time or
place of regular meetings, notice of such action shall be given personally or by
mail, facsimile or similar means of communication promptly to each Director who
shall not have been present at the meeting at which such action was taken.
Section 2.04 Special Meetings; Notice. Special meetings of the Board of
Directors shall be held whenever called by the Chairman of the Board, if any, or
by the President (or, in the absence or disability of the Chairman of the Board
and the President, by any Vice President), or by any two Directors, at such time
and place (which may be within or outside of the State of Delaware) as may be
specified in the respective notices or waivers of notice thereof. Special
meetings of the Board of Directors may be called on two days' notice to each
Director, personally or by telephone or facsimile or on four days' notice by
mail. Notice of any special meeting need not be given to any Director who shall
be present at such meeting, or to any Director who shall waive notice of such
meeting in
<PAGE>
5
writing, whether before or after the time of such meeting, and any business may
be transacted thereat. No notice need be given of any adjourned meeting.
Section 2.05 Telephonic Meetings. Directors may participate in a meeting of the
Board of Directors, or a meeting of any committee designated by the Board, by
means of conference telephone or similar communications equipment by means of
which all persons participating in the meeting can hear each other, and
participation in a meeting pursuant to this By-Law shall constitute presence in
person at such meeting.
Section 2.06 Quorum and Vote. At all meetings of the Board of Directors, the
presence of a majority of the total authorized number of Directors under Section
2.02 hereof shall be necessary and sufficient to constitute a quorum for the
transaction of business. Except when otherwise required by statute, the vote of
a majority of the total number of Directors present and acting at a meeting at
which a quorum is present shall be the act of the Board of Directors. In the
absence of a quorum, a majority of the Directors present may adjourn the meeting
from time to time, until a quorum shall be present.
Section 2.07 Action Without a Meeting. Any action required or permitted to be
taken at any meeting of the Board of Directors or any meeting of a Committee of
the Board of Directors may be taken without a meeting, if written consents
thereto are signed by all members of the Board or Committee and such written
consents are filed with the minutes of proceedings of the Board.
Section 2.08 Manner of Acting. The Directors shall act only as a Board, and the
individual Directors shall have no power as such, except as permitted by
statute.
Section 2.09 Resignations. Any Director may resign at any time by delivering a
written resignation to the Chairman of the Board, if any, the President, a Vice
President, the Secretary or any Assistant Secretary. Unless otherwise specified
therein, such resignation shall take effect upon delivery.
Section 2.10 Reliance on Accounts and Reports, etc. A Director, or a member of
any committee designated by the Board of Directors, in the performance of his or
her duties, shall be fully protected in relying in good faith on the records of
the Corporation and upon such information, opinions, reports or statements
presented to the Corporation by any of its officers or employees, or committees
of the Board of Directors or by any other person as to matters the Director or
member reasonably believes are within such other person's professional or expert
competence and who has been selected with reasonable care by or on behalf of the
Corporation.
Section 2.11 Committees. The Board may establish such committees having such
responsibilities and composition as it shall from time to time by resolution
determine.
<PAGE>
6
ARTICLE III
OFFICERS
Section 3.01 Number and Designation. The officers of the Corporation shall be
chosen by the Board of Directors and may include a Chairman of the Board, a
President, a Vice President, a Secretary, a Controller and a Treasurer who shall
hold office until their successors are chosen and qualify or their earlier
resignation or removal. The Board of Directors may also choose additional Vice
Presidents, and one or more Assistant Secretaries, Assistant Controllers and
Assistant Treasurers. Any one or more of such Vice Presidents may be designated
as Executive or Senior Vice President. Any number of offices may be held by the
same person, except that no person shall simultaneously hold the offices of
Chairman or President and Secretary, Treasurer or Controller. The Chairman shall
be a member of the Board of Directors. The Board may also designate any Vice
Presidents as Chief Financial Officer and as General Counsel.
Section 3.02 Additional Officers. The Board of Directors may appoint such other
officers and agents as it shall deem necessary who shall hold their offices for
such terms and shall exercise such powers and perform such duties as shall be
determined from time to time by the Board of Directors. The Board of Directors
may also delegate its Chairman or the President to appoint and remove such
additional officers as the Chairman or the President, as the case may be, shall
designate in writing, with such limited authority as shall be set forth in
writing, and such appointments shall be reported to the Board of Directors.
Section 3.03 Election. The Board of Directors at its first meeting or such
subsequent meetings as shall be held prior to its first annual meeting, and
thereafter annually at its annual meeting, shall choose the officers of the
Corporation. If any officers are not chosen at an annual meeting, such officers
may be chosen at any subsequent regular or special meeting.
Section 3.04 Removal and Vacancies. Any officer elected or appointed by the
Board of Directors may be removed at any time by the affirmative vote of a
majority of the Board of Directors, either with or without cause. Any vacancy
occurring in any office of the Corporation shall be filled by the Board of
Directors.
Section 3.05 Duties of the Chairman of the Board of Directors. The Chairman of
the Board of Directors, if present, shall preside at all stockholders' meetings
and all meetings of the Board at which he is present and shall have such other
duties as shall be assigned to him or her by the Board of Directors. The
Chairman may be the Chief Executive Officer of the Corporation.
Section 3.06 Duties of the President. The President shall have direct charge of
the business of the Corporation, subject to the general control of the Board of
Directors, and may be the Chief Executive Officer and/or the Chief Operating
Officer of the
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7
Corporation. In the absence of the Chairman of the Board or if no Chairman of
the Board has been chosen, the President shall also have the duties of the
Chairman of the Board.
Section 3.07 Duties of the Vice President. In the event of the absence or
disability of the Chairman of the Board and the President, the Executive or
Senior Vice President, if any, or if absent, any Vice President designated by
the Board of Directors, shall perform all the duties of the President, and when
so acting, shall have all the powers of, and be subject to all the restrictions
upon, the President. Except where by law the signature of the President is
required, each of the Vice Presidents shall possess the same power as the
President to sign all certificates, contracts, obligations and other instruments
of the Corporation. Any Vice President shall perform such other duties and may
exercise such other powers as from time to time may be assigned to him or her by
these By-Laws or by the Board of Directors or the President. An Executive Vice
President may be the Chief Operating Officer of the Corporation.
Section 3.08 Duties of the Secretary. The Secretary shall, if present, act as
Secretary of, and keep the minutes of, all the proceedings of the meetings of
the stockholders and of the Board of Directors and of any committee of the Board
of Directors in one or more books to be kept for that purpose; shall perform
such other duties as shall be assigned to him or her by the President or the
Board of Directors; and, in general, shall perform all duties incident to the
office of Secretary.
Section 3.09 Duties of the Treasurer. The Treasurer shall keep or cause to be
kept full and accurate records of all receipts and disbursements in the books of
the Corporation and shall have the care and custody of all funds and securities
of the Corporation. He or she shall disburse the funds of the Corporation as may
be ordered by the Board of Directors, shall render to the President and the
Board of Directors, whenever they request it, an account of all of his or her
transactions as Treasurer and shall perform such other duties as may be assigned
to him or her by the President or the Board of Directors; and, in general, shall
perform all duties incident to the office of Treasurer.
Section 3.10 Duties of the Controller. The Controller shall be the chief
accounting officer of the Corporation. The Controller shall keep or cause to be
kept all books of account and accounting records of the Corporation and shall
keep and maintain, or cause to be kept and maintained, adequate and correct
accounts of the properties and business transactions of the Corporation. The
Controller shall prepare or cause to be prepared appropriate financial
statements for the Corporation and shall perform such other duties as may be
assigned to him or her by the President or the Board of Directors; and, in
general, shall perform all duties incident to the office of Controller.
Section 3.11 Duties of the Assistant Secretary. The Assistant Secretary, if any,
shall, in the absence or disability of the Secretary, exercise the powers and
perform the duties of the Secretary, and shall perform such other duties as
shall be assigned to him or her by the President or the Board of Directors.
<PAGE>
8
Section 3.12 Duties of the Assistant Controller. The Assistant Controller, if
any, shall, in the absence or disability of the Controller, exercise the powers
and perform the duties of the Controller, and shall perform such other duties as
shall be assigned to him or her by the President or the Board of Directors.
Section 3.13 Duties of the Assistant Treasurer. The Assistant Treasurer, if any,
shall, in the absence or disability of the Treasurer, exercise the powers and
perform the duties of the Treasurer, and shall perform such other duties as
shall be assigned to him or her by the President or the Board of Directors.
ARTICLE IV
EXECUTION OF INSTRUMENTS; DEPOSITS; FINANCES
Section 4.01 General. Subject to the provisions of Sections 4.02, 4.03 and 4.04
hereof, all deeds, documents, transfers, contracts, and agreements and other
instruments requiring execution by the Corporation shall be signed by the
Chairman of the Board, the President, a Vice President or the Treasurer, or as
the Board of Directors may otherwise from time to time authorize by resolution.
Any such authorization may be general or confined to specific instances.
Section 4.02 Corporate Indebtedness. No loan shall be contracted on behalf of
the Corporation, and no evidences of indebtedness shall be issued in its name,
unless authorized by the Board of Directors. Such authorizations of the Board
may be general or confined to specific instances. Loans authorized by the Board
of Directors may be effected at any time for the Corporation from any bank,
trust company or other institution, or from any firm, corporation or individual.
All bonds, debentures, notes and other obligations or evidences of indebtedness
of the Corporation issued for such loans as the Board shall authorize shall be
made, executed and delivered as the Board of Directors shall authorize. All
notes and other obligations or evidences of indebtedness permitted hereunder
without authorization of the Board of Directors shall be signed by the
President, a Vice President or the Treasurer. When so authorized by the Board of
Directors, any part of or all the properties, including contract rights, assets,
business or goodwill of the Corporation, whether then owned or thereafter
acquired, may be mortgaged, pledged, hypothecated or conveyed or assigned in
trust as security for the payment of such bonds, debentures, notes and other
obligations or evidences of indebtedness to the Corporation, and of the interest
thereon, by instruments executed and delivered in the name of the Corporation.
Section 4.03 Checks, Drafts, etc. All checks, drafts, bills of exchange or
orders for the payment of money, issued in the name of the Corporation, shall be
signed only by the Treasurer or such other person or persons and in such manner
as may from time to time be designated by the Board of Directors, which
designation may be general or confined to
<PAGE>
9
specific instances; and unless so designated, no person shall have any power or
authority thereby to bind the Corporation or to pledge its credit or to render
it liable.
Section 4.04 Deposits. All funds of the Corporation not otherwise employed shall
be deposited from time to time to the credit of the Corporation in such banks,
trust companies or other depositories as the Board of Directors may select. The
Board of Directors may make such special rules and regulations with respect to
such bank accounts, not inconsistent with the provisions of these By-Laws, as it
may deem expedient. For the purpose of deposit and for the purpose of collection
for the account of the Corporation, checks, drafts and other orders for the
payment of money which are payable to the order of the Corporation shall be
endorsed, assigned and delivered by the Treasurer or such other person or
persons and in such manner as may from time to time be designated by the Board
of Directors.
Section 4.05 Dividends. Dividends upon the stock of the Corporation, subject to
the provisions of the Certificate of Incorporation, if any, may be declared by
the Board of Directors at any regular or special meeting, pursuant to law. Such
declaration may be continuing or limited to a specific payment or distribution.
Dividends may be paid in cash, in property, or in shares of stock, subject to
the provisions of the Certificate of Incorporation.
Section 4.06 Fiscal Year. The fiscal year of the Corporation shall be the
calendar year, unless otherwise fixed by resolution of the Board of Directors.
ARTICLE V
CAPITAL STOCK
Section 5.01 Certificates of Stock. Every holder of stock in the Corporation
shall be entitled to have a certificate signed by, or in the name of the
Corporation by, the Chairman of the Board of Directors, or the President or a
Vice President, and by the Treasurer or an Assistant Treasurer, or by the
Secretary or an Assistant Secretary of the Corporation, certifying the number of
shares owned by such holder in the Corporation.
ARTICLE VI
SEAL; OFFICES
Section 6.01 Seal. The corporate seal shall have inscribed thereon the name of
the Corporation, the year of its incorporation and the words "Corporate Seal,
Delaware." The seal may be used by causing it or a facsimile thereof to be
impressed or affixed or reproduced or otherwise.
<PAGE>
10
Section 6.02 Offices. The Corporation may have offices at such other places both
within or outside the State of Delaware as the Board of Directors may from time
to time determine or as the business of the Corporation may require.
ARTICLE VII
INDEMNIFICATION
Section 7.01 Indemnification. (a) No director of the Corporation shall have any
personal liability to the Corporation or its stockholders for monetary damages
for breach of fiduciary duty as a director, provided that this provision shall
not eliminate or limit the liability of a director (i) for any breach of the
director's duty of loyalty to the Corporation or its stockholders, (ii) for acts
or omissions not in good faith or which involve intentional misconduct or a
knowing violation of law, (iii) under Section 174 of the General Corporation Law
of the State of Delaware, or (iv) for any transaction from which the director
derived an improper personal benefit.
(b) Each person who was or is made a party or is threatened to be made a
party to or is involved in any action, suit or proceeding, whether civil,
criminal, administrative or investigative (hereinafter a "proceeding"), by
reason of the fact that he or she is or was a director or officer of the
Corporation or is or was serving at the request of the Corporation as a director
or officer of another corporation or of a partnership, joint venture, trust or
other enterprise, including service with respect to employee benefit plans,
whether the basis of such proceeding is alleged action either in an official
capacity as a director or officer or in any other capacity while serving as a
director or officer, shall be indemnified and held harmless by the Corporation
to the fullest extent authorized by the General Corporation Law of the State of
Delaware, as the same exists or may hereafter be amended (but, in the case of
any such amendment, only to the extent that such amendment permits the
Corporation to provide broader indemnification rights than said law permitted
the Corporation to provide prior to such amendment), against all expenses,
liability and loss (including attorneys' fees, judgments, fines, excise taxes
pursuant to the Employee Retirement Income Security Act of 1974, as amended, or
penalties and amounts paid or to be paid in settlement) reasonably incurred or
suffered by such person in connection therewith and such indemnification shall
continue as to a person who has ceased to be a director or officer and shall
inure to the benefit of his or her heirs, executors and administrators;
provided, however, that, the Corporation shall indemnify any such person seeking
indemnification in connection with a proceeding (or part thereof) initiated by
such person only if such proceeding (or part thereof) was authorized by the
Board of Directors of the Corporation. The right to be indemnified conferred in
this Section 7.01 shall be a contract right and shall include the right to be
paid by the Corporation the expenses incurred in defending any such proceeding
in advance of its final disposition; provided, however, that, the payment of
such expenses incurred by the director or officer in his or her capacity as a
director or officer (and not in any other capacity in which service was or is to
be rendered by such person while a director
<PAGE>
11
or officer, including, without limitation, service to an employee benefit plan),
in advance of the final disposition of proceeding, shall be made only upon
delivery to the Corporation of an undertaking, by or on behalf of such director
or officer, to repay all amounts so advanced if it shall ultimately be
determined that such director or officer is not entitled to be indemnified under
this Article or otherwise. The Corporation may, by action of its Directors,
provide indemnification to employees and agents of the Corporation with the same
scope and effect as the foregoing indemnification of directors and officers.
(c) The indemnification provided by this Section 7.01 shall not limit or
exclude any rights, indemnities or limitations of liability to which any person
may be entitled, whether as a matter of law, under the Certificate of
Incorporation of the Corporation, by agreement, vote of the stockholders or
disinterested directors of the Corporation or otherwise.
(d) If a claim under paragraph (b) of this Section 7.01 is not paid in full
by the Corporation within sixty (60) days after a written claim has been
received by the Corporation, the claimant may at any time thereafter bring suit
against the Corporation to recover the unpaid amount of the claim and, if
successful in whole or in part, the claimant shall be entitled to be paid also
the expense of prosecuting such claim. It shall be a defense to any such action
(other than an action brought to enforce a claim for expenses incurred in
defending any proceeding in advance of its final disposition where the required
undertaking, if any is required, has been tendered to the Corporation) that the
claimant has not met the standards of conduct which make it permissible under
the General Corporation Law of the State of Delaware for the Corporation to
indemnify the claimant for the amount claimed, but the burden of proving such
defense shall be on the Corporation. Neither the failure of the Corporation
(including its Board, independent legal counsel, or its stockholders) to have
made a determination prior to the commencement of such action that
indemnification of the claimant is proper in the circumstances because he or she
has met the applicable standard or conduct set forth in the General Corporation
Law of the State of Delaware, nor an actual determination by the Corporation
(including its Board, independent legal counsel, or its stockholders) that the
claimant has not met such applicable standard of conduct, shall create a
presumption that the claimant has not met the applicable standard of conduct.
(e) The Corporation may maintain insurance, at its expense, to protect
itself and any director, officer, employee or agent of the corporation or
another corporation, partnership, joint venture, trust or other enterprise
against any such expense, liability or loss, whether or not the Corporation
would have the power to indemnify such person against such expense, liability or
loss under the General Corporation Law of the State of Delaware.
<PAGE>
12
ARTICLE VIII
AMENDMENTS
Section 8.01 Amendments. These By-Laws may only be altered or repealed and new
By-Laws adopted by resolution of the Board of Directors.
- --------------------------------------------------------------------------------
RIGHTS AGREEMENT
----------------
CORNING CLINICAL LABORATORIES INC.
and
HARRIS TRUST AND SAVINGS BANK
Rights Agent
----------------
Dated as of December 31, 1996
- --------------------------------------------------------------------------------
<PAGE>
TABLE OF CONTENTS
Page
Section 1. Certain Definitions......................................... 1
Section 2. Appointment of Rights Agent................................. 10
Section 3. Issue of Right Certificates................................. 10
Section 4. Form of Right Certificates.................................. 14
Section 5. Countersignature and Registration........................... 15
Section 6. Transfer, Split Up, Combination and
Exchange of Right Certificates;
Mutilated, Destroyed, Lost or
Stolen Right Certificates............................... 16
Section 7. Exercise of Rights; Purchase Price;
Expiration Date of Rights............................... 17
Section 8. Cancellation and Destruction of
Right Certificates...................................... 20
Section 9. Availability of Preferred Shares............................ 20
Section 10. Preferred Shares Record Date................................ 22
Section 11. Adjustment of Purchase Price, Number of
Shares or Number of Rights.............................. 23
Section 12. Certificate of Adjusted Purchase Price
or Number of Shares..................................... 37
Section 13. Consolidation, Merger or Sale or Transfer
of Assets or Earning Power.............................. 38
Section 14. Fractional Rights and Fractional Shares..................... 40
Section 15. Rights of Action............................................ 43
<PAGE>
Page
Section 16. Agreement of Right Holders.................................. 44
Section 17. Right Certificate Holder Not Deemed a
Stockholder............................................. 45
Section 18. Concerning the Rights Agent................................. 45
Section 19. Merger or Consolidation or Change of
Name of Rights Agent.................................... 46
Section 20. Duties of Rights Agent...................................... 48
Section 21. Change of Rights Agent...................................... 52
Section 22. Issuance of New Right Certificates.......................... 54
Section 23. Redemption.................................................. 54
Section 24. Exchange.................................................... 56
Section 25. Notice of Certain Events.................................... 58
Section 26. Notices..................................................... 60
Section 27. Supplements and Amendments.................................. 61
Section 28. Successors.................................................. 62
Section 29. Benefits of this Agreement.................................. 62
Section 30. Severability................................................ 62
Section 31. Governing Law............................................... 63
Section 32. Counterparts................................................ 63
Section 33. Descriptive Headings........................................ 63
Signatures............................................................... 64
Exhibit A - Form of Right Certificate
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<PAGE>
Agreement, dated as of December 31, 1996, between Corning Clinical
Laboratories Inc., a Delaware corporation (the "Company"), and Harris Trust and
Savings Bank (the "Rights Agent").
The Board of Directors of the Company has authorized and declared a
dividend of one preferred share purchase right (a "Right") for each Common Share
(as hereinafter defined) of the Company outstanding on December 31, 1996 (the
"Record Date"), each Right representing the right to purchase one one-hundredth
of a Preferred Share (as hereinafter defined), upon the terms and subject to the
conditions herein set forth, and has further authorized and directed the
issuance of one Right with respect to each Common Share that shall become
outstanding between the Record Date and the earliest of the Distribution Date,
the Redemption Date and the Final Expiration Date (as such terms are hereinafter
defined).
Accordingly, in consideration of the premises and the mutual agreements
herein set forth, the parties hereby agree as follows:
Section 1. Certain Definitions. For purposes of this Agreement, the
following terms have the meanings indi cated:
<PAGE>
(a) "Acquiring Person" shall mean any Person (as such term is
hereinafter defined) who or which, together with all Affiliates and Associates
(as such terms are hereinafter defined) of such Person, shall be the Beneficial
Owner (as such term is hereinafter defined) of 20% or more of the Common Shares
of the Company then outstanding, but shall not include the Company, any
Subsidiary (as such term is hereinafter defined) of the Company, any employee
benefit plan of the Company or any Subsidiary of the Company, or any entity
holding Common Shares for or pursuant to the terms of any such plan.
Notwithstanding the foregoing, no Person shall become an "Acquiring Person" as
the result of an acquisition of Common Shares by the Company which, by reducing
the number of shares outstanding, increases the proportionate number of shares
beneficially owned by such Person to 20% or more of the Common Shares of the
Company then outstanding; provided, however, that if a Person shall become the
Beneficial Owner of 20% or more of the Common Shares of the Company then
outstanding by reason of share purchases by the Company and shall, after such
share purchases by the Company, become the Beneficial Owner of any additional
Common Shares of the Company, then such Person shall be deemed to be an
"Acquiring Person". Notwithstanding the foregoing, if the Board of Directors of
the Company determines in good faith that a Person who would otherwise be an
"Acquiring Person", as defined pursuant to the foregoing provisions of this
paragraph (a), has become such inadvert-
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<PAGE>
ently, and such Person divests as promptly as practicable a sufficient number of
Common Shares so that such Person would no longer be an "Acquiring Person," as
defined pursuant to the foregoing provisions of this paragraph (a), then such
Person shall not be deemed to be an "Acquiring Person" for any purposes of this
Agreement.
(b) "Affiliate" and "Associate" shall have the respective meanings
ascribed to such terms in Rule 12b-2 of the General Rules and Regulations under
the Securities Exchange Act of 1934, as amended (the "Exchange Act"), as in
effect on the date of this Agreement.
(c) A Person shall be deemed the "Beneficial Owner" of and shall be
deemed to "beneficially own" any securities:
(i) which such Person or any of such Person's Affiliates or Associates
beneficially owns, directly or indirectly;
(ii) which such Person or any of such Person's Af filiates or
Associates has (A) the right to acquire (whether such right is
exercisable immediately or only after the passage of time) pursuant to
any agreement, arrangement or understanding (other than customary
agreements with and between underwriters and selling group
-6-
<PAGE>
members with respect to a bona fide public offering of securities), or
upon the exercise of conversion rights, exchange rights, rights (other
than these Rights), warrants or options, or otherwise; provided,
however, that a Person shall not be deemed the Beneficial Owner of, or
to beneficially own, securities tendered pursuant to a tender or
exchange offer made by or on behalf of such Person or any of such
Person's Affiliates or Associates until such tendered securities are
accepted for purchase or exchange; or (B) the right to vote pursuant to
any agreement, arrangement or understanding; provided, however, that a
Person shall not be deemed the Beneficial Owner of, or to beneficially
own, any security if the agreement, arrangement or understanding to
vote such security (1) arises solely from a revocable proxy or consent
given to such Person in response to a public proxy or consent
solicitation made pursuant to, and in accordance with, the applicable
rules and regulations promulgated under the Exchange Act and (2) is not
also then reportable on Schedule 13D under the Exchange Act (or any
comparable or successor report); or
(iii) which are beneficially owned, directly or indirectly, by any
other Person with which such Person or any of such Person's Affiliates
or Associates has any agreement, arrangement or understanding (other
than cus-
-7-
<PAGE>
tomary agreements with and between underwriters and selling group
members with respect to a bona fide public offering of securities) for
the purpose of acquiring, holding, voting (except to the extent
contemplated by the proviso to Section 1(c)(ii)(B)) or disposing of any
securities of the Company.
Notwithstanding anything in this definition of Beneficial Ownership to
the contrary, the phrase "then outstanding," when used with reference to a
Person's Beneficial Ownership of securities of the Company, shall mean the
number of such securities then issued and outstanding together with the number
of such securities not then actually issued and outstanding which such Person
would be deemed to own beneficially hereunder.
(d) "Business Day" shall mean any day other than a Saturday, a Sunday,
or a day on which banking institutions in State of Delaware are authorized or
obligated by law or executive order to close.
(e) "Close of business" on any given date shall mean 5:00 P.M., Chicago
time, on such date; provided, however, that if such date is not a Business Day
it shall mean 5:00 P.M., Chicago time, on the next succeeding Business Day.
-8-
<PAGE>
(f) "Common Shares" when used with reference to the Company shall mean
the shares of common stock, par value $.01 per share, of the Company. "Common
Shares" when used with reference to any Person other than the Company shall mean
the capital stock (or equity interest) with the greatest voting power of such
other Person or, if such other Person is a Subsidiary of another Person, the
Person or Persons which ultimately control such first-mentioned Person.
(g) "Distribution Date" shall have the meaning set forth in Section 3
hereof.
(h) "Final Expiration Date" shall have the meaning set forth in Section
7 hereof.
(i) "Person" shall mean any individual, firm, corporation or other
entity, and shall include any successor (by merger or otherwise) of such entity.
(j) "Preferred Shares" shall mean shares of Series A Junior
Participating Preferred Stock, par value $1 per share, of the Company.
(k) "Redemption Date" shall have the meaning set forth in Section 7
hereof.
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<PAGE>
(l) "Shares Acquisition Date" shall mean the first date of public
announcement by the Company or an Acquiring Person that an Acquiring Person has
become such.
(m) "Subsidiary" of any Person shall mean any corporation or other
entity of which a majority of the voting power of the voting equity securities
or equity interest is owned, directly or indirectly, by such Person.
Section 2. Appointment of Rights Agent. The Company hereby appoints the
Rights Agent to act as agent for the Company and the holders of the Rights (who,
in accordance with Section 3 hereof, shall prior to the Distribution Date also
be the holders of the Common Shares) in accordance with the terms and conditions
hereof, and the Rights Agent hereby accepts such appointment. The Company may
from time to time appoint such co-Rights Agents as it may deem necessary or
desirable.
Section 3. Issue of Right Certificates. (a) Until the earlier of (i)
the tenth day after the Shares Acquisition Date or (ii) the tenth business day
(or such later date as may be determined by action of the Board of Directors
prior to such time as any Person becomes an Acquiring Person) after the date of
the commencement by any Person (other than the Company, any Subsidiary of the
Company, any employee benefit plan of the Company or of any Subsidiary of the
Company or any entity
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<PAGE>
holding Common Shares for or pursuant to the terms of any such plan) of, or of
the first public announcement of the intention of any Person (other than the
Company, any Subsidiary of the Company, any employee benefit plan of the Company
or of any Subsidiary of the Company or any entity holding Common Shares for or
pursuant to the terms of any such plan) to commence, a tender or exchange offer
the consummation of which would result in any Person becoming the Beneficial
Owner of Common Shares aggregating 20% or more of the then outstanding Common
Shares (including any such date which is after the date of this Agreement and
prior to the issuance of the Rights; the earlier of such dates being herein
referred to as the "Distribution Date"), (x) the Rights will be evidenced
(subject to the provisions of Section 3(b) hereof) by the certificates for
Common Shares registered in the names of the holders thereof (which certificates
shall also be deemed to be Right Certificates) and not by separate Right
Certificates, and (y) the right to receive Right Certificates will be
transferable only in connection with the transfer of Common Shares. As soon as
practicable after the Distribution Date, the Company will prepare and execute,
the Rights Agent will countersign, and the Company will send or cause to be sent
(and the Rights Agent will, if requested, send) by first-class, insured,
postage-prepaid mail, to each record holder of Common Shares as of the close of
business on the Distribution Date, at the address of such holder shown on the
records of the Company, a
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Right Certificate, in substantially the form of Exhibit B hereto (a "Right
Certificate"), evidencing one Right for each Common Share so held. As of the
Distribution Date, the Rights will be evidenced solely by such Right
Certificates.
(b) On the Record Date, or as soon as practicable thereafter, the
Company will send a copy of a Summary of Rights to Purchase Preferred Shares, in
substantially the form of Exhibit B hereto (the "Summary of Rights"), by
first-class, postage-prepaid mail, to each record holder of Common Shares as of
the close of business on the Record Date, at the address of such holder shown on
the records of the Company. With respect to certificates for Common Shares
outstanding as of the Record Date, until the Distribution Date, the Rights will
be evidenced by such certificates registered in the names of the holders thereof
together with a copy of the Summary of Rights attached thereto. Until the
Distribution Date (or the earlier of the Redemption Date or the Final Expiration
Date), the surrender for transfer of any certificate for Common Shares
outstanding on the Record Date, with or without a copy of the Summary of Rights
attached thereto, shall also constitute the transfer of the Rights associated
with the Common Shares represented thereby.
(c) Certificates for Common Shares which become outstanding (including,
without limitation, reacquired Common
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Shares referred to in the last sentence of this paragraph (c)) after the Record
Date but prior to the earliest of the Distribution Date, the Redemption Date or
the Final Expiration Date shall have impressed on, printed on, written on or
otherwise affixed to them the following legend:
This certificate also evidences and entitles the holder hereof to
certain rights as set forth in a Rights Agreement between Corning
Clinical Laboratories Inc. and Harris Trust and Savings Bank, dated as
of December 31, 1996 (the "Rights Agreement"), the terms of which are
hereby incorporated herein by reference and a copy of which is on file
at the principal executive offices of Corning Clinical Laboratories
Inc.. Under certain circumstances, as set forth in the Rights
Agreement, such Rights will be evidenced by separate certificates and
will no longer be evidenced by this certificate. Corning Clinical
Laboratories Inc. will mail to the holder of this certificate a copy of
the Rights Agreement without charge after receipt of a written request
therefor. Under certain circumstances, as set forth in the Rights
Agreement, Rights issued to any Person who becomes an Acquiring Person
(as defined in the Rights Agreement) may become null and void.
With respect to such certificates containing the foregoing legend, until the
Distribution Date, the Rights associated with the Common Shares represented by
such certificates shall be evidenced by such certificates alone, and the
surrender for transfer of any such certificate shall also constitute the
transfer of the Rights associated with the Common Shares represented thereby. In
the event that the Company purchases or acquires any Common Shares after the
Record Date but prior
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to the Distribution Date, any Rights associated with such Common Shares shall be
deemed cancelled and retired so that the Company shall not be entitled to
exercise any Rights associated with the Common Shares which are no longer
outstanding.
Section 4. Form of Right Certificates. The Right Certificates (and the
forms of election to purchase Preferred Shares and of assignment to be printed
on the reverse thereof) shall be substantially the same as Exhibit A hereto and
may have such marks of identification or designation and such legends, summaries
or endorsements printed thereon as the Company may deem appropriate and as are
not inconsistent with the provisions of this Agreement, or as may be required to
comply with any applicable law or with any rule or regulation made pursuant
thereto or with any rule or regulation of any stock exchange on which the Rights
may from time to time be listed, or to conform to usage. Subject to the
provisions of Section 22 hereof, the Right Certificates shall entitle the
holders thereof to purchase such number of one one-hundredths of a Preferred
Share as shall be set forth therein at the price per one one-hundredth of a
Preferred Share set forth therein (the "Purchase Price"), but the number of such
one one-hundredths of a Preferred Share and the Purchase Price shall be subject
to adjustment as provided herein.
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Section 5. Countersignature and Registration. The Right Certificates
shall be executed on behalf of the Company by its Chairman of the Board, its
Vice Chairman, its Chief Executive Officer, its President, any of its Vice
Presidents, or its Treasurer, either manually or by facsimile signature, shall
have affixed thereto the Company's seal or a facsimile thereof, and shall be
attested by the Secretary or an Assistant Secretary of the Company, either
manually or by facsimile signature. The Right Certificates shall be manually
countersigned by the Rights Agent and shall not be valid for any purpose unless
countersigned. In case any officer of the Company who shall have signed any of
the Right Certificates shall cease to be such officer of the Company before
countersignature by the Rights Agent and issuance and delivery by the Company,
such Right Certificates, nevertheless, may be countersigned by the Rights Agent
and issued and delivered by the Company with the same force and effect as though
the person who signed such Right Certificates had not ceased to be such officer
of the Company; and any Right Certificate may be signed on behalf of the Company
by any person who, at the actual date of the execution of such Right
Certificate, shall be a proper officer of the Company to sign such Right
Certificate, although at the date of the execution of this Rights Agreement any
such person was not such an officer.
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Following the Distribution Date, the Rights Agent will keep or cause to
be kept, at its principal office, books for registration and transfer of the
Right Certificates issued hereunder. Such books shall show the names and
addresses of the respective holders of the Right Certificates, the number of
Rights evidenced on its face by each of the Right Certificates and the date of
each of the Right Certificates.
Section 6. Transfer, Split Up, Combination and Exchange of Right
Certificates; Mutilated, Destroyed, Lost or Stolen Right Certificates. Subject
to the provisions of Section 14 hereof, at any time after the close of business
on the Distribution Date, and at or prior to the close of business on the
earlier of the Redemption Date or the Final Expiration Date, any Right
Certificate or Right Certificates (other than Right Certificates representing
Rights that have become void pursuant to Section 11(a)(ii) hereof or that have
been exchanged pursuant to Section 24 hereof) may be transferred, split up,
combined or exchanged for another Right Certificate or Right Certificates,
entitling the registered holder to purchase a like number of one one-hundredths
of a Preferred Share as the Right Certificate or Right Certificates surrendered
then entitled such holder to purchase. Any registered holder desiring to
transfer, split up, combine or exchange any Right Certificate or Right
Certificates shall make such request in writing delivered to the Rights Agent,
and
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shall surrender the Right Certificate or Right Certificates to be transferred,
split up, combined or exchanged at the principal office of the Rights Agent.
Thereupon the Rights Agent shall countersign and deliver to the person entitled
thereto a Right Certificate or Right Certificates, as the case may be, as so
requested. The Company may require payment of a sum sufficient to cover any tax
or governmental charge that may be imposed in connection with any transfer,
split up, combination or exchange of Right Certificates.
Upon receipt by the Company and the Rights Agent of evidence reasonably
satisfactory to them of the loss, theft, destruction or mutilation of a Right
Certificate, and, in case of loss, theft or destruction, of indemnity or
security reasonably satisfactory to them, and, at the Company's request,
reimbursement to the Company and the Rights Agent of all reasonable expenses
incidental thereto, and upon surrender to the Rights Agent and cancellation of
the Right Certificate if mutilated, the Company will make and deliver a new
Right Certificate of like tenor to the Rights Agent for delivery to the
registered holder in lieu of the Right Certificate so lost, stolen, destroyed or
mutilated.
Section 7. Exercise of Rights; Purchase Price; Expiration Date of
Rights. (a) The registered holder of any Right Certificate may exercise the
Rights evidenced thereby
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(except as otherwise provided herein) in whole or in part at any time after the
Distribution Date upon surrender of the Right Certificate, with the form of
election to purchase on the reverse side thereof duly executed, to the Rights
Agent at the principal office of the Rights Agent, together with payment of the
Purchase Price for each one one-hundredth of a Preferred Share as to which the
Rights are exercised, at or prior to the earliest of (i) the close of business
on December 31, 2006 (the "Final Expiration Date"), (ii) the time at which the
Rights are redeemed as provided in Section 23 hereof (the "Redemption Date"), or
(iii) the time at which such Rights are exchanged as provided in Section 24
hereof.
(b) The Purchase Price for each one one-hundredth of a Preferred Share
purchasable pursuant to the exercise of a Right shall initially be $35, and
shall be subject to adjustment from time to time as provided in Section 11 or 13
hereof and shall be payable in lawful money of the United States of America in
accordance with paragraph (c) below.
(c) Upon receipt of a Right Certificate representing exercisable
Rights, with the form of election to purchase duly executed, accompanied by
payment of the Purchase Price for the shares to be purchased and an amount equal
to any applicable transfer tax required to be paid by the holder of such Right
Certificate in accordance with Section 9 hereof by certified
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check, cashier's check or money order payable to the order of the Company, the
Rights Agent shall thereupon promptly (i) (A) requisition from any transfer
agent of the Preferred Shares certificates for the number of Preferred Shares to
be purchased and the Company hereby irrevocably authorizes its transfer agent to
comply with all such requests, or (B) requisition from the depositary agent
depositary receipts representing such number of one one-hundredths of a
Preferred Share as are to be purchased (in which case certificates for the
Preferred Shares represented by such receipts shall be deposited by the transfer
agent with the depositary agent) and the Company hereby directs the depositary
agent to comply with such request, (ii) when appropriate, requisition from the
Company the amount of cash to be paid in lieu of issuance of fractional shares
in accordance with Section 14 hereof, (iii) after receipt of such certificates
or depositary receipts, cause the same to be delivered to or upon the order of
the registered holder of such Right Certificate, registered in such name or
names as may be designated by such holder and (iv) when appropriate, after
receipt, deliver such cash to or upon the order of the registered holder of such
Right Certificate.
(d) In case the registered holder of any Right Certificate shall
exercise less than all the Rights evidenced thereby, a new Right Certificate
evidencing Rights equivalent to the Rights remaining unexercised shall be issued
by the
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Rights Agent to the registered holder of such Right Certificate or to his duly
authorized assigns, subject to the provisions of Section 14 hereof.
Section 8. Cancellation and Destruction of Right Certificates. All
Right Certificates surrendered for the purpose of exercise, transfer, split up,
combination or exchange shall, if surrendered to the Company or to any of its
agents, be delivered to the Rights Agent for cancellation or in cancelled form,
or, if surrendered to the Rights Agent, shall be cancelled by it, and no Right
Certificates shall be issued in lieu thereof except as expressly permitted by
any of the provisions of this Rights Agreement. The Company shall deliver to the
Rights Agent for cancellation and retirement, and the Rights Agent shall so
cancel and retire, any other Right Certificate purchased or acquired by the
Company otherwise than upon the exercise thereof. The Rights Agent shall deliver
all cancelled Right Certificates to the Company, or shall, at the written
request of the Company, destroy such cancelled Right Certificates, and in such
case shall deliver a certificate of destruction thereof to the Company.
Section 9. Availability of Preferred Shares. The Company covenants and
agrees that it will cause to be reserved and kept available out of its
authorized and unissued Preferred Shares or any Preferred Shares held in its
treasury, the number
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of Preferred Shares that will be sufficient to permit the exercise in full of
all outstanding Rights in accordance with Section 7. The Company covenants and
agrees that it will take all such action as may be necessary to ensure that all
Preferred Shares delivered upon exercise of Rights shall, at the time of
delivery of the certificates for such Preferred Shares (subject to payment of
the Purchase Price), be duly and validly authorized and issued and fully paid
and nonassessable shares.
The Company further covenants and agrees that it will pay when due and
payable any and all federal and state transfer taxes and charges which may be
payable in respect of the issuance or delivery of the Right Certificates or of
any Preferred Shares upon the exercise of Rights. The Company shall not,
however, be required to pay any transfer tax which may be payable in respect of
any transfer or delivery of Right Certificates to a person other than, or the
issuance or delivery of certificates or depositary receipts for the Preferred
Shares in a name other than that of, the registered holder of the Right
Certificate evidencing Rights surrendered for exercise or to issue or to deliver
any certificates or depositary receipts for Preferred Shares upon the exercise
of any Rights until any such tax shall have been paid (any such tax being
payable by the holder of such Right Certificate at
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the time of surrender) or until it has been established to the Company's
reasonable satisfaction that no such tax is due.
Section 10. Preferred Shares Record Date. Each person in whose name any
certificate for Preferred Shares is issued upon the exercise of Rights shall for
all purposes be deemed to have become the holder of record of the Preferred
Shares represented thereby on, and such certificate shall be dated, the date
upon which the Right Certificate evidencing such Rights was duly surrendered and
payment of the Purchase Price (and any applicable transfer taxes) was made;
provided, however, that if the date of such surrender and payment is a date upon
which the Preferred Shares transfer books of the Company are closed, such person
shall be deemed to have become the record holder of such shares on, and such
certificate shall be dated, the next succeeding Business Day on which the
Preferred Shares transfer books of the Company are open. Prior to the exercise
of the Rights evidenced thereby, the holder of a Right Certificate shall not be
entitled to any rights of a holder of Preferred Shares for which the Rights
shall be exercisable, including, without limitation, the right to vote, to
receive dividends or other distributions or to exercise any preemptive rights,
and shall not be entitled to receive any notice of any proceedings of the
Company, except as provided herein.
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<PAGE>
Section 11. Adjustment of Purchase Price, Number of Shares or Number of
Rights. The Purchase Price, the number of Preferred Shares covered by each Right
and the number of Rights outstanding are subject to adjustment from time to time
as provided in this Section 11.
(a) (i) In the event the Company shall at any time after the date of
this Agreement (A) declare a dividend on the Preferred Shares payable in
Preferred Shares, (B) subdivide the outstanding Preferred Shares, (C) combine
the outstanding Preferred Shares into a smaller number of Preferred Shares or
(D) issue any shares of its capital stock in a reclassification of the Preferred
Shares (including any such reclassification in connection with a consolidation
or merger in which the Company is the continuing or surviving corporation),
except as otherwise provided in this Section 11(a), the Purchase Price in effect
at the time of the record date for such dividend or of the effective date of
such subdivision, combination or reclassification, and the number and kind of
shares of capital stock issuable on such date, shall be proportionately adjusted
so that the holder of any Right exercised after such time shall be entitled to
receive the aggregate number and kind of shares of capital stock which, if such
Right had been exercised immediately prior to such date and at a time when the
Preferred Shares transfer books of the Company were open, he would have owned
upon such exercise and been entitled to receive by virtue
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of such dividend, subdivision, combination or reclassification; provided,
however, that in no event shall the consideration to be paid upon the exercise
of one Right be less than the aggregate par value of the shares of capital stock
of the Company issuable upon exercise of one Right.
(ii) Subject to Section 24 of this Agreement, in the event any Person
becomes an Acquiring Person, each holder of a Right shall thereafter have a
right to receive, upon exercise thereof at a price equal to the then current
Purchase Price multiplied by the number of one one-hundredths of a Preferred
Share for which a Right is then exercisable, in accordance with the terms of
this Agreement and in lieu of Preferred Shares, such number of Common Shares of
the Company as shall equal the result obtained by (x) multiplying the then
current Purchase Price by the number of one one-hundredths of a Preferred Share
for which a Right is then exercisable and dividing that product by (y) 50% of
the then current per share market price of the Company's Common Shares
(determined pursuant to Section 11(d) hereof) on the date of the occurrence of
such event. In the event that any Person shall become an Acquiring Person and
the Rights shall then be outstanding, the Company shall not take any action
which would eliminate or diminish the benefits intended to be afforded by the
Rights.
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From and after the occurrence of such event, any Rights that are or
were acquired or beneficially owned by any Acquiring Person (or any Associate or
Affiliate of such Acquiring Person) shall be void and any holder of such Rights
shall thereafter have no right to exercise such Rights under any provision of
this Agreement. No Right Certificate shall be issued pursuant to Section 3 that
represents Rights beneficially owned by an Acquiring Person whose Rights would
be void pursuant to the preceding sentence or any Associate or Affiliate
thereof; no Right Certificate shall be issued at any time upon the transfer of
any Rights to an Acquiring Person whose Rights would be void pursuant to the
preceding sentence or any Associate or Affiliate thereof or to any nominee of
such Acquiring Person, Associate or Affiliate; and any Right Certificate
delivered to the Rights Agent for transfer to an Acquiring Person whose Rights
would be void pursuant to the preceding sentence shall be cancelled.
(iii) In the event that there shall not be sufficient Common Shares
issued but not outstanding or authorized but unissued to permit the exercise in
full of the Rights in accordance with the foregoing subparagraph (ii), the
Company shall take all such action as may be necessary to authorize additional
Common Shares for issuance upon exercise of the Rights. In the event the Company
shall, after good faith effort, be unable to take all such action as may be
necessary
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to authorize such additional Common Shares, the Company shall substitute, for
each Common Share that would otherwise be issuable upon exercise of a Right, a
number of Preferred Shares or fraction thereof such that the current per share
market price of one Preferred Share multiplied by such number or fraction is
equal to the current per share market price of one Common Share as of the date
of issuance of such Preferred Shares or fraction thereof.
(b) In case the Company shall fix a record date for the issuance of
rights, options or warrants to all holders of Preferred Shares entitling them
(for a period expiring within 45 calendar days after such record date) to
subscribe for or purchase Preferred Shares (or shares having the same rights,
privileges and preferences as the Preferred Shares ("equivalent preferred
shares")) or securities convertible into Preferred Shares or equivalent
preferred shares at a price per Preferred Share or equivalent preferred share
(or having a conversion price per share, if a security convertible into
Preferred Shares or equivalent preferred shares) less than the then current per
share market price of the Preferred Shares (as defined in Section 11(d)) on such
record date, the Purchase Price to be in effect after such record date shall be
determined by multiplying the Purchase Price in effect immediately prior to such
record date by a fraction, the numerator of which shall be the number of
Preferred Shares
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outstanding on such record date plus the number of Preferred Shares which the
aggregate offering price of the total number of Preferred Shares and/or
equivalent preferred shares so to be offered (and/or the aggregate initial
conversion price of the convertible securities so to be offered) would purchase
at such current market price and the denominator of which shall be the number of
Preferred Shares outstanding on such record date plus the number of additional
Preferred Shares and/or equivalent preferred shares to be offered for
subscription or purchase (or into which the convertible securities so to be
offered are initially convertible); provided, however, that in no event shall
the consideration to be paid upon the exercise of one Right be less than the
aggregate par value of the shares of capital stock of the Company issuable upon
exercise of one Right. In case such subscription price may be paid in a
consideration part or all of which shall be in a form other than cash, the value
of such consideration shall be as determined in good faith by the Board of
Directors of the Company, whose determination shall be described in a statement
filed with the Rights Agent. Preferred Shares owned by or held for the account
of the Company shall not be deemed outstanding for the purpose of any such
computation. Such adjustment shall be made successively whenever such a record
date is fixed; and in the event that such rights, options or warrants are not so
issued, the Purchase Price shall be adjusted to be the Purchase
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Price which would then be in effect if such record date had not been fixed.
(c) In case the Company shall fix a record date for the making of a
distribution to all holders of the Preferred Shares (including any such
distribution made in connection with a consolidation or merger in which the
Company is the continuing or surviving corporation) of evidences of indebtedness
or assets (other than a regular quarterly cash dividend or a dividend payable in
Preferred Shares) or subscription rights or warrants (excluding those referred
to in Section 11(b) hereof), the Purchase Price to be in effect after such
record date shall be determined by multiplying the Purchase Price in effect
immediately prior to such record date by a fraction, the numerator of which
shall be the then current per share market price of the Preferred Shares on such
record date, less the fair market value (as determined in good faith by the
Board of Directors of the Company, whose determination shall be described in a
statement filed with the Rights Agent) of the portion of the assets or evidences
of indebtedness so to be distributed or of such subscription rights or warrants
applicable to one Preferred Share and the denominator of which shall be such
current per share market price of the Preferred Shares; provided, however, that
in no event shall the consideration to be paid upon the exercise of one Right be
less than the aggregate par value of the shares of capital stock of
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the Company to be issued upon exercise of one Right. Such adjustments shall be
made successively whenever such a record date is fixed; and in the event that
such distribution is not so made, the Purchase Price shall again be adjusted to
be the Purchase Price which would then be in effect if such record date had not
been fixed.
(d) (i) For the purpose of any computation hereunder, the "current per
share market price" of any security (a "Security" for the purpose of this
Section 11(d)(i)) on any date shall be deemed to be the average of the daily
closing prices per share of such Security for the 30 consecutive Trading Days
(as such term is hereinafter defined) immediately prior to such date; provided,
however, that in the event that the current per share market price of the
Security is determined during a period following the announcement by the issuer
of such Security of (A) a dividend or distribution on such Security payable in
shares of such Security or securities convertible into such shares, or (B) any
subdivision, combination or reclassification of such Security and prior to the
expiration of 30 Trading Days after the ex-dividend date for such dividend or
distribution, or the record date for such subdivision, combination or
reclassification, then, and in each such case, the current per share market
price shall be appropriately adjusted to reflect the current market price per
share equivalent of such Security. The closing price for each
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day shall be the last sale price, regular way, or, in case no such sale takes
place on such day, the average of the closing bid and asked prices, regular way,
in either case as reported in the principal consolidated transaction reporting
system with respect to securities listed or admitted to trading on the New York
Stock Exchange or, if the Security is not listed or admitted to trading on the
New York Stock Exchange, as reported in the principal consolidated transaction
reporting system with respect to securities listed on the principal national
securities exchange on which the Security is listed or admitted to trading or,
if the Security is not listed or admitted to trading on any national securities
exchange, the last quoted price or, if not so quoted, the average of the high
bid and low asked prices in the over-the-counter market, as reported by the
National Association of Securities Dealers, Inc. Automated Quotations System
("NASDAQ") or such other system then in use, or, if on any such date the
Security is not quoted by any such organization, the average of the closing bid
and asked prices as furnished by a professional market maker making a market in
the Security selected by the Board of Directors of the Company. The term
"Trading Day" shall mean a day on which the principal national securities
exchange on which the Security is listed or admitted to trading is open for the
transaction of business or, if the Security is not listed or admitted to trading
on any national securities exchange, a Business Day.
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(ii) For the purpose of any computation hereunder, the "current per
share market price" of the Preferred Shares shall be determined in accordance
with the method set forth in Section 11(d)(i). If the Preferred Shares are not
publicly traded, the "current per share market price" of the Preferred Shares
shall be conclusively deemed to be the current per share market price of the
Common Shares as determined pursuant to Section 11(d)(i) (appropriately adjusted
to reflect any stock split, stock dividend or similar transaction occurring
after the date hereof), multiplied by one hundred. If neither the Common Shares
nor the Preferred Shares are publicly held or so listed or traded, "current per
share market price" shall mean the fair value per share as determined in good
faith by the Board of Directors of the Company, whose determination shall be
described in a statement filed with the Rights Agent.
(e) No adjustment in the Purchase Price shall be required unless such
adjustment would require an increase or decrease of at least 1% in the Purchase
Price; provided, however, that any adjustments which by reason of this Section
11(e) are not required to be made shall be carried forward and taken into
account in any subsequent adjustment. All calculations under this Section 11
shall be made to the nearest cent or to the nearest one one-millionth of a
Preferred Share or one ten- thousandth of any other share or security as the
case may be. Notwithstanding the first sentence of this
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Section 11(e), any adjustment required by this Section 11 shall be made no later
than the earlier of (i) three years from the date of the transaction which
requires such adjustment or (ii) the date of the expiration of the right to
exercise any Rights.
(f) If as a result of an adjustment made pursuant to Section 11(a)
hereof, the holder of any Right thereafter exercised shall become entitled to
receive any shares of capital stock of the Company other than Preferred Shares,
thereafter the number of such other shares so receivable upon exercise of any
Right shall be subject to adjustment from time to time in a manner and on terms
as nearly equivalent as practicable to the provisions with respect to the
Preferred Shares contained in Section 11(a) through (c), inclusive, and the
provisions of Sections 7, 9, 10 and 13 with respect to the Preferred Shares
shall apply on like terms to any such other shares.
(g) All Rights originally issued by the Company subsequent to any
adjustment made to the Purchase Price hereunder shall evidence the right to
purchase, at the adjusted Purchase Price, the number of one one-hundredths of a
Preferred Share purchasable from time to time hereunder upon exercise of the
Rights, all subject to further adjustment as provided herein.
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(h) Unless the Company shall have exercised its election as provided in
Section 11(i), upon each adjustment of the Purchase Price as a result of the
calculations made in Sections 11(b) and (c), each Right outstanding immediately
prior to the making of such adjustment shall thereafter evidence the right to
purchase, at the adjusted Purchase Price, that number of one one-hundredths of a
Preferred Share (calculated to the nearest one one-millionth of a Preferred
Share) obtained by (i) multiplying (x) the number of one one-hundredths of a
share covered by a Right immediately prior to this adjustment by (y) the
Purchase Price in effect immediately prior to such adjustment of the Purchase
Price and (ii) dividing the product so obtained by the Purchase Price in effect
immediately after such adjustment of the Purchase Price.
(i) The Company may elect on or after the date of any adjustment of the
Purchase Price to adjust the number of Rights, in substitution for any
adjustment in the number of one one-hundredths of a Preferred Share purchasable
upon the exercise of a Right. Each of the Rights outstanding after such
adjustment of the number of Rights shall be exercisable for the number of one
one-hundredths of a Preferred Share for which a Right was exercisable
immediately prior to such adjustment. Each Right held of record prior to such
adjustment of the number of Rights shall become that number of Rights
(calculated to the nearest one ten-thousandth) obtained by dividing the
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Purchase Price in effect immediately prior to adjustment of the Purchase Price
by the Purchase Price in effect immediately after adjustment of the Purchase
Price. The Company shall make a public announcement of its election to adjust
the number of Rights, indicating the record date for the adjustment, and, if
known at the time, the amount of the adjustment to be made. This record date may
be the date on which the Purchase Price is adjusted or any day thereafter, but,
if the Right Certificates have been issued, shall be at least 10 days later than
the date of the public announcement. If Right Certificates have been issued,
upon each adjustment of the number of Rights pursuant to this Section 11(i), the
Company shall, as promptly as practicable, cause to be distributed to holders of
record of Right Certificates on such record date Right Certificates evidencing,
subject to Section 14 hereof, the additional Rights to which such holders shall
be entitled as a result of such adjustment, or, at the option of the Company,
shall cause to be distributed to such holders of record in substitution and
replacement for the Right Certificates held by such holders prior to the date of
adjustment, and upon surrender thereof, if required by the Company, new Right
Certificates evidencing all the Rights to which such holders shall be entitled
after such adjustment. Right Certificates so to be distributed shall be issued,
executed and countersigned in the manner provided for herein and shall be
registered in the names of the holders of
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record of Right Certificates on the record date specified in the public
announcement.
(j) Irrespective of any adjustment or change in the Purchase Price or
the number of one one-hundredths of a Preferred Share issuable upon the exercise
of the Rights, the Right Certificates theretofore and thereafter issued may
continue to express the Purchase Price and the number of one one-hundredths of a
Preferred Share which were expressed in the initial Right Certificates issued
hereunder.
(k) Before taking any action that would cause an adjustment reducing
the Purchase Price below one one-hundredth of the then par value, if any, of the
Preferred Shares issuable upon exercise of the Rights, the Company shall take
any corporate action which may, in the opinion of its counsel, be necessary in
order that the Company may validly and legally issue fully paid and
nonassessable Preferred Shares at such adjusted Purchase Price.
(l) In any case in which this Section 11 shall require that an
adjustment in the Purchase Price be made effective as of a record date for a
specified event, the Company may elect to defer until the occurrence of such
event the issuing to the holder of any Right exercised after such record date of
the Preferred Shares and other capital stock or
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securities of the Company, if any, issuable upon such exercise over and above
the Preferred Shares and other capital stock or securities of the Company, if
any, issuable upon such exercise on the basis of the Purchase Price in effect
prior to such adjustment; provided, however, that the Company shall deliver to
such holder a due bill or other appropriate instrument evidencing such holder's
right to receive such additional shares upon the occurrence of the event
requiring such adjustment.
(m) Anything in this Section 11 to the contrary notwithstanding, the
Company shall be entitled to make such reductions in the Purchase Price, in
addition to those adjustments expressly required by this Section 11, as and to
the extent that it in its sole discretion shall determine to be advisable in
order that any consolidation or subdivision of the Preferred Shares, issuance
wholly for cash of any Preferred Shares at less than the current market price,
issuance wholly for cash of Preferred Shares or securities which by their terms
are convertible into or exchangeable for Preferred Shares, dividends on
Preferred Shares payable in Preferred Shares or issuance of rights, options or
warrants referred to hereinabove in Section 11(b), hereafter made by the Company
to holders of its Preferred Shares shall not be taxable to such stockholders.
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(n) In the event that at any time after the date of this Agreement and
prior to the Distribution Date, the Company shall (i) declare or pay any
dividend on the Common Shares payable in Common Shares or (ii) effect a
subdivision, combination or consolidation of the Common Shares (by
reclassification or otherwise than by payment of dividends in Common Shares)
into a greater or lesser number of Common Shares, then in any such case (A) the
number of one one-hundredths of a Preferred Share purchasable after such event
upon proper exercise of each Right shall be determined by multiplying the number
of one one-hundredths of a Preferred Share so purchasable immediately prior to
such event by a fraction, the numerator of which is the number of Common Shares
outstanding immediately before such event and the denominator of which is the
number of Common Shares outstanding immediately after such event, and (B) each
Common Share outstanding immediately after such event shall have issued with
respect to it that number of Rights which each Common Share outstanding
immediately prior to such event had issued with respect to it. The adjustments
provided for in this Section 11(n) shall be made successively whenever such a
dividend is declared or paid or such a subdivision, combination or consolidation
is effected.
Section 12. Certificate of Adjusted Purchase Price or Number of Shares.
Whenever an adjustment is made as provided in Section 11 or 13 hereof, the
Company shall promptly
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(a) prepare a certificate setting forth such adjustment, and a brief statement
of the facts accounting for such adjustment, (b) file with the Rights Agent and
with each transfer agent for the Common Shares or the Preferred Shares a copy of
such certificate and (c) mail a brief summary thereof to each holder of a Right
Certificate in accordance with Section 25 hereof.
Section 13. Consolidation, Merger or Sale or Transfer of Assets or
Earning Power. In the event, directly or indirectly, at any time after a Person
has become an Acquiring Person, (a) the Company shall consolidate with, or merge
with and into, any other Person, (b) any Person shall consolidate with the
Company, or merge with and into the Company and the Company shall be the
continuing or surviving corporation of such merger and, in connection with such
merger, all or part of the Common Shares shall be changed into or exchanged for
stock or other securities of any other Person (or the Company) or cash or any
other property, or (c) the Company shall sell or otherwise transfer (or one or
more of its Subsidiaries shall sell or otherwise transfer), in one or more
transactions, assets or earning power aggregating 50% or more of the assets or
earning power of the Company and its Subsidiaries (taken as a whole) to any
other Person other than the Company or one or more of its wholly-owned
Subsidiaries, then, and in each such case, proper provision shall be made so
that (i) each holder of a Right (except as otherwise provided herein) shall
thereafter
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have the right to receive, upon the exercise thereof at a price equal to the
then current Purchase Price multiplied by the number of one one-hundredths of a
Preferred Share for which a Right is then exercisable, in accordance with the
terms of this Agreement and in lieu of Preferred Shares, such number of Common
Shares of such other Person (including the Company as successor thereto or as
the surviving corporation) as shall equal the result obtained by (A) multiplying
the then current Purchase Price by the number of one one-hundredths of a
Preferred Share for which a Right is then exercisable and dividing that product
by (B) 50% of the then current per share market price of the Common Shares of
such other Person (determined pursuant to Section 11(d) hereof) on the date of
consummation of such consolidation, merger, sale or transfer; (ii) the issuer of
such Common Shares shall thereafter be liable for, and shall assume, by virtue
of such consolidation, merger, sale or transfer, all the obligations and duties
of the Company pursuant to this Agreement; (iii) the term "Company" shall
thereafter be deemed to refer to such issuer; and (iv) such issuer shall take
such steps (including, but not limited to, the reservation of a sufficient
number of its Common Shares in accordance with Section 9 hereof) in connection
with such consummation as may be necessary to assure that the provisions hereof
shall thereafter be applicable, as nearly as reasonably may be, in relation to
the Common Shares thereafter deliverable upon the exercise of the Rights. The
Company shall not
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consummate any such consolidation, merger, sale or transfer unless prior thereto
the Company and such issuer shall have executed and delivered to the Rights
Agent a supplemental agreement so providing. The Company shall not enter into
any transaction of the kind referred to in this Section 13 if at the time of
such transaction there are any rights, warrants, instruments or securities
outstanding or any agreements or arrangements which, as a result of the
consummation of such transaction, would eliminate or substantially diminish the
benefits intended to be afforded by the Rights. The provisions of this Section
13 shall similarly apply to successive mergers or consolidations or sales or
other transfers.
Section 14. Fractional Rights and Fractional Shares. (a) The Company
shall not be required to issue fractions of Rights or to distribute Right
Certificates which evidence fractional Rights. In lieu of such fractional
Rights, there shall be paid to the registered holders of the Right Certificates
with regard to which such fractional Rights would otherwise be issuable, an
amount in cash equal to the same fraction of the current market value of a whole
Right. For the purposes of this Section 14(a), the current market value of a
whole Right shall be the closing price of the Rights for the Trading Day
immediately prior to the date on which such fractional Rights would have been
otherwise issuable. The closing price for any day shall be the last sale price,
regular
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way, or, in case no such sale takes place on such day, the average of the
closing bid and asked prices, regular way, in either case as reported in the
principal consolidated transaction reporting system with respect to securities
listed or admitted to trading on the New York Stock Exchange or, if the Rights
are not listed or admitted to trading on the New York Stock Exchange, as
reported in the principal consolidated transaction reporting system with respect
to securities listed on the principal national securities exchange on which the
Rights are listed or admitted to trading or, if the Rights are not listed or
admitted to trading on any national securities exchange, the last quoted price
or, if not so quoted, the average of the high bid and low asked prices in the
over-the-counter market, as reported by NASDAQ or such other system then in use
or, if on any such date the Rights are not quoted by any such organization, the
average of the closing bid and asked prices as furnished by a professional
market maker making a market in the Rights selected by the Board of Directors of
the Company. If on any such date no such market maker is making a market in the
Rights, the fair value of the Rights on such date as determined in good faith by
the Board of Directors of the Company shall be used.
(b) The Company shall not be required to issue fractions of Preferred
Shares (other than fractions which are integral multiples of one one-hundredth
of a Preferred Share)
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upon exercise of the Rights or to distribute certificates which evidence
fractional Preferred Shares (other than fractions which are integral multiples
of one one-hundredth of a Preferred Share). Fractions of Preferred Shares in
integral multiples of one one-hundredth of a Preferred Share may, at the
election of the Company, be evidenced by depositary receipts, pursuant to an
appropriate agreement between the Company and a depositary selected by it;
provided, that such agreement shall provide that the holders of such depositary
receipts shall have all the rights, privileges and preferences to which they are
entitled as beneficial owners of the Preferred Shares represented by such
depositary receipts. In lieu of fractional Preferred Shares that are not
integral multiples of one one-hundredth of a Preferred Share, the Company shall
pay to the registered holders of Right Certificates at the time such Rights are
exercised as herein provided an amount in cash equal to the same fraction of the
current market value of one Preferred Share. For the purposes of this Section
14(b), the current market value of a Preferred Share shall be the closing price
of a Preferred Share (as determined pursuant to the second sentence of Section
11(d)(i) hereof) for the Trading Day immediately prior to the date of such
exercise.
(c) The holder of a Right by the acceptance of the Right expressly
waives his right to receive any fractional
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Rights or any fractional shares upon exercise of a Right (except as provided
above).
Section 15. Rights of Action. All rights of action in respect of this
Agreement, excepting the rights of action given to the Rights Agent under
Section 18 hereof, are vested in the respective registered holders of the Right
Certificates (and, prior to the Distribution Date, the registered holders of the
Common Shares); and any registered holder of any Right Certificate (or, prior to
the Distribution Date, of the Common Shares), without the consent of the Rights
Agent or of the holder of any other Right Certificate (or, prior to the
Distribution Date, of the Common Shares), may, in his own behalf and for his own
benefit, enforce, and may institute and maintain any suit, action or proceeding
against the Company to enforce, or otherwise act in respect of, his right to
exercise the Rights evidenced by such Right Certificate in the manner provided
in such Right Certificate and in this Agreement. Without limiting the foregoing
or any remedies available to the holders of Rights, it is specifically
acknowledged that the holders of Rights would not have an adequate remedy at law
for any breach of this Agreement and will be entitled to specific performance of
the obligations under, and injunctive relief against actual or threatened
violations of the obligations of any Person subject to, this Agreement.
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Section 16. Agreement of Right Holders. Every holder of a Right, by
accepting the same, consents and agrees with the Company and the Rights Agent
and with every other holder of a Right that:
(a) prior to the Distribution Date, the Rights will be transferable
only in connection with the transfer of the Common Shares;
(b) after the Distribution Date, the Right Certificates are
transferable only on the registry books of the Rights Agent if surrendered at
the principal office of the Rights Agent, duly endorsed or accompanied by a
proper instrument of transfer; and
(c) the Company and the Rights Agent may deem and treat the person in
whose name the Right Certificate (or, prior to the Distribution Date, the
associated Common Shares certificate) is registered as the absolute owner
thereof and of the Rights evidenced thereby (notwithstanding any notations of
ownership or writing on the Right Certificates or the associated Common Shares
certificate made by anyone other than the Company or the Rights Agent) for all
purposes whatsoever, and neither the Company nor the Rights Agent shall be
affected by any notice to the contrary.
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Section 17. Right Certificate Holder Not Deemed a Stockholder. No
holder, as such, of any Right Certificate shall be entitled to vote, receive
dividends or be deemed for any purpose the holder of the Preferred Shares or any
other securities of the Company which may at any time be issuable on the
exercise of the Rights represented thereby, nor shall anything contained herein
or in any Right Certificate be construed to confer upon the holder of any Right
Certificate, as such, any of the rights of a stockholder of the Company or any
right to vote for the election of directors or upon any matter submitted to
stockholders at any meeting thereof, or to give or withhold consent to any
corporate action, or to receive notice of meetings or other actions affecting
stockholders (except as provided in Section 25 hereof), or to receive dividends
or subscription rights, or otherwise, until the Right or Rights evidenced by
such Right Certificate shall have been exercised in accordance with the
provisions hereof.
Section 18. Concerning the Rights Agent. The Company agrees to pay to
the Rights Agent reasonable compensation for all services rendered by it
hereunder and, from time to time, on demand of the Rights Agent, its reasonable
expenses and counsel fees and other disbursements incurred in the administration
and execution of this Agreement and the exercise and performance of its duties
hereunder. The Company also agrees to indemnify the Rights Agent for, and to
hold it
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harmless against, any loss, liability, or expense, incurred without negligence,
bad faith or willful misconduct on the part of the Rights Agent, for anything
done or omitted by the Rights Agent in connection with the acceptance and
administration of this Agreement, including the costs and expenses of defending
against any claim of liability in the premises.
The Rights Agent shall be protected and shall incur no liability for,
or in respect of any action taken, suffered or omitted by it in connection with,
its administration of this Agreement in reliance upon any Right Certificate or
certificate for the Preferred Shares or Common Shares or for other securities of
the Company, instrument of assignment or transfer, power of attorney,
endorsement, affidavit, letter, notice, direction, consent, certificate,
statement, or other paper or document believed by it to be genuine and to be
signed, executed and, where necessary, verified or acknowledged, by the proper
person or persons, or otherwise upon the advice of counsel as set forth in
Section 20 hereof.
Section 19. Merger or Consolidation or Change of Name of Rights Agent.
Any corporation into which the Rights Agent or any successor Rights Agent may be
merged or with which it may be consolidated, or any corporation resulting from
any merger or consolidation to which the Rights Agent or any successor Rights
Agent shall be a party, or any corporation
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succeeding to the stock transfer or corporate trust powers of the Rights Agent
or any successor Rights Agent, shall be the successor to the Rights Agent under
this Agreement without the execution or filing of any paper or any further act
on the part of any of the parties hereto; provided, that such corporation would
be eligible for appointment as a successor Rights Agent under the provisions of
Section 21 hereof. In case at the time such successor Rights Agent shall succeed
to the agency created by this Agreement, any of the Right Certificates shall
have been countersigned but not delivered, any such successor Rights Agent may
adopt the countersignature of the predecessor Rights Agent and deliver such
Right Certificates so countersigned; and in case at that time any of the Right
Certificates shall not have been countersigned, any successor Rights Agent may
countersign such Right Certificates either in the name of the predecessor Rights
Agent or in the name of the successor Rights Agent; and in all such cases such
Right Certificates shall have the full force provided in the Right Certificates
and in this Agreement.
In case at any time the name of the Rights Agent shall be changed and
at such time any of the Right Certificates shall have been countersigned but not
delivered, the Rights Agent may adopt the countersignature under its prior name
and deliver Right Certificates so countersigned; and in case at that time any of
the Right Certificates shall not have been
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countersigned, the Rights Agent may countersign such Right Certificates either
in its prior name or in its changed name; and in all such cases such Right
Certificates shall have the full force provided in the Right Certificates and in
this Agreement.
Section 20. Duties of Rights Agent. The Rights Agent undertakes the
duties and obligations imposed by this Agreement upon the following terms and
conditions, by all of which the Company and the holders of Right Certificates,
by their acceptance thereof, shall be bound:
(a) The Rights Agent may consult with legal counsel (who may be legal
counsel for the Company), and the opinion of such counsel shall be full and
complete authorization and protection to the Rights Agent as to any action taken
or omitted by it in good faith and in accordance with such opinion.
(b) Whenever in the performance of its duties under this Agreement the
Rights Agent shall deem it necessary or desirable that any fact or matter be
proved or established by the Company prior to taking or suffering any action
hereunder, such fact or matter (unless other evidence in respect thereof be
herein specifically prescribed) may be deemed to be conclusively proved and
established by a certificate signed by
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any one of the Chairman of the Board, the Chief Executive Officer, the
President, any Vice President, the Treasurer or the Secretary of the Company and
delivered to the Rights Agent; and such certificate shall be full authorization
to the Rights Agent for any action taken or suffered in good faith by it under
the provisions of this Agreement in reliance upon such certificate.
(c) The Rights Agent shall be liable hereunder to the Company and any
other Person only for its own negligence, bad faith or willful misconduct.
(d) The Rights Agent shall not be liable for or by reason of any of the
statements of fact or recitals contained in this Agreement or in the Right
Certificates (except its countersignature thereof) or be required to verify the
same, but all such statements and recitals are and shall be deemed to have been
made by the Company only.
(e) The Rights Agent shall not be under any responsibility in respect
of the validity of this Agreement or the execution and delivery hereof (except
the due execution hereof by the Rights Agent) or in respect of the validity or
execution of any Right Certificate (except its countersignature thereof); nor
shall it be responsible for any breach by the Company of any covenant or
condition contained in this
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Agreement or in any Right Certificate; nor shall it be responsible for any
change in the exercisability of the Rights (including the Rights becoming void
pursuant to Section 11(a)(ii) hereof) or any adjustment in the terms of the
Rights (including the manner, method or amount thereof) provided for in Section
3, 11, 13, 23 or 24, or the ascertaining of the existence of facts that would
require any such change or adjustment (except with respect to the exercise of
Rights evidenced by Right Certificates after actual notice that such change or
adjustment is required); nor shall it by any act hereunder be deemed to make any
representation or warranty as to the authorization or reservation of any
Preferred Shares to be issued pursuant to this Agreement or any Right
Certificate or as to whether any Preferred Shares will, when issued, be validly
authorized and issued, fully paid and nonassessable.
(f) The Company agrees that it will perform, execute, acknowledge and
deliver or cause to be performed, executed, acknowledged and delivered all such
further and other acts, instruments and assurances as may reasonably be required
by the Rights Agent for the carrying out or performing by the Rights Agent of
the provisions of this Agreement.
(g) The Rights Agent is hereby authorized and directed to accept
instructions with respect to the performance of its duties hereunder from any
one of the Chairman of the
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Board, the Vice Chairman, the Chief Executive Officer, the President, any Vice
President, the Secretary or the Treasurer of the Company, and to apply to such
officers for advice or instructions in connection with its duties, and it shall
not be liable for any action taken or suffered by it in good faith in accordance
with instructions of any such officer or for any delay in acting while waiting
for those instructions.
(h) The Rights Agent and any stockholder, director, officer or employee
of the Rights Agent may buy, sell or deal in any of the Rights or other
securities of the Company or become pecuniarily interested in any transaction in
which the Company may be interested, or contract with or lend money to the
Company or otherwise act as fully and freely as though it were not Rights Agent
under this Agreement. Nothing herein shall preclude the Rights Agent from acting
in any other capacity for the Company or for any other legal entity.
(i) The Rights Agent may execute and exercise any of the rights or
powers hereby vested in it or perform any duty hereunder either itself or by or
through its attorneys or agents, and the Rights Agent shall not be answerable or
accountable for any act, default, neglect or misconduct of any such attorneys or
agents or for any loss to the Company resulting from any such act, default,
neglect or misconduct,
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provided reasonable care was exercised in the selection and continued employment
thereof.
Section 21. Change of Rights Agent. The Rights Agent or any successor
Rights Agent may resign and be discharged from its duties under this Agreement
upon 30 days' notice in writing mailed to the Company and to each transfer agent
of the Common Shares or Preferred Shares by registered or certified mail, and to
the holders of the Right Certificates by first-class mail. The Company may
remove the Rights Agent or any successor Rights Agent upon 30 days' notice in
writing, mailed to the Rights Agent or successor Rights Agent, as the case may
be, and to each transfer agent of the Common Shares or Preferred Shares by
registered or certified mail, and to the holders of the Right Certificates by
first-class mail. If the Rights Agent shall resign or be removed or shall
otherwise become incapable of acting, the Company shall appoint a successor to
the Rights Agent. If the Company shall fail to make such appointment within a
period of 30 days after giving notice of such removal or after it has been
notified in writing of such resignation or incapacity by the resigning or
incapacitated Rights Agent or by the holder of a Right Certificate (who shall,
with such notice, submit his Right Certificate for inspection by the Company),
then the registered holder of any Right Certificate may apply to any court of
competent jurisdiction for the appointment of a new Rights
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Agent. Any successor Rights Agent, whether appointed by the Company or by such a
court, shall be a corporation organized and doing business under the laws of the
United States or of the State of Illinois (or of any other state of the United
States so long as such corporation is authorized to do business as a banking
institution in the State of Illinois, in good standing, having an office in the
State of Illinois, which is authorized under such laws to exercise corporate
trust or stock transfer powers and is subject to supervision or examination by
federal or state authority and which has at the time of its appointment as
Rights Agent a combined capital and surplus of at least $50 million. After
appointment, the successor Rights Agent shall be vested with the same powers,
rights, duties and responsibilities as if it had been originally named as Rights
Agent without further act or deed; but the predecessor Rights Agent shall
deliver and transfer to the successor Rights Agent any property at the time held
by it hereunder, and execute and deliver any further assurance, conveyance, act
or deed necessary for the purpose. Not later than the effective date of any such
appointment the Company shall file notice thereof in writing with the
predecessor Rights Agent and each transfer agent of the Common Shares or
Preferred Shares, and mail a notice thereof in writing to the registered holders
of the Right Certificates. Failure to give any notice provided for in this
Section 21, however, or any defect therein, shall not affect the legality or
validity of the resignation or removal
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of the Rights Agent or the appointment of the successor Rights Agent, as the
case may be.
Section 22. Issuance of New Right Certificates. Notwithstanding any of
the provisions of this Agreement or of the Rights to the contrary, the Company
may, at its option, issue new Right Certificates evidencing Rights in such form
as may be approved by its Board of Directors to reflect any adjustment or change
in the Purchase Price and the number or kind or class of shares or other
securities or property purchasable under the Right Certificates made in
accordance with the provisions of this Agreement.
Section 23. Redemption. (a) The Board of Directors of the Company may,
at its option, at any time prior to such time as any Person becomes an Acquiring
Person, redeem all but not less than all the then outstanding Rights at a
redemption price of $.01 per Right, appropriately adjusted to reflect any stock
split, stock dividend or similar transaction occurring after the date hereof
(such redemption price being hereinafter referred to as the "Redemption Price").
The redemption of the Rights by the Board of Directors may be made effective at
such time, on such basis and with such conditions as the Board of Directors in
its sole discretion may establish.
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(b) Immediately upon the action of the Board of Directors of the
Company ordering the redemption of the Rights pursuant to paragraph (a) of this
Section 23, and without any further action and without any notice, the right to
exercise the Rights will terminate and the only right thereafter of the holders
of Rights shall be to receive the Redemption Price. The Company shall promptly
give public notice of any such redemption; provided, however, that the failure
to give, or any defect in, any such notice shall not affect the validity of such
redemption. Within 10 days after such action of the Board of Directors ordering
the redemption of the Rights, the Company shall mail a notice of redemption to
all the holders of the then outstanding Rights at their last addresses as they
appear upon the registry books of the Rights Agent or, prior to the Distribution
Date, on the registry books of the transfer agent for the Common Shares. Any
notice which is mailed in the manner herein provided shall be deemed given,
whether or not the holder receives the notice. Each such notice of redemption
will state the method by which the payment of the Redemption Price will be made.
Neither the Company nor any of its Affiliates or Associates may redeem, acquire
or purchase for value any Rights at any time in any manner other than that
specifically set forth in this Section 23 or in Section 24 hereof, and other
than in connection with the purchase of Common Shares prior to the Distribution
Date.
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Section 24. Exchange. (a) The Board of Directors of the Company may, at
its option, at any time after any Person becomes an Acquiring Person, exchange
all or part of the then outstanding and exercisable Rights (which shall not
include Rights that have become void pursuant to the provisions of Section
11(a)(ii) hereof) for Common Shares at an exchange ratio of one Common Share per
Right, appropriately adjusted to reflect any stock split, stock dividend or
similar transaction occurring after the date hereof (such exchange ratio being
hereinafter referred to as the "Exchange Ratio"). Notwithstanding the foregoing,
the Board of Directors shall not be empowered to effect such exchange at any
time after any Person (other than the Company, any Subsidiary of the Company,
any employee benefit plan of the Company or any such Subsidiary, or any entity
holding Common Shares for or pursuant to the terms of any such plan), together
with all Affiliates and Associates of such Person, becomes the Beneficial Owner
of 50% or more of the Common Shares then outstanding.
(b) Immediately upon the action of the Board of Directors of the
Company ordering the exchange of any Rights pursuant to paragraph (a) of this
Section 24 and without any further action and without any notice, the right to
exercise such Rights shall terminate and the only right thereafter of a holder
of such Rights shall be to receive that number of Common Shares equal to the
number of such Rights held by such holder
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multiplied by the Exchange Ratio. The Company shall promptly give public notice
of any such exchange; provided, however, that the failure to give, or any defect
in, such notice shall not affect the validity of such exchange. The Company
promptly shall mail a notice of any such exchange to all of the holders of such
Rights at their last addresses as they appear upon the registry books of the
Rights Agent. Any notice which is mailed in the manner herein provided shall be
deemed given, whether or not the holder receives the notice. Each such notice of
exchange will state the method by which the exchange of the Common Shares for
Rights will be effected and, in the event of any partial exchange, the number of
Rights which will be exchanged. Any partial exchange shall be effected pro rata
based on the number of Rights (other than Rights which have become void pursuant
to the provisions of Section 11(a)(ii) hereof) held by each holder of Rights.
(c) In the event that there shall not be sufficient Common Shares
issued but not outstanding or authorized but unissued to permit any exchange of
Rights as contemplated in accordance with this Section 24, the Company shall
take all such action as may be necessary to authorize additional Common Shares
for issuance upon exchange of the Rights. In the event the Company shall, after
good faith effort, be unable to take all such action as may be necessary to
authorize such additional Common Shares, the Company shall substitute, for
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each Common Share that would otherwise be issuable upon exchange of a Right, a
number of Preferred Shares or fraction thereof such that the current per share
market price of one Preferred Share multiplied by such number or fraction is
equal to the current per share market price of one Common Share as of the date
of issuance of such Preferred Shares or fraction thereof.
(d) The Company shall not be required to issue fractions of Common
Shares or to distribute certificates which evidence fractional Common Shares. In
lieu of such fractional Common Shares, the Company shall pay to the registered
holders of the Right Certificates with regard to which such fractional Common
Shares would otherwise be issuable an amount in cash equal to the same fraction
of the current market value of a whole Common Share. For the purposes of this
paragraph (d), the current market value of a whole Common Share shall be the
closing price of a Common Share (as determined pursuant to the second sentence
of Section 11(d)(i) hereof) for the Trading Day immediately prior to the date of
exchange pursuant to this Section 24.
Section 25. Notice of Certain Events. (a) In case the Company shall
propose (i) to pay any dividend payable in stock of any class to the holders of
its Preferred Shares or to make any other distribution to the holders of its
Preferred
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Shares (other than a regular quarterly cash dividend), (ii) to offer to the
holders of its Preferred Shares rights or warrants to subscribe for or to
purchase any additional Preferred Shares or shares of stock of any class or any
other securities, rights or options, (iii) to effect any reclassification of its
Preferred Shares (other than a reclassification involving only the subdivision
of outstanding Preferred Shares), (iv) to effect any consolidation or merger
into or with, or to effect any sale or other transfer (or to permit one or more
of its Subsidiaries to effect any sale or other transfer), in one or more
transactions, of 50% or more of the assets or earning power of the Company and
its Subsidiaries (taken as a whole) to, any other Person, (v) to effect the
liquidation, dissolution or winding up of the Company, or (vi) to declare or pay
any dividend on the Common Shares payable in Common Shares or to effect a
subdivision, combination or consolidation of the Common Shares (by
reclassification or otherwise than by payment of dividends in Common Shares),
then, in each such case, the Company shall give to each holder of a Right
Certificate, in accordance with Section 26 hereof, a notice of such proposed
action, which shall specify the record date for the purposes of such stock
dividend, or distribution of rights or warrants, or the date on which such
reclassification, consolidation, merger, sale, transfer, liquidation,
dissolution, or winding up is to take place and the date of participation
therein by the holders of the Common Shares and/or Preferred Shares, if any such
date
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<PAGE>
is to be fixed, and such notice shall be so given in the case of any action
covered by clause (i) or (ii) above at least 10 days prior to the record date
for determining holders of the Preferred Shares for purposes of such action, and
in the case of any such other action, at least 10 days prior to the date of the
taking of such proposed action or the date of participation therein by the
holders of the Common Shares and/or Preferred Shares, whichever shall be the
earlier.
(b) In case the event set forth in Section 11(a)(ii) hereof shall
occur, then the Company shall as soon as practicable thereafter give to each
holder of a Right Certificate, in accordance with Section 26 hereof, a notice of
the occurrence of such event, which notice shall describe such event and the
consequences of such event to holders of Rights under Section 11(a)(ii) hereof.
Section 26. Notices. Notices or demands authorized by this Agreement to
be given or made by the Rights Agent or by the holder of any Right Certificate
to or on the Company shall be sufficiently given or made if sent by first-class
mail, postage prepaid, addressed (until another address is filed in writing with
the Rights Agent) as follows:
Corning Clinical Laboratories Inc.
One Malcolm Avenue
Teterboro, New Jersey 07608
-60-
<PAGE>
Attention: Corporate Secretary
Subject to the provisions of Section 21 hereof, any notice or demand authorized
by this Agreement to be given or made by the Company or by the holder of any
Right Certificate to or on the Rights Agent shall be sufficiently given or made
if sent by first-class mail, postage prepaid, addressed (until another address
is filed in writing with the Company) as follows:
Harris Trust and Savings Bank
311 West Monroe, 11th Floor
P.O. Box 755
Chicago, Illinois 60690
Notices or demands authorized by this Agreement to be given or made by the
Company or the Rights Agent to the holder of any Right Certificate shall be
sufficiently given or made if sent by first-class mail, postage prepaid,
addressed to such holder at the address of such holder as shown on the registry
books of the Company.
Section 27. Supplements and Amendments. The Company may from time to
time supplement or amend this Agreement without the approval of any holders of
Right Certificates in order to cure any ambiguity, to correct or supplement any
provision contained herein which may be defective or inconsistent with any other
provisions herein, or to make any other
-61-
<PAGE>
provisions with respect to the Rights which the Company may deem necessary or
desirable, any such supplement or amendment to be evidenced by a writing signed
by the Company and the Rights Agent; provided, however, that from and after such
time as any Person becomes an Acquiring Person, this Agreement shall not be
amended in any manner which would adversely affect the interests of the holders
of Rights.
Section 28. Successors. All the covenants and provisions of this
Agreement by or for the benefit of the Company or the Rights Agent shall bind
and inure to the benefit of their respective successors and assigns hereunder.
Section 29. Benefits of this Agreement. Nothing in this Agreement shall
be construed to give to any person or corporation other than the Company, the
Rights Agent and the registered holders of the Right Certificates (and, prior to
the Distribution Date, the Common Shares) any legal or equitable right, remedy
or claim under this Agreement; but this Agreement shall be for the sole and
exclusive benefit of the Company, the Rights Agent and the registered holders of
the Right Certificates (and, prior to the Distribution Date, the Common Shares).
Section 30. Severability. If any term, provision, covenant or
restriction of this Agreement is held by a court of
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<PAGE>
competent jurisdiction or other authority to be invalid, void or unenforceable,
the remainder of the terms, provisions, covenants and restrictions of this
Agreement shall remain in full force and effect and shall in no way be affected,
impaired or invalidated.
Section 31. Governing Law. This Agreement and each Right Certificate
issued hereunder shall be deemed to be a contract made under the laws of the
State of Delaware and for all purposes shall be governed by and construed in
accordance with the laws of such State applicable to contracts to be made and
performed entirely within such State.
Section 32. Counterparts. This Agreement may be executed in any number
of counterparts and each of such counterparts shall for all purposes be deemed
to be an original, and all such counterparts shall together constitute but one
and the same instrument.
Section 33. Descriptive Headings. Descriptive headings of the several
Sections of this Agreement are inserted for convenience only and shall not
control or affect the meaning or construction of any of the provisions hereof.
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<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed and attested, all as of the day and year first above written.
CORNING CLINICAL LABORATORIES INC.
Attest:
By ___________________________ By ___________________________
Title: Title:
Attest: HARRIS TRUST AND SAVINGS BANK
By ___________________________ By ___________________________
Title: Title:
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<PAGE>
Form of Right Certificate
Certificate No. R- Rights
NOT EXERCISABLE AFTER DECEMBER 31, 2006 OR EARLIER IF REDEMPTION
OR EXCHANGE OCCURS. THE RIGHTS ARE SUBJECT TO REDEMPTION AT $.01
PER RIGHT AND TO EXCHANGE ON THE TERMS SET FORTH IN THE RIGHTS
AGREEMENT.
Right Certificate
CORNING CLINICAL LABORATORIES INC.
This certifies that , or registered assigns, is the
registered owner of the number of Rights set forth above, each of which entitles
the owner thereof, subject to the terms, provisions and conditions of the Rights
Agreement, dated as of December 31, 1996 (the "Rights Agreement"), between
Corning Clinical Laboratories Inc., a Delaware corporation (the "Company"), and
Harris Trust and Savings Bank (the "Rights Agent"), to purchase from the Company
at any time after the Distribution Date (as such term is defined in the Rights
Agreement) and prior to 5:00 P.M., New York time, on December 31, 2006 at the
principal office of the Rights Agent, or at the office of its successor as
Rights Agent, one one-hundredth of a fully paid non-assessable share of Series A
Junior Participating Preferred Stock, par value $1 per share (the "Preferred
Shares"), of the Company, at a purchase price of $35 per one one-hundredth of a
Preferred Share (the "Purchase Price"), upon presentation and surrender of this
Right Certificate with the Form of Election to Purchase duly executed. The
number of Rights evidenced by this Right Certificate (and the number of one
one-hundredths of a Preferred Share which may be purchased upon exercise hereof)
set forth above, and the Purchase Price set forth above, are the number and
Purchase Price as of December 31, 1996, based on the Preferred Shares as
constituted at such date. As provided in the Rights Agreement, the Purchase
Price and the number of one one-hundredths of a Preferred Share which may be
purchased
<PAGE>
upon the exercise of the Rights evidenced by this Right Certificate are subject
to modification and adjustment upon the happening of certain events.
This Right Certificate is subject to all of the terms, provisions
and conditions of the Rights Agreement, which terms, provisions and conditions
are hereby Clinical Laboratories Inc. herein by reference and made a part hereof
and to which Rights Agreement reference is hereby made for a full description of
the rights, limitations of rights, obligations, duties and immunities hereunder
of the Rights Agent, the Company and the holders of the Right Certificates.
Copies of the Rights Agreement are on file at the principal executive offices of
the Company and the above-mentioned offices of the Rights Agent.
This Right Certificate, with or without other Right Certificates,
upon surrender at the principal office of the Rights Agent, may be exchanged for
another Right Certificate or Right Certificates of like tenor and date
evidencing Rights entitling the holder to purchase a like aggregate number of
Preferred Shares as the Rights evidenced by the Right Certificate or Right
Certificates surrendered shall have entitled such holder to purchase. If this
Right Certificate shall be exercised in part, the holder shall be entitled to
receive upon surrender hereof another Right Certificate or Right Certificates
for the number of whole Rights not exercised.
Subject to the provisions of the Rights Agreement, the Rights
evidenced by this Certificate (i) may be redeemed by the Company at a redemption
price of $.01 per Right or (ii) may be exchanged in whole or in part for
Preferred Shares or shares of the Company's Common Stock, par value $.01 per
share.
No fractional Preferred Shares will be issued upon the exercise
of any Right or Rights evidenced hereby (other than fractions which are integral
multiples of one one-hundredth of a Preferred Share, which may, at the election
of the Company, be evidenced by depositary receipts), but in lieu thereof a cash
payment will be made, as provided in the Rights Agreement.
No holder of this Right Certificate shall be entitled to vote or
receive dividends or be deemed for any purpose the holder of the Preferred
Shares or of any other securities of
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<PAGE>
the Company which may at any time be issuable on the exercise hereof, nor shall
anything contained in the Rights Agreement or herein be construed to confer upon
the holder hereof, as such, any of the rights of a stockholder of the Company or
any right to vote for the election of directors or upon any matter submitted to
stockholders at any meeting thereof, or to give or withhold consent to any
corporate action, or to receive notice of meetings or other actions affecting
stockholders (except as provided in the Rights Agreement), or to receive
dividends or subscription rights, or otherwise, until the Right or Rights
evidenced by this Right Certificate shall have been exercised as provided in the
Rights Agreement.
This Right Certificate shall not be valid or obligatory for any
purpose until it shall have been countersigned by the Rights Agent.
WITNESS the facsimile signature of the proper officers of the
Company and its corporate seal. Dated as of , 199_.
ATTEST: CORNING CLINICAL LABORATORIES INC.
___________________________ By ___________________________
Name: Name:
Title: Title:
Countersigned:
HARRIS TRUST AND SAVINGS BANK
By ___________________________
Name:
Title:
A-67
<PAGE>
Form of Reverse Side of Right Certificate
FORM OF ASSIGNMENT
(To be executed by the registered holder if such holder desires
to transfer the Right Certificate.)
FOR VALUE RECEIVED
hereby sells, assigns and transfers unto
(Please print name and address of transferee)
this Right Certificate, together with all right, title and interest therein, and
does hereby irrevocably constitute and appoint Attorney, to transfer the within
Right Certificate on the books of the within-named Company, with full power of
substitution.
Dated: ___________________________, 199_
Signature
Signature Guaranteed:
Signatures must be guaranteed by a member firm of a registered
national securities exchange, a member of the National Association of Securities
Dealers, Inc., or a commercial bank or trust company having an office or
correspondent in the United States.
- -------------------------------------------------------------------------------
The undersigned hereby certifies that the Rights evidenced by
this Right Certificate are not beneficially owned
A-68
<PAGE>
by an Acquiring Person or an Affiliate or Associate thereof (as defined in the
Rights Agreement).
Signature
- -------------------------------------------------------------------------------
A-69
<PAGE>
Form of Reverse Side of Right Certificate -- continued
FORM OF ELECTION TO PURCHASE
(To be executed if holder desires to exercise Rights represented
by the Right Certificate.)
To: CORNING CLINICAL LABORATORIES INC.
The undersigned hereby irrevocably elects to exercise
Rights represented by this Right
Certificate to purchase the Preferred Shares issuable upon the exercise of such
Rights and requests that certificates for such Preferred Shares be issued in the
name of:
Please insert social security
or other identifying number
(Please print name and address)
If such number of Rights shall not be all the Rights evidenced by this Right
Certificate, a new Right Certificate for the balance remaining of such Rights
shall be registered in the name of and delivered to:
Please insert social security
or other identifying number
(Please print name and address)
Dated: ___________________________, 199_
Signature
Signature Guaranteed:
A-70
<PAGE>
Signatures must be guaranteed by a member firm of a registered
national securities exchange, a member of the National Association of Securities
Dealers, Inc., or a commercial bank or trust company having an office or
correspondent in the United States.
A-71
<PAGE>
Form of Reverse Side of Right Certificate -- continued
- -------------------------------------------------------------------------------
The undersigned hereby certifies that the Rights evidenced by
this Right Certificate are not beneficially owned by an Acquiring Person or an
Affiliate or Associate thereof (as defined in the Rights Agreement).
Signature
- -------------------------------------------------------------------------------
NOTICE
The signature in the Form of Assignment or Form of Election to
Purchase, as the case may be, must conform to the name as written upon the face
of this Right Certificate in every particular, without alteration or enlargement
or any change whatsoever.
In the event the certification set forth above in the Form of
Assignment or the Form of Election to Purchase, as the case may be, is not
completed, the Company and the Rights Agent will deem the beneficial owner of
the Rights evidenced by this Right Certificate to be an Acquiring Person or an
Affiliate or Associate thereof (as defined in the Rights Agreement) and such
Assignment or Election to Purchase will not be honored.
A-72
DRAFT of November 15, 1996
TAX SHARING AGREEMENT
This TAX SHARING AGREEMENT (this "Agreement") is dated as of [ ], 1996,
by and among CORNING INCORPORATED, a New York corporation ("Corning"), CORNING
CLINICAL LABORATORIES INC., a Delaware corporation ("CCL"), and CORNING
PHARMACEUTICAL SERVICES INC., a Delaware corporation ("CPS").
W I T N E S S E T H
WHEREAS, Corning is the common parent of an affiliated group
of corporations which includes CCL and CPS and which group and the members
thereof file consolidated federal income tax returns as well as certain
consolidated, combined or unitary state tax returns;
WHEREAS, the Board of Directors of Corning has determined that
it is appropriate and desirable to effect the Distributions as defined in and
pursuant to a Transaction Agreement dated as of even date herewith between
Corning, Corning Life Sciences Inc., a Delaware corporation ("CLSI"), CCL, and
CPS (the "Transaction Agreement"), subject to the satisfaction or waiver of the
conditions set forth in the Transaction Agreement; and
WHEREAS, the parties hereto desire to set forth their
agreements with regard to their respective liabilities for federal, state, local
and foreign taxes for periods before and after the Distributions and to provide
for certain other tax matters.
NOW, THEREFORE, in consideration of the mutual agreements,
provisions and covenants contained in this Agreement, the parties hereby agree
as follows:
ARTICLE 1
DEFINITIONS
SECTION 1.01. General. As used in this Agreement, the following terms
shall have the following meanings (such meanings to be equally applicable to
both the singular and plural forms of the terms defined):
<PAGE>
"Affiliate" shall mean, when used with respect to a specified person,
another person that directly, or indirectly through one or more intermediaries,
will control, or will be controlled by or will be under common control with the
person specified immediately following the Distribution Date.
"Agreement" shall have the meaning described in the above preamble.
"Carryback Item" shall have the meaning as described in Section
5.01(b) below.
"CCL" shall have the meaning as described in the preamble to this
Agreement.
"CCL Companies" shall mean, collectively, CCL and each Subsidiary of
CCL, other than CPS and any Subsidiary of CPS.
"CCL Distribution" shall mean the distribution by Corning to the
Corning shareholders of the stock of CCL as more particularly described in the
Transaction Agreement.
"CCL Domestic Companies" shall mean, collectively, each CCL Company
incorporated or organized under the laws of one of the respective States of the
United States.
"CCL Group" shall mean the affiliated group of corporations as defined
in Section 1504(a) of the Code of which CCL is the common parent, not including
CPS or any member of the CPS Group and determined as if the capital stock of CCL
is widely held.
"CCL Returns" shall have the meaning as described in Section 2.03
below.
"CCL Return Period" shall mean a taxable period to which this Agreement
applies and for which a CCL Return is filed.
"CCL Separate Liability" shall have the meaning as described in
Section 4.01.
"CI Consolidated Return" shall mean any consolidated federal income tax
return or amendment thereof of the CI Group which includes one or more of the
CCL Domestic Companies or the CPS Domestic Companies.
"CI Consolidated Return Period" shall mean a taxable period to which
this Agreement applies and for which a CI Consolidated Return is filed.
"CI Group" shall mean the affiliated group of corporations as defined
in Section 1504(a) of the Code of which Corning is the common parent.
2
<PAGE>
"CI Group Benefit Amount" shall have the meaning as described in
Section 4.04(b) hereof.
"CI State, Local and Foreign Returns" shall have the meaning as
described in Section 2.02 below.
"CI State, Local and Foreign Return Period" shall mean a taxable period
to which this Agreement applies and for which a CI State, Local and Foreign
Return is filed.
"Code" shall mean the Internal Revenue Code of 1986, as amended.
"Corning" shall have the meaning as described in the preamble to this
Agreement.
"Corning Subsidiary" shall mean any subsidiary of Corning other than
any of the CPS Companies and the CCL Companies.
"CPS" shall have the meaning as described in the preamble to this
Agreement.
"CPS Companies" shall mean, collectively, CPS and each Subsidiary of
CPS.
"CPS Distribution" shall mean the distribution by CCL to the CCL
shareholders of the stock of CPS as more particularly described in the
Transaction Agreement.
"CPS Domestic Companies" shall mean, collectively, each CPS Company
incorporated or organized under the laws of one of the respective States of the
United States. "CPS Group" shall mean the affiliated group of corporations as
defined in Section 1504(a) of the Code of which CPS is the common parent and
determined as if the capital stock of CPS is widely held.
"CPS Returns" shall have the meaning as described in Section 2.04
below.
"CPS Return Period" shall mean a taxable period to which this Agreement
applies and for which a CPS Return is filed.
"CPS Separate Liability" shall have the meaning as described in Section
4.01 below.
"Distributions" shall mean the CCL Distribution, the CPS Distribution
and any transfers relating to the CCL Distribution or the CPS Distribution.
"Distribution Date" shall have the meaning as described in the
Transaction Agreement.
"IRS" shall mean the Internal Revenue Service.
"IRS Penalty Rate" small mean the rate of interest imposed from time to
time on underpayments of income tax pursuant to Code section 6621.
3
<PAGE>
"IRS Ruling" shall mean the ruling issued by the IRS which states the
tax treatment of the Distributions and related transactions.
"person" shall mean any natural person, corporation, business trust,
joint venture, association, company, partnership or government, or any agency or
political subdivision thereof.
"Separate CPS/CCL Liability" shall have the meaning as described in
Section 4.02 below.
"Separate Returns" shall have the meaning as described in Section 2.04
below.
"Spin-Off Tax Indemnification Agreements" shall mean the Spin-Off Tax
Indemnification Agreements dated of even date herewith between or among two or
more of Corning, CCL and CPS.
"Subsidiary" shall have the meaning as described in the Transaction
Agreement.
"Tax" or "Taxes" shall mean all federal, state, local and foreign gross
or net income, gross receipts, withholding, franchise, transfer, estimated or
other tax or similar charges and assessments, including all interest, penalties
and additions imposed with respect to such amounts.
"Temporary Differences" attributable to any entity shall mean (a) any
single item of income or deduction in a CI Consolidated Return in respect of any
tax period that should reverse in one or more subsequent tax periods assuming
proper tax treatment and no change in law or in the tax accounting policies of
such entity (each an "Originating Temporary Difference") or (b) the partial or
complete reversal of an Originating Temporary Difference.
"Transaction Agreement" shall have the meaning as described on page 1
of this Agreement.
SECTION 1.02. CLSI. For all tax periods ending before or on the
Distribution Date, references herein to CCL shall include CLSI, which will be
merged into CCL prior to the Distribution Date pursuant to the Transaction
Agreement.
4
<PAGE>
ARTICLE 2
TAX RETURN FILING
SECTION 2.01. CI Consolidated Returns. Corning shall prepare and file
with the IRS all CI Consolidated Returns and amendments thereto required to be
filed by the CI Group for all tax periods beginning before or on the
Distribution Date. Such returns shall include all income, gains, losses,
deductions and credits of the CCL Domestic Companies and the CPS Domestic
Companies. Corning shall make all decisions relating to the preparation and
filing of such returns, subject to the approval of CCL and CPS, which approval
shall not be withheld unless no reasonable basis exists for the decisions made
by Corning in respect of such return. CCL and CPS further agree to, and
respectively agree to compel the CCL Domestic Companies and the CPS Domestic
Companies to, file or join in the filing of such authorizations, elections,
consents and other documents, and take such other actions as may be necessary or
appropriate, in the opinion of Corning, to carry out the purposes and intent of
this Section 2.01, provided that such actions are not inconsistent with this
Agreement or the Spin-Off Tax Indemnification Agreements. CCL and CPS each shall
furnish Corning at least sixty (60) days before the due date (including
extensions) of any such CI Consolidated Return with its completed section of
such CI Consolidated Return, prepared in accordance with this Agreement, in
accordance with instructions from Corning and in a manner consistent with prior
returns, except to the extent otherwise required by the Spin-Off Tax
Indemnification Agreements. CCL and CPS each shall also furnish Corning work
papers and other such information and documentation as is reasonably requested
by Corning with respect to the CCL Companies and the CPS Companies. At Corning's
request, major items of income, deduction, gain and loss selected by Corning for
inclusion in the CI Consolidated Returns and relating to CCL Domestic Companies
and CPS Domestic Companies shall have been reviewed and approved prior to
submission to Corning by a nationally recognized accounting firm or law firm
with expertise sufficient to address the issues presented mutually acceptable to
Corning and the party or parties submitting such information. Corning and the
other party or parties submitting such information shall each pay an equal share
of the cost of such review.
5
<PAGE>
SECTION 2.02. CI State, Local and Foreign Returns. For any taxable
period beginning before or on the Distribution Date, Corning will prepare and
file all combined, consolidated or unitary state, local or foreign income or
franchise tax returns which are required to be filed by Corning or a Corning
Subsidiary and which include the operations conducted before or as of the
Distribution Date by (i) any of the CCL Companies or the CPS Companies, and (ii)
Corning or any Corning Subsidiary (herein, together with such returns filed for
previous periods, "CI State, Local and Foreign Returns"). Corning will timely
advise CCL and CPS of the inclusion of any of the CCL Companies and the CPS
Companies in any CI State, Local and Foreign Returns and the jurisdictions in
which such returns will be filed, which inclusion will not be inconsistent with
prior CI State, Local and Foreign Returns unless required by applicable law. CCL
and CPS will, and respectively will compel each of the CCL Companies and CPS
Companies whose tax information is included in any CI State, Local and Foreign
Return to, evidence its agreement to be included in such return on the
appropriate form and take such other action as may be appropriate, in the
opinion of Corning, to carry out the purposes and intent of this Section 2.02,
provided that such actions are not inconsistent with this Agreement or the
Spin-Off Tax Indemnification Agreements. CCL and CPS each shall furnish Corning
at least sixty (60) days before the due date (including extensions) of any such
CI State, Local and Foreign Return with a final copy of the information
necessary for Corning to complete such CI State, Local and Foreign Return,
prepared in accordance with instructions from Corning and in a manner consistent
with prior returns, except to the extent otherwise required by the Spin-Off Tax
Indemnification Agreements. CCL and CPS each shall also furnish Corning work
papers and other such information and documentation as is reasonably requested
by Corning.
2.03 CCL Returns. For any taxable period beginning before or on the
Distribution Date, CCL will prepare and file all combined, consolidated or
unitary state, local or foreign income or franchise tax returns which are
required to be filed separately by CCL or any Subsidiary of CCL, and which
include the operations conducted before or as of the
6
<PAGE>
Distribution Date by any of the CCL Companies and any of the CPS Companies
(herein, together with such returns filed for previous periods, "CCL Returns").
CCL will timely advise CPS of the inclusion of any of the CPS Companies in any
CCL Returns and the jurisdictions in which such returns will be filed, which
inclusion will not be inconsistent with prior CCL Returns unless required by
applicable law. CPS will, and will compel each of the CPS Companies whose tax
information is included in any CCL Return to, evidence its agreement to be
included in such return on the appropriate form and take such other action as
may be appropriate, in the opinion of CCL, to carry out the purposes and intent
of this Section 2.03, provided that such actions are not inconsistent with this
Agreement or the Spin-Off Tax Indemnification Agreements. CPS shall furnish CCL
at least sixty (60) days before any CCL Return is due (with extensions) with a
final copy of the information necessary for CCL to complete such CCL Return,
prepared in accordance with instructions from CCL and in a manner consistent
with prior returns, except to the extent otherwise required by the Spin-Off Tax
Indemnification Agreements. CPS shall also furnish CCL work papers and other
such information and documentation as is requested by CCL.
2.04 Separate Returns. For any taxable period ending before, on or
after the Distribution Date, each of Corning, CCL and CPS will prepare and file
all respective separate combined, consolidated or unitary state, local or
foreign income or franchise tax returns which are required to be filed
separately by such party and not otherwise described in Section 2.01, 2.02 or
2.03 above (herein, together with such returns filed for previous periods,
"Separate Returns").
ARTICLE 3
TAX LIABILITY
SECTION 3.01. Corning Liability. Except to the extent otherwise
provided herein and in the Spin-Off Tax Indemnification Agreements, for each CI
Consolidated Return Period and each CI State, Local and Foreign Return Period,
Corning shall be liable for and indemnify
7
<PAGE>
CCL and CPS against all taxes due in respect of all CI Consolidated Returns and
all CI State, Local and Foreign Returns, subject to reimbursement from CCL and
CPS respectively as contemplated by Article 4.
SECTION 3.02. State, local and foreign and separate return liability.
Except to the extent otherwise provided herein and in the Spin-Off Tax
Indemnification Agreements, (a) Corning will pay all taxes due on CI State,
Local and Foreign Returns, subject to appropriate reimbursement by CCL and CPS
respectively for liabilities for state, local and foreign returns as
contemplated by Article 4; (b) CCL will pay all taxes due on returns required to
be filed by CCL by Sections 2.03 and 2.04 hereof, subject to appropriate
reimbursement by CPS as contemplated by Article 4; and (c) CPS will pay all
taxes due on returns required to be filed by CPS by Section 2.04 hereof.
SECTION 3.03. Taxes resulting from the failure of either Distribution.
In the event that either the CCL Distribution or the CPS Distribution shall fail
to qualify for the tax treatment stated in the IRS Ruling, for reasons other
than those indemnified against in the Spin-Off Tax Indemnification Agreements,
any and all Taxes imposed upon or incurred by Corning, CCL or CPS as a result of
such failure (including any liability of Corning, CCL or CPS arising from Taxes
imposed on shareholders of Corning, CCL or CPS to the extent any such
shareholders successfully seek recourse against Corning, CCL or CPS on account
of such failure, or any liability for such Taxes which Corning, CCL or CPS may
assume or otherwise provide for) shall be allocated among Corning, CCL and CPS
in such a manner as will take into account the extent to which the actions or
inactions before, on or after the Distribution Date of each of Corning, CCL, CPS
and their respective Affiliates may have contributed to such failure, and
Corning, CCL and CPS each shall indemnify and hold harmless the other from and
against the Taxes so allocated to Corning, CCL and CPS, respectively. In
determining the extent to which Corning, CCL and CPS may have contributed to
such failure, all facts and circumstances shall be taken into account. If it is
determined that none of Corning, CCL or CPS contributed to the failure of such
Distribution to qualify for the tax
8
<PAGE>
treatment stated in the IRS Ruling, the liability of Corning, CCL and CPS under
this Section 3.03 shall be borne by each corporation in proportion to their
relative average market capitalization as determined by the average closing
price for each of Corning, CCL and CPS common stock during the 20 trading-day
period immediately following the Distribution Date. Any payments to be made by
any of Corning, CCL or CPS to another pursuant to this Section 3.03 shall be
made in immediately available funds within ten (10) days of the receipt of
notice that a payment requiring indemnification under this Section 3.03 has been
made (or is required to be made), or if there is disagreement among the parties
as to the amount or existence of liability under this Section 3.03, within ten
(10) days of the resolution of such disagreement.
ARTICLE 4
SEPARATE LIABILITY
SECTION 4.01. Separate Federal Liability Computation. For all tax
periods beginning after December 31, 1995, for which CI Consolidated Returns
have not been filed by Corning as of the Distribution Date and in respect of
which Corning is required to file a CI Consolidated Return, CCL and CPS
respectively shall compute the CCL Separate Liability and the CPS Separate
Liability for the portion of such periods in which the CCL Domestic Companies
and the CPS Domestic Companies respectively are members of the CI Group. "CCL
Separate Liability" in respect of any CI Consolidated Return Period means the
federal income tax liability (including CCL's share of Corning's alternative
minimum tax if Corning is subject to alternative minimum tax for such CI
Consolidated Return Period, not to exceed Corning's consolidated alternative
minimum tax for such period) computed as of December 31, 1996, as if CCL had
filed a consolidated federal income tax return for the CCL Group in respect of
such CI Consolidated Return Period. "CPS Separate Liability" in respect of any
CI Consolidated Return Period means the federal income tax liability (including
CPS's share of Corning's alternative minimum tax if Corning is subject to
alternative minimum tax for such CI Consolidated Return Period, not to exceed
Corning's consolidated alternative minimum tax for such period) computed as of
December 31, 1996, as if CPS had filed a consolidated federal
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income tax return for the CPS Group in respect of such CI Consolidated Return
Period. If, in computing the CCL Separate Liability or the CPS Separate
Liability, CCL or CPS calculates that the CCL Group or the CPS Group,
respectively, would experience a net operating loss resulting in no federal
income tax liability as of December 31, 1996, the CCL Separate Liability or the
CPS Separate Liability, as the case may be, shall be equal to a credit amount
calculated by Corning and equal to the reduction in the Federal income tax
liability of the CI Group by reason of the use of such net operating loss of the
CCL Group or the CPS Group, as the case may be, in the CI Consolidated Return
that Corning projects to be filed in respect of such period. Except as may
otherwise be required by the Spin-Off Tax Indemnification Agreements,
computations in respect of the CCL Separate Liability and the CPS Separate
Liability shall be consistent with prior CI Group returns, shall follow the tax
elections and other tax positions adopted or prescribed by Corning and shall
take into account the adjustments and modifications set forth in Section 4.03;
provided, however, that the Tax Director and/or General Counsel of each of
Corning and CCL or CPS, as the case may be, shall negotiate reasonable
modifications or alternatives to such requirements in the event that either CCL
or CPS, as the case may be, reasonably determines that such elections,
positions, adjustments or modifications would have a materially detrimental
effect on the tax obligations of CCL or CPS, as the case may be, in respect of
the current or any subsequent tax period.
SECTION 4.02. Separate CPS/CCL Liability Computation. For all tax
periods beginning after December 31, 1995, for which CCL Returns have not been
filed by CCL as of the Distribution Date and in respect of which CCL is required
to prepare and file a CCL Return, CPS shall compute the Separate CPS/CCL
Liability for the portion of such periods in which the CPS Companies
respectively are subsidiaries of CCL. "Separate CPS/CCL Liability" in respect of
any tax period means the state, local and foreign tax liability computed as of
December 31, 1996, as if CPS had filed consolidated combined or unitary state,
local and foreign tax returns with the CPS Companies in respect of such tax
period. Except as may otherwise be required by the Spin-Off Tax Indemnification
Agreements, computations in respect of the Separate CPS/CCL Liability shall be
consistent with any prior CCL Returns,
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shall follow the tax elections, positions, adjustments and modifications adopted
or prescribed by CCL and take into account adjustments and modifications similar
to those set forth in Section 4.03; provided, however, that the Tax Director
and/or General Counsel of each of CCL and CPS shall negotiate reasonable
modifications or alternatives to such requirements in the event that CPS
reasonably determines that such elections, positions, adjustments or
modifications would have a materially detrimental effect on the tax obligations
of CPS in respect of the current or any subsequent tax period.
SECTION 4.03. Adjustments. In computing the liabilities under
Sections 4.01 and 4.02, CCL and CPS respectively shall take into account the
following adjustments and modifications:
(i) Dividends from any member of the CI Group shall be
eliminated;
(ii) Gains or losses on intercompany transactions and
intercompany distributions between any members of the CI Group shall be
deferred and recognized pursuant to Treas. Reg. ss. 1.1502-13 and
1.1502-14 and Code Section 267 and the regulations thereunder;
(iii) All carryforwards of tax credits (except the minimum tax
credit), net operating losses, capital losses, charitable contributions
and other similar items shall be determined consistent with prior CI
Consolidated Returns;
(iv) All ordinary income shall be subject to tax at the
highest tax rate applicable to taxable ordinary income of corporations;
(v) Any exemption or similar item that must be prorated or
apportioned among the component members of a controlled group of
corporations shall not be taken into account; and
(vi) Other adjustments specified by Corning shall be made.
SECTION 4.04. Payments. In respect of each period for which liabilities
are required to be calculated pursuant to Section 4.01, CCL and Corning shall
provide for payments in respect of the CCL Separate Liability and CPS and
Corning shall provide for payments in
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respect of the CPS Separate Liability, in each case effective as of December 31,
1996. In respect of each period for which liabilities are required to be
calculated pursuant to Section 4.02, CPS and CCL shall provide for payments in
respect of the Separate CPS/CCL Liability, effective as of December 31, 1996.
SECTION 4.05. Discrepancies. (a) To the extent that the liabilities
calculated pursuant to Section 4.01 are not equal to the liabilities reported on
the actual tax returns filed in respect of the periods contemplated therein: (i)
Corning shall be liable for and shall indemnify and hold harmless the other
parties hereto against all liabilities and claims and shall receive all benefits
and refunds arising in respect of such differences that do not relate to
Temporary Differences attributable to CCL or CPS and (ii) CCL or CPS, as the
case may be, shall be liable for, make payment to Corning in respect of, and
indemnify and hold harmless the other parties hereto against all liabilities and
claims and shall receive all benefits and refunds arising in respect of such
differences that relate to Temporary Differences attributable to CCL or CPS,
respectively, in accordance with Section 7.01(b).
(b) To the extent that the liabilities calculated pursuant to Section
4.02 are not equal to the liabilities reported on the actual tax returns filed
in respect of the periods contemplated therein, CPS shall be liable for, make
payment to CCL in respect of, and indemnify and hold harmless the other parties
hereto against all liabilities and claims where such actual liabilities are
greater than the liabilities calculated under Section 4.02 and shall receive all
benefits and refunds arising in respect of such differences attributable to CPS
where such actual liabilities are less than the liabilities calculated under
Section 4.02.
(c) Payments to be made to Corning ,CCL or CPS in respect of
obligations arising under this Section 4.04 shall be made no later than five
days before the due date (without extensions) of the actual return to be filed.
SECTION 4.06. State and local returns. The liabilities of CCL and the
CCL Companies and CPS and the CPS Companies with respect to CI State, Local and
Foreign Returns in respect of tax periods beginning before or on the
Distribution Date shall be computed as of December 31, 1996, under the
principles set forth in Section 4.01 and
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compensation in respect to such liabilites shall be provided to Corning in
accordance with the principles of Sections 4.04 and 4.05.
ARTICLE 5
POST-DISTRIBUTION CARRYBACKS OF TAX BENEFITS
SECTION 5.01(a). CI Consolidated Returns; Net Operating Losses. If for
any taxable period beginning on or after the Distribution Date, a CCL Company or
a CPS Company incurs a net operating loss that may be carried back to a CI
Consolidated Return Period, the CCL Company or the CPS Company shall make an
election to relinquish the entire carryback period with respect to any such net
operating loss. If for any taxable period beginning on or after the Distribution
Date, a CCL Company or a CPS Company is entitled to a foreign tax credit or a
deduction in respect of such foreign taxes, such CCL Company or CPS Company must
take the deduction in lieu of the foreign tax credit, unless the foreign tax
credit can be fully utilized on a return other than a CI Consolidated Return.
(b) Other Tax Benefits. If for any taxable period beginning on
or after the date of the CCL Distribution, a CCL Company or a CPS Company incurs
a net capital loss, business credit or other Tax attribute that must be carried
back to a CI Consolidated Return (each a "Carryback Item"), such CCL Company or
CPS Company may file a refund claim reflecting such Carryback Item only after
having obtained a written consent from Corning. In the event that such CCL
Company or CPS Company does not obtain such written consent or shall not be
eligible to file such claim under applicable law, Corning may, at the written
request and expense of such CCL Company or CPS Company, file amended returns or
refund claims reflecting such Carryback Item. Such CCL Company or CPS Company
shall be compensated for the use of such Carryback Item as follows:
(i) Corning shall, within thirty (30) days after
receipt thereof, pay to such CCL Company or CPS Company respectively any refunds
actually received by Corning resulting from the filing of an amended return or
refund claim with respect to such Carryback Item attributable to such company,
whether such amended return or refund claim was filed by
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Corning or the CCL Company or the CPS Company, together with interest received
net of taxes with respect thereto. With respect to CCL, in the event that
Corning would have received a refund (including interest) with respect to such
claim had such refund not been offset against deficiencies, interest, or
penalties assessed against the CI Group or any member thereof (other than
deficiencies, interest or penalties (A) attributable to the operations of such
CCL Company and with respect to which such entity would otherwise be responsible
under the terms of this Agreement, (B) attributable to a taxable period of the
CI Group for which the statute of limitations has expired, (C) against which CCL
is obligated to indemnify Corning pursuant to the Spin-Off Tax Indemnity
Agreements or (D) in respect of which CCL is obligated to share payment pursuant
to Section 3.03 hereof), Corning shall pay to such CCL Company, within thirty
(30) days after receipt of notice of such offset, an amount equal to the amount
of such offset, together with interest that would have been paid to Corning if
such refund had not been offset. With respect to CPS, in the event that Corning
would have received a refund (including interest) with respect to such claim had
such refund not been offset against deficiencies, interest, or penalties
assessed against the CI Group or any member thereof (other than deficiencies,
interest or penalties (A) attributable to the operations of such CPS Company and
with respect to which such entity would otherwise be responsible under the terms
of this Agreement, (B) attributable to a taxable period of the CI Group for
which the statute of limitations has expired, (C) against which CPS is obligated
to indemnify Corning pursuant to the Spin-Off Tax Indemnity Agreements or (D) in
respect of which CPS is obligated to share payment pursuant to Section 3.03
hereof), Corning shall pay to such CPS Company, within thirty (30) days after
receipt of notice of such offset, an amount equal to the amount of such offset,
together with interest that would have been paid to Corning if such refund had
not been offset.
(ii) If, for any taxable period, Corning is required
to and does make a repayment to the IRS of any portion of a refund described in
this Article 5 attributable to the denial of the CCL Company or CPS Company
Carryback Item, then such CCL Company or CPS Company shall pay to Corning in
immediately available funds within ten (10) days
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following the date Corning notifies such CCL Company or CPS Company of such
repayment, the amount of such repayment including interest thereon.
(iii) If Corning elects not to file amended returns
or refund claims reflecting a Carryback Item as to which CCL or CPS might
receive a tax benefit, Corning shall notify such CCL Company or CPS Company of
its decision and state the amount including interest which it has determined to
be the appropriate compensation for its claim, and Corning shall pay such CCL
Company or CPS Company within ten (10) days of the receipt by Corning of written
notification that the CCL Company or the CPS Company agrees with its
determination, or upon irreconcilable disagreement between such parties, upon
receipt by Corning of a written determination of a nationally recognized
accounting firm or law firm with expertise sufficient to address the issues
presented and mutually agreeable to such parties.
(iv) Notwithstanding anything to the contrary in this Article,
before Corning files a claim for refund or a CCL Company or a CPS Company is
permitted to file a claim for refund which reflects a Carryback Item and which
would affect a CI Consolidated Return, the validity and amount of any such
Carryback Item shall be reviewed and approved by Corning and such CCL Company or
CPS Company, as applicable, and, upon irreconcilable disagreement between such
parties, by a nationally recognized accounting firm or law firm with expertise
sufficient to address the issues presented and mutually agreeable to such
parties. Each CCL Company and each CPS Company, as applicable, agrees to
reimburse Corning for its reasonable expenses incurred in reviewing, filing and
securing any refund claim made at the request of such CCL Company or CPS
Company.
ARTICLE 6
POST-DISTRIBUTION CARRYOVERS OF TAX BENEFITS
SECTION 6.01. CI Group items. Corning shall notify CCL and CPS as soon
as practicable after the Distribution Date of any consolidated carryover item
which may be partially or totally attributed to and carried over by a CCL
Company or a CPS Company and will notify CCL and CPS of subsequent adjustments
which may affect such carryover item.
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SECTION 6.02. CCL Group Items. CCL shall notify Corning and CPS as soon
as practicable after the Distribution Date of any consolidated carryover item
which may be partially or totally attributed to and carried over by a CPS
Company and will notify Corning and CPS of subsequent adjustments which may
affect such carryover item.
ARTICLE 7
AUDIT ADJUSTMENTS
SECTION 7.01. CI Consolidated, State, Local and Foreign Returns. Except
as provided in the Spin-Off Tax Indemnification Agreements and in Section 3.03
hereof, if any tax liability or refund in respect of the CI Group arises as a
result of an audit by the IRS or other taxing authority and such tax liability
or refund relates to a CI Consolidated Return or a CI State, Local and Foreign
Return filed in respect of any period commencing before or on the Distribution
Date and such liability:
(a) does not relate to Temporary Differences attributable to CCL or
CPS, Corning shall be liable for and shall pay any tax liabilities and
any interest and underpayment penalties associated therewith and
Corning shall receive any such tax refunds and any interest associated
therewith. Any penalties or additions to tax associated with tax
liabilities that are not underpayment penalties shall be allocated
among Corning, CCL and CPS in the proportion to which such penalties
are assessed to Corning, CCL and CPS, respectively, or in the event
such penalties are not clearly assessed to any individual party or
parties, in such a manner as will take into account the extent to which
each may have contributed to such penalties. Corning, CCL and CPS each
shall indemnify and hold harmless the other from and against the
penalties so allocated to Corning, CCL and CPS, respectively; or
(b) does relate to Temporary Differences attributable to CCL or CPS,
and such taxing authority:
(i) acknowledges directly or indirectly to Corning's sole
satisfaction that Corning may utilize such Temporary
Differences in computing tax liability,
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benefit or refunds in respect of post-Distribution Date tax
periods, Corning shall be liable for and shall pay any such
tax liability and any interest and underpayment penalties
associated with such tax liability and shall receive any such
benefit or refunds and any interest associated therewith; or
(ii) does not acknowledge directly or indirectly to Corning's
sole satisfaction that Corning may utilize such Temporary
Differences in computing tax liability, benefit or refunds in
respect of post-Distribution Date tax periods, the party
hereto against which the issue giving rise to such tax
liability is directed shall be liable for and shall pay any
such tax liability and any interest and underpayment penalties
associated with such tax liability and shall receive any such
benefit or refunds and any interest associated therewith; and
any liability and any penalties or additions to tax associated with
such tax liability that are not underpayment penalties shall be
allocated among Corning, CCL and CPS in the proportion to which such
penalties have been assessed by such taxing authority to Corning, CCL
and CPS, respectively, or in the event such penalties have not been
clearly assessed to any individual party or parties, in such a manner
as will take into account the extent to which each may have contributed
to such penalties, and Corning, CCL and CPS each shall indemnify and
hold harmless the other from and against the penalties so allocated to
Corning, CCL and CPS, respectively.
SECTION 7.02. Non-CI Consolidated, State, Local and Foreign Returns. If
any tax liability or refunds arise in respect of any member of the CI Group
(determined before giving effect to the Distributions) as a result of an audit
by the IRS or other taxing authority and such tax liability or refund does not
relate to a CI Consolidated Return or a CI State, Local and Foreign Return, the
party hereto against which the issue giving rise to such tax liability is
directed or in favor of which such return is applicable shall be liable for and
shall pay any such tax liability and any interest and penalties associated
therewith and shall receive any such refund and any interest associated
therewith, and shall indemnify and hold harmless the other parties hereto from
and against all such liabilities and any interest and penalties related thereto.
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SECTION 7.03. Other Audit Liabilities and Refunds. Except as otherwise
provided in this Article 7 or Articles 3 or 4 hereof or in the Spin-Off Tax
Indemnification Agreements, (a) CCL or CPS, as the case may be, shall be liable
for and shall pay all tax liabilities and any interest and penalties associated
therewith, and shall receive any tax refunds and any interest associated
therewith, that arise as a result of an audit by the IRS or other taxing
authority and that relate to the business or operations of CCL or Subsidiaries
of CCL and CPS or Subsidiaries of CPS, respectively, and CCL and CPS each shall
indemnify and hold harmless Corning and each other from and against the
penalties so allocated to CCL and CPS, respectively; and (b) Corning shall be
liable for and shall pay all tax liabilities and any interest and penalties
associated therewith, and shall receive any tax refunds and any interest
associated therewith, that arise as a result of an audit by the IRS or other
taxing authority and that relate to the business or operations of Corning or
Corning Subsidiaries.
SECTION 7.04. Expenses. Any out-of-pocket expenses (e.g., travel
expenses, accountants' fees, attorneys' fees, experts' fees, etc.) incurred by
the CI Group in connection with proposed or actual liabilities or refunds of the
type contemplated in this Article 7 shall be paid by the entities to which such
liabilities or refunds are allocated hereunder. In cases where such expenses
relate to more than one member of the CI Group or more than one party hereto,
the parties affected shall determine how such expenses shall be allocated.
ARTICLE 8
CONTESTS
SECTION 8.01. CI Group Contests; Notification and communication. If a
notice of audit is given, an audit is begun, an audit adjustment is (or has
been) proposed, or any other claim is (or has been) made by any taxing authority
with respect to a tax liability that, pursuant to the terms hereof, may be
attributable to a CCL Company or a CPS Company with regard to a CI Consolidated
Return or a CI State, Local and Foreign Return, Corning shall promptly
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notify CCL and CPS of such event (unless a CCL Company and a CPS Company
previously was notified directly by the relevant tax authority). Thereafter,
Corning or CCL or CPS, as the case may be, shall keep the others, on a timely
basis, informed of all material developments in connection with audits,
administrative proceedings, litigation and other similar matters that may affect
their respective tax liabilities. Failure or delay in providing notification
hereunder shall not relieve any party hereto of any obligation hereunder in
respect of any particular tax liability, except to the extent that such failure
or delay restricts the ability of such party to contest such liability
administratively or in the courts and otherwise materially and adversely
prejudices such party.
SECTION 8.02. Group Contests; Control and Management of Claims. (a) As
among the parties hereto, Corning shall control the prosecution of any audits
and any contests in respect of any claim made by a taxing authority on audit or
in a related administrative or judicial proceeding or in respect of any refund
or credit of taxes, and shall make and prosecute other claims for refunds with
respect to any tax liability, that relates to a CI Consolidated Return Period or
a CI State, Local and Foreign Return Period. CCL or CPS, as the case may be, may
participate in such audits or contests to the extent that Corning in its sole
discretion shall deem appropriate, provided, however, that Corning shall have
the sole right to control, at Corning's expense, the prosecution of any audit,
refund claim or related administrative or judicial proceeding with respect to
those matters which could affect the CI Group's tax liability.
(b) With respect to a tax liability or refund that, pursuant to the
provisions hereof, may be attributable to a CCL Company or a CPS Company
relating to a CI Consolidated Return Period or a CI State, Local and Foreign
Return Period, if Corning elects not to exercise its rights of control under
subsection (a) hereof, and if CCL or CPS so requests, Corning shall contest,
control and allow CCL or CPS, as the case may be, to participate to the extent
that Corning in its sole discretion shall deem appropriate, all at CCL's or
CPS's respective expense, or in the alternative shall permit CCL or CPS at its
own expense to contest and control a claim made by a taxing authority on audit
or in a related administrative or judicial
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proceeding or by appropriate claim for refund or credit of taxes (or to make and
prosecute other claims for refund. CCL or CPS, as the case may be, shall pay all
out-of-pocket and other costs relating to such contests, including but not
limited to fees for attorneys, accountants, expert witnesses or other
consultants.
(c) If asserted liabilities unrelated to the matters contemplated
herein become grouped with contests arising hereunder, the parties shall use
their respective best efforts to cause the contest arising hereunder to be the
subject of a separate proceeding.
(d) With respect to matters arising hereunder controlled by Corning,
and where deemed necessary by Corning, CCL and CPS respectively shall compel the
relevant CCL Company or CPS Company to authorize by appropriate powers of
attorney such persons as Corning shall designate to represent such CCL Company
or CPS Company with respect to such matters. The parties hereto shall reasonably
cooperate with one another in a timely manner with respect to any matter arising
hereunder.
(e) With respect to a particular adjustment or claim made with respect
to a CCL Company or a CPS Company that, pursuant to the provisions hereof, may
be attributable to a CCL Company or a CPS Company, to the extent, and for so
long as, Corning, in the exercise of its reasonable judgment, is satisfied that
CCL and the CCL Companies or CPS and the CPS Companies can and will meet all
their obligations under this Agreement, Corning shall not settle, compromise, or
concede such adjustment or claim without the written consent of CCL or CPS, as
the case may be, which consent shall not be unreasonably withheld.
(f) Group contests and the control and management of matters hereunder
relating solely to CCL Returns shall be subject to the provisions of this
Section 8.02, applied as if CCL was Corning and CPS was CCL for purposes
thereof.
ARTICLE 9
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INFORMATION AND COOPERATION; BOOKS AND RECORDS
SECTION 9.01(a). Each of CCL and CPS shall deliver to Corning, as soon
as practicable after Corning's request, and CPS shall deliver to CCL, as soon as
practicable after CCL's request, such information and data concerning the
operations conducted before or as of the Distribution Date by the CCL Companies
and the CPS Companies respectively and make available such knowledgeable
employees of the CCL Companies and CPS Companies respectively as Corning or CCL,
as the case may be, may reasonably request, including providing the information
and data required by Corning's, CCL's or CPS's customary internal tax and
accounting procedures, in order to enable each of Corning or CCL, as the case
may be, to complete and file all tax forms or reports that it may be required to
file with respect to the activities of the CCL Companies and the CPS Companies
for taxable periods ending on, prior to or including the Distribution Date, to
respond to audits by any taxing authorities with respect to such activities, to
prosecute or defend any administrative or judicial proceeding and to otherwise
enable Corning or CCL, as the case may be, to satisfy its accounting and tax
requirements. CCL and CPS shall provide office space to IRS and other tax
auditors when they are conducting on-site audits, and to employees and
representatives of Corning or CCL, as the case may be, as long as a CI
Consolidated Return Period or a CI State, Local and Foreign Return Period or a
CCL Return Period, as the case may be, is open to assessment of additional taxes
or an assessment with respect to such period is being contested. Corning shall
deliver to CCL or CPS as soon as practical after CCL's or CPS's request, and CCL
shall deliver to CPS as soon as practical after CPS's request, such information
and data concerning any tax attributes which were allocated to a CCL Company or
a CPS Company that is reasonably necessary in order to enable CCL or CPS to
complete and file all tax forms or reports that it may be required to file with
respect to such activities of the CCL Companies or the CPS Companies from and
after the Distribution Date, to respond to audits by any tax authorities with
respect to such activities, to prosecute or defend claims for taxes in any
administrative or judicial proceeding, and to otherwise enable CCL or CPS to
satisfy its
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accounting and tax requirements. In addition, Corning shall make available to
CCL and CPS, and CCL shall make available to CPS, its knowledgeable employees
for such purpose.
(b). Each CCL Company and each CPS Company shall retain all books,
records, documentation or other information relating to any CI Consolidated
Return or CI State, Local and Foreign Return, and each CPS Company shall retain
all books, records, documentation or other information relating to any CCL
Return Period, until the expiration of the applicable statute of limitations
(including any extension or waiver thereof). Upon the expiration of any statute
of limitations, the foregoing information may be destroyed or disposed of
provided that (i) the CCL Company or the CPS Company provides sixty (60) days
prior written notice to Corning or CCL, as the case may be, describing in
reasonable detail the documentation to be destroyed or disposed of and (ii)
Corning or CCL, as the case may be, agrees in writing to such destruction or
disposal. If Corning or CCL, as the case may be, objects to the proposed
destruction or disposal, then the CCL Company or the CPS Company shall promptly
deliver such materials to Corning or CCL, as the case may be, or continue to
retain such materials.
ARTICLE 10
GENERAL PROVISIONS
SECTION 10.01. Effectiveness. The effectiveness of this Agreement and
the obligations and rights created hereunder are subject and conditioned upon
the completion of the Distributions pursuant to the terms of the Transaction
Agreement.
SECTION 10.02. Notices. All notices, requests, claims, demands
and other communications hereunder shall be in writing and shall be
given or made (and shall be deemed to have been duly given or made upon
receipt) by delivery in person, by courier service (including overnight
delivery), by cable, by telecopy confirmed by
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return telecopy, by telegram, by telex or by registered or certified
mail (postage prepaid, return receipt requested) to the respective
parties at the addresses (or at such other address for a party as shall
be specified in a notice given in accordance with this Section 10.01)
listed below:
(a) To Corning Incorporated:
One Riverfront Plaza
Corning, New York 14831
Telecopy: (607) 974-8656
Attn: each of the General Counsel and Tax Director
(b) To CCL:
One Malcolm Avenue
Teterboro, New Jersey 07608
Telecopy: (201) 462-4795
Attn: each of the General Counsel and Tax Director
(c) To CPS:
210 Carnegie Center
Princeton, New Jersey 08540-6233
Telecopy:(609) 452-9865
Attn: each of the General Counsel and Tax Director
SECTION 10.03. Complete Agreement; Construction. This Agreement is
intended to provide rights, obligations and covenants in respect of Taxes and,
together with the Spin-Off Tax Indemnification Agreements, shall supersede all
prior agreements and undertakings, both written and oral, between the parties
with respect to the subject matter hereof and thereof. In the event provisions
of this Agreement are inconsistent with provisions in a Spin-Off Tax
Indemnification Agreement, the provisions in the Spin-Off Tax Indemnification
Agreement shall control, except in cases where this construction would provide a
duplicate benefit.
SECTION 10.04. Counterparts. This Agreement may be executed in one or
more counterparts, and by the different parties hereto in separate counterparts,
each of which when
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executed shall be deemed to be an original but all of which taken together shall
constitute one and the same agreement.
SECTION 10.05. Waiver. The parties to this Agreement may (a) extend the
time for the performance of any of the obligations or other acts of the other
party or parties, (b) waive any inaccuracies in the representations and
warranties of the other party or parties contained herein or in any document
delivered by the other party or parties pursuant hereto or (c) waive compliance
with any of the agreements or conditions of the other party or parties contained
herein. Any such extension or waiver shall be valid only if set forth in an
instrument in writing signed by the party to be bound thereby. Any waiver of any
term or condition shall not be construed as a waiver of any subsequent breach or
a subsequent waiver of the same term or condition, or a waiver of any other term
or condition, of this Agreement. The failure of any party to assert any of its
rights hereunder shall not constitute a waiver of any such rights.
SECTION 10.06. Amendments. This Agreement may not be amended or
modified except (a) by an instrument in writing signed by, or on behalf of, the
parties or (b) by a waiver in accordance with Section 10.05.
SECTION 10.07. Successors and Assigns. The provisions of this Agreement
shall be binding upon, inure to the benefit of and be enforceable by the parties
and their respective successors and permitted assigns. This Agreement cannot be
assigned by Corning, CCL or CPS, in each case without the consent of the other
two parties hereto.
SECTION 10.08. Subsidiaries. Each of the parties hereto shall cause to
be performed, and hereby guarantees the performance of, all actions, agreements
and obligations set forth herein to be performed by any subsidiary of such party
or by any entity that is contemplated to be a subsidiary of such party on and
after the Distribution Date.
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SECTION 10.09. Third Party Beneficiaries. This Agreement shall be
binding upon and inure solely to the benefit of the parties hereto and their
respective subsidiaries, and nothing herein, express or implied, is intended to
or shall confer upon any third parties any legal or equitable right, benefit or
remedy of any nature whatsoever under or by reason of this Agreement.
SECTION 10.10. Headings. The descriptive headings contained in this
Agreement are for convenience of reference only and shall not affect in any way
the meaning or interpretation of this Agreement.
SECTION 10.11. Specific Performance. The parties hereto agree that
irreparable damage would occur in the event any provision of this Agreement was
not performed in accordance with the terms hereof and that the parties shall be
entitled to specific performance of the terms hereof, in addition to any other
remedy at law or equity.
SECTION 10.12. Governing Law. This Agreement shall be governed by, and
construed in accordance with, the laws of the State of New York, applicable to
contracts executed in and to be performed entirely within that state.
SECTION 10.13. Arbitration. Any conflict or disagreement arising out of
the interpretation, implementation, or compliance with the provisions of this
Agreement shall be finally settled pursuant to the provisions of Article V
(Dispute Resolution) of the Transaction Agreement, which provisions are
incorporated herein by reference.
SECTION 10.14. Severability. If any term or other provision of this
Agreement is invalid, illegal or incapable of being enforced by any law or
public policy, all other terms and provisions of this Agreement shall
nevertheless remain in full force and effect so long as the economic or legal
substance of the transactions contemplated hereby is not affected in any manner
materially adverse to any party. Upon such determination that any term or other
25
<PAGE>
provision is invalid, illegal or incapable of being enforced, the parties hereto
shall negotiate in good faith to modify this Agreement so as to effect the
original intent of the parties as closely as possible in an acceptable manner in
order that the transactions contemplated hereby are consummated as originally
contemplated to the greatest extent possible.
26
<PAGE>
IN WITNESS WHEREOF, the parties have caused this Agreement to
be executed as of the date first written above by their respective officers
thereunto duly authorized.
CORNING INCORPORATED,
by ____________________________________
Name:
Title:
CORNING CLINICAL LABORATORIES INC.,
by ____________________________________
Name:
Title:
CORNING PHARMACEUTICAL SERVICES INC.,
by ____________________________________
Name:
Title:
MPE
taxshar.009
27
Draft of September 31, 1996
CORNING/CCL SPIN-OFF TAX INDEMNIFICATION AGREEMENT
This SPIN-OFF TAX INDEMNIFICATION AGREEMENT ("Agreement") is
made and entered into this __ day of ______, 1996, by and among CORNING
INCORPORATED, a New York corporation ("Corning") and CORNING CLINICAL
LABORATORIES INC., a Delaware corporation ("CCL").
WITNESSETH
WHEREAS, Corning is the common parent of an affiliated group
of corporations within the meaning of Code1 Section 1504 which includes CCL;
WHEREAS, Corning has determined to effect the Distributions
pursuant to a Transaction Agreement (the "Transaction Agreement") dated of even
date herewith;
WHEREAS, the IRS has issued the IRS Ruling which states the
tax treatment of the Distributions and the Other Transactions; and
WHEREAS, the parties hereto are entering into this Agreement
to indemnify Corning as hereinafter provided in the event the Distributions or
the Other Transactions fail to qualify for the tax treatment stated in the IRS
Ruling due to actions by CCL.
NOW, THEREFORE, in consideration of the mutual agreements,
provisions and covenants contained in this Agreement, the parties hereby agree
as follows:
ARTICLE 1: Representations and Covenants
SECTION 1.01. Representations. (a) CCL has reviewed the
materials submitted to the IRS in connection with the IRS Ruling and, to the
best of CCL's knowledge, these materials, including, without limitation, any
statements and representations concerning CCL, its business, operations capital
structure and/or organization, are complete and accurate in all material
respects. CCL shall, and shall cause each member of the CCL Group, to comply
with each such representation and statement concerning CCL and the CCL Group
made in the materials so submitted, the IRS Ruling and any subsequent IRS
ruling, including without limitation, statements as to the creation, funding and
operation of employee compensation plans by CCL. With respect to any
representation or statement made by or on
- -------
1 Capitalized terms not defined herein have the meaning given to them in Annex
A.
<PAGE>
behalf of CCL in connection with the IRS Ruling and any subsequent IRS ruling
and to the extent such representation or statement relates to future actions or
events under their control, neither CCL nor any member of the CCL Group will
take any action during the Restricted Period that would have caused such
representation or statement to be untrue if CCL had planned or intended to take
such action at the time such representation or statement was made by or on
behalf of CCL.
(b) CCL hereby represents and warrants to Corning that CCL has
no present intention to undertake any of the transactions set forth in Section
1.02 (a) (iii) or to cease to engage in the active conduct of the trade or
business (within the meaning of Section 355(b)(2) of the Code) of providing
clinical laboratory testing services.
SECTION 1.02. Covenants. (a) CCL covenants and agrees with
Corning that during the Restricted Period:
(i) CCL will continue to engage in the clinical laboratory
testing business in the U.S. and will continue to maintain in the U.S. a
substantial portion of its assets and business operations as they existed prior
to the Distributions, provided that the foregoing shall not be deemed to
prohibit CCL from entering into or acquiring other businesses or operations
which may or may not be consistent with its business and operations as they
existed prior to the Distributions so long as CCL continues to engage in such
clinical business in the U.S. and continues to so maintain such substantial
portion in the U.S.;
(ii) CCL will continue to manage and to own (A) directly
assets which represent at least fifty percent (50%) of the Gross Assets which
CCL managed and owned directly immediately after the Distributions, and (B)
directly or indirectly through one or more entities, assets which represent at
least 50% of the Gross Assets which CCL owned indirectly through one or more
entities immediately after the Distributions;
(iii) except as provided in Section 1.02(c), neither CCL, nor
any of its Affiliates nor any of their respective, directors, officers or other
representatives will undertake, authorize, approve, recommend, permit,
facilitate, or enter into any contract, or consummate any transaction with
respect to: (A) the issuance of CCL Common Stock (including options, warrants,
rights or securities exercisable for, or convertible into, CCL Common Stock) in
a single transaction or in a series of related or unrelated transactions or
otherwise or in the aggregate which would exceed (or could exceed if any such
options, warrants or rights were exercised or such securities were converted)
fifty percent (50%) when expressed as a percentage of the outstanding shares of
CCL Common Stock immediately following the Distributions; (B) the issuance of
any class or series of capital stock or any other instrument (other than CCL
Common Stock and options, warrants, rights or securities exercisable for, or
convertible into, CCL Common Stock) that would constitute equity for federal tax
purposes (such classes or series of capital stock and other instruments being
referred to herein as "Disqualified CCL Stock"); (C) the issuance of any
options, rights, warrants, securities or
2
<PAGE>
similar arrangements exercisable for, or convertible into, Disqualified CCL
Stock; (D) any redemptions, repurchases or other acquisitions of capital stock
or other equity interests in CCL in a single transaction or a series of related
or unrelated transactions, unless such redemptions, repurchases or other
acquisitions (1) satisfy the following requirements: (a) there is a "sufficient
business purpose" (within the meaning of Section 4.05(1)(b) of Revenue Procedure
96-30) for the transaction, (b) the stock to be purchased, redeemed or otherwise
acquired is widely held, (c) the stock purchases or other acquisitions will be
made on the open market, and (d) the amount of stock purchases, redemption, or
other acquisitions in a single transaction or in a series of related or
unrelated transactions will not exceed an amount of stock representing twenty
percent (20%) of the outstanding stock of CCL immediately following the
Distributions; or (2) are made in connection with employee equity compensation
plans of CCL and do not result, individually or in the aggregate, in the
acquisition of more than ten percent (10%) of the voting power in respect of the
outstanding stock of CCL immediately following the Distributions, (E) the
dissolution, merger , or complete or partial liquidation of CCL or any
announcement of such action; or (F) the waiver, amendment, termination or
modification of any provision of the CCL Rights Plan in connection with, or in
order to permit or facilitate, any acquisition or proposed acquisition of
Beneficial Ownership of capital stock or other equity interest in CCL.
(b) In addition to the other representations, warranties,
covenants and agreements set forth in this Agreement, CCL and the CCL Group will
take, or refrain from taking, as the case may be, such actions as Corning may
reasonably request during the Ruling Period as necessary to insure that the
Distributions and the Other Transactions qualify for the tax treatment stated in
the IRS Ruling, including, without limitation, such actions as Corning
determines may be necessary to obtain and preserve the IRS Ruling or any
subsequent IRS ruling on which the parties can rely. Without limiting the
generality of the foregoing, CCL and the CCL Group shall cooperate with Corning
if Corning determines to obtain additional IRS rulings pertaining to whether any
actual or proposed change in facts and circumstances affects the tax status of
the Distributions or the Other Transactions.
(c) Following the six-month anniversary of the Distribution
Date, CCL and its Affiliates may take any action or engage in conduct otherwise
prohibited by Section 1.02 so long as prior to such action or conduct, as the
case may be, Corning or CCL receives (A) a ruling from the IRS in form and
substance reasonably satisfactory to Corning and upon which Corning can rely to
the effect that the proposed action or conduct, as the case may be, will not
cause the Distributions or the Other Transactions to fail to qualify for the tax
treatment stated in the IRS Ruling or otherwise to be taxable for federal income
tax purposes, or (B) an Opinion of Counsel in form and substance reasonably
satisfactory to Corning and upon which Corning can rely to the effect that the
proposed action or conduct, as the case may be, will not cause the Distributions
or the Other Transactions to fail to qualify for the tax treatment stated in the
IRS Ruling or otherwise to be taxable for federal income tax purposes.
ARTICLE 2: CCL Indemnity Obligations
3
<PAGE>
SECTION 2.01. Tax Indemnities. (a) If CCL, or another member
of the CCL Group (collectively the "Indemnifying Party") shall take any action
prohibited by Article 1 or shall violate a representation or covenant contained
in Article 1, and either of the Distributions or any of the Other Transactions
shall fail to qualify for the tax treatment stated in the IRS Ruling primarily
as a result of such action or violation, then the Indemnifying Party shall
(jointly or severally) indemnify and hold harmless Corning and each member of
the Corning Group (collectively the "Indemnified Party") against any and all
Taxes imposed upon or incurred by the Indemnified Party as a result of the
failure, including, without limitation, any liability of the Indemnified Party
arising from Taxes imposed on shareholders of Corning to the extent any
shareholder or shareholders of Corning successfully seek recourse against the
Indemnified Party on account of any such failure, or any liability for such
Taxes which the Indemnified Party may assume or otherwise provide for.
(b) Notwithstanding anything to the contrary set forth in this
Agreement, if, during the Restricted Period, any Person or Group of Affiliated
Persons or Associated Persons acquires Beneficial Ownership of twenty percent
(20%) or more of CCL Common Stock (or any other class of outstanding CCL stock)
or commences a tender or other purchase offer for the capital stock of CCL upon
consummation of which such Person or Group of Affiliated Persons or Associated
Persons would acquire Beneficial Ownership of twenty percent (20%) or more of
the CCL Common Stock (or any other class of outstanding CCL stock) and either of
the Distributions or any of the Other Transactions shall fail to qualify for the
tax treatment stated in the IRS Ruling primarily as a result of such acquisition
or tender or other purchase offer; then the Indemnifying Party shall indemnify
and hold harmless the Indemnified Party against any and all Taxes imposed upon
or incurred by the Indemnified Party and/or its shareholders as a result of the
failure of either Distribution or the Other Transactions to so qualify.
(c) The Indemnified Party shall be indemnified and held
harmless under Section 2.01(a) without regard to the fact that the Indemnified
Party may have received a supplemental ruling from the IRS or an Opinion of
Counsel as contemplated by Section 1.02(c). The Indemnified Party shall be
indemnified and held harmless under Section 2.01(b) without regard to whether an
acquisition of Beneficial Ownership results from a transaction which is not
prohibited under Article 1.
4
<PAGE>
ARTICLE 3: Calculation of Indemnity Amounts
SECTION 3.01. Amount of Indemnified Liability. The amount
indemnified against under Article 2 ("Indemnified Liability") for a tax based on
or determined with reference to income shall be deemed to be the amount of the
tax computed by multiplying (i) the taxing jurisdiction's highest marginal tax
rate applicable to taxable income of corporations such as the Indemnified Party
on income of the character subject to tax and indemnified against under Article
2 for the taxable period in which the Distributions occur, times (ii) the gain
or income of the Indemnified Party which is subject to tax in the taxing
jurisdiction and indemnified against under Article 2. In the case of an
Indemnified Liability attributable to a payment owed to a shareholder or
shareholders of Corning, the amount of the Indemnified Liability shall be equal
to the amount so owed, including without limitation, interest, costs, additions,
expenses and penalties. All amounts payable under this Agreement shall be paid
on an after-tax basis. If an Indemnified Liability is of a type that constitutes
a deduction from income in any taxable period in determining the Indemnified
Party's liability for a tax based upon or determined with reference to income,
the amount of the Indemnified Liability shall be reduced by the reduction in the
tax liability of the Indemnified Party.
ARTICLE 4: Procedural Matters
SECTION 4.01. General. (a) If either the Indemnified Party or
the Indemnifying Party receives any written notice of deficiency, claim or
adjustment or any other written communication from a taxing authority that may
result in an Indemnified Liability, the party receiving such notice or
communication shall promptly give written notice thereof to the other party,
provided that any delay by the Indemnified Party in so notifying an Indemnifying
Party shall not relieve the Indemnifying Party of any liability hereunder,
except to the extent (i) such delay restricts the ability of the Indemnifying
Party to contest the resulting Indemnified Liability administratively or in the
courts in accordance with Section 4.02 and (ii) the Indemnifying Party is
materially and adversely prejudiced by such delay.
(b) The parties hereto undertake and agree that from and after
such time as they obtain knowledge that any representative of a taxing authority
has begun to investigate or inquire into either Distribution or any of the Other
Transactions (whether or not such investigation or inquiry is a formal or
informal investigation or inquiry), the party obtaining such knowledge shall (i)
notify the other party thereof, provided that any delay by the Indemnified Party
in so notifying the Indemnifying Party shall not relieve the Indemnifying Party
of any liability hereunder (except to the extent (A) such delay restricts the
ability of the Indemnifying Party to contest the resulting Indemnified Liability
administratively or in the courts in accordance with Section 4.02 and (B) the
Indemnifying Party is materially and adversely prejudiced by such delay), (ii)
consult with the other party from time to time as to the conduct of such
investigation or inquiry, (iii) provide the other party with copies of all
correspondence with such taxing authority or any representative thereof
pertaining to such investigation or inquiry, and (iv) arrange for a
representative of the other party to be present at
5
<PAGE>
all meetings with such taxing authority or any representative thereof pertaining
to such investigation or inquiry.
SECTION 4.02. Contests. (a) Provided that (i) the Indemnifying
Party shall furnish the Indemnified Party with evidence reasonably satisfactory
to the Indemnified Party of its ability to pay the full amount of the
Indemnified Liability and (ii) the Indemnifying Party acknowledges in writing
that the asserted liability is an Indemnified Liability, the Indemnifying Party
shall assume and direct the defense or settlement of any hearing, arbitration,
suit or other proceeding (each a "Proceeding") commenced, filed or otherwise
initiated or convened to investigate or resolve the existence and extent of such
liability.
(b) If the Indemnified Liability is grouped with other
unrelated asserted liabilities or issues in the Proceeding, the parties shall
use their respective best efforts to cause the Indemnified Liability to be the
subject of a separate proceeding. If such severance is not possible, the
Indemnifying Party shall assume and direct and be responsible only for the
matters relating to the Indemnified Liability.
(c) If at any time during a Proceeding controlled by the
Indemnifying Party pursuant to Section 4.02(a) the Indemnifying Party fails to
provide evidence reasonably satisfactory to the Indemnified Party of its ability
to pay the full amount of the Indemnified Liability or the Indemnified Party
reasonably determines, after due investigation, that the Indemnifying Party
could not pay the full amount of the Indemnified Liability, then the Indemnified
Party may assume control of the Proceedings upon seven (7) days written notice.
(d) The Indemnifying Party shall pay all out-of-pocket
expenses and other costs related to the Indemnified Liability, including but not
limited to fees for attorneys, accountants, expert witnesses or other
consultants retained by the Indemnifying Party and/or the Indemnified Party,
other than fees for attorneys, accountants, expert witnesses or other
consultants retained solely by the Indemnified Party and incurred at any time
during which the Indemnifying Party is controlling and directing the Proceeding
in respect of which such fees are incurred. To the extent that any such expenses
and other costs have been or are paid by an Indemnified Party, the Indemnifying
Party shall promptly reimburse the Indemnified Party therefor.
(e) The Indemnifying Party shall not pay (unless otherwise
required by a proper notice of levy and after prompt notification to the
Indemnified Party of receipt of notice and demand for payment), settle,
compromise or conceded any portion of the Indemnified Liability without the
written consent of the Indemnified Party, which consent shall not be
unreasonably withheld. The Indemnifying Party shall, on a timely basis, keep the
Indemnified Party informed of all developments in the Proceeding and provide the
Indemnified Party with copies of all pleadings, briefs, orders, and other
written papers.
6
<PAGE>
(f) Any Proceeding which is not controlled or which is no
longer controlled by the Indemnifying Party pursuant to Section 4.02 shall be
controlled and directed exclusively by the Indemnified Party, and any related
out-of-pocket expenses and other costs incurred by the Indemnified Party,
including but not limited to, fees for attorneys, accountants, expert witnesses
or other consultants, shall be reimbursed by the Indemnifying Party. The
Indemnified Party will not be required to pursue the claim in the federal
district court, Court of Claims or any state court if as a prerequisite to such
Court's jurisdiction, the Indemnified Party is required to pay the asserted
liability unless the funds necessary to invoke such jurisdiction are provided by
the Indemnifying Party.
SECTION 4.03. Time and Manner of Payment. The Indemnifying
Party shall pay to the Indemnified Party the amount of the Indemnified Liability
and any expenses or other costs indemnified against (less any amount paid
directly by the Indemnifying Party to the taxing authority) no less than (7)
business days prior to the date payment of the Indemnified Liability is to be
made by any party to the taxing authority. Such payment shall be paid by wire
transfer of immediately available funds to an account designated by the
Indemnified Party by written notice to the Indemnifying Party prior to the due
date of such payment. If the Indemnifying Party delays making payment beyond the
due date hereunder, such party shall pay interest on the amount unpaid at the
IRS Penalty Rate for each day and the actual number of days for which any amount
due hereunder is unpaid.
SECTION 4.04. Refunds. In connection with this Agreement,
should an Indemnified Party receive a refund in respect of amounts paid by an
Indemnifying Party to any taxing authority on its behalf, or should any such
amounts that would otherwise be refundable to the Indemnifying Party be applied
by the taxing authority to obligations of the Indemnified Party unrelated to an
Indemnified Liability, then such Indemnified Party shall, promptly following
receipt (or notification of credit), remit such refund and any related interest
to the Indemnifying Party.
SECTION 4.05. Cooperation. The parties shall cooperate with
one another in a timely manner in any administrative or judicial proceeding
involving any matter that may result in an Indemnified Liability.
ARTICLE 5: General Provisions
SECTION 5.01. Notices. All notices, requests, claims and other
communications hereunder shall be in writing and shall be given or made (and
shall be deemed to have been duly given or made upon receipt) by delivery in
person, by courier service, by cable, by telecopy, by telegram, by telex or by
registered or certified mail (postage prepaid, return receipt requested) to the
respective parties at the addresses (or at such other address for a party as
shall be specified in a notice given in accordance with this Section 5.01)
listed below:
7
<PAGE>
To Corning:
One Riverfront Plaza
Corning, New York 14831
Telecopy:
Attn: General Counsel
To CCL:
One Malcolm Avenue
Teterboro, New Jersey 07608-1070210
Telecopy:
Attn: General Counsel
SECTION 5.02. Miscellaneous. This Agreement, including the
attachments, shall constitute the entire agreement between the parties hereto
with respect to the subject matter hereof and shall supersede all prior
agreements and undertakings, both written and oral, between the parties with
respect to the subject matter hereof and thereof. This Agreement may be executed
in one or more counterparts, and by the different parties hereto in separate
counterparts, each of which when executed shall be deemed to be an original but
all of which taken together shall constitute one and the same agreement. This
Agreement may not be amended or modified except (a) by an instrument in writing
signed by, or on behalf of, the parties or (b) by a waiver in accordance with
Section 5.03. This Agreement shall be binding upon and inure solely to the
benefit of the parties hereto and their respective subsidiaries, and nothing
herein, express or implied, is intended to or shall confer upon any third
parties any legal or equitable right, benefit or remedy of any nature whatsoever
under or by reason of this Agreement.
SECTION 5.03. Waiver. The parties to this Agreement may (a)
extend the time for the performance of any of the obligations or other acts of
the other party or parties, (b) waive any inaccuracies in the representations
and warranties of the other party or parties contained herein or in any document
delivered by the other party or parties pursuant hereto or (c) waive compliance
with any of the agreements or conditions of the other party or parties contained
herein. Any such extension or waiver shall be valid only if set forth in an
instrument in writing signed by the party to be bound thereby. Any waiver of any
term or condition shall not be construed as a waiver of any subsequent breach or
a subsequent waiver of the same term or condition, or a waiver of any other term
or condition, of this Agreement. The failure of any party to assert any of its
rights hereunder shall not constitute a waiver of any such rights.
SECTION 5.04. Successors and Assigns. The provisions of this
Agreement shall be binding upon, inure to the benefit of and be enforceable by
the parties and their respective successors and permitted assigns.
Notwithstanding the previous sentence, CCL shall not assign this Agreement or
any rights, interests or obligations hereunder, or delegate performance of any
of its obligations hereunder, without the consent of Corning.
8
<PAGE>
SECTION 5.05. Specific Performance. The parties hereto agree
that irreparable damage would occur in the event any provision of this Agreement
was not performed in accordance with the terms hereof and that the parties shall
be entitled to specific performance of the terms hereof, in addition to any
other remedy at law or equity.
SECTION 5.06. Governing Law and Severability. This Agreement
shall be governed by, and construed in accordance with, the laws of the State of
New York, applicable to contracts executed in and to be performed entirely
within that state. If any term or other provision of this Agreement is invalid,
illegal or incapable of being enforced by any law or public policy, all other
terms and provisions of this Agreement shall nevertheless remain in full force
and effect so long as the economic or legal substance of the transactions
contemplated hereby is not affected in any manner materially adverse to any
party. Upon such determination that any term or other provision is invalid,
illegal or incapable of being enforced, the parties hereto shall negotiate in
good faith to modify this Agreement so as to effect the original intent of the
parties as closely as possible in an acceptable manner in order that the
transactions contemplated hereby are consummated as originally contemplated to
the greatest extent possible.
IN WITNESS WHEREOF, the parties have caused this Agreement to be
executed as of the date first written above by their respective officers
thereunto duly authorized.
CORNING INCORPORATED CORNING CLINICAL
LABORATORIES INC.
By______________________________ By________________________________
Name: Name:
Title: Title:
9
<PAGE>
Draft of August 12, 1996
ANNEX A
DEFINITIONS
"Affiliate" shall mean, when used with respect to a specified Person, another
Person that directly, or indirectly through one or more intermediaries, controls
or is controlled by or is under common control with such Person.
"Affiliated Person" shall have the meaning ascribed to such term in the
Investment Company Act of 1940, as amended, and the rules and regulations
promulgated thereunder.
"Associated Person" shall have the meaning ascribed to such term in the
Securities Exchange Act of 1934, as amended, and the rules and regulations
promulgated thereunder.
"Beneficial Ownership" shall have the meaning ascribed to such term in the
Securities Exchange Act of 1934, as amended, and the rules and regulations
promulgated thereunder.
"CCL Common Stock" shall mean the common stock, [$0.50] par value [with attached
Preferred Stock Purchase Rights] of CCL.
"CCL Distribution" shall mean the distribution by Corning to the Corning
shareholders of the CCL Common Stock.
"CCL Group" shall mean the affiliated group of corporations as defined in
Section 1504(a) of the Code of which CCL (or any successor thereto) is the
common parent, excluding CPS and the other members of the CPS Group.
"CCL Rights Plan" shall mean the Preferred Share Purchase Rights Plan of CCL as
governed by the Rights Agreement, dated as of __________, 1996, between CCL and
____________________, as Rights Agent.
"Code" shall mean the Internal Revenue Code of 1986, as amended, and the
Treasury regulations promulgated thereunder, including any comparable successor
legislation.
"Corning Group" shall mean the affiliated group of corporations as defined in
Section 1504(a) of the Code of which Corning (or any successor thereto) is the
common parent, excluding for tax periods of the Corning Group commencing
subsequent to the Distribution Date, CCL and the other members of the CCL Group
and CPS and other members of the CPS Group.
<PAGE>
"CPS Common Stock" shall mean the common stock, [$0.50] par value [with attached
Preferred Stock Purchase Rights] of CPS.
"CPS Distribution" shall mean the distribution by CCL to the CCL shareholders of
the CPS Common Stock.
"CPS Group" shall mean the affiliated group of corporations as defined in
Section 1504(a) of the Code of which CPS (or any successor thereto) is the
common parent.
"CPS Rights Plan" shall mean the Preferred Share Purchase Rights Plan of CPS as
governed by the Rights Agreement, dated as of __________, 1996, between CPS and
____________________, as Rights Agent.
"Distributions" shall mean the each of the CCL Distribution and the CPS
Distribution, including any transfers relating to the CCL Distribution or the
CPS Distribution.
"Distribution Date" shall mean such date as has been or hereafter will be
determined by Corning's Board of Directors as the date as of which the
Distributions shall be effected.
"Gross Assets" shall mean, when used with respect to a specified Person, the
fair market value of such Person's assets unencumbered by any liabilities.
"Group" shall have the meaning ascribed to such term in the Securities Exchange
Act of 1934, as amended, and the rules and regulations promulgated thereunder.
"IRS" shall mean the U.S. Internal Revenue Service.
"IRS Penalty Rate" shall mean the rate of interest imposed from time to time on
underpayments of income tax pursuant to Code section 6621.
"IRS Ruling" shall mean the private letter ruling (together with any
supplements) issued by the IRS in respect of the Ruling Request.
"Opinion of Counsel" shall mean an opinion of independent tax counsel of
recognized national standing and experienced in the issues to be addressed and
otherwise reasonably acceptable to Corning, which sets forth an Unqualified Tax
Opinion in form and substance satisfactory to Corning. In no event shall Corning
be required to conclude that an opinion is satisfactory if there is any risk,
however remote, that the transaction which is the subject of the opinion will
cause either of the Distributions to be taxable to any extent under the Code.
"Other Transactions" shall mean the transactions related to the Distributions
and described in Parts I through IV of the Ruling Request.
2
<PAGE>
"Person" shall mean any natural person, corporation, business trust, joint
venture, association, company, partnership or government, or any agency or
political subdivision thereof.
"Restricted Period" shall mean the two year period following the Distribution
Date.
"Ruling Period" shall mean the period commencing on the Distribution Date and
ending on the later of (i) the third anniversary of the close of the taxable
year of Corning in which the Distributions occur, and (ii) the first anniversary
of the date on which there shall have expired all statutes of limitations in
respect of taxable periods for which Taxes might be imposed or otherwise
assessed in respect of the Distributions and the Other Transactions.
"Ruling Request" shall mean the request for rulings, as amended and
supplemented, under Section 355 of the Code, as filed on behalf of Corning on
June 17, 1996, in respect of the Distributions.
"Taxes" shall mean all federal, state, local and foreign gross or net income,
gross receipts, withholding, franchise, transfer, estimated or other taxes or
similar charges and assessments, including all interest, penalties and additions
imposed with respect to such amounts.
"Unqualified Tax Opinion" shall mean (a) an unqualified "will" opinion of tax
counsel to the effect that a transaction does not disqualify either of the
Distributions from qualifying for tax-free treatment for the shareholders of
Corning and CCL and any member of the Corning Group and the CCL Group under Code
section 355 and any other applicable sections of the Code, assuming that the
Distributions would have qualified for tax-free treatment if such transaction
did not occur. An Unqualified Tax Opinion may rely upon, and assume the accuracy
of, any representations contained in any application for a letter ruling from
the IRS, and any representations contained in an officer's certificate delivered
by an officer of Corning, CCL or CPS to such counsel.
3
Draft of August 23, 1996
CCL/CPS SPIN-OFF TAX INDEMNIFICATION AGREEMENT
This SPIN-OFF TAX INDEMNIFICATION AGREEMENT ("Agreement") is
made and entered into this __ day of ______, 1996, by and among CORNING CLINICAL
LABORATORIES INC., a Delaware corporation ("CCL") and CORNING PHARMACEUTICAL
SERVICES INC., a Delaware corporation ("CPS").
WITNESSETH
WHEREAS, Corning Incorporated, a New York corporation
("Corning") is the common parent of an affiliated group of corporations within
the meaning of Code1 Section 1504 which includes CPS;
WHEREAS, Corning has determined to effect the Distributions
pursuant to a Transaction Agreement (the "Transaction Agreement") dated of even
date herewith;
WHEREAS, the IRS has issued the IRS Ruling which states the
tax treatment of the Distributions and the Other Transactions; and
WHEREAS, the parties hereto are entering into this Agreement
to indemnify CCL as hereinafter provided in the event the Distributions or the
Other Transactions fail to qualify for the tax treatment stated in the IRS
Ruling due to actions by CPS.
NOW, THEREFORE, in consideration of the mutual agreements,
provisions and covenants contained in this Agreement, the parties hereby agree
as follows:
ARTICLE 1: Representations and Covenants
SECTION 1.01. Representations. (a) CPS has reviewed the
materials submitted to the IRS in connection with the IRS Ruling and, to the
best of CPS's knowledge, these materials, including, without limitation, any
statements and representations concerning CPS, its business, operations capital
structure and/or organization, are complete and accurate in all material
respects. CPS shall, and shall cause each member of the CPS Group, to comply
with each such representation and statement concerning CPS and the CPS Group
made in the materials so submitted, the IRS Ruling and any subsequent IRS
ruling, including without limitation, statements as to the creation, funding and
operation of employee compensation
- --------
1 Capitalized terms not defined herein have the meaning given to them in Annex
A.
<PAGE>
plans by CPS. With respect to any representation or statement made by or on
behalf of CPS in connection with the IRS Ruling and any subsequent IRS ruling
and to the extent such representation or statement relates to future actions or
events under their control, neither CPS nor any member of the CPS Group will
take any action during the Restricted Period that would have caused such
representation or statement to be untrue if CPS had planned or intended to take
such action at the time such representation or statement was made by or on
behalf of CPS.
(b) CPS hereby represents and warrants to CCL that CPS has no
present intention to undertake any of the transactions set forth in Section 1.02
(a) (iii) or to cease to engage in the active conduct of the trade or business
(within the meaning of Section 355(b)(2) of the Code) of providing
pharmaceutical services.
SECTION 1.02. Covenants. (a) CPS covenants and agrees with CCL
that during the Restricted Period:
(i) CPS will continue to engage in the pharmaceutical services
business in the U.S. and will continue to maintain in the U.S. a substantial
portion of its assets and business operations as they existed prior to the
Distributions, provided that the foregoing shall not be deemed to prohibit CPS
from entering into or acquiring other businesses or operations which may or may
not be consistent with its business and operations as they existed prior to the
Distributions so long as CPS continues to engage in such pharmaceutical services
business in the U.S. and continues to so maintain such substantial portion in
the U.S.;
(ii) CPS will continue to manage and to own (A) directly
assets which represent at least fifty percent (50%) of the Gross Assets which
CPS managed and owned directly immediately after the Distributions, and (B)
directly or indirectly through one or more entities, assets which represent at
least 50% of the Gross Assets which CPS owned indirectly through one or more
entities immediately after the Distributions;
(iii) except as provided in Section 1.02(c), neither CPS, nor
any of its Affiliates nor any of their respective, directors, officers or other
representatives will undertake, authorize, approve, recommend, permit,
facilitate, or enter into any contract, or consummate any transaction with
respect to: (A) the issuance of CPS Common Stock (including options, warrants,
rights or securities exercisable for, or convertible into, CPS Common Stock) in
a single transaction or in a series of related or unrelated transactions or
otherwise or in the aggregate which would exceed (or could exceed if any such
options, warrants or rights were exercised or such securities were converted)
fifty percent (50%) when expressed as a percentage of the outstanding shares of
CPS Common Stock immediately following the Distributions; (B) the issuance of
any class or series of capital stock or any other instrument (other than CPS
Common Stock and options, warrants, rights or securities exercisable for, or
convertible into, CPS Common Stock) that would constitute equity for federal tax
purposes (such classes or series of capital stock and other instruments being
referred to herein as
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<PAGE>
"Disqualified CPS Stock"); (C) the issuance of any options, rights, warrants,
securities or similar arrangements exercisable for, or convertible into,
Disqualified CPS Stock; (D) any redemptions, repurchases or other acquisitions
of capital stock or other equity interests in CPS in a single transaction or a
series of related or unrelated transactions, unless such redemptions,
repurchases or other acquisitions (1) satisfy the following requirements: (a)
there is a "sufficient business purpose" (within the meaning of Section
4.05(1)(b) of Revenue Procedure 96-30) for the transaction, (b) the stock to be
purchased, redeemed or otherwise acquired is widely held, (c) the stock
purchases or other acquisitions will be made on the open market, and (d) the
amount of stock purchases, redemption, or other acquisitions in a single
transaction or in a series of related or unrelated transactions will not exceed
an amount of stock representing twenty percent (20%) of the outstanding stock of
CPS immediately following the Distributions; or (2) are made in connection with
employee equity compensation plans of CPS and do not result, individually or in
the aggregate, in the acquisition of more than ten percent (10%) of the voting
power in respect of the outstanding stock of CPS immediately following the
Distributions, (E) the dissolution, merger , or complete or partial liquidation
of CPS or any announcement of such action; or (F) the waiver, amendment,
termination or modification of any provision of the CPS Rights Plan in
connection with, or in order to permit or facilitate, any acquisition or
proposed acquisition of Beneficial Ownership of capital stock or other equity
interest in CPS.
(b) In addition to the other representations, warranties,
covenants and agreements set forth in this Agreement, CPS and the CPS Group will
take, or refrain from taking, as the case may be, such actions as CCL may
reasonably request during the Ruling Period as necessary to insure that the
Distributions and the Other Transactions qualify for the tax treatment stated in
the IRS Ruling, including, without limitation, such actions as CCL determines
may be necessary to obtain and preserve the IRS Ruling or any subsequent IRS
ruling on which the parties can rely. Without limiting the generality of the
foregoing, CPS and the CPS Group shall cooperate with CCL if CCL determines to
obtain additional IRS rulings pertaining to whether any actual or proposed
change in facts and circumstances affects the tax status of the Distributions or
the Other Transactions.
(c) Following the six-month anniversary of the Distribution
Date, CPS and its Affiliates may take any action or engage in conduct otherwise
prohibited by Section 1.02 so long as prior to such action or conduct, as the
case may be, CCL or CPS receives (A) a ruling from the IRS in form and substance
reasonably satisfactory to CCL and upon which CCL can rely to the effect that
the proposed action or conduct, as the case may be, will not cause the
Distributions or the Other Transactions to fail to qualify for the tax treatment
stated in the IRS Ruling or otherwise to be taxable for federal income tax
purposes, or (B) an Opinion of Counsel in form and substance reasonably
satisfactory to CCL and upon which CCL can rely to the effect that the proposed
action or conduct, as the case may be, will not cause the Distributions or the
Other Transactions to fail to qualify for the tax treatment stated in the IRS
Ruling or otherwise to be taxable for federal income tax purposes.
3
<PAGE>
ARTICLE 2: CPS Indemnity Obligations
SECTION 2.01. Tax Indemnities. (a) If CPS, or another member
of the CPS Group (collectively the "Indemnifying Party") shall take any action
prohibited by Article 1 or shall violate a representation or covenant contained
in Article 1, and either of the Distributions or any of the Other Transactions
shall fail to qualify for the tax treatment stated in the IRS Ruling primarily
as a result of such action or violation, then the Indemnifying Party shall
(jointly or severally) indemnify and hold harmless CCL and each member of the
CCL Group (collectively the "Indemnified Party") against any and all Taxes
imposed upon or incurred by the Indemnified Party as a result of the failure,
including, without limitation, any liability of the Indemnified Party arising
from Taxes imposed on shareholders of CCL to the extent any shareholder or
shareholders of CCL successfully seek recourse against the Indemnified Party on
account of any such failure, or any liability for such Taxes which the
Indemnified Party may assume or otherwise provide for.
(b) Notwithstanding anything to the contrary set forth in this
Agreement, if, during the Restricted Period, any Person or Group of Affiliated
Persons or Associated Persons acquires Beneficial Ownership of twenty percent
(20%) or more of CPS Common Stock (or any other class of outstanding CPS stock)
or commences a tender or other purchase offer for the capital stock of CPS upon
consummation of which such Person or Group of Affiliated Persons or Associated
Persons would acquire Beneficial Ownership of twenty percent (20%) or more of
the CPS Common Stock (or any other class of outstanding CPS stock) and either of
the Distributions or any of the Other Transactions shall fail to qualify for the
tax treatment stated in the IRS Ruling primarily as a result of such acquisition
or tender or other purchase offer; then the Indemnifying Party shall indemnify
and hold harmless the Indemnified Party against any and all Taxes imposed upon
or incurred by the Indemnified Party and/or its shareholders as a result of the
failure of either Distribution or the Other Transactions to so qualify.
(c) The Indemnified Party shall be indemnified and held harmless
under Section 2.01(a) without regard to the fact that the Indemnified Party may
have received a supplemental ruling from the IRS or an Opinion of Counsel as
contemplated by Section 1.02(c). The Indemnified Party shall be indemnified and
held harmless under Section 2.01(b) without regard to whether an acquisition of
Beneficial Ownership results from a transaction which is not prohibited under
Article 1.
4
<PAGE>
ARTICLE 3: Calculation of Indemnity Amounts
SECTION 3.01. Amount of Indemnified Liability. The amount
indemnified against under Article 2 ("Indemnified Liability") for a tax based on
or determined with reference to income shall be deemed to be the amount of the
tax computed by multiplying (i) the taxing jurisdiction's highest marginal tax
rate applicable to taxable income of corporations such as the Indemnified Party
on income of the character subject to tax and indemnified against under Article
2 for the taxable period in which the Distributions occur, times (ii) the gain
or income of the Indemnified Party which is subject to tax in the taxing
jurisdiction and indemnified against under Article 2. In the case of an
Indemnified Liability attributable to a payment owed to a shareholder or
shareholders of CCL, the amount of the Indemnified Liability shall be equal to
the amount so owed, including without limitation, interest, costs, additions,
expenses and penalties. All amounts payable under this Agreement shall be paid
on an after-tax basis. If an Indemnified Liability is of a type that constitutes
a deduction from income in any taxable period in determining the Indemnified
Party's liability for a tax based upon or determined with reference to income,
the amount of the Indemnified Liability shall be reduced by the reduction in the
tax liability of the Indemnified Party.
ARTICLE 4: Procedural Matters
SECTION 4.01. General. (a) If either the Indemnified Party or
the Indemnifying Party receives any written notice of deficiency, claim or
adjustment or any other written communication from a taxing authority that may
result in an Indemnified Liability, the party receiving such notice or
communication shall promptly give written notice thereof to the other party,
provided that any delay by the Indemnified Party in so notifying an Indemnifying
Party shall not relieve the Indemnifying Party of any liability hereunder,
except to the extent (i) such delay restricts the ability of the Indemnifying
Party to contest the resulting Indemnified Liability administratively or in the
courts in accordance with Section 4.02 and (ii) the Indemnifying Party is
materially and adversely prejudiced by such delay.
(b) The parties hereto undertake and agree that from and after
such time as they obtain knowledge that any representative of a taxing authority
has begun to investigate or inquire into either Distribution or any of the Other
Transactions (whether or not such investigation or inquiry is a formal or
informal investigation or inquiry), the party obtaining such knowledge shall (i)
notify the other party thereof, provided that any delay by the Indemnified Party
in so notifying the Indemnifying Party shall not relieve the Indemnifying Party
of any liability hereunder (except to the extent (A) such delay restricts the
ability of the Indemnifying Party to contest the resulting Indemnified Liability
administratively or in the courts in accordance with Section 4.02 and (B) the
Indemnifying Party is materially and adversely prejudiced by such delay), (ii)
consult with the other party from time to time as to the conduct of such
investigation or inquiry, (iii) provide the other party with copies of all
correspondence with such taxing authority or any representative thereof
pertaining to such investigation or inquiry, and (iv) arrange for a
representative of the other party to be present at
5
<PAGE>
all meetings with such taxing authority or any representative thereof pertaining
to such investigation or inquiry.
SECTION 4.02. Contests. (a) Provided that (i) the Indemnifying
Party shall furnish the Indemnified Party with evidence reasonably satisfactory
to the Indemnified Party of its ability to pay the full amount of the
Indemnified Liability and (ii) the Indemnifying Party acknowledges in writing
that the asserted liability is an Indemnified Liability, the Indemnifying Party
shall assume and direct the defense or settlement of any hearing, arbitration,
suit or other proceeding (each a "Proceeding") commenced, filed or otherwise
initiated or convened to investigate or resolve the existence and extent of such
liability.
(b) If the Indemnified Liability is grouped with other
unrelated asserted liabilities or issues in the Proceeding, the parties shall
use their respective best efforts to cause the Indemnified Liability to be the
subject of a separate proceeding. If such severance is not possible, the
Indemnifying Party shall assume and direct and be responsible only for the
matters relating to the Indemnified Liability.
(c) If at any time during a Proceeding controlled by the
Indemnifying Party pursuant to Section 4.02(a) the Indemnifying Party fails to
provide evidence reasonably satisfactory to the Indemnified Party of its ability
to pay the full amount of the Indemnified Liability or the Indemnified Party
reasonably determines, after due investigation, that the Indemnifying Party
could not pay the full amount of the Indemnified Liability, then the Indemnified
Party may assume control of the Proceedings upon seven (7) days written notice.
(d) The Indemnifying Party shall pay all out-of-pocket
expenses and other costs related to the Indemnified Liability, including but not
limited to fees for attorneys, accountants, expert witnesses or other
consultants retained by the Indemnifying Party and/or the Indemnified Party,
other than fees for attorneys, accountants, expert witnesses or other
consultants retained solely by the Indemnified Party and incurred at any time
during which the Indemnifying Party is controlling and directing the Proceeding
in respect of which such fees are incurred. To the extent that any such expenses
and other costs have been or are paid by an Indemnified Party, the Indemnifying
Party shall promptly reimburse the Indemnified Party therefor.
(e) The Indemnifying Party shall not pay (unless otherwise
required by a proper notice of levy and after prompt notification to the
Indemnified Party of receipt of notice and demand for payment), settle,
compromise or conceded any portion of the Indemnified Liability without the
written consent of the Indemnified Party, which consent shall not be
unreasonably withheld. The Indemnifying Party shall, on a timely basis, keep the
Indemnified Party informed of all developments in the Proceeding and provide the
Indemnified Party with copies of all pleadings, briefs, orders, and other
written papers.
6
<PAGE>
(f) Any Proceeding which is not controlled or which is no
longer controlled by the Indemnifying Party pursuant to Section 4.02 shall be
controlled and directed exclusively by the Indemnified Party, and any related
out-of-pocket expenses and other costs incurred by the Indemnified Party,
including but not limited to, fees for attorneys, accountants, expert witnesses
or other consultants, shall be reimbursed by the Indemnifying Party. The
Indemnified Party will not be required to pursue the claim in the federal
district court, Court of Claims or any state court if as a prerequisite to such
Court's jurisdiction, the Indemnified Party is required to pay the asserted
liability unless the funds necessary to invoke such jurisdiction are provided by
the Indemnifying Party.
SECTION 4.03. Time and Manner of Payment. The Indemnifying
Party shall pay to the Indemnified Party the amount of the Indemnified Liability
and any expenses or other costs indemnified against (less any amount paid
directly by the Indemnifying Party to the taxing authority) no less than (7)
business days prior to the date payment of the Indemnified Liability is to be
made by any party to the taxing authority. Such payment shall be paid by wire
transfer of immediately available funds to an account designated by the
Indemnified Party by written notice to the Indemnifying Party prior to the due
date of such payment. If the Indemnifying Party delays making payment beyond the
due date hereunder, such party shall pay interest on the amount unpaid at the
IRS Penalty Rate for each day and the actual number of days for which any amount
due hereunder is unpaid.
SECTION 4.04. Refunds. In connection with this Agreement,
should an Indemnified Party receive a refund in respect of amounts paid by an
Indemnifying Party to any taxing authority on its behalf, or should any such
amounts that would otherwise be refundable to the Indemnifying Party be applied
by the taxing authority to obligations of the Indemnified Party unrelated to an
Indemnified Liability, then such Indemnified Party shall, promptly following
receipt (or notification of credit), remit such refund and any related interest
to the Indemnifying Party.
SECTION 4.05. Cooperation. The parties shall cooperate with
one another in a timely manner in any administrative or judicial proceeding
involving any matter that may result in an Indemnified Liability.
ARTICLE 5: General Provisions
SECTION 5.01. Notices. All notices, requests, claims and other
communications hereunder shall be in writing and shall be given or made (and
shall be deemed to have been duly given or made upon receipt) by delivery in
person, by courier service, by cable, by telecopy, by telegram, by telex or by
registered or certified mail (postage prepaid, return receipt requested) to the
respective parties at the addresses (or at such other address for a party as
shall be specified in a notice given in accordance with this Section 5.01)
listed below:
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<PAGE>
To CCL:
One Malcolm Avenue
Teterboro, New Jersey 07608-1070210
Telecopy:
Attn: General Counsel
To CPS:
Carnegie Center
Princeton, New Jersey 08540-6233
Telecopy:
Attn: General Counsel
SECTION 5.02. Miscellaneous. This Agreement, including the
attachments, shall constitute the entire agreement between the parties hereto
with respect to the subject matter hereof and shall supersede all prior
agreements and undertakings, both written and oral, between the parties with
respect to the subject matter hereof and thereof. This Agreement may be executed
in one or more counterparts, and by the different parties hereto in separate
counterparts, each of which when executed shall be deemed to be an original but
all of which taken together shall constitute one and the same agreement. This
Agreement may not be amended or modified except (a) by an instrument in writing
signed by, or on behalf of, the parties or (b) by a waiver in accordance with
Section 5.03. This Agreement shall be binding upon and inure solely to the
benefit of the parties hereto and their respective subsidiaries, and nothing
herein, express or implied, is intended to or shall confer upon any third
parties any legal or equitable right, benefit or remedy of any nature whatsoever
under or by reason of this Agreement.
SECTION 5.03. Waiver. The parties to this Agreement may (a)
extend the time for the performance of any of the obligations or other acts of
the other party or parties, (b) waive any inaccuracies in the representations
and warranties of the other party or parties contained herein or in any document
delivered by the other party or parties pursuant hereto or (c) waive compliance
with any of the agreements or conditions of the other party or parties contained
herein. Any such extension or waiver shall be valid only if set forth in an
instrument in writing signed by the party to be bound thereby. Any waiver of any
term or condition shall not be construed as a waiver of any subsequent breach or
a subsequent waiver of the same term or condition, or a waiver of any other term
or condition, of this Agreement. The failure of any party to assert any of its
rights hereunder shall not constitute a waiver of any such rights.
SECTION 5.04. Successors and Assigns. The provisions of this
Agreement shall be binding upon, inure to the benefit of and be enforceable by
the parties and their respective successors and permitted assigns.
Notwithstanding the previous sentence, CPS shall not assign this Agreement or
any rights, interests or obligations hereunder, or delegate performance of any
of its obligations hereunder, without the consent of CCL.
8
<PAGE>
SECTION 5.05. Specific Performance. The parties hereto agree
that irreparable damage would occur in the event any provision of this Agreement
was not performed in accordance with the terms hereof and that the parties shall
be entitled to specific performance of the terms hereof, in addition to any
other remedy at law or equity.
SECTION 5.06. Governing Law and Severability. This Agreement
shall be governed by, and construed in accordance with, the laws of the State of
New York, applicable to contracts executed in and to be performed entirely
within that state. If any term or other provision of this Agreement is invalid,
illegal or incapable of being enforced by any law or public policy, all other
terms and provisions of this Agreement shall nevertheless remain in full force
and effect so long as the economic or legal substance of the transactions
contemplated hereby is not affected in any manner materially adverse to any
party. Upon such determination that any term or other provision is invalid,
illegal or incapable of being enforced, the parties hereto shall negotiate in
good faith to modify this Agreement so as to effect the original intent of the
parties as closely as possible in an acceptable manner in order that the
transactions contemplated hereby are consummated as originally contemplated to
the greatest extent possible.
IN WITNESS WHEREOF, the parties have caused this Agreement to be
executed as of the date first written above by their respective officers
thereunto duly authorized.
CORNING CLINICAL CORNING PHARMACEUTICAL
LABORATORIES INC. SERVICES INC.
By__________________________________ By_________________________________
Name: Name:
Title: Title:
<PAGE>
Draft of August 12, 1996
ANNEX A
DEFINITIONS
"Affiliate" shall mean, when used with respect to a specified Person, another
Person that directly, or indirectly through one or more intermediaries, controls
or is controlled by or is under common control with such Person.
"Affiliated Person" shall have the meaning ascribed to such term in the
Investment Company Act of 1940, as amended, and the rules and regulations
promulgated thereunder.
"Associated Person" shall have the meaning ascribed to such term in the
Securities Exchange Act of 1934, as amended, and the rules and regulations
promulgated thereunder.
"Beneficial Ownership" shall have the meaning ascribed to such term in the
Securities Exchange Act of 1934, as amended, and the rules and regulations
promulgated thereunder.
"CCL Common Stock" shall mean the common stock, [$0.50] par value [with attached
Preferred Stock Purchase Rights] of CCL.
"CCL Distribution" shall mean the distribution by Corning to the Corning
shareholders of the CCL Common Stock.
"CCL Group" shall mean the affiliated group of corporations as defined in
Section 1504(a) of the Code of which CCL (or any successor thereto) is the
common parent, excluding CPS and the other members of the CPS Group.
"CCL Rights Plan" shall mean the Preferred Share Purchase Rights Plan of CCL as
governed by the Rights Agreement, dated as of __________, 1996, between CCL and
____________________, as Rights Agent.
"Code" shall mean the Internal Revenue Code of 1986, as amended, and the
Treasury regulations promulgated thereunder, including any comparable successor
legislation.
"Corning Group" shall mean the affiliated group of corporations as defined in
Section 1504(a) of the Code of which Corning (or any successor thereto) is the
common parent, excluding for tax periods of the Corning Group commencing
subsequent to the Distribution Date, CCL and the other members of the CCL Group
and CPS and other members of the CPS Group.
<PAGE>
"CPS Common Stock" shall mean the common stock, [$0.50] par value [with attached
Preferred Stock Purchase Rights] of CPS.
"CPS Distribution" shall mean the distribution by CCL to the CCL shareholders of
the CPS Common Stock.
"CPS Group" shall mean the affiliated group of corporations as defined in
Section 1504(a) of the Code of which CPS (or any successor thereto) is the
common parent.
"CPS Rights Plan" shall mean the Preferred Share Purchase Rights Plan of CPS as
governed by the Rights Agreement, dated as of __________, 1996, between CPS and
____________________, as Rights Agent.
"Distributions" shall mean the each of the CCL Distribution and the CPS
Distribution, including any transfers relating to the CCL Distribution or the
CPS Distribution.
"Distribution Date" shall mean such date as has been or hereafter will be
determined by Corning's Board of Directors as the date as of which the
Distributions shall be effected.
"Gross Assets" shall mean, when used with respect to a specified Person, the
fair market value of such Person's assets unencumbered by any liabilities.
"Group" shall have the meaning ascribed to such term in the Securities Exchange
Act of 1934, as amended, and the rules and regulations promulgated thereunder.
"IRS" shall mean the U.S. Internal Revenue Service.
"IRS Penalty Rate" shall mean the rate of interest imposed from time to time on
underpayments of income tax pursuant to Code section 6621.
"IRS Ruling" shall mean the private letter ruling (together with any
supplements) issued by the IRS in respect of the Ruling Request.
"Opinion of Counsel" shall mean an opinion of independent tax counsel of
recognized national standing and experienced in the issues to be addressed and
otherwise reasonably acceptable to Corning, which sets forth an Unqualified Tax
Opinion in form and substance satisfactory to Corning. In no event shall Corning
be required to conclude that an opinion is satisfactory if there is any risk,
however remote, that the transaction which is the subject of the opinion will
cause either of the Distributions to be taxable to any extent under the Code.
"Other Transactions" shall mean the transactions related to the Distributions
and described in Parts I through IV of the Ruling Request.
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<PAGE>
"Person" shall mean any natural person, corporation, business trust, joint
venture, association, company, partnership or government, or any agency or
political subdivision thereof.
"Restricted Period" shall mean the two year period following the Distribution
Date.
"Ruling Period" shall mean the period commencing on the Distribution Date and
ending on the later of (i) the third anniversary of the close of the taxable
year of Corning in which the Distributions occur, and (ii) the first anniversary
of the date on which there shall have expired all statutes of limitations in
respect of taxable periods for which Taxes might be imposed or otherwise
assessed in respect of the Distributions and the Other Transactions.
"Ruling Request" shall mean the request for rulings, as amended and
supplemented, under Section 355 of the Code, as filed on behalf of Corning on
June 17, 1996, in respect of the Distributions.
"Taxes" shall mean all federal, state, local and foreign gross or net income,
gross receipts, withholding, franchise, transfer, estimated or other taxes or
similar charges and assessments, including all interest, penalties and additions
imposed with respect to such amounts.
"Unqualified Tax Opinion" shall mean (a) an unqualified "will" opinion of tax
counsel to the effect that a transaction does not disqualify either of the
Distributions from qualifying for tax-free treatment for the shareholders of
Corning and CCL and any member of the Corning Group and the CCL Group under Code
section 355 and any other applicable sections of the Code, assuming that the
Distributions would have qualified for tax-free treatment if such transaction
did not occur. An Unqualified Tax Opinion may rely upon, and assume the accuracy
of, any representations contained in any application for a letter ruling from
the IRS, and any representations contained in an officer's certificate delivered
by an officer of Corning, CCL or CPS to such counsel.
3
Draft of September 30, 1996
CPS/CCL SPIN-OFF TAX INDEMNIFICATION AGREEMENT
This SPIN-OFF TAX INDEMNIFICATION AGREEMENT ("Agreement") is
made and entered into this __ day of ______, 1996, by and among CORNING
PHARMACEUTICAL SERVICES INC., a Delaware corporation ("CPS") and CORNING
CLINICAL LABORATORIES INC., a Delaware corporation ("CCL").
WITNESSETH
WHEREAS, Corning Incorporated, a New York corporation
("Corning"), is the common parent of an affiliated group of corporations within
the meaning of Code1 Section 1504 which includes CPS and CCL;
WHEREAS, Corning has determined to effect the Distributions
pursuant to a Transaction Agreement (the "Transaction Agreement") dated of even
date herewith;
WHEREAS, the IRS has issued the IRS Ruling which states the
tax treatment of the Distributions and the Other Transactions; and
WHEREAS, the parties hereto are entering into this Agreement
to indemnify CPS as hereinafter provided in the event the CPS Distribution or
the Other Transactions fail to qualify for the tax treatment stated in the IRS
Ruling due to actions by CCL.
NOW, THEREFORE, in consideration of the mutual agreements,
provisions and covenants contained in this Agreement, the parties hereby agree
as follows:
ARTICLE 1: Representations and Covenants
SECTION 1.01. Representations. (a) CCL has reviewed the
materials submitted to the IRS in connection with the IRS Ruling and, to the
best of CCL's knowledge, these materials, including, without limitation, any
statements and representations concerning CCL, its business, operations capital
structure and/or organization, are complete and accurate in all material
respects. CCL shall, and shall cause each member of the CCL Group, to comply
with each such representation and statement concerning CCL and the CCL Group
made in the materials so submitted, the IRS Ruling and any subsequent IRS
ruling, including without limitation, statements as to the creation, funding and
operation of employee
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1 Capitalized terms not defined herein have the meaning given to them in Annex
A.
<PAGE>
compensation plans by CCL. With respect to any representation or statement made
by or on behalf of CCL in connection with the IRS Ruling and any subsequent IRS
ruling and to the extent such representation or statement relates to future
actions or events under their control, neither CCL nor any member of the CCL
Group will take any action during the Restricted Period that would have caused
such representation or statement to be untrue if CCL had planned or intended to
take such action at the time such representation or statement was made by or on
behalf of CCL.
(b) CCL hereby represents and warrants to CPS that CCL has no
present intention to undertake any of the transactions set forth in Section 1.02
(a) (iii) or to cease to engage in the active conduct of the trade or business
(within the meaning of Section 355(b)(2) of the Code) of providing clinical
laboratory testing services.
SECTION 1.02. Covenants. (a) CCL covenants and agrees with CPS
that during the Restricted Period:
(i) CCL will continue to engage in the clinical laboratory
testing business in the U.S. and will continue to maintain in the U.S. a
substantial portion of its assets and business operations as they existed prior
to the Distributions, provided that the foregoing shall not be deemed to
prohibit CCL from entering into or acquiring other businesses or operations
which may or may not be consistent with its business and operations as they
existed prior to the Distributions so long as CCL continues to engage in such
clinical business in the U.S. and continues to so maintain such substantial
portion in the U.S.;
(ii) CCL will continue to manage and to own (A) directly
assets which represent at least fifty percent (50%) of the Gross Assets which
CCL managed and owned directly immediately after the Distributions, and (B)
directly or indirectly through one or more entities, assets which represent at
least 50% of the Gross Assets which CCL owned indirectly through one or more
entities immediately after the Distributions;
(iii) except as provided in Section 1.02(c), neither CCL, nor
any of its Affiliates nor any of their respective, directors, officers or other
representatives will undertake, authorize, approve, recommend, permit,
facilitate, or enter into any contract, or consummate any transaction with
respect to: (A) the issuance of CCL Common Stock (including options, warrants,
rights or securities exercisable for, or convertible into, CCL Common Stock) in
a single transaction or in a series of related or unrelated transactions or
otherwise or in the aggregate which would exceed (or could exceed if any such
options, warrants or rights were exercised or such securities were converted)
fifty percent (50%) when expressed as a percentage of the outstanding shares of
CCL Common Stock immediately following the Distributions; (B) the issuance of
any class or series of capital stock or any other instrument (other than CCL
Common Stock and options, warrants, rights or securities exercisable for, or
convertible into, CCL Common Stock) that would constitute equity for federal tax
purposes (such classes or series of capital stock and other instruments being
referred to herein as
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"Disqualified CCL Stock"); (C) the issuance of any options, rights, warrants,
securities or similar arrangements exercisable for, or convertible into,
Disqualified CCL Stock; (D) any redemptions, repurchases or other acquisitions
of capital stock or other equity interests in CCL in a single transaction or a
series of related or unrelated transactions, unless such redemptions,
repurchases or other acquisitions (1) satisfy the following requirements: (a)
there is a "sufficient business purpose" (within the meaning of Section
4.05(1)(b) of Revenue Procedure 96-30) for the transaction, (b) the stock to be
purchased, redeemed or otherwise acquired is widely held, (c) the stock
purchases or other acquisitions will be made on the open market, and (d) the
amount of stock purchases, redemption, or other acquisitions in a single
transaction or in a series of related or unrelated transactions will not exceed
an amount of stock representing twenty percent (20%) of the outstanding stock of
CCL immediately following the Distributions; or (2) are made in connection with
employee equity compensation plans of CCL and do not result, individually or in
the aggregate, in the acquisition of more than ten percent (10%) of the voting
power in respect of the outstanding stock of CCL immediately following the
Distributions, (E) the dissolution, merger , or complete or partial liquidation
of CCL or any announcement of such action; or (F) the waiver, amendment,
termination or modification of any provision of the CCL Rights Plan in
connection with, or in order to permit or facilitate, any acquisition or
proposed acquisition of Beneficial Ownership of capital stock or other equity
interest in CCL.
(b) Following the six-month anniversary of the Distribution
Date, CCL and its Affiliates may take any action or engage in conduct otherwise
prohibited by Section 1.02 so long as prior to such action or conduct, as the
case may be, Corning or CCL receives (A) a ruling from the IRS in form and
substance reasonably satisfactory to Corning to the effect that the proposed
action or conduct, as the case may be, will not cause the CPS Distribution or
the Other Transactions to fail to qualify for the tax treatment stated in the
IRS Ruling or otherwise to be taxable for federal income tax purposes, or (B) an
Opinion of Counsel in form and substance reasonably satisfactory to Corning to
the effect that the proposed action or conduct, as the case may be, will not
cause the CPS Distribution or the Other Transactions to fail to qualify for the
tax treatment stated in the IRS Ruling or otherwise to be taxable for federal
income tax purposes.
ARTICLE 2: CCL Indemnity Obligations
SECTION 2.01. Tax Indemnities. (a) If CCL, or another member
of the CCL Group (collectively the "Indemnifying Party") shall take any action
prohibited by Article 1 or shall violate a representation or covenant contained
in Article 1, and the CPS Distribution or any of the Other Transactions shall
fail to qualify for the tax treatment stated in the IRS Ruling primarily as a
result of such action or violation, then the Indemnifying Party shall (jointly
or severally) indemnify and hold harmless CPS and each member of the CPS Group
(collectively the "Indemnified Party") against any and all Taxes imposed upon or
incurred by the Indemnified Party as a result of the failure, including, without
limitation, any liability of the
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<PAGE>
Indemnified Party arising from Taxes imposed on shareholders of CPS to the
extent any shareholder or shareholders of CPS successfully seek recourse against
the Indemnified Party on account of any such failure, or any liability for such
Taxes which the Indemnified Party may assume or otherwise provide for.
(b) Notwithstanding anything to the contrary set forth in this
Agreement, if, during the Restricted Period, any Person or Group of Affiliated
Persons or Associated Persons acquires Beneficial Ownership of twenty percent
(20%) or more of CCL Common Stock (or any other class of outstanding CCL stock)
or commences a tender or other purchase offer for the capital stock of CCL upon
consummation of which such Person or Group of Affiliated Persons or Associated
Persons would acquire Beneficial Ownership of twenty percent (20%) or more of
the CCL Common Stock (or any other class of outstanding CCL stock) and the CPS
Distribution or any of the Other Transactions shall fail to qualify for the tax
treatment stated in the IRS Ruling primarily as a result of such acquisition or
tender or other purchase offer; then the Indemnifying Party shall indemnify and
hold harmless the Indemnified Party against any and all Taxes imposed upon or
incurred by the Indemnified Party and/or its shareholders as a result of the
failure of either Distribution or the Other Transactions to so qualify.
(c) The Indemnified Party shall be indemnified and held harmless under
Section 2.01(a) without regard to the fact that the Indemnified Party may have
received a supplemental ruling from the IRS or an Opinion of Counsel as
contemplated by Section 1.02(c). The Indemnified Party shall be indemnified and
held harmless under Section 2.01(b) without regard to whether an acquisition of
Beneficial Ownership results from a transaction which is not prohibited under
Article 1.
ARTICLE 3: Calculation of Indemnity Amounts
SECTION 3.01. Amount of Indemnified Liability. The amount
indemnified against under Article 2 ("Indemnified Liability") for a tax based on
or determined with reference to income shall be deemed to be the amount of the
tax computed by multiplying (i) the taxing jurisdiction's highest marginal tax
rate applicable to taxable income of corporations such as the Indemnified Party
on income of the character subject to tax and indemnified against under Article
2 for the taxable period in which the Distributions occur, times (ii) the gain
or income of the Indemnified Party which is subject to tax in the taxing
jurisdiction and indemnified against under Article 2. In the case of an
Indemnified Liability attributable to a payment owed to a shareholder or
shareholders of CPS, the amount of the Indemnified Liability shall be equal to
the amount so owed, including without limitation, interest, costs, additions,
expenses and penalties. All amounts payable under this Agreement shall be paid
on an after-tax basis. If an Indemnified Liability is of a type that constitutes
a deduction from income in any taxable period in determining the Indemnified
Party's liability for a tax based upon or determined with reference to income,
the amount of the Indemnified Liability shall be reduced by the reduction in the
tax liability of the Indemnified Party.
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ARTICLE 4: Procedural Matters
SECTION 4.01. General. (a) If either the Indemnified Party or
the Indemnifying Party receives any written notice of deficiency, claim or
adjustment or any other written communication from a taxing authority that may
result in an Indemnified Liability, the party receiving such notice or
communication shall promptly give written notice thereof to the other party,
provided that any delay by the Indemnified Party in so notifying an Indemnifying
Party shall not relieve the Indemnifying Party of any liability hereunder,
except to the extent (i) such delay restricts the ability of the Indemnifying
Party to contest the resulting Indemnified Liability administratively or in the
courts in accordance with Section 4.02 and (ii) the Indemnifying Party is
materially and adversely prejudiced by such delay.
(b) The parties hereto undertake and agree that from and after
such time as they obtain knowledge that any representative of a taxing authority
has begun to investigate or inquire into either Distribution or any of the Other
Transactions (whether or not such investigation or inquiry is a formal or
informal investigation or inquiry), the party obtaining such knowledge shall (i)
notify the other party thereof, provided that any delay by the Indemnified Party
in so notifying the Indemnifying Party shall not relieve the Indemnifying Party
of any liability hereunder (except to the extent (A) such delay restricts the
ability of the Indemnifying Party to contest the resulting Indemnified Liability
administratively or in the courts in accordance with Section 4.02 and (B) the
Indemnifying Party is materially and adversely prejudiced by such delay), (ii)
consult with the other party from time to time as to the conduct of such
investigation or inquiry, (iii) provide the other party with copies of all
correspondence with such taxing authority or any representative thereof
pertaining to such investigation or inquiry, and (iv) arrange for a
representative of the other party to be present at all meetings with such taxing
authority or any representative thereof pertaining to such investigation or
inquiry.
SECTION 4.02. Contests. (a) Provided that (i) the Indemnifying
Party shall furnish the Indemnified Party with evidence reasonably satisfactory
to the Indemnified Party of its ability to pay the full amount of the
Indemnified Liability and (ii) the Indemnifying Party acknowledges in writing
that the asserted liability is an Indemnified Liability, the Indemnifying Party
shall assume and direct the defense or settlement of any hearing, arbitration,
suit or other proceeding (each a "Proceeding") commenced, filed or otherwise
initiated or convened to investigate or resolve the existence and extent of such
liability.
(b) If the Indemnified Liability is grouped with other
unrelated asserted liabilities or issues in the Proceeding, the parties shall
use their respective best efforts to cause the Indemnified Liability to be the
subject of a separate proceeding. If such severance is not possible, the
Indemnifying Party shall assume and direct and be responsible only for the
matters relating to the Indemnified Liability.
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(c) If at any time during a Proceeding controlled by the
Indemnifying Party pursuant to Section 4.02(a) the Indemnifying Party fails to
provide evidence reasonably satisfactory to the Indemnified Party of its ability
to pay the full amount of the Indemnified Liability or the Indemnified Party
reasonably determines, after due investigation, that the Indemnifying Party
could not pay the full amount of the Indemnified Liability, then the Indemnified
Party may assume control of the Proceedings upon seven (7) days written notice.
(d) The Indemnifying Party shall pay all out-of-pocket
expenses and other costs related to the Indemnified Liability, including but not
limited to fees for attorneys, accountants, expert witnesses or other
consultants retained by the Indemnifying Party and/or the Indemnified Party,
other than fees for attorneys, accountants, expert witnesses or other
consultants retained solely by the Indemnified Party and incurred at any time
during which the Indemnifying Party is controlling and directing the Proceeding
in respect of which such fees are incurred. To the extent that any such expenses
and other costs have been or are paid by an Indemnified Party, the Indemnifying
Party shall promptly reimburse the Indemnified Party therefor.
(e) The Indemnifying Party shall not pay (unless otherwise
required by a proper notice of levy and after prompt notification to the
Indemnified Party of receipt of notice and demand for payment), settle,
compromise or conceded any portion of the Indemnified Liability without the
written consent of the Indemnified Party, which consent shall not be
unreasonably withheld. The Indemnifying Party shall, on a timely basis, keep the
Indemnified Party informed of all developments in the Proceeding and provide the
Indemnified Party with copies of all pleadings, briefs, orders, and other
written papers.
(f) Any Proceeding which is not controlled or which is no
longer controlled by the Indemnifying Party pursuant to Section 4.02 shall be
controlled and directed exclusively by the Indemnified Party, and any related
out-of-pocket expenses and other costs incurred by the Indemnified Party,
including but not limited to, fees for attorneys, accountants, expert witnesses
or other consultants, shall be reimbursed by the Indemnifying Party. The
Indemnified Party will not be required to pursue the claim in the federal
district court, Court of Claims or any state court if as a prerequisite to such
Court's jurisdiction, the Indemnified Party is required to pay the asserted
liability unless the funds necessary to invoke such jurisdiction are provided by
the Indemnifying Party.
SECTION 4.03. Time and Manner of Payment. The Indemnifying
Party shall pay to the Indemnified Party the amount of the Indemnified Liability
and any expenses or other costs indemnified against (less any amount paid
directly by the Indemnifying Party to the taxing authority) no less than (7)
business days prior to the date payment of the Indemnified Liability is to be
made by any party to the taxing authority. Such payment shall be paid by wire
transfer of immediately available funds to an account designated by the
Indemnified Party by written notice to the Indemnifying Party prior to the due
date of such payment. If the Indemnifying Party delays making payment beyond the
due date hereunder, such party shall
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pay interest on the amount unpaid at the IRS Penalty Rate for each day and the
actual number of days for which any amount due hereunder is unpaid.
SECTION 4.04. Refunds. In connection with this Agreement,
should an Indemnified Party receive a refund in respect of amounts paid by an
Indemnifying Party to any taxing authority on its behalf, or should any such
amounts that would otherwise be refundable to the Indemnifying Party be applied
by the taxing authority to obligations of the Indemnified Party unrelated to an
Indemnified Liability, then such Indemnified Party shall, promptly following
receipt (or notification of credit), remit such refund and any related interest
to the Indemnifying Party.
SECTION 4.05. Cooperation. The parties shall cooperate with
one another in a timely manner in any administrative or judicial proceeding
involving any matter that may result in an Indemnified Liability.
ARTICLE 5: General Provisions
SECTION 5.01. Notices. All notices, requests, claims and other
communications hereunder shall be in writing and shall be given or made (and
shall be deemed to have been duly given or made upon receipt) by delivery in
person, by courier service, by cable, by telecopy, by telegram, by telex or by
registered or certified mail (postage prepaid, return receipt requested) to the
respective parties at the addresses (or at such other address for a party as
shall be specified in a notice given in accordance with this Section 5.01)
listed below:
To CPS:
210 Carnegie Center
Princeton, New Jersey 08540
Telecopy:
Attn: General Counsel
To CCL:
One Malcolm Avenue
Teterboro, New Jersey 07608-1070210
Telecopy:
Attn: General Counsel
SECTION 5.02. Miscellaneous. This Agreement, including the
attachments, shall constitute the entire agreement between the parties hereto
with respect to the subject matter hereof and shall supersede all prior
agreements and undertakings, both written and oral, between the parties with
respect to the subject matter hereof and thereof. This Agreement may be executed
in one or more counterparts, and by the different parties hereto in separate
counterparts, each of which when executed shall be deemed to be an original but
all of which
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taken together shall constitute one and the same agreement. This Agreement may
not be amended or modified except (a) by an instrument in writing signed by, or
on behalf of, the parties or (b) by a waiver in accordance with Section 5.03.
This Agreement shall be binding upon and inure solely to the benefit of the
parties hereto and their respective subsidiaries, and nothing herein, express or
implied, is intended to or shall confer upon any third parties any legal or
equitable right, benefit or remedy of any nature whatsoever under or by reason
of this Agreement.
SECTION 5.03. Waiver. The parties to this Agreement may (a)
extend the time for the performance of any of the obligations or other acts of
the other party or parties, (b) waive any inaccuracies in the representations
and warranties of the other party or parties contained herein or in any document
delivered by the other party or parties pursuant hereto or (c) waive compliance
with any of the agreements or conditions of the other party or parties contained
herein. Any such extension or waiver shall be valid only if set forth in an
instrument in writing signed by the party to be bound thereby. Any waiver of any
term or condition shall not be construed as a waiver of any subsequent breach or
a subsequent waiver of the same term or condition, or a waiver of any other term
or condition, of this Agreement. The failure of any party to assert any of its
rights hereunder shall not constitute a waiver of any such rights.
SECTION 5.04. Successors and Assigns. The provisions of this
Agreement shall be binding upon, inure to the benefit of and be enforceable by
the parties and their respective successors and permitted assigns.
Notwithstanding the previous sentence, CCL shall not assign this Agreement or
any rights, interests or obligations hereunder, or delegate performance of any
of its obligations hereunder, without the consent of CPS.
SECTION 5.05. Specific Performance. The parties hereto agree
that irreparable damage would occur in the event any provision of this Agreement
was not performed in accordance with the terms hereof and that the parties shall
be entitled to specific performance of the terms hereof, in addition to any
other remedy at law or equity.
SECTION 5.06. Governing Law and Severability. This Agreement
shall be governed by, and construed in accordance with, the laws of the State of
New York, applicable to contracts executed in and to be performed entirely
within that state. If any term or other provision of this Agreement is invalid,
illegal or incapable of being enforced by any law or public policy, all other
terms and provisions of this Agreement shall nevertheless remain in full force
and effect so long as the economic or legal substance of the transactions
contemplated hereby is not affected in any manner materially adverse to any
party. Upon such determination that any term or other provision is invalid,
illegal or incapable of being enforced, the parties hereto shall negotiate in
good faith to modify this Agreement so as to effect the original intent of the
parties as closely as possible in an acceptable manner in order that the
transactions contemplated hereby are consummated as originally contemplated to
the greatest extent possible.
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IN WITNESS WHEREOF, the parties have caused this Agreement to be
executed as of the date first written above by their respective officers
thereunto duly authorized.
CORNING PHARMACEUTICAL CORNING CLINICAL
SERVICES LABORATORIES INC.
By__________________________________ By_________________________________
Name: Name:
Title: Title:
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Draft of August 12, 1996
ANNEX A
DEFINITIONS
"Affiliate" shall mean, when used with respect to a specified Person, another
Person that directly, or indirectly through one or more intermediaries, controls
or is controlled by or is under common control with such Person.
"Affiliated Person" shall have the meaning ascribed to such term in the
Investment Company Act of 1940, as amended, and the rules and regulations
promulgated thereunder.
"Associated Person" shall have the meaning ascribed to such term in the
Securities Exchange Act of 1934, as amended, and the rules and regulations
promulgated thereunder.
"Beneficial Ownership" shall have the meaning ascribed to such term in the
Securities Exchange Act of 1934, as amended, and the rules and regulations
promulgated thereunder.
"CCL Common Stock" shall mean the common stock, [$0.50] par value [with attached
Preferred Stock Purchase Rights] of CCL.
"CCL Distribution" shall mean the distribution by Corning to the Corning
shareholders of the CCL Common Stock.
"CCL Group" shall mean the affiliated group of corporations as defined in
Section 1504(a) of the Code of which CCL (or any successor thereto) is the
common parent, excluding CPS and the other members of the CPS Group.
"CCL Rights Plan" shall mean the Preferred Share Purchase Rights Plan of CCL as
governed by the Rights Agreement, dated as of __________, 1996, between CCL and
____________________, as Rights Agent.
"Code" shall mean the Internal Revenue Code of 1986, as amended, and the
Treasury regulations promulgated thereunder, including any comparable successor
legislation.
"Corning Group" shall mean the affiliated group of corporations as defined in
Section 1504(a) of the Code of which Corning (or any successor thereto) is the
common parent, excluding for tax periods of the Corning Group commencing
subsequent to the Distribution Date, CCL and the other members of the CCL Group
and CPS and other members of the CPS Group.
<PAGE>
"CPS Common Stock" shall mean the common stock, [$0.50] par value [with attached
Preferred Stock Purchase Rights] of CPS.
"CPS Distribution" shall mean the distribution by CCL to the CCL shareholders of
the CPS Common Stock.
"CPS Group" shall mean the affiliated group of corporations as defined in
Section 1504(a) of the Code of which CPS (or any successor thereto) is the
common parent.
"CPS Rights Plan" shall mean the Preferred Share Purchase Rights Plan of CPS as
governed by the Rights Agreement, dated as of __________, 1996, between CPS and
____________________, as Rights Agent.
"Distributions" shall mean the each of the CCL Distribution and the CPS
Distribution, including any transfers relating to the CCL Distribution or the
CPS Distribution.
"Distribution Date" shall mean such date as has been or hereafter will be
determined by Corning's Board of Directors as the date as of which the
Distributions shall be effected.
"Gross Assets" shall mean, when used with respect to a specified Person, the
fair market value of such Person's assets unencumbered by any liabilities.
"Group" shall have the meaning ascribed to such term in the Securities Exchange
Act of 1934, as amended, and the rules and regulations promulgated thereunder.
"IRS" shall mean the U.S. Internal Revenue Service.
"IRS Penalty Rate" shall mean the rate of interest imposed from time to time on
underpayments of income tax pursuant to Code section 6621.
"IRS Ruling" shall mean the private letter ruling (together with any
supplements) issued by the IRS in respect of the Ruling Request.
"Opinion of Counsel" shall mean an opinion of independent tax counsel of
recognized national standing and experienced in the issues to be addressed and
otherwise reasonably acceptable to Corning, which sets forth an Unqualified Tax
Opinion in form and substance satisfactory to Corning. In no event shall Corning
be required to conclude that an opinion is satisfactory if there is any risk,
however remote, that the transaction which is the subject of the opinion will
cause either of the Distributions to be taxable to any extent under the Code.
"Other Transactions" shall mean the transactions related to the Distributions
and described in Parts I through IV of the Ruling Request.
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"Person" shall mean any natural person, corporation, business trust, joint
venture, association, company, partnership or government, or any agency or
political subdivision thereof.
"Restricted Period" shall mean the two year period following the Distribution
Date.
"Ruling Period" shall mean the period commencing on the Distribution Date and
ending on the later of (i) the third anniversary of the close of the taxable
year of Corning in which the Distributions occur, and (ii) the first anniversary
of the date on which there shall have expired all statutes of limitations in
respect of taxable periods for which Taxes might be imposed or otherwise
assessed in respect of the Distributions and the Other Transactions.
"Ruling Request" shall mean the request for rulings, as amended and
supplemented, under Section 355 of the Code, as filed on behalf of Corning on
June 17, 1996, in respect of the Distributions.
"Taxes" shall mean all federal, state, local and foreign gross or net income,
gross receipts, withholding, franchise, transfer, estimated or other taxes or
similar charges and assessments, including all interest, penalties and additions
imposed with respect to such amounts.
"Unqualified Tax Opinion" shall mean (a) an unqualified "will" opinion of tax
counsel to the effect that a transaction does not disqualify either of the
Distributions from qualifying for tax-free treatment for the shareholders of
Corning and CCL and any member of the Corning Group and the CCL Group under Code
section 355 and any other applicable sections of the Code, assuming that the
Distributions would have qualified for tax-free treatment if such transaction
did not occur. An Unqualified Tax Opinion may rely upon, and assume the accuracy
of, any representations contained in any application for a letter ruling from
the IRS, and any representations contained in an officer's certificate delivered
by an officer of Corning, CCL or CPS to such counsel.
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Draft 11/1/96
CORNING CLINICAL LABORATORIES INC.
EMPLOYEES STOCK PURCHASE PROGRAM
The purpose of the Employees Stock Purchase Program (the "Program") of
Corning Clinical Laboratories Inc. (the "Corporation") is to provide to
employees an ongoing opportunity to purchase shares of Common Stock of the
Corporation ("Common Stock") through offerings to be made during the five-year
period commencing January 1, 1997. Two million (2,000,000) shares in the
aggregate have been approved for this purpose.
1. Administration. The Plan will be administered by a committee
appointed by the Board of Directors, consisting of at least three employees
(the "Committee"). Members of the Committee shall be eligible to participate in
the Program on the same terms as other employees. The Committee will have
authority to make rules and regulations for the administration of the Program
and its interpretations and decisions with regard thereto shall be final and
conclusive.
2. Eligibility. Such groups of employees of the Corporation or its
subsidiaries as may from time to time be designated by the Committee will be
eligible to participate in the Program, in accordance with such rules as may be
prescribed from time to time by the Committee. No employee can participate in
the Program if such employee would, immediately after participating in the
Program, own stock possessing five percent or more of the total combined voting
power or value of all classes of stock of the Corporation or of its parent or
subsidiary corporations.
3. Offerings. The Corporation shall make during each calendar quarter
or such other period as the Committee may determine (such quarter or other
period being an "Offering Period"), an offering to such employees to purchase
shares of Common Stock under the Program.
4. Participation. An employee eligible pursuant to Section 2 above on
the first day of any Offering Period may participate in such offering by
completing and forwarding by a date, selected by the Committee, prior to such
Offering Period a payroll deduction authorization form to the employee's
appropriate payroll location. The employee will authorize a regular payroll
deduction from his regular compensation and will specify the date on which such
deduction is to commence, which may not be retroactive. If the Committee so
determines, the employee may also specify whether he wishes deductions to be
made from such non-fixed, bonus compensation as he may receive from time to
time.
5. Deductions. The Corporation will maintain payroll deduction accounts
on its books for all participating employees. With respect to any offering made
under the Program, an employee may authorize a payroll deduction in terms of
whole number of dollars, but not in excess of a maximum of (a) 10% of the
compensation an employee receives during the Offering
<PAGE>
Period (or during such portion thereof as an employee may elect to participate)
or (b) such lesser amount as is determined by the Committee.
6. Deduction Changes. The employee may at any time stop (but not
increase or decrease) the employee's payroll deduction by filing a new payroll
deduction authorization form. The cessation of contributions shall become
effective as soon as possible after receipt of the form. The employee may
thereafter begin participation again only during the next Offering Period. A
payroll deduction may not be increased or reduced during any Offering Period.
7. Interest. The Corporation shall not credit employee accounts with
interest.
8. No Withdrawal of Funds. Once an employee has begun participation in
any Offering Period, he may stop his payroll deductions but, except as provided
in Section 13, may not withdraw any cash balance accumulated in his account.
9. Purchase of Shares. Each employee participating in any offering under
the Program will be granted an opportunity to purchase, upon the effective date
of such offering, as many shares of Common Stock as may be purchased with the
funds that the participating employee elects to withhold pursuant to Section 5
above.
The purchase price for each share purchased will be 85% of the market
price on either the first or last business day of any Offering Period
(whichever price is lower). As of the last day of Offering Period, the account
of each participating employee shall be totaled and the funds in the employee's
account as of that date shall be used to purchase Common Stock. The employee
shall be deemed to have exercised an option to purchase such shares at such
price and the employee's account shall be charged for the amount of the
purchase. Subsequent shares purchased by the employee will be purchased in the
same manner, subject to funds having again been deposited in the employee's
account.
10. Registration of Certificates. It is anticipated that shares of
Common Stock purchased by the employee shall be held by a third party agent in
an investment account established for the employee and that, unless special
arrangements are made to the contrary, any dividends paid on shares of Common
Stock purchased under the Program will be reinvested.
Upon request by the employee to the third party agent or the Corporation,
certificates for whole shares will be delivered to the employee. Fractional
shares will not be delivered.
Certificates when issued may be registered only in the name of the
employee, or, if the employee so indicates on the employee's payroll deduction
authorization form, in the employee's name jointly with a member of the
employee's family, with right of survivorship. An employee who is a resident of
a jurisdiction which does not recognize such a joint tenancy may have
certificates registered in the employee's name as tenant in common or as
community property with a member of the employee's family, without right of
survivorship.
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11. Definitions. The phrase "market price" means the closing price of
Common Stock on a given day as reported in the Wall Street Journal or, if no
sales of Common Stock were made on that day, the closing price of stock on the
next preceding day on which sales were made.
The term "subsidiary" means a subsidiary of the Corporation within the
meaning of Section 452(f) of the Internal Revenue Code of 1986 and the
regulations promulgated thereunder; provided, however, that the Program shall
not be deemed to cover the employees of any subsidiary unless so authorized
by the Committee.
12. Rights as a Stockholder. None of the rights or privileges of a
stockholder of the Corporation shall exist with respect to shares purchased
under the Program unless and until ownership of such shares shall have been
appropriately evidenced on the Corporation's books.
13. Rights of Retirement, Death, or Termination of Employment. In the
event of a participating employee's retirement, death, or termination of
employment, no payroll deduction shall be taken with respect to any
severance, life insurance or other similar payments due to such employee but,
pursuant to the employee's payroll deduction authorization form, a payroll
deduction will be made with respect to regular compensation due for the period
prior to the participating employee's retirement, death or termination of
employment. In the event of an employee's death and upon the request of his
estate but subject to the approval of the Committee, the balance in the
deceased employee's account shall be paid to the employee's estate rather than
utilized to purchase shares of Common Stock.
14. Rights Not Transferable. Rights under the Program are not
transferable by a participating employee other than by will or the laws of
descent and distribution, and are exercisable during the employee's lifetime
only by the employee.
15. Application of Funds. All funds received or held by the Corporation
under the Program may be used for any corporate purpose.
16. Adjustment in Case of Changes Affecting Common Stock. In the event of
a subdivision of outstanding shares, or the payment of a stock dividend, the
number of shares approved for the Program, and the share limitations contained
herein, shall be increased proportionately, and such other adjustment shall be
made as may be deemed equitable by the Board of Directors. In the event of any
other change affecting Common Stock, such adjustment shall be made as may be
deemed equitable by the Board of Directors to give proper effect to such event.
17. Amendment of the Plan. The Board of Directors may at any time, or
from time to time, amend the Program in any respect, except that, without the
approval of a majority of the shares of capital stock of the Corporation
present at a meeting notice for which included such purpose, no amendment shall
be made (i) increasing the number of shares approved for the Program (other
than as provided in Section 16), (ii) decreasing the purchase price per share,
or (iii) changing the designation of subsidiaries eligible to participate in the
Program.
3
<PAGE>
18. Termination of the Plan. The Program and all rights of employees
under any offering hereunder shall terminate:
(a) on the day that participating employees become entitled to
purchase a number of shares greater than the number of shares remaining
available for purposes provided, however, if the number of shares so
purchasable is greater than the shares remaining available, the available
shares shall be allocated by the Committee among such participating
employees in such manner as it deems fair; or
(b) at any earlier time, at the discretion of the Board of Directors.
No offering hereunder shall be made which shall extend beyond December 31,
2001. Upon termination of the Program all amounts in the accounts of
participating employees shall be carried forward into the employee's payroll
deduction account under a successor program, if any, or promptly refunded.
19. Governmental Regulations. The Corporation's obligation to sell and
deliver shares of Common Stock under the Program is subject to the approval of
any governmental authority required in connection with the authorization,
issuance, or sale of such stock.
20. Share Purchases. Purchases of outstanding shares may be made pursuant
to and on behalf of the Program, upon such terms as the Board of Directors of
the Corporation may approve, for delivery under the Program.
4
CORNING Clinical
Laboratories
Corning Clinical Laboratories/Corning Nichols Institute
1996 Management Incentive Plan Document
(For Use of Employees of Corning Nichols Institute)
Employee Name: ((Last_Name)), ((First_Name))
Target Level: ((Bon_Tgt_))%
Business Unit: ((Business_Unit_Name))
Purpose of the Plan
The purpose of the 1996 CCL/CNI Management Incentive Plan is to improve
profitability by rewarding participants for their contribution in meeting or
exceeding annually established financial and other performance objectives. The
reward will be in the form of an annual cash bonus.
Performance Objectives
The 1996 Management Incentive Plan has three performance objectives:
o Achievement of CCL/CNI Operating Margin Target
o Achievement of Business Unit Operating Financial Target
o Achievement of Individual Performance Objectives
o 20% of the participating employee's incentive award shall be determined by
CCL/CNI 1996 year-end operating margin as measured against the 1996 Plan
(See Attachment A)
o 30% of the participating employee's incentive award shall be determined by
Business Unit 1996 year-end financial targets as measured against the 1996
Plan (See Attachment A)
o 50% of the participating employee's incentive award shall be determined by
the individual's actual performance measured against specific objectives
set forth by the employee's immediate supervisor.
Individual Performance Objectives
The results of this measure are incorporated into the final award determination
process through an IPF (individual performance factor). The IPF recognizes the
achievement of CCL/CNI profitability objectives as well as the employee's
personal objective achievements. The factor is submitted to Corporate
Compensation at the close of
<PAGE>
1996 by the employee's supervisor, with the approval of the General Manager. The
individual performance factor (IPF) score may vary from 50% to 150%.
IPF's, by design, should include a good mix of solid, objective, calculated
measures and subjective assessments of how well a participant performed against
their overall short and long term personal and unit measures.
<PAGE>
We will use the following test as a logic check for proposed IPF's:
150% Very unusual, extraordinary
125%
100% Normal Range
75%
50% Very unusual, poor performance
Determination of Awards: Sample Calculation
Following is a generic example of the award determination process. This example
is not personalized for each participant.
Sample Salary and Award Target Assumptions:
o Assume a year-end salary of $75,000
o Assume a target level of 15%
o Target award equals $11,250; $75,000 X 15%
Sample Performance Assumptions:
o Assume the actual 1996 year-end OM for CCL/CNI yields a performance
adjustment factor of 100%
o Assume the actual 1996 year-end OM for the business unit yields a
performance adjustment factor of 125%
o Assume the IPF rating is 90%
Sample Award Calculation:
1996 Management Incentive Award
Year-End Salary: $75,000 Bonus Target: 15%
Bonus Target Amount (1X): $11,250.00
<PAGE>
------------------------------------------------------
Individual Business Unit CCL/CNI Total
- --------------------------------------------------------------------------------
Weighting 50% 30% 20% 100%
- --------------------------------------------------------------------------------
Target Award (1X) $5,625.00 $3,375.00 $2,250.00 $11,250.00
- --------------------------------------------------------------------------------
Performance Adjustment 90% 125% 100%
Factor
- --------------------------------------------------------------------------------
Total Award $5,062.50 $4,218.75 $2,250.00 $11,531.25
========= ========= ========= ==========
- --------------------------------------------------------------------------------
<PAGE>
Definition of Terms
Year-End Salary: Base salary effective as of December 31, 1996.
Plan Year: CCL/CNI fiscal year; January 1, 1996 through December 31, 1996.
Award Adjustments
o Awards will be prorated to reflect date of hire, transfer between business
units and promotions which impact the target level. Proration of awards is
determined as follows:
o If action (hire, promotion, transfer) occurs during the first
quarter of 1996, no proration will occur.
o If a participant is hired or promoted to an MIP eligible position
(from an ineligible position) during the second or third quarter of
1996 (April 1996 to September 1996), the award will be prorated to
reflect the number of months spent in the MIP eligible position.
o If a participant is transferred across business units, or promoted to
a position with a different MIP target, during the second or third
quarter of 1996, the award will be prorated to reflect the number of
months spent at each business unit/target level.
o If action (hire, promotion, transfer) occurs during the fourth
quarter of 1996, the award will be prorated as follows:
o New hires or promotions into MIP eligible positions will not be
eligible to participate in the Plan until 1997
o Transfers or promotions to a new target level will not be
reflected in 1996 award, but will become effective in 1997.
If an employee voluntarily terminates employment with CCL/CNI prior to the
payout date, they shall be ineligible for an award.
Plan Amendment or Termination
The Chairman and CEO may amend or terminate this plan at any time.
<PAGE>
CORNING Clinical
Laboratories
Corning Clinical Laboratories/Corning Nichols Institute
1996 Management Incentive Plan Document
(For Use of Employees of Corning Clinical Laboratories Business Units)
Employee Name: ((Last_Name)), ((First_Name))
Target Level: ((Bon_Tgt_))%
Business Unit: ((Business_Unit_Name))
Purpose of the Plan
The purpose of the 1996 CCL/CNI Management Incentive Plan is to improve
profitability by rewarding participants for their contribution in meeting or
exceeding annually established financial and other performance objectives. The
reward will be in the form of an annual cash bonus.
Performance Objectives
The 1996 Management Incentive Plan has three performance objectives:
o Achievement of CCL/CNI Operating Margin Target
o Achievement of Business Unit Operating Margin Target
o Achievement of Individual Performance Objectives
o 20% of the participating employee's incentive award shall be determined
by CCL/CNI 1996 year-end operating margin as measured against the 1996
Plan (See Attachment A)
o 30% of the participating employee's incentive award shall be determined
by Business Unit 1996 year-end operating margin as measured against the
1996 Plan (See Attachment A)
o 50% of the participating employee's incentive award shall be determined
by the individual's actual performance measured against specific objectives
set forth by the employee's immediate supervisor.
Individual Performance Objectives
The results of this measure are incorporated into the final award determination
process through an IPF (individual performance factor). The IPF recognizes the
achievement of CCL/CNI profitability objectives as well as the employee's
personal objective achievements. The factor is submitted to Corporate
Compensation at the close of 1996 by the employee's supervisor, with the
approval of the General Manager. The individual performance factor (IPF) score
may vary from 50% to 150%.
IPF's, by design should include a good mix of solid, objective, calculated
measures and subjective assessments of how well a participant performed against
their overall short and long term personal and unit measures.
<PAGE>
We will use the following test as a logic check for proposed IPF's:
150% Very unusual, extraordinary
125%
100% Normal Range
75%
50% Very unusual, poor performance
Determination of Awards: Sample Calculation
Following is a generic example of the award determination process. This example
is not personalized for each participant.
Sample Salary and Award Target Assumptions:
o Assume a year-end salary of $75,000
o Assume a target level of 15%
o Target award equals $11,250; $75,000 X 15%
Sample Performance Assumptions:
o Assume the actual 1996 year-end OM for CCL/CNI yields a performance
adjustment factor of 100%
o Assume the actual 1996 year-end OM for the business unit yields a
performance adjustment factor of 125%
o Assume the IPF rating is 90%
Sample Award Calculation:
1996 Management Incentive Award
Year-End Salary: $75,000 Bonus Target: 15%
Bonus Target Amount (1X): $11,250.00
-------------------------------------------------------
Individual Business Unit CCL/CNI Total
- --------------------------------------------------------------------------------
Weighting 50% 30% 20% 100%
- --------------------------------------------------------------------------------
Target Award (1X) $5,625.00 $3,375.00 $2,250.00 $11,250.00
- --------------------------------------------------------------------------------
Performance Adjustment 90% 125% 100%
Factor
- --------------------------------------------------------------------------------
Total Award $5,062.50 $4,218.75 $2,250.00 $11,531.25
========= ========= ========= ==========
- --------------------------------------------------------------------------------
<PAGE>
Definition of Terms
Year-End Salary: Base salary effective as of December 31, 1996.
Plan Year: CCL/CNI fiscal year; January 1, 1996 through December 31, 1996.
Award Adjustments
o Awards will be prorated to reflect date of hire, transfer between
business units and promotions which impact the target level. Proration of
awards is determined as follows:
o If action (hire, promotion, transfer) occurs during the first
quarter of 1996, no proration will occur.
o If a participant is hired or promoted to an MIP eligible position
(from an ineligible position) during the second or third quarter of
1996 (April 1996 to September 1996), the award will be prorated to
reflect the number of months spent in the MIP eligible position.
o If a participant is transferred across business units, or promoted
to a position with a different MIP target, during the second or third
quarter of 1996, the award will be prorated to reflect the number of
months spent at each business unit/target level.
o If action (hire, promotion, transfer) occurs during the fourth
quarter of 1996, the award will be prorated as follows:
o New hires or promotions into MIP eligible positions will not be
eligible to participate in the Plan until 1997
o Transfers or promotions to a new target level will not be
reflected in 1996 award, but will become effective in 1997.
If an employee voluntarily terminates employment with CCL/CNI prior to the
payout date, they shall be ineligible for an award.
Plan Amendment or Termination
The Chairman and CEO may amend or terminate this plan at any time.
<PAGE>
CORNING Clinical
Laboratories
Corning Clinical Laboratories/Corning Nichols Institute
1996 Management Incentive Plan Document
(For Use of Employees of the Corporate Staff)
Employee Name: ((Last_Name)), ((First_Name))
Target Level: ((Bon_Tgt_))%
Business Unit: ((Business_Unit_Name))
Purpose of the Plan
The purpose of the 1996 CCL/CNI Management Incentive Plan is to improve
profitability by rewarding participants for their contribution in meeting or
exceeding annually established financial and other performance objectives. The
reward will be in the form of an annual cash bonus.
Performance Objectives
The 1996 Management Incentive Plan has two performance objectives:
o Achievement of CCL/CNI Operating Margin Target
o Achievement of Individual Performance Objectives
o 50% of the participating employee's incentive award shall be determined
by CCL/CNI 1996 year-end operating margin as measured against the 1996
Plan (See Attachment A)
o 50% of the participating employee's incentive award shall be determined
by the individual's actual performance measured against specific objectives
set forth by the employee's immediate supervisor.
Individual Performance Objectives
The results of this measure are incorporated into the final award determination
process through an IPF (individual performance factor). The IPF recognizes the
achievement of CCL/CNI profitability objectives as well as the employee's
personal objective achievements. The factor is submitted to Corporate
Compensation at the close of 1996 by the employee's supervisor, with the
approval of the General Manager. The individual performance factor (IPF) score
may vary from 50% to 150%.
IPF's, by design, should include a good mix of solid, objective calculated
measures and subjective assessments of how well a participant performed against
their overall short and long term personal and unit measures.
<PAGE>
We will use the following test as a logic check for proposed IPF's:
150% Very unusual, extraordinary
125%
100% Normal Range
75%
50% Very unusual, poor performance
Determination of Awards: Sample Calculation
Following is a generic example of the award determination process. This example
is not personalized for each participant.
Sample Salary and Award Target Assumptions:
o Assume a year-end salary of $75,000
o Assume a target level of 15%
o Target award equals $11,250; $75,000 X 15%
Sample Performance Assumptions:
o Assume the actual 1996 year-end OM for CCL/CNI yields an award score of
125%
o Assume the IPF rating is 90%
Sample Award Calculation:
1996 Management Incentive Award
Year-End Salary: $75,000 Bonus Target: 15%
Bonus Target Amount (1X): $11,250.00
--------------------------------------------------------
Individual CCL/CNI Total
- --------------------------------------------------------------------------------
Weighting 50% 50% 100%
- --------------------------------------------------------------------------------
Target Award (1X) $5,625.00 $5,625.00 $11,250.00
- --------------------------------------------------------------------------------
Performance Adjustment 90% 125%
Factor
- --------------------------------------------------------------------------------
Total Award $5,062.50 $7,031.25 $12,093.75
========= ========= ==========
- --------------------------------------------------------------------------------
<PAGE>
Definition of Terms
Year-End Salary: Base salary effective as of December 31, 1996.
Plan Year: CCL/CNI fiscal year; January 1, 1996 through December 31, 1996.
Award Adjustments
o Awards will be prorated to reflect date of hire, transfer between
business units and promotions which impact the target level. Proration of
awards is determined as follows:
o If action (hire, promotion, transfer) occurs during the first
quarter of 1996, no proration will occur.
o If a participant is hired or promoted to an MIP eligible position
(from an ineligible position) during the second or third quarter of
1996 (April 1996 to September 1996), the award will be prorated to
reflect the number of months spent in the MIP eligible position.
o If a participant is transferred across business units, or promoted
to a position with a different MIP target, during the second or third
quarter of 1996, the award will be prorated to reflect the number of
months spent at each business unit/target level.
o If action (hire, promotion, transfer) occurs during the fourth
quarter of 1996, the award will be prorated as follows:
o New hires or promotions into MIP eligible positions will not be
eligible to participate in the Plan until 1997
o Transfers or promotions to a new target level will not be
reflected in 1996 award, but will become effective in 1997.
If an employee voluntarily terminates employment with CCL/CNI prior to the
payout date, they shall be ineligible for an award.
Plan Amendment or Termination
The Chairman and CEO may amend or terminate this plan at any time.
OCTOBER 28, 1996
THE PROFIT SHARING PLAN OF CORNING CLINICAL LABORATORIES INC.
(RESTATED AS OF DECEMBER 31, 1996)
<PAGE>
TABLE OF CONTENTS
INTRODUCTION .................................................................1
ARTICLE I DEFINITIONS......................................................4
ARTICLE II ELIGIBILITY AND PARTICIPATION...................................21
2.1 Eligibility.....................................................21
2.2 Participation...................................................21
2.3 Beneficiary Designation.........................................22
2.4 Investment Option Specification.................................23
2.5 Notification of Individual Account Balance......................23
2.6 Diversification of Investments or Distribution for Certain
Participants....................................................24
ARTICLE III CONTRIBUTIONS...................................................25
3.1 Employee Pre-Tax Contributions..................................25
3.2 Employer Matching Contributions.................................27
3.3 Discretionary Contributions.....................................28
3.4 Rollover Contributions..........................................28
3.5 Maximum Deductible Contribution.................................28
3.6 Actual Deferral Percentage Test.................................28
3.7 Payment of Contributions to Trustee.............................30
3.8 Employee After-Tax Contributions................................30
3.9 Actual Contribution Percentage Test.............................31
3.10 Multiple Use Restrictions.......................................31
ARTICLE IV ALLOCATIONS TO INDIVIDUAL ACCOUNTS..............................33
4.1 Individual Accounts.............................................33
4.2 Allocation of Employee Pre-Tax Contributions....................33
4.3 Allocation of Employer Matching Contributions...................33
4.4 Allocation of Discretionary Contributions.......................33
4.5 Allocation of Forfeitures.......................................34
4.6 Maximum Additions...............................................34
4.7 Multiple Plan Participation.....................................35
ARTICLE V DISTRIBUTIONS...................................................37
5.1 Normal Retirement...............................................37
5.2 Disability Retirement...........................................37
<PAGE>
5.3 Death Before Retirement or Termination of Employment............37
5.4 Death After Retirement or Termination of Employment.............38
5.5 Termination of Employment.......................................39
5.6 Method of Payment...............................................42
5.7 Benefits to Minors and Incompetents.............................46
5.8 Payment of Benefits.............................................47
5.9 Valuation of Accounts...........................................48
5.10 Direct Rollovers................................................50
5.11 Payment to Alternate Payee Under QDRO...........................51
ARTICLE VI LOANS AND WITHDRAWALS...........................................52
6.1 Loans to Participants...........................................52
6.2 Hardship Withdrawals............................................54
6.3 Non-Hardship Withdrawals........................................56
ARTICLE VII TRUST FUND/ESOP.................................................58
7.1 Contributions...................................................58
7.2 Trustee.........................................................58
7.3 Employer Stock..................................................59
7.4 Corning Stock Fund and CPS Stock Fund...........................59
7.5 Dividends on ESOP Stock Attributable to Exempt Loan.............60
7.6 Voting and Tender Offer Rights on Employer Stock................60
ARTICLE VIII FIDUCIARIES.....................................................62
8.1 General.........................................................62
8.2 Corporation.....................................................62
8.3 Employer........................................................63
8.4 Trustee.........................................................63
8.5 Committee.......................................................63
8.6 Claims for Benefits.............................................65
8.7 Denial of Benefits - Review Procedure...........................66
8.8 Records.........................................................66
8.9 Missing Persons.................................................66
ARTICLE IX AMENDMENT AND TERMINATION OF THE PLAN...........................68
9.1 Amendment of the Plan...........................................68
<PAGE>
9.2 Termination of the Plan.........................................68
ARTICLE X PROVISIONS RELATIVE TO EMPLOYERS INCLUDED IN PLAN...............70
10.1 Method of Participation.........................................70
10.2 Withdrawal......................................................70
10.3 Adoption of ESOP by Participating Employer......................71
ARTICLE XI TOP-HEAVY PROVISIONS............................................72
11.1 Determination of Top-Heavy......................................72
11.2 Top-Heavy Definitions...........................................74
ARTICLE XII MISCELLANEOUS...................................................76
12.1 Governing Law...................................................76
12.2 Construction....................................................76
12.3 Administration Expenses.........................................76
12.4 Participant's Rights; Acquittance...............................76
12.5 Spendthrift Clause..............................................76
12.6 Merger, Consolidation or Transfer...............................76
12.7 Mistake of Fact.................................................77
12.8 Counterparts....................................................77
12.9 Transitional Rule...............................................77
ARTICLE XIII ADOPTION OF THE PLAN............................................78
SUPPLEMENT A - to The Profit Sharing Plan of Corning Clinical Laboratories Inc.
- Employee Stock Ownership Plan (ESOP)
<PAGE>
INTRODUCTION
Effective October 1, 1973, MetPath Inc. established the Profit Sharing
Plan of MetPath Inc. (the "MetPath Plan") for the benefit of its eligible
employees.
Effective September 1, 1986, the MetPath Plan was amended and restated
to incorporate a qualified cash or deferred arrangement under Code Section
401(k). Effective January 1, 1989, the MetPath Plan was again amended and
restated in its entirety to comply with the requirements of the Tax Reform Act
of 1986 and subsequent legislation.
Prior to April 1, 1992, the MetPath Plan was funded through a group
annuity contract arrangement with AEtna Life Insurance Company and with
Connecticut National Bank as Trustee. Effective April 1, 1992, MetPath Inc.
severed the group annuity contract arrangement, removed Connecticut National
Bank as Trustee, and appointed Fidelity Management Trust Company as successor
Trustee.
Prior to October 31, 1992, MetPath Inc., a New York corporation, was a
wholly-owned subsidiary of Corning Lab Services Inc. As a result of a corporate
restructuring, effective October 31, 1992, MetPath Inc. merged with and into
Corning Lab Services Inc. Consequently, effective October 31, 1992, the Profit
Sharing Plan of MetPath Inc. was renamed the Profit Sharing Plan of Corning Lab
Services Inc.
As a result of another corporate restructuring, effective January 1,
1994, Corning Lab Services Inc. changed its name to MetPath Inc., a Delaware
corporation. Consequently, effective January 1, 1994, the Profit Sharing Plan of
Corning Lab Services Inc. was renamed the Profit Sharing Plan of MetPath Inc.
Effective January 1, 1996, the Plan was again amended and restated in
its entirety to reflect certain substantive changes and was renamed the Profit
Sharing Plan of Corning Clinical Labs Inc. to reflect another corporate
restructuring effective December 31, 1994.
Also effective January 1, 1996, the assets and liabilities of this Plan
representing the account balances of Corning SciCor, Inc. employees were
transferred to the Corning Pharmaceutical Services Inc.
Retirement Savings Plan.
Effective as of December 31, 1996, the Plan is again amended and
restated in its entirety to reflect the adoption of an employee stock ownership
plan and is hereby renamed the Profit Sharing Plan of Corning Clinical
Laboratories Inc.
-1-
<PAGE>
Except as expressly provided herein, the Plan provisions as in effect
immediately prior to this amendment and restatement shall remain in effect for
those participants who do not complete an hour of service at any time after
December 31, 1996.
No provision of this amended and restated Plan shall be construed to
eliminate or reduce any early retirement benefit or subsidy that continues after
retirement or optional form of benefit that existed under the Plan prior to this
amendment and restatement, except to the extent permitted under Treasury
Regulations ss.1.401(a)-4 and ss.1.411(d)-4.
This Plan consists of a profit sharing and stock bonus plan which is
intended to qualify under sections 401(a) and 401(k) of the Internal Revenue
Code, and an employee stock ownership plan which is intended to qualify as a
stock bonus plan under Section 401(a) of the Internal Revenue Code and as an
employee stock ownership plan under Section 4975(e)(7) of the Internal Revenue
Code. The assets of the employee stock ownership plan shall consist of the
amounts attributable to Employer Stock Matching Contributions on or after the
Distribution Date. The assets of the employee stock ownership plan shall be
invested primarily in common shares of the Employer ("Employer Stock") which
qualify as "employer securities" within the meaning of section 409(1) of the
Internal Revenue Code.
(a) Spinoff of the Employer. As of the day prior to the Distribution
Date, the Employer and its subsidiaries were members of the
controlled group of corporations (within the meaning of section
414(b) of the Internal Revenue Code) that includes Corning. It is
contemplated that as of a certain date (the "Distribution Date")
on or before December 31, 1996, all of the shares of the Employer
("Employer Stock") held by Corning will be distributed to the
shareholders of Corning as a spinoff dividend and the Employer
will thereby cease to be a member of the controlled group of
corporations that includes Corning. As a result of the spinoff of
the Employer from Corning on the Distribution Date, Corning Stock
held in Participants' accounts under the Plan will be converted
into Corning Stock, CPS Stock and Employer Stock that will be
received as dividends with respect to such Corning Stock. The
Corning Stock, the dividend CPS Stock and the dividend Employer
Stock will each represent a portion of the value of pre-spinoff
investments
-2-
<PAGE>
of Participants' accounts in Corning Stock. Accordingly, the
Employer has determined that in order to provide Participants with
the opportunity to continue to hold the same economic investment
following the Employer spinoff as before and enhanced investment
flexibility following the spinoff, the Plan shall provide for not
only an Employer Stock Fund and a CPS Stock Fund, but shall also
continue to provide for a Corning Stock Fund. As provided in
Section 7.4, and subject to the provisions thereof, following the
Distribution Date, participants may elect to continue holding
Corning Stock in their accounts under the Plan or may elect to
sell such shares and reinvest the proceeds in Employer Stock or
any other Investment Option. The Corning Stock Fund and the CPS
Stock Fund are provided solely to permit the continued holding of
Corning and CPS Shares allocated to Participants' accounts
following the spinoff of the Employer. Accordingly, following the
Distribution Date no future contributions or investment transfers
may be made to the Corning Stock Fund or the CPS Stock Fund.
(b) Spinoff of Corning Pharmaceutical Services, Inc. As of the day
prior to the Distribution Date, Corning Pharmaceutical Services,
Inc. ("CPS") and its affiliates were members of the controlled
group of corporations (within the meaning of section 414(b) of the
Internal Revenue Code) that includes Corning. On the Distribution
Date, all of the shares of CPS held by Corning were distributed to
the shareholders of Corning as a spinoff dividend and CPS thereby
ceased to be a member of the controlled group of corporations that
includes Corning. As a result of the spinoff of CPS from Corning
the shares of Corning which had been held in Participants'
Individual Accounts under the Plan ("Corning Shares") were
converted into Corning Stock and shares of CPS and shares of the
Employer that were received as dividends with respect to such
Corning Shares. The Corning Stock and the dividend CPS and
Employer shares each represent the pre-spinoff investments of
Participants' Individual Accounts in Corning Stock.
-3-
<PAGE>
ARTICLE I
DEFINITIONS
1.1 As used herein, unless otherwise required by the context, the following
words and phrases shall have the meanings indicated:
Active Participant - A Participant shall be deemed an Active
Participant with respect to a Fiscal Quarter if he is employed on the last day
of such Fiscal Quarter.
Actual Contribution Percentage - (a) (1) For each Plan Year, the
average of the ratios, calculated separately for each Eligible Employee in a
specified group, of (A) the amount of Employer Matching Contributions under
Section 3.2 which are allocated to the Individual Account of an Eligible
Employee as of a date within such Plan Year to (B) the Testing Compensation of
such Eligible Employee while an Eligible Employee for such Plan Year.
(2) When calculating the Actual Contribution Percentage for a
Highly Compensated Employee, all arrangements subject to Code Section 401(m)
maintained by the Employer or an Affiliate in which such Employee participates
(other than those that may not be permissively aggregated) shall be treated as
one arrangement. All matching contributions that are made under two or more
plans that are aggregated for purposes of Code Section 410(b)(other than Code
Section 410(b)(2)(A)(ii)) are to be treated as made under a single plan.
(b) (1) In the case of a Highly Compensated Employee who is either a 5%
owner or one of the ten most highly compensated Employees and is thereby subject
to the family aggregation rules of Code Section 414(q)(6), the Actual
Contribution Percentage for the family group (which consists of a Highly
Compensated Employee described in this sentence and his HC Family Members and is
treated as one Highly Compensated Employee) is determined by combining the
Employer Matching Contributions and Testing Compensation of all eligible HC
Family Members with those of the Highly Compensated Employee. Except to the
extent taken into account in the preceding sentence, the Employer Matching
Contributions and Testing Compensation of all HC Family Members are disregarded
in determining the Actual Contribution
-4-
<PAGE>
Percentages for the groups of Highly Compensated Employees and non-highly
compensated employees.
(2) For purposes of applying the dollar limit on Testing
Compensation, the family group described in paragraph (1) will be treated as a
single Highly Compensated Employee with a single Testing Compensation, and the
dollar limit will be allocated among the members of the family group in
proportion to each member's individual Testing Compensation. Solely for purposes
of the Testing Compensation rule in this paragraph (2), the term "HC Family
Member" shall include only the spouse of the employee and any lineal descendants
of the employee who have not attained age 19 before the close of the Plan Year
in question.
Actual Deferral Percentage - (a) (1) For each Plan Year, the average of
the ratios, calculated separately for each Eligible Employee in a specified
group, of (A) the amount of Employee Pre-Tax Contributions under Section 3.1
(which are attributable to Deferral Compensation that would have been received
by the Employee during such Plan Year but for his salary reduction agreement)
which are allocated to the Individual Account of an Eligible Employee as of a
date within such Plan Year to (B) the Testing Compensation of such Eligible
Employee while an Eligible Employee for such Plan Year.
(2) Except as provided in regulations issued by the Secretary of
the Treasury, Actual Deferral Percentage shall be determined without regard to
whether any Employee Pre-Tax Contributions are distributed under Section
3.1(c)(2)(A). When calculating the Actual Deferral Percentage for a Highly
Compensated Employee, all cash or deferred arrangements maintained by the
Employer or an Affiliate in which such Employee participates (other than those
that may not be permissively aggregated) shall be treated as one arrangement.
All elective contributions that are made under two or more plans that are
aggregated for purposes of Code Section 410(b)(other than Code Section
410(b)(2)(A)(ii)) are to be treated as made under a single plan.
(b) The special HC Family Member rules set forth in subsection (b) of
the definition of Actual Contribution Percentage shall also apply in determining
the Actual Deferral Percentage.
Advance Medical Plan - The Advance Medical & Research Center, Inc.
Retirement Plan, the assets and liabilities of which have been transferred to
this Plan.
-5-
<PAGE>
Affiliate - An organization which is not an Employer, but which must be
considered together with an Employer under Code Sections 414(b), (c), (m) or
(o).
Beneficiary - Any person designated by a Participant under Section 2.3
to receive such benefits as may become payable hereunder after the death of such
Participant.
Board - The Board of Directors of the Corporation.
Calendar Quarter - January 1-March 31; April 1-June 30, July
1-September 30, October 1-December 31.
CBCLS Employer Contribution Account - The CBCLS Employer Contribution
Account shall hold any amount transferred to this Plan from the CBCLS Plan
representing employer matching contributions and discretionary contributions
made to the CBCLS Plan on behalf of a Participant who was formerly a participant
in the CBCLS Plan but was not an active participant in the CBCLS Plan on
December 31, 1991, and any earnings and losses thereon. (Any amount transferred
to this Plan from the CBCLS Plan representing employer matching contributions
and discretionary contributions made to the CBCLS Plan on behalf of a
Participant who was an active participant in the CBCLS Plan on December 31, 1991
shall be held in such Participant's Rollover Account.)
CBCLS Plan - The Continental Bio Clinical Laboratory Service, Inc.
Profit Sharing and Retirement Savings Plan, the assets and liabilities of which
have been transferred to this Plan.
CPF Pension Plan - The Clinical Pathology, Inc. Pension Plan, the
assets and liabilities of which have been transferred to this Plan.
CPF Savings Plan - The CPF/MetPath Savings and Retirement Plan
(formerly, the MDS Health Group, Inc. Savings and Retirement Plan), the assets
and liabilities of which have been transferred to this Plan.
Code - The Internal Revenue Code of 1986, as amended.
Committee - The Benefits Administration Committee, as provided for in
Section 8.5.
Contributions - Payments as provided herein by the Employer to the
Trustee for the purpose of providing the benefits under this Plan.
Corning - Corning Incorporated, a New York corporation.
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<PAGE>
Corporation - Corning Clinical Laboratories Inc. (DE) or any successor
thereto. The Corporation is the sponsor, named Fiduciary, and plan administrator
of the Plan for purposes of ERISA as it relates to the employees of each
Employer.
Damon Plan - The Damon Corporation Savings Plus Retirement Plan, the
assets and liabilities of which have been transferred to this Plan.
Deferral Compensation - The Section 415 Compensation paid to an
Employee by the Employer for his services, excluding reimbursements or other
expense allowances, cash and non-cash fringe benefits (e.g., employee
discounts), moving expenses, deferred compensation and welfare benefits, plus
Employee Pre-Tax Contributions and salary reduction contributions to a Code
Section 125 cafeteria plan. Deferral Compensation in excess of $150,000 (or such
different amount as may be applicable under Code Section 401(a)(17)(B)) shall
not be taken into account.
DeYor Plan - The DeYor Laboratories 401(k) Profit Sharing Plan and
Trust, the assets and liabilities of which have been transferred to this Plan.
Discretionary Account - That portion of a Participant's Individual
Account attributable to the Discretionary Contributions allocated to such
Participant under Section 4.4 and any earnings or losses on such contributions.
The Discretionary Account of a Participant who was formerly a participant in the
Damon Plan shall also hold any amount transferred to this Plan from the Damon
Plan representing "Long Term Savings Contributions" made to the Damon Plan on
his behalf and earnings and losses thereon. The Discretionary Account of a
Participant who was a participant in the MetWest Plan shall also hold any amount
transferred to this Plan from the MetWest Plan representing that portion of such
Participant's "Incentive Contribution Account" under the MetWest Plan which
consisted of non-matching "Incentive Contributions" and earnings and losses
thereon.
Discretionary Contributions - Contributions made by an Employer under
Section 3.3.
Distribution Date - [ ], the effective date of the spinoff of the
Employer from Corning through the distribution of stock dividends in shares of
Corning, CPS and the Employer.
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<PAGE>
Effective Date - October 1, 1973, except as set forth below. (This
amendment and restatement is generally effective December 31, 1996.) The
Effective Date for the following Employers is as follows:
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- --------------------------------------------------------------------------------
Employer Effective Date
- --------------------------------------------------------------------------------
Corning Clinical Laboratories Inc. (DE) October 1, 1973
- --------------------------------------------------------------------------------
Corning Clinical Laboratories Inc. (MI) May 1, 1990
- --------------------------------------------------------------------------------
MetPath New England Inc. January 1, 1994
- --------------------------------------------------------------------------------
MetPath (PA) Inc. July 1, 1993
DeYor CPF/MetPath Inc. January 1, 1994
Southgate Medical Services, Inc. July 1, 1993
- --------------------------------------------------------------------------------
MetWest Inc. April 1, 1994
- --------------------------------------------------------------------------------
Corning Clinical Laboratories Inc. (MA) March 1, 1995
- --------------------------------------------------------------------------------
Corning Clinical Laboratories Inc. (MD) January 1, 1995
- --------------------------------------------------------------------------------
Nichols InstituteDiagnostics (formerly Corning Nichols January 1, 1995
Institute)
- --------------------------------------------------------------------------------
Corning Nichols Institute Inc. January 1, 1995
- --------------------------------------------------------------------------------
Corning Franklin Health Inc. July 1, 1995
(through
December 31, 1996)
- --------------------------------------------------------------------------------
Corning Clinical Laboratories, a Georgia general partnership March 1, 1994
- --------------------------------------------------------------------------------
Eligible Employee - An Employee eligible for participation under
Section 2.1.
Employee - Any person employed by the Corporation and any person
employed by any other Employer. Notwithstanding the preceding sentence, Employee
shall not include (1) independent contractors, (2) any person who is covered by
a collective bargaining agreement where such agreement provides for a different
retirement plan, or where no provision is made for any retirement plan after
good faith bargaining between the Employer and employee representatives and (3)
any person who is excluded from participation hereunder by the terms of his
Employer's adoption of this Plan. No person who is a leased employee of an
Employer within the meaning of Code Section 414(n), or who receives compensation
solely for service as a member of the Board, shall be eligible to participate in
this Plan.
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<PAGE>
Employee After-Tax Account - That portion of a Participant's Individual
Account attributable to the Employee After-Tax Contributions allocated to such
Participant prior to January 1, 1996 and any earnings or losses on such
contributions. The Employee After-Tax Account of a Participant who was a
participant in a Merged Plan that permitted after-tax contributions shall also
hold any amount transferred to this Plan from such Merged Plan representing the
balance of such Participant's after-tax account under such Merged Plan and
earnings and losses thereon.
Employee Pre-Tax Account - That portion of a Participant's Individual
Account attributable to the Employee Pre-Tax Contributions allocated to such
Participant under Section 4.2 and any earnings or losses on such contributions.
The Employee Pre-Tax Account of a Participant who was a participant in a Merged
Plan that contained a qualified cash or deferred arrangement shall also hold any
amount transferred to this Plan from such Merged Plan representing the balance
of such Participant's pre-tax account under such Merged Plan and any earnings
and losses thereon.
Employee Pre-Tax Contributions - Contributions made to the Plan by the
Employer under Section 3.1(a) pursuant to a salary reduction agreement entered
into between the Employer and the Participant.
Employer - Collectively or individually as the context may indicate,
Corning Clinical Laboratories Inc. (DE) (previously MetPath Inc.); Corning
Clinical Laboratories Inc. (MI) (previously Advance Medical & Research Center,
Inc.), Corning Clinical Laboratories, (Connecticut) and Corning Clinical
Laboratories of PA, Inc., all of which are wholly-owned subsidiaries of Corning
Clinical Laboratories Inc. (DE); DeYor CPF/MetPath Inc. and Southgate Medical
Services, Inc., both of which are wholly-owned subsidiaries of MetPath (PA)
Inc.; MetWest Inc., a second-tier wholly-owned subsidiary of Corning Clinical
Laboratories Inc. (DE); Corning Clinical Laboratories Inc. (MA) (previously
Corning Bioran Inc.); Corning Clinical Laboratories Inc. (MD) (previously
Maryland Medical Laboratory, Inc.) d/b/a Maryland Medical MetPath; Nichols
Institute Diagnostics (previously Nichols Diagnostics); Corning Nichols
Institute Inc. (previously Nichols Institute Reference Laboratories); Corning
Franklin Health Inc. (through the pay period ending December 27, 1996); and any
other entity which (1) must be considered together with the Corporation under
Code Section 414(b), (c) or (m), (2) has been authorized by the Board to adopt
the Plan and (3) by action of its own board of directors shall have
-10-
<PAGE>
adopted the Plan and become signatory to the Trust Agreement, or any successor
to one or more of such entities.
Employer Matching Account - That portion of a Participant's Individual
Account attributable to the Employer Matching Contributions allocated to such
Participant under Section 4.3 and invested in one or more of the Investment
Options at the directon of the Participant, and any earnings and losses on such
contributions. The Employer Matching Account of a Participant who was formerly a
participant in the Maryland Medical Laboratory Plan also shall hold any amount
transferred to this Plan from the Maryland Medical Laboratory Plan representing
matching company contributions and discretionary company contributions made to
the Maryland Medical Laboratory Plan and any earnings and losses thereon.
Employer Matching Contributions - Contributions made to the Plan by the
Employer under Section 3.2.
Employer Stock - Any class of the Employer's common stock or the
Employer's preferred stock that is convertible into common stock. Employer Stock
includes ESOP Stock.
Employer Stock Matching Account - That portion of a Participant's
Individual Account attributable to the Employer Matching Contributions allocated
to such Participant under Section 4.3 and invested in the Employer Stock Fund,
and any earnings and losses of such contributions.
Employment Commencement Date - The date on which an Employee first
performs an hour of service for an Employer (even if such date is before the
Effective Date with respect to such Employer) or, if the sponsor of a Merged
Plan is not an Employer, for the sponsor of a Merged Plan (even if such date is
before the Merger Date).
ERISA - The Employee Retirement Income Security Act of 1974, as
amended.
ESOP Stock - Employer securities within the meaning of Code section
409(1) that have been acquired with the proceeds of an Exempt Loan. Unallocated
ESOP Stock shall remain in a suspense account described in Section A-5 until
allocated to Participants' ESOP Accounts pursuant to section-9.
Fiduciary - The Corporation, the Employer, the Trustee, the Committee
and any individual, corporation, firm or other entity which assumes, in
accordance with Article
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<PAGE>
VIII, responsibilities of the Corporation, the Employer, the Trustee or the
Committee respecting management of the Plan or the disposition of its assets.
Fund - The Trust Fund.
Highly Compensated Employee - (a) For any Plan Year, any employee
described in subsection (b) or (c).
(b) Any employee who during the immediately preceding Plan Year:
(1) was at any time a 5-percent owner (as defined in Code
Section 416(i)(l));
(2) received compensation (as defined in Code Section
414(q)(7)) from an Employer or an Affiliate in excess of $50,000 (as adjusted
under Code Section 414(q)(1)); or
(3) was at any time an officer and received compensation (as
defined in Code Section 414(q)(7)) from an Employer or an Affiliate greater than
50 percent of the amount in effect under Code Section 415(b)(1)(A) for such
year.
(c) Any employee who during the current Plan Year:
(1) was at any time a 5-percent owner (as defined in Code
Section 416(i)(l));
(2) received compensation (as defined in Code Section
414(q)(7)) from an Employer or an Affiliate in excess of $50,000 (as adjusted
under Code Section 414(q)(1)) and was one of the 100 employees receiving the
most compensation (as defined in Code Section 414(q)(7)); or
(3) was at any time an officer who received compensation (as
defined in Code Section 414(q)(7)) from an Employer or an Affiliate greater than
50 percent of the amount in effect under Code Section 415(b)(1)(A) for such year
and was one of the 100 employees receiving the most compensation (as defined in
Code Section 414(q)(7).
This definition shall be applied in accordance with Code Section 414(q)
and the regulations issued thereunder.
(d) For purposes of applying the HC Family Member aggregation rules
under this Plan, Highly Compensated Employee shall also include former employees
who separated prior to the Plan Year being tested and who met the definition of
Highly
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<PAGE>
Compensated Employee in either (1) the Plan Year in which they separated or (2)
any Plan Year ending on or after their 55th birthday.
HC Family Member - With respect to a Highly Compensated Employee who is
either a 5% owner or one of the ten most highly compensated Employees, the
spouse and the lineal ascendants and descendants (and spouses of such ascendants
and descendants) of any such Highly Compensated Employee.
Individual Account - The aggregate of a Participant's Employee Pre-Tax
Account, Employee After-Tax Account, Employer Matching Account, Discretionary
Account, Rollover Account, Money Purchase Pension Plan Account, Prior Employer
Contribution Account, Prior Employer Qualified Account and CBCLS Employer
Contribution Account.
Investment Option - The investment vehicle elected by the Participant
in accordance with Section 2.4(a) for investment of his Individual Account. The
Investment Options are the Blended Interest Fund, Fidelity Asset Manager Fund:
Income, Fidelity Asset Manager Fund, Fidelity Asset Manager Fund: Growth,
Fidelity Balanced Fund, Fidelity Contrafund, Fidelity Equity-Income Fund,
Fidelity International Growth & Income Fund, Fidelity Magellan Fund and a stock
fund investing primarily in the common stock of the Employer as defined in
Section 409(l) of the Code. As a result of the spinoff of the Employer, there
are also funds investing primarily in the common stock of Corning and CPS, which
shall not be available to receive new contributions effective as of the
Distribution Date. (The stock fund investing entirely in the common stock of
Unilab Corporation shall no longer be available as an Investment Option,
effective January 1, 1996.) The Committee may add, change or delete the
available Investment Options at any time.
Limitation Year - January 1 - December 31.
Maryland Medical Laboratory Plan - The Maryland Medical Laboratory,
Inc. 401(k) Profit Sharing Plan and Trust, the assets and liabilities of which
have been transferred to this Plan.
Merged Plan - The Advance Medical Plan, the CBCLS Plan, the CPF Pension
Plan, the CPF Savings Plan, the Damon Plan, the DeYor Plan, the Maryland Medical
Laboratory Plan, the MetWest Plan, the Nichols Institute Plan, the Podiatric
Pathology Laboratories Plan and the Statlab Plan, either individually or
collectively as the case may be.
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<PAGE>
Merger Date - The Merger Date with respect to the following plans, the
assets and liabilities of which have been transferred to this Plan, is as
follows:
- --------------------------------------------------------------------------------
Name Merger Date
- --------------------------------------------------------------------------------
Advance Medical & Research Center, Inc. Retirement Plan May 1, 1990
- --------------------------------------------------------------------------------
CPF/MetPath Savings and Retirement Plan July 1, 1993
- --------------------------------------------------------------------------------
Clinical Pathology Facility, Inc. Pension Plan July 1, 1993
- --------------------------------------------------------------------------------
Continental Bio Clinical Laboratory Service, Inc. Profit
Sharing and Retirement Savings Plan January 1, 1992
- --------------------------------------------------------------------------------
DeYor Laboratories 401(k) Profit Sharing Plan and Trust January 1, 1994
- --------------------------------------------------------------------------------
Maryland Medical Laboratory, Inc. 401(k) Profit Sharing
Plan and Trust January 1, 1995
- --------------------------------------------------------------------------------
Nichols Institute 401(k) Plan January 1, 1995
- --------------------------------------------------------------------------------
Podiatric Pathology Laboratories, Inc. Profit Sharing Plan January 1, 1995
- --------------------------------------------------------------------------------
The Profit Sharing Plan and Trust Agreement for Employees of
MetWest Inc. April 1, 1994
- --------------------------------------------------------------------------------
Statlab, Inc. Retirement Plan March 1, 1993
- --------------------------------------------------------------------------------
There are several different Merger Dates for Participants who were
former participants in the Damon Plan, depending on the Damon Corporation entity
with which such former participant was employed before transferring to an
Employer:
Name of Entity Merger Date
-------------- ---------------
American Health Resources, Inc. January 1, 1994
Damon Clinical Laboratories, Inc. (FL) January 1, 1994
Damon Clinical Laboratories, Inc. (MA) - Connecticut locations January 1, 1994
Damon Clinical Laboratories, Inc. (PA) January 1, 1994
Damon Clinical Laboratories, Inc. (TX) - Kansas and
Missouri locations January 1, 1994
Damon Corporation January 1, 1994
Health Care Laboratories, Inc. January 1, 1994
Damon Clinical Laboratories, an Illinois general partnership March 1, 1994
Damon Clinical Laboratories, Inc. (AZ)* April 1, 1994
Damon Clinical Laboratories, Inc. (TX)-All locations other than
Kansas and Missouri* April 1, 1994
Damon Clinical Laboratories - Houston, Inc.* April 1, 1994
New York Damon Clinical Laboratories, Inc. April 1, 1994
Damon Clinical Laboratories, Inc. (MA) - All locations other
than Connecticut** May 1, 1994
Damon Clinical Laboratories - Pittsburgh, Inc. June 1, 1994
*As of January 1, 1994, individuals who had been employed with these
entities became employees of
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<PAGE>
MetWest Inc., but continued to participate in the Damon Plan through
March 31, 1994.
**As of January 1, 1994, individuals who had been employed with this
entity became employees of MetPath New England Inc., but continued to
participate in the Damon Plan through April 30, 1994.
MetWest Plan - The Profit Sharing Plan and Trust Agreement for
Employees of MetWest Inc., the assets and liabilities of which have been
transferred to this Plan.
Money Purchase Pension Plan Account - The Money Purchase Pension Plan
Account of a Participant who was formerly a participant in the CPF Pension Plan
shall hold any amount transferred to this Plan from the CPF Pension Plan
representing employer contributions made to the CPF Pension Plan and any
earnings and losses thereon.
Net Asset Value - With respect to any mutual fund that the Committee
may designate as an available Investment Option, the total net assets of the
respective fund divided by the number of outstanding shares of the respective
fund.
Nichols Institute Plan - The Nichols Institute 401(k) Plan, the assets
and liabilities of which have been transferred to this Plan.
Normal Retirement Age - Age 65.
Participant - Any Employee or former Employee who has an Individual
Account balance and any Employee who has met the eligibility requirements of
Section 2.1. Participation ends in accordance with Section 2.2.
Period of Severance - The period of time commencing on an Employee's
Severance from Service Date and ending on his Reemployment Commencement Date.
Plan - The Profit Sharing Plan of Corning Clinical Laboratories Inc.
formerly known as The Profit Sharing Plan of Corning Life Sciences Inc. (January
1, 1996 Restatement), as contained herein or as duly amended. Prior to January
1, 1996, the Plan was known as the Profit Sharing Plan of MetPath Inc. Prior to
January 1, 1994, the Plan was known as the Profit Sharing Plan of Corning Lab
Services Inc. Prior to October 31, 1992, the Plan was known as the Profit
Sharing Plan of MetPath Inc.
Plan Year - January 1 - December 31.
Podiatric Pathology Laboratories Plan - The Podiatric Pathology
Laboratories, Inc. Profit Sharing Plan, the assets and liabilities of which have
been transferred to this Plan.
Prime Rate - The "prime rate," as published in The Wall Street Journal.
-15-
<PAGE>
Prior Employer Contribution Account - The Prior Employer Contribution
Account of a Participant who was a participant in the DeYor Plan shall hold any
amount transferred to this Plan from the DeYor Plan representing discretionary
contributions and employer matching contributions made to the DeYor Plan and any
earnings and losses thereon.
Prior Employer Qualified Account - The Prior Employer Qualified Account
of a Participant who was a participant in the CBCLS Plan shall hold any amount
transferred to this Plan from the CBCLS Plan representing qualified nonelective
contributions and qualified matching contributions made to the CBCLS Plan and
any earnings and losses thereon.
Reemployment Commencement Date - The first date on which an Employee
again performs an hour of service following a Period of Severance.
Rollover Account - That portion of a Participant's Individual Account
attributable to his rollover contributions under Section 3.4 and any earnings or
losses on such contributions. The Rollover Account of a Participant who was an
active participant in the CBCLS Plan on December 31, 1991 also shall hold any
amount transferred to this Plan from the CBCLS Plan representing employer
matching contributions and discretionary contributions made to the CBCLS Plan
and any earnings and losses thereon. The Rollover Account of a Participant who
was formerly a participant in the CPF Savings Plan also shall hold any amount
transferred to this Plan from the CPF Savings Plan representing employer
matching contributions made to the CPF Savings Plan and any earnings and losses
thereon. The Rollover Account of a Participant who was formerly a participant in
the Statlab Plan also shall hold any amount transferred to this Plan from the
Statlab Plan representing employer contributions made to the Statlab Plan and
earnings and losses thereon. The Rollover Account of a Participant who was
formerly a participant in the Damon Plan also shall hold any amount transferred
to this Plan from the Damon Plan representing matching contributions and
rollover contributions made to the Damon Plan and any earnings and losses
thereon. The Rollover Account of a Participant who was formerly a participant in
the Podiatric Pathology Laboratories Plan also shall hold any amount transferred
to this Plan from the Podiatric Pathology Laboratories Plan representing
employer contributions made to the Podiatric Pathology Laboratories Plan and
earnings and losses thereon. The Rollover Account of a Participant who was
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<PAGE>
formerly a participant in the Nichols Institute Plan also shall hold any amount
transferred to this Plan from the Nichols Institute Plan representing matching
contributions, rollover contributions and qualified non-elective contributions
made to the Nichols Institute Plan and any earnings and losses thereon.
Section 415 Compensation - An Employee's wages as defined in Code
Section 3401(a) and all other payments of compensation to an Employee by an
Employer (in the course of the Employer's trade or business) for which the
Employer is required to furnish the Employee a written statement under Code
Sections 6041(d) and 6051(a)(3). Section 415 Compensation shall be determined
without regard to any rules that limit the remuneration included in wages based
on the nature or location of the employment or the services performed (such as
the exception for agricultural labor in Code Section 3401(a)(2)). Section 415
Compensation does not include Employee Pre-Tax Contributions to this Plan and
salary reduction contributions to a Code Section 125 cafeteria plan.
Severance from Service Date - The date on which an Employee quits,
retires, is discharged or dies, provided he does not earn an hour of service for
an Employer within 12 months after such date.
Statlab Plan - The Statlab, Inc. Retirement Plan, the assets and
liabilities of which have been transferred to this Plan.
Target Rate - The rate at which Employee Pre-Tax Contributions may be
made by each eligible Highly Compensated Employee for the balance of the Plan
Year so that one of the two qualifying tests under Section 3.6(a) will be
satisfied for such Plan Year.
Testing Compensation - For each Participant, his Deferral Compensation.
Testing Compensation in excess of $150,000 (or such different amount as may be
applicable under Code Section 401(a)(17)(B)) shall not be taken into account.
Total and Permanent Disability - A Participant shall be considered
totally and permanently disabled once the Committee, in its sole discretion,
determines that he has incurred a disability which renders him totally and
permanently unable to satisfactorily perform his usual duties for his Employer
or the duties of such other position which the Employer makes available to him
and for which he is qualified by reason of his training, education or
experience. Such determination shall be made by the Committee based on medical
reports and such other evidence which the Committee determines to be
satisfactory; provided, however, that conclusive evidence that the Participant
is eligible
-17-
<PAGE>
for and is receiving disability benefits under the provisions of the Federal
Social Security Act shall be sufficient to deem the Participant totally and
permanently disabled.
Trust Agreement - The agreement entered into between the Employer and
the Trustee under Article VII.
Trust Fund - All funds received by the Trustee together with all
income, profits and increments thereon, and less any expenses or payments made
out of the Trust Fund.
Trustee - Such individual, individuals, financial institution, or a
combination of them as shall be designated in the Trust Agreement to hold in
trust any assets of the Plan for the purpose of providing benefits under the
Plan, and shall include any successor trustee to the Trustee initially
designated thereunder.
Valuation Date - The date on which a Participant's Individual Account
is valued pursuant to Section 5.9. Subject to Section 5.9(b), the Valuation Date
shall be a date that falls as soon as administratively feasible after a
properly-completed written request for a distribution is received by an
authorized representative of the Committee.
Year of Vesting Service - (a) As of any date, the aggregate of an
Employee's periods of vesting service, including any vesting service credited
under subsection (c) and excluding any vesting service disregarded under
subsection (d). For purposes of this subsection (a), a period of vesting service
is each period of time required to be recognized under this Plan commencing on
the Employee's Employment Commencement Date, or any subsequent Reemployment
Commencement Date, and ending on a Severance from Service Date.
(b) (1) Notwithstanding subsection (a), a Participant who was formerly
a participant in the Damon Plan and who became a Participant in this Plan on
January 1, 1994 shall be credited with Years of Vesting Service equal to the sum
of (A) his years of service under the Damon Plan as of December 31, 1993, and
(B) his periods of vesting service, including any vesting service credited under
subsection (c) and excluding any vesting service disregarded under subsection
(d). For purposes of this paragraph (1), a period of vesting service is each
period of time required to be recognized under this Plan commencing on January
1, 1994, or any subsequent Reemployment Commencement Date, and ending on a
Severance from Service Date.
(2) Notwithstanding subsection (a), a Participant who was formerly
a participant in the Damon Plan, who became a Participant in this Plan after
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<PAGE>
January 1, 1994 (such date is hereafter referred to as the "Entry Date") and
who was credited with at least 1,000 hours of service under the Damon Plan
between January 1, 1994 and the day before his Entry Date shall be credited with
Years of Vesting Service equal to the sum of (A) his years of service under the
Damon Plan as of December 31, 1993, (B) one year of service for the period
between January 1, 1994 and the day before his Entry Date, and (C) his periods
of vesting service, including any vesting service credited under subsection (c)
and excluding any vesting service disregarded under subsection (d). For purposes
of this paragraph (2), a period of vesting service is each period of time
required to be recognized under this Plan commencing on the Participant's Entry
Date, or any subsequent Reemployment Commencement Date, and ending on a
Severance from Service Date.
(3) Notwithstanding subsection (a), a Participant who was formerly
a participant in the Damon Plan, who became a Participant in this Plan after
January 1, 1994 (such date is hereafter referred to as the "Entry Date") and who
was not credited with at least 1,000 hours of service under the Damon Plan
between January 1, 1994 and the day before his Entry Date shall be credited with
Years of Vesting Service equal to the sum of (A) his years of service under the
Damon Plan as of December 31, 1993, and (B) his periods of vesting service,
including any vesting service credited under subsection (c) and excluding any
vesting service disregarded under subsection (d). For purposes of this paragraph
(3), a period of vesting service is each period of time required to be
recognized under this Plan commencing on January 1, 1994, or any subsequent
Reemployment Date, and ending on a Severance from Service Date.
(c) Vesting service shall also include the following:
(1) Periods of employment with an Affiliate (while such
organization is an Affiliate) which would have constituted vesting service had
the Participant been employed by an Employer shall be included as if such
periods had been performed for an Employer;
(2) Periods of employment with an Employer other than as an
Employee, including employment as a leased employee within the meaning of Code
Section 414(n), which would have constituted vesting service had the Participant
been employed as an Employee shall be included as if such periods had been
performed as an Employee; and
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<PAGE>
(3) Periods of employment with MetWest Inc. prior to November 10,
1993 that would have been counted as vesting service under the terms of the Plan
if such service was rendered to the Employer as an Employee.
(4) With respect to any person employed by the Employer on or
before December 31, 1998, periods of employment with Corning or Corning
Pharmaceutical Services, Inc. that would have been counted as vesting service
under the terms of the Plan if such service was rendered to the Employer as an
Employee.
(d) Years of Vesting Service recognized under the preceding
subsections shall not include any vesting service earned prior to a five-year
Period of Severance if, when the Period of Severance commenced, the Employee had
not yet earned any vested interest in his Employer Matching Account,
Discretionary Account, Money Purchase Pension Plan Account or Prior Employer
Contribution Account under Sections 5.5 or 11.1.
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ARTICLE II
ELIGIBILITY AND PARTICIPATION
2.1 Eligibility
Any Employee who was a Participant in this Plan on shall remain a
Participant on December 30, 1996, as long as he remains an Employee on such
date. Any Employee who was not a Participant in this Plan on December 30, 1996
shall become a Participant on the date on which he completes six months of total
employment with an Employer. Notwithstanding the preceding sentence, (a) any
Employee who was a participant in a Merged Plan immediately before the Merger
Date with respect to such Merged Plan shall become a Participant in this Plan on
such Merger Date; and (b) any Employee who was employed by an employer which
sponsored a Merged Plan immediately before the applicable Merger Date, but was
not a participant in such Merged Plan, shall be credited with service with the
sponsor prior to the Merger Date for purposes of determining when he shall
become eligible to participate in this Plan.
2.2 Participation
(a) Each Employee who is a Participant may, by filing a
properly-completed agreement with an authorized representative of the Committee,
enter into a salary reduction agreement in accordance with Section 3.1(a). Such
agreement shall be effective as of the first payroll period coincident with or
next following the later of (1) the date the Employee becomes a Participant, or
(2) the date on which the agreement is processed. If an Employee elects not to
enter into a salary reduction agreement on the date he is first eligible, he
may, by filing a properly-completed agreement with an authorized representative
of the Committee, enter into such an agreement effective as of the first payroll
period coincident with or next following the date on which the agreement is
processed.
(b) Each person who becomes a Participant shall remain a Participant so
long as he remains an Employee or maintains an Individual Account balance. If a
Participant terminates employment with no balance in his Individual Account, he
shall cease being a Participant upon his termination of employment. In the event
an Employee ceases to be
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a Participant and is later reemployed as an Employee, he shall once again become
a Participant upon his reemployment date.
2.3 Beneficiary Designation
(a) Upon commencing participation, each Participant shall designate a
Beneficiary by filing a properly-completed form with an authorized
representative of the Committee. In the absence of any valid designation of
Beneficiary, the Participant shall be deemed to have designated his spouse as
his Beneficiary, and if the Participant is unmarried upon his death, he shall be
deemed to have designated his estate as his Beneficiary.
(b) The Beneficiary of a married Participant shall be his spouse unless
the Participant designates someone other than his spouse as his Beneficiary, and
the Participant files with an authorized representative of the Committee his
spouse's written consent to such designation. Such spousal consent shall be on a
form approved by the Committee, shall be irrevocable by the spouse, shall
acknowledge the effect of such designation and shall be witnessed by a Committee
member (or an authorized representative) or a notary public. The spouse may
alternatively execute an irrevocable general consent that does not identify the
designated Beneficiary and which allows the Participant to make future changes
in the Beneficiary designation without spousal consent. Any such general consent
shall satisfy the requirements of Treasury Regulation ss.1.401(a)-20 Q&A-31(c).
(c) If an unmarried Participant later marries, or if a married
Participant later remarries, any prior designation by such Participant of a
Beneficiary other than the spouse to whom he is married on his date of death
shall be null and void unless consented to by such spouse in the manner provided
in subsection (b).
(d) The interpretation of the Committee with respect to any Beneficiary
designation, subject to applicable law, shall be binding and conclusive upon all
parties, and no person who claims to be a Beneficiary, or any other person,
shall have the right to question any action of the Committee.
(e) The rights of any spouse or Beneficiary hereunder shall be subject
to the provisions of any qualified domestic relations order within the meaning
of ERISA Section 206(d)(3).
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2.4 Investment Option Specification
(a) This subsection (a) shall apply only to a Participant who became a
Participant on or after January 1, 1996. That portion of such a Participant's
Individual Account which represents Contributions made on his behalf with
respect to his first calendar month of participation automatically shall be
invested in the Fidelity Asset Manager Fund, unless the Committee specifies a
different Investment Option for this purpose. On or about the 15th day of the
next calendar month, the Participant may change his Investment Option
specification in accordance with subsection (b). Initial Investment Option
specifications shall be in increments of 5%. In the absence of any valid
Investment Option specification, a Participant's Individual Account shall
continue to be invested in the Fidelity Asset Manager Fund, unless the Committee
specifies a different Investment Option for this purpose.
(b) A Participant may change his Investment Option specification with
respect to Contributions to be made in the future and with respect to amounts
already in his Individual Account by calling Fidelity Investments. Telephone
exchanges between Investment Options shall be subject to such administrative
procedures as have been instituted by Fidelity Investments and adopted by the
Committee. The Committee, in its sole discretion, may modify such procedures
after providing reasonable notification to Participants.
(c) On or after the Distribution Date, each such election in effect
under the Plan to invest the Participant's Individual Account (as of the
Distribution Date) in the Employer Stock Fund shall be deemed an election under
the Plan to invest proportionately in the Corning Stock Fund, the CPS Stock Fund
and the Employer Stock Fund proportionately to the dividend received from
Corning as of such date. As of the Distribution Date, each Participant's
investment election regarding investing Employee Pre-Tax Contributions made on
or after the Distribution Date in the Employer Stock Fund shall be deemed an
election to invest in the Fidelity Asset Manager Fund, until such time as the
participant affirmatively re-elects another Investment Option.
2.5 Notification of Individual Account Balance
As of the last day of each calendar quarter, the Committee shall notify
each Participant of the amount of his share in the Contributions for the period
just completed
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and the balance of his Individual Account, including distributions, loans and
withdrawals, if any, since the effective date of the last statement.
2.6 Diversification of Investments or Distribution for Certain Participants
For purposes of this Section 2.6, "Qualified Participant" shall mean a
Participant who has attained age 55 and has completed or has been eligible to
complete at least ten Years of Vesting Service in the Plan including any prior
plan in effect before this restatement.
No later than 90 days after the last day of each Plan Year after
becoming a Qualified Participant (or at more frequent periods permitted under
procedures adopted by the Committee), each Qualified Participant shall be
permitted to direct the Plan as to the investment of one hundred percent (100%)
of an amount equal to the value of his Employer Match Account attributable to
Employer Stock. The Participant's direction shall be provided to the Committee
in writing and shall be effective no later than 180 days after the close of the
Plan Year to which the direction applies.
The Plan shall satisfy the Participant's direction by transferring the
portion of his Account that is covered by the election to another qualified plan
(including the portion of this Plan that does not constitute an ESOP) of the
Employer that accepts the transfer and permits employee-directed investments and
offers the Participant at least three investment options (not inconsistent with
regulations prescribed by the Secretary of the Treasury) other than Employer
Stock. The transfer shall be made, and the amount transferred shall be invested
in accordance with the Participant's election, no later than 90 days after the
last day of the period during which the election can be made. If at the time of
an election no Employer then maintains a qualified plan that is eligible to
receive the portion of the Participant's Account that is covered by the
election, the Plan shall distribute that portion to the Qualified Participant
within 90 days after the last day of the period during which the election can be
made, subject to the requirements of Section A-10 concerning put options. This
Section shall apply notwithstanding any other provision of the Plan, other than
such provisions as require the consent of the Participant to a distribution with
a present value in excess of $3,500. If the Participant does not consent to such
a distribution, the amount as to which the election is made shall be retained in
the Plan and the diversification requirement of this Section shall be deemed to
have been satisfied.
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ARTICLE III
CONTRIBUTIONS
3.1 Employee Pre-Tax Contributions
A Participant may have Employee Pre-Tax Contributions made to the Plan
on his behalf as follows:
(a) (1) A Participant may enter into a salary reduction agreement with
his Employer in which it is agreed that the Employer will reduce the
Participant's Deferral Compensation during each pay period by a designated
percentage and contribute that amount so determined to the Plan on behalf of the
Participant. The Employer may disregard or modify a Participant's salary
reduction agreement (including a salary reduction agreement subject to the
special limit set forth in the last sentence of this paragraph) to the extent
necessary to insure that (1) the Actual Deferral Percentage test of Code Section
401(k) as set forth in Section 3.6 is met, (2) the excess deferral rules of
subsection (c) are met, or (3) the limitations set forth in Sections 3.5 or 4.6
are not exceeded. Employee Pre-Tax Contributions may be any whole percentage
between 1% and 15% of the Deferral Compensation otherwise payable to the
Participant during the applicable payroll period. Notwithstanding the preceding
sentence, with respect to a Participant who received compensation (as defined in
Code Section 414(q)(7)) from an Employer or an Affiliate in excess of $50,000
(as adjusted under Code Section 414(q)(1)) in a particular Plan Year, the
Employee Pre-Tax Contributions of such a Participant in the immediately
succeeding Plan Year may not exceed 8% of the Deferral Compensation otherwise
payable to him during the applicable payroll period in such immediately
succeeding Plan Year.
The salary reduction agreement of an Employee who becomes eligible to
participate in the Plan shall be effective under the rules set forth in Section
2.2.
(2) Employee Pre-Tax Contributions shall be invested among the
various Investment Options in accordance with the Employee's outstanding
Investment Option election as in effect under Section 2.4.
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(b) (1) A Participant who has in effect a salary reduction agreement
may elect to change such agreement, including prospectively suspending such
agreement, by filing a properly-completed written notice with an authorized
representative of the Committee. Such election shall become effective as of the
first payroll period coincident with or next following the date on which it is
processed.
(2) Amounts contributed by salary reduction shall be remitted to
the Trustee in accordance with Department of Labor Regulations at 29 C.F.R.
ss.2510.3-102. Contributions once elected to be deferred by a Participant shall
be credited to his Employee Pre-Tax Account under Section 4.2(a).
(c) Excess deferrals
(1) No Participant may have Employee Pre-Tax Contributions made on
his behalf under this Plan in any calendar year which in the aggregate exceed
$7,000 or such greater amount as may be specified by the Secretary of the
Treasury for purposes of Code Section 402(g)(1). For purposes of the preceding
sentence, Employee Pre-Tax Contributions are deemed made as of the pay date for
which the salary is deferred, regardless of when the contributions are actually
made to the Trust Fund.
(2) (A) If in any calendar year the aggregate of a Participant's
Employee Pre-Tax Contributions made on his behalf under this Plan, plus his
other elective deferrals under any other qualified cash or deferred arrangement
(as defined in Code Section 401(k)) maintained by any sponsor, under any
simplified employee pension (as defined in Code Section 408(k)), or used to have
an annuity contract purchased on his behalf under Code Section 403(b), exceed
the limitations of paragraph (1), then no later than the March 1 following such
calendar year the Participant may notify the Committee (i) that he has exceeded
the limitation and (ii) of the amount of his Employee Pre-Tax Contributions
under this Plan which he wants distributed to him (and earnings thereon)
notwithstanding his salary reduction agreement so that he will not exceed the
limitation. The Committee may require the Participant to provide reasonable
proof that he has exceeded the limitation of paragraph (1).
If in any calendar year the aggregate of a Participant's Employee
Pre-Tax Contributions made on his behalf under the Plan, plus his other elective
deferrals under any other qualified cash or deferred arrangement (as defined in
Code Section 401(k)) maintained by the Employer, under a simplified employee
pension (as defined in Code
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Section 408(k)) sponsored by the Employer, or used to have the Employer purchase
an annuity contract on his behalf under Code Section 403(b), exceed the
limitations of paragraph (1), then the Participant shall be deemed to have
notified the Committee that (i) he has exceeded the limitation and (ii) he wants
distributed to him the amount of such excess deferrals (and income thereon)
notwithstanding the salary reduction agreement so that he will not exceed the
limitation. No later than the next April 15, the Committee may (but shall not be
obligated to) make the distribution requested, or deemed to have been requested,
by the Participant under this subparagraph. Such distribution may be made
notwithstanding any other provision of law or this Plan. Except as otherwise
provided by regulations issued by the Secretary of the Treasury, such
distribution shall not reduce the amount of Employee Pre-Tax Contributions used
in computing Actual Deferral Percentage, or the amount of Employee Pre-Tax
Contributions considered as Annual Additions under Section 4.6. Any amounts not
distributed under this subparagraph shall continue to be held in accordance with
the terms of this Plan.
(B) After a distribution of excess Employee Pre-Tax
Contributions (if any) under subparagraph (A), Employer Matching Contributions
made with respect to such distributed Employee Pre-Tax Contributions (if any)
shall be withdrawn (with earnings thereon) from such Participant's Employer
Matching Account and applied to reduce future Employer Matching Contributions
under Section 3.2.
3.2 Employer Matching Contributions
Subject to Sections 3.5, 3.9 and 3.10, as of each calendar month, the
Employer shall make Employer Matching Contributions to the Trust Fund equal to
100% of the Employee Pre-Tax Contributions made by each Participant with respect
to such calendar month, but taking into account only those Employee Pre-Tax
Contributions made by the Participant with respect to such month which are made
at a rate that does not exceed 4% of the Participant's Deferral Compensation.
The Employer Matching Contributions shall be invested: (a) one-half in
the investment options designated by the Participant for the investment of the
Participant's Employee Pre-tax Contributions and held in the Employee Matching
Account; and (b) one-half in Employer Stock and held in the Employer Stock
Matching Account.
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In addition, the Employer shall contribute an additional 15 percent of
each Participant's aggregate contribution allocable under subparagraph (b) above
and invested in Employer Stock which additional amount shall also be invested in
Employer Stock.
The Employer Matching Contribution otherwise required under this
Section 3.2 for any Plan Year shall be reduced by the fair market value
(determined as of December 31 of that plan year) of the Employer Stock
attributable to an Exempt Loan and allocated to the accounts of Participants, as
provided in Supplement A.
3.3 Discretionary Contributions
Each business unit of the Employer may elect for any Fiscal Quarter to
make a Discretionary Contribution. Each business unit of the Employer, in its
sole discretion, shall determine the amount of such Discretionary Contribution
which shall be expressed as a percentage of Deferral Compensation and which
shall be allocated in accordance with Section 4.4. No Discretionary Contribution
shall be made with respect to any Participant who is not an Active Participant
for the applicable Fiscal Quarter. The Employer shall also contribute sufficient
Discretionary Contributions as may be required by Section 11.1(b).
3.4 Rollover Contributions
Subject to the approval of the Committee, an Employee (regardless of
whether he has satisfied the initial eligibility requirements of Section 2.1)
may make a rollover contribution to the Plan, provided it qualifies for tax free
rollover treatment under Code Sections 402(c) or 408(d). Rollover contributions
must be in cash; contributions in-kind shall not be permitted. Such a
contribution shall be held in the Employee's Rollover Account and shall be 100%
vested at all times. The rollover contribution of an Employee who has not
satisfied the initial eligibility requirements of Section 2.1 shall be invested
in the Fidelity Asset Manager Fund, unless and until he makes a different
Investment Option specification pursuant to Section 2.4. The rollover
contribution of an Employee who has already satisfied the initial eligibility
requirements of Section 2.1 shall be invested in accordance with the Employee's
outstanding Investment Option specification.
3.5 Maximum Deductible Contribution
In no event shall the Employer be obligated to make a Contribution for
a Plan Year in excess of the maximum amount deductible by it under Code Section
404(a)(3).
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3.6 Actual Deferral Percentage Test
(a) During each Plan Year, the Committee periodically shall monitor
Plan participation to determine whether the rate of Employee Pre-Tax
Contributions made pursuant to Section 3.1(a) for such Plan Year meets either of
the following qualifying tests (applied subject to Section 3.10):
(1) The Actual Deferral Percentage for the group of eligible
Highly Compensated Employees will not exceed 125% of the Actual Deferral
Percentage for the group of all other Eligible Employees, or
(2) The Actual Deferral Percentage for the group of eligible
Highly Compensated Employees will not exceed the Actual Deferral Percentage for
the group of all other Eligible Employees by more than two percentage points and
by more than 200%.
(b) If the Committee determines during a Plan Year that neither of the
qualifying tests under subsection (a) shall be met in that Plan Year, then the
Committee, in its sole discretion, may require each Participant who is a Highly
Compensated Employee and whose rate of Employee Pre-Tax Contributions exceeds
the Target Rate to reduce his rate of Employee Pre-Tax Contributions for the
balance of such Plan Year to the extent necessary to ensure that his Employee
Pre-Tax Contributions will not exceed the Target Rate.
(c) If, after the end of a Plan Year, the Committee determines that
neither of the qualifying tests under subsection (a) above shall be met for such
Plan Year, the Committee shall determine whether to follow the procedure set
forth in paragraph (1) or the procedure set forth in paragraph (2), as follows:
(1) The Committee shall direct the Trustee to distribute,
preferably within 2 1/2 months after the last day of such Plan Year, but in any
event no later than the last day of the Plan Year immediately following such
Plan Year, to Highly Compensated Employees that portion of the Employee Pre-Tax
Contributions made on their behalf for such Plan Year (adjusted for income
allocable to such portion) necessary to ensure that one of the two qualifying
tests under subsection (a) shall be satisfied for such Plan Year. Contributions
made on behalf of Highly Compensated Employees shall be distributed under the
rules prescribed in Treasury Regulation ss.1.401(k)-1(f)(3). The amount of any
Employee Pre-Tax Contributions to be distributed under this paragraph (1) shall
be reduced by any excess deferrals previously distributed under Section
3.1(c)(2) for the
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calendar year ending in the same Plan Year. Similarly, any excess deferrals to
be distributed under Section 3.1(c)(2) shall be reduced by any excess Employee
Pre-Tax Contributions previously distributed under this paragraph (1) for the
Plan Year beginning in such calendar year. In connection with a distribution of
excess Employee Pre-Tax Contributions under this paragraph (1), Employer
Matching Contributions made with respect to distributed Employee Pre-Tax
Contributions (if any) shall be withdrawn (with earnings thereon) from the
Participant's Employer Matching Account and applied to reduce future Employer
Matching Contributions under Section 3.2.
(2) As of the last day of such Plan Year, the Employer shall
contribute to the Employee Pre-Tax Account of each Participant who is not a
Highly Compensated Employee and who has elected under Section 3.1(a) to have
Employee Pre-Tax Contributions made on his behalf during such Plan Year that
amount, expressed as a uniform percentage of the Deferral Compensation of each
such Participant for such Plan Year, necessary to ensure that one of the two
qualifying tests under subsection (a) shall be satisfied for such Plan Year. All
contributions made by the Employer under this paragraph (2) shall be paid to the
Trustee no later than the last day of the Plan Year immediately following such
Plan Year and credited to the affected Participants' Employee Pre-Tax Accounts
as of the last day of the Plan Year immediately preceding the Plan Year in which
such contribution was made and shall be immediately 100% vested. Notwithstanding
the foregoing, for purposes of determining the amount of a Participant's
Employer Matching Contribution under Section 3.2, such contributions made by the
Employer under this paragraph (2) shall not be treated as Employee Pre-Tax
Contributions.
3.7 Payment of Contributions to Trustee
Unless an earlier time for contribution is specified elsewhere in this
Plan, in all events the Employer shall pay to the Trustee its Contributions for
each Plan Year within the time prescribed by law, including extensions of time
for the filing of its federal income tax return for the Employer's taxable year
during which such Plan Year ended.
3.8 Employee After-Tax Contributions
Effective January 1, 1996, no Participant shall be permitted to make
employee after-tax contributions under the Plan.
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3.9 Actual Contribution Percentage Test
(a) As of the last day of each Plan Year, the Committee shall determine
whether the rate of Employer Matching Contributions made under Section 3.2 for
such Plan Year meets either of the following qualifying tests (applied subject
to Section 3.10):
(1) The Actual Contribution Percentage for the group of eligible
Highly Compensated Employees does not exceed 125% of the Actual Contribution
Percentage for the group of all other Eligible Employees, or
(2) The Actual Contribution Percentage for the group of eligible
Highly Compensated Employees does not exceed the Actual Contribution Percentage
for the group of all other Eligible Employees by more than two percentage points
and by more than 200%.
(b) If the Committee determines that neither of the qualifying tests
under subsection (a) shall be met in that Plan Year, then the Committee shall
direct the Trustee to distribute, preferably within 2- months after the last day
of such Plan Year, but in any event no later than the last day of the Plan Year
immediately following such Plan Year, to Highly Compensated Employees that
portion of the Employer Matching Contributions made on their behalf for such
Plan Year (adjusted for income allocable to such portion) necessary to ensure
that one of the two qualifying tests under subsection (a) shall be satisfied for
such Plan Year. (Employer Matching Contributions which are not 100% vested shall
be forfeited and allocated under Section 4.5 in lieu of being distributed.)
Employer Matching Contributions made on behalf of Highly Compensated Employees
shall be distributed (or forfeited, if applicable) under the rules prescribed in
Treasury Regulation ss.1.401(m)-1(e)(2).
3.10 Multiple Use Restrictions
The application of the Actual Deferral Percentage test in Section 3.6
and the Actual Contribution Percentage test in Section 3.9 shall be coordinated
in accordance with regulations issued by the Secretary of the Treasury under
Code Section 401(m)(9), so as to prohibit the multiple use of the alternative
limitations set forth in Sections 3.6(a)(2) and 3.9(a)(2). Corrections required
by the multiple use restriction shall be effected by a reduction for any Highly
Compensated Employee participating in this Plan of the otherwise permissible
Employee Pre-Tax Contributions under Section 3.1 or Employer Matching
Contributions under Section 3.2 as shall be designated by the Employer.
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Notwithstanding the foregoing, this limitation shall be applied after
satisfying the mandatory disaggregation rules applicable to the portion of a
plan that constitutes an ESOP and the portion that does not constitute an ESOP.
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ARTICLE IV
ALLOCATIONS TO INDIVIDUAL ACCOUNTS
4.1 Individual Accounts
(a) The Committee shall establish and maintain an Individual Account in
the name of each Participant, comprised of an Employee Pre-Tax Account, an
Employee After-Tax Account, an Employer Matching Account (a cash match), an
Employer Stock Matching Account, a Discretionary Account, a Rollover Account, a
Money Purchase Pension Plan Account, a Prior Employer Contribution Account, a
Prior Employer Qualified Account and a CBCLS Employer Contribution Account to
which the Committee shall credit all amounts allocated to each such Participant
under this Article IV.
(b) Separate accounts shall be maintained for all former Employee
Participants who have an interest in the Plan.
(c) The maintenance of separate accounts shall not require a
segregation of the Trust assets and no Participant shall acquire any right to or
interest in any specific asset of the Trust as a result of the allocations
provided for in the Plan.
4.2 Allocation of Employee Pre-Tax Contributions
A Participant's Employee Pre-Tax Contributions under Section 3.1 shall
be allocated to the Participant's Employee Pre-Tax Account, and shall be
invested in accordance with the Participant's outstanding Investment Option
specification. Allocations for Highly Compensated Employees shall be subject to
Sections 3.6 and 3.10.
4.3 Allocation of Employer Matching Contributions
As of each calendar month, a Participant's allocable share of the
Employer Matching Contributions made on his behalf under Section 3.2 shall be
allocated to his Employer Matching Account and Employer Stock Matching Account
and shall be invested in accordance with that Section. Allocations for Highly
Compensated Employees shall be subject to Sections 3.1(c)(2)(B), 3.6(c)(1), 3.9
and 3.10.
4.4 Allocation of Discretionary Contributions
(a) A Participant's allocable share as determined under subsection (b)
of the Discretionary Contribution shall be credited to the Participant's
Discretionary Account as of the last day of the Fiscal Quarter for which his
Employer shall make a Discretionary
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Contribution under Section 3.3 and shall be invested in accordance with the
Participant's outstanding Investment Option specification, provided that the
Employer may direct that all or any portion of such Discretionary Contributions
shall be invested in Employer Stock.
(b) Each Participant who is an Active Participant for the Fiscal
Quarter with respect to which his Employer shall make a Discretionary
Contribution shall receive an allocation of the Discretionary Contribution. No
other Participant shall receive an allocation. Each Active Participant shall
receive an amount equal to the Discretionary Contribution, expressed as a
percentage of Deferral Compensation, multiplied by the Active Participant's
Deferral Compensation during the Fiscal Quarter.
4.5 Allocation of Forfeitures
As of the last day of each Fiscal Quarter, any forfeitures arising
under Sections 3.9(b) or 5.5(c) shall be used to the extent necessary to restore
a Participant's Employer Matching Account, Discretionary Account and/or Prior
Employer Contribution Account as provided in Section 5.5(c)(1), and/or shall be
applied to reduce Discretionary Contributions under Section 3.3 and Employer
Matching Contributions under Section 3.2.
4.6 Maximum Additions
(a) Notwithstanding anything herein to the contrary, the sum of the
Employee Pre-Tax Contributions, Employer Matching Contributions and
Discretionary Contributions allocated to a Participant's Individual Account for
any Limitation Year (the "Annual Additions"), when combined with any annual
additions credited to the Participant for the same period under another
qualified defined contribution plan maintained by the Employer or an Affiliate,
shall not exceed the lesser of the following:
(1) $30,000 or such larger amount as may be determined under Code
Section 415(c)(1)(A); or
(2) 25% of the Participant's total Section 415 Compensation
received from the Employer for such Limitation Year.
(b) In the event a Participant is covered by more than one defined
contribution plan maintained by the Employer (or an Affiliate), the maximum
Annual Additions to this Plan shall be decreased as determined necessary by the
Employer to insure that the limitations of Code Section 415(c) are not exceeded.
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In the event that corrective adjustments in the Annual Additions to any
Individual Accounts are required due to a reasonable error in estimating a
Participant's compensation or in determining the amount of Employee Pre-Tax
Contributions that may be made with respect to any Participant under the annual
additions limit of Section 4.6(a), the adjustment shall first be made by
reducing the Employee Pre-Tax Contributions, next the Discretionary
Contributions, and finally the Employer Matching Contributions.
Any amounts withheld or taken from a Participant's Individual Account
pursuant to the above shall be segregated in the Trust Fund in a separate
account and applied toward the Contribution of the Employer for the next
Limitation Year, except that Employee Pre-Tax Contributions shall be distributed
to the Participant who made them.
(c) A Participant's annual additions with respect to Employer Stock
allocable to the Participant's Employer Matching Contribution Account and
attributable to an Exempt Loan shall be determined on the basis of the lesser of
contributions thereto or the value of Employer Stock released from the Suspense
Account and, if no more than one third of the Employer Matching Contributions
which are deductible under Section 404(a)(9) of the Code by reason of their
application to make payments on an Exempt Loan are allocated to Highly
Compensated Employees, a Participant's annual additions shall not include
employer contributions which are deductible under Section 404(a)(9)(B) of the
Code by reason of their applications to the payment of interest on an Exempt
Loan or forfeitures of Employer Stock attributable to an Exempt Loan.
4.7 Multiple Plan Participation
(a) If a Participant is a participant in a defined benefit plan
maintained by the Employer, the sum of his defined benefit plan fraction
(determined in subsection (c)) and his defined contribution plan fraction
(determined in subsection (b)) for any Limitation Year may not exceed 1.0.
(b) The term "defined contribution plan fraction" shall mean a
fraction, the numerator of which is the sum of all of the Annual Additions to
the Participant's Individual Account under this Plan as of the close of the
Limitation Year and the denominator of which is the sum of the lesser of the
following amounts determined for such Limitation Year and for each prior
Limitation Year of employment with the Employer:
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(1) the product of 1.25 multiplied by the dollar limitation in
effect under Section 4.6(a)(1) for such Year; or
(2) the product of 1.4 multiplied by an amount determined under
Section 4.6(a)(2) for such Year.
(c) The term "defined benefit plan fraction" shall mean a fraction the
numerator of which is the Participant's projected annual benefit determined as
of the close of the Limitation Year and the denominator of which is the lesser
of:
(1) the product of 1.25 multiplied by the dollar limitation in
effect under Code Section 415(b)(1)(A) for such Limitation Year; or
(2) the product of 1.4 multiplied by the amount which may be taken
into account under Code Section 415(b)(1)(B) with respect to each individual
under the Plan for such Limitation Year.
For purposes of this limitation, all defined benefit plans maintained
by an Employer (or any Affiliates), whether or not terminated, are to be treated
as one defined benefit plan and all defined contribution plans maintained by an
Employer (or any Affiliates), whether or not terminated, are to be treated as
one defined contribution plan. The extent to which the annual benefit under any
defined benefit plans shall be reduced in order to achieve compliance with the
limitations of Code Section 415 shall be determined in such a manner so as to
maximize the aggregate benefits payable to such Participant. If such reduction
is under this Plan, the Committee shall advise affected Participants of any
additional limitation on their annual benefits required by this Section.
(d) The above limitations in Section 4.6 and this Section 4.7 are
intended to comply with the provisions of Code Section 415 so that the maximum
benefits able to be provided by plans of the Employer shall be exactly equal to
the maximum amounts allowed under Code Section 415. If there is any discrepancy
between the provisions of Section 4.6 or this Section 4.7 and the provisions of
Code Section 415, such discrepancy shall be resolved in such a way as to give
full effect to the provisions of Code Section 415, which provisions are hereby
incorporated by reference.
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ARTICLE V
DISTRIBUTIONS
5.1 Normal Retirement
Upon the retirement of a Participant on or after attaining his Normal
Retirement Age, the value of his Individual Account (as determined under Section
5.9) shall become 100% vested and shall become payable as soon as
administratively feasible following his retirement. The Committee shall
thereupon direct the Trustee to distribute to the retiring Participant such
amount in accordance with Section 5.6.
5.2 Disability Retirement
(a) A Participant may retire from the employment of the Employer on the
first day of any month coincident with or next following a determination by the
Committee that the Participant has incurred a Total and Permanent Disability.
Upon the retirement of a Participant under this Section 5.2, the value of his
Individual Account (as determined under Section 5.9) shall become 100% vested
and shall become payable as soon as administratively feasible following his
retirement. The Committee shall thereupon direct the Trustee to distribute to
the retiring Participant such amount in accordance with Section 5.6.
(b) Notwithstanding anything herein to the contrary, a Participant who
retires in accordance with this Section 5.2 shall (1) have the right to delay
receipt of his disability retirement benefit until the time required by Section
5.8(b), and (2) if deferred benefit commencement is elected, have the right at
any time subsequent to his disability retirement date but prior to the time
required by Section 5.8(b) to request benefit commencement at some earlier date.
5.3 Death Before Retirement or Termination of Employment
(a) Upon the death of a Participant before retirement or termination of
employment, the value of such Participant's Individual Account (as determined
under Section 5.9) shall become 100% vested and shall become payable as soon as
administratively feasible following his death. Subject to subsection (b), the
Committee shall direct the Trustee to distribute to the deceased Participant's
Beneficiary such amount in accordance with Section 5.6. After the death of the
Participant, the Participant's
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Beneficiary shall be entitled to select the Investment Options in which the
Individual Account will be invested in accordance with the same rules then
applicable to Participant selection of Investment Options.
(b) If the Beneficiary is the Participant's surviving spouse and the
value of the Participant' Individual Account exceeds $3,500, then the Individual
Account shall be paid by purchase of an annuity contract providing for annuity
payments for the spouse's lifetime, unless the spouse shall elect in writing to
receive the Individual Account in a lump sum or installments under Section
5.6(c). Subject to Section 5.8(c), payments under an annuity contract shall
commence at a time designated by the spouse, but in no event earlier than a date
that falls as soon as administratively feasible following the Participant's date
of death.
5.4 Death After Retirement or Termination of Employment
(a) Upon the death of a Participant who has terminated employment and
who is not receiving benefit payments in accordance with a form of distribution
under Section 5.6, the value of the vested portion of such Participant's
Individual Account (as determined under Section 5.9) shall become payable as
soon as administratively feasible following his death. (For any Participant who
is receiving benefit payments in accordance with a form of distribution under
Section 5.6, the provisions of such form of distribution shall control any
payments upon the death of such Participant.) Subject to subsection (b), the
Committee shall direct the Trustee to distribute to the deceased Participant's
Beneficiary such amount in accordance with Section 5.6. After the death of the
Participant, the Participant's Beneficiary shall be entitled to select the
Investment Options in which the Individual Account will be invested in
accordance with the same rules then applicable to Participant selection of
Investment Options.
(b) If the Beneficiary is the Participant's surviving spouse and the
value of the vested portion of the Participant's Individual Account exceeds
$3,500, then the Individual Account shall be paid by purchase of an annuity
contract providing for annuity payments for the spouse's lifetime, unless the
spouse shall elect in writing to receive the Individual Account in a lump sum or
installments under Section 5.6(c). Subject to Section 5.8(c), payments under an
annuity contract shall commence at a time designated by the spouse, but in no
event earlier than a date that falls as soon as administratively feasible
following the Participant's date of death.
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5.5 Termination of Employment
(a) Upon termination of employment for any reason other than retirement
under Section 5.1 or 5.2, or death, a Participant shall be entitled to the value
of the vested portion of his Individual Account (as determined under Section
5.9) and payable at the time set forth in subsection (b). A Participant shall at
all times be one hundred percent (100%) vested in his Employee Pre-Tax Account,
his Employee After-Tax Account, his Rollover Account, and his Prior Employer
Qualified Account. A Participant shall have a vested interest in the following
percentage of his Employer Matching Account, Discretionary Account and Money
Purchase Pension Plan Account, based upon his Years of Vesting Service:
- --------------------------------------------------------------------------------
Years of Vesting Service Vested Interest
- --------------------------------------------------------------------------------
Less than 2 0%
- --------------------------------------------------------------------------------
2 25%
- --------------------------------------------------------------------------------
3 50%
- --------------------------------------------------------------------------------
4 or more 100%
- --------------------------------------------------------------------------------
A Participant shall have a vested interest in the following percentage of his
Prior Employer Contribution Account, based on his Years of Vesting Service:
- --------------------------------------------------------------------------------
Years of Vesting Service Vested Interest
- --------------------------------------------------------------------------------
0 0%
- --------------------------------------------------------------------------------
1 20%
- --------------------------------------------------------------------------------
2 40%
- --------------------------------------------------------------------------------
3 60%
- --------------------------------------------------------------------------------
4 or more 100%
- --------------------------------------------------------------------------------
A Participant who was formerly a participant in the CBCLS Plan but was not an
active participant in the CBCLS Plan on December 31, 1991 shall have a vested
interest in the following percentage of his CBCLS Employer Contribution Account,
based upon his Years of Vesting Service:
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- --------------------------------------------------------------------------------
Years of Vesting Service Vested Interest
- --------------------------------------------------------------------------------
0 0%
- --------------------------------------------------------------------------------
1 10%
- --------------------------------------------------------------------------------
2 20%
- --------------------------------------------------------------------------------
3 30%
- --------------------------------------------------------------------------------
4 40%
- --------------------------------------------------------------------------------
5 60%
- --------------------------------------------------------------------------------
6 80%
- --------------------------------------------------------------------------------
7 or more 100%
- --------------------------------------------------------------------------------
Notwithstanding the above vesting schedules, a Participant shall be 100% vested
in his entire Individual Account (1) if he was employed by MetPath Inc. prior to
September 1, 1986, and (2) upon the attainment of age 65 while employed by an
Employer or an Affiliate.
(b) (1) As soon as administratively feasible following a Participant's
termination of employment, the Committee shall direct the Trustee to distribute
to such Participant the value of the vested portion of his Individual Account
(as determined under Section 5.9). Notwithstanding the preceding sentence, if
the amount to be distributed under this subsection (b) exceeds (or at the time
of any prior distribution exceeded) $3,500, then no distribution shall be made
prior to the Participant attaining his Normal Retirement Age unless he consents
in writing to the making of such distribution. The consent of the Participant
shall be obtained in writing within the 90-day period ending on the date
distribution commences. The Participant shall be given a written notice of the
right to defer any distribution until the Participant's Individual Account
balance is no longer immediately distributable. Such notification shall be
provided no less than seven days and no more than 90 days prior to the date
distribution commences and shall inform the Participant that he has a right to a
period of at least 30 days after receiving the notice to consider the decision
of whether or not to elect a distribution.
(2) As soon as administratively feasible following the attainment
of Normal Retirement Age on the part of a Participant who has previously
terminated his employment but the distribution of whose benefit has not
commenced, the Committee
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shall direct the Trustee to distribute to such Participant the value of his
Individual Account (as determined under Section 5.9) in a lump sum payment.
(c) If a Participant's employment terminates for any reason other than
retirement or death at a time when he is not fully vested in his Employer
Matching Account and Discretionary Account (and, if applicable, his Money
Purchase Pension Plan Account or his Prior Employer Contribution Account), then
the Committee shall follow the procedure set forth in paragraph (1) or that set
forth in paragraph (2) below, as appropriate:
(1) If the vested portion of the Participant's Employer Matching
Account and Discretionary Account (and/or, if applicable, his Money Purchase
Pension Plan Account or his Prior Employer Contribution Account) is distributed
to him at any time before the end of the second Plan Year following the Plan
Year in which his employment terminated, the remaining portion of such Accounts
shall be forfeited as of the date of such termination of employment. However, if
the Participant had no vested interest in his Employer Matching Account and
Discretionary Account (and, if applicable, his Money Purchase Pension Plan
Account or his Prior Employer Contribution Account) at the time of his
termination of employment, the Committee nonetheless shall treat the Participant
as if he had received a distribution on the date his employment terminated and
shall forfeit the Participant's entire Employer Matching Account and
Discretionary Account (and, if applicable, his entire Money Purchase Pension
Plan Account or his Prior Employer Contribution Account) on the date his
employment terminated. If the former Participant returns as an Employee prior to
incurring a five-year Period of Severance beginning immediately after the date
of his distribution (or on the date his employment terminated in the case of a
former Participant who had no vested interest in his Employer Matching Account
and Discretionary Account (and, if applicable, his Money Purchase Pension Plan
Account or his Prior Employer Contribution Account) on the date his employment
terminated), and if he repays the full amount of the distribution (if any) paid
to him by reason of his termination of employment no later than the fifth
anniversary of the date of his reemployment, then his Employer Matching Account
and Discretionary Account (and, if applicable, his Money Purchase Pension Plan
Account or his Prior Employer Contribution Account), determined as of the date
of the distribution of his vested interest, shall be fully restored to him as of
the end of the Plan Year in which such repayment
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occurred. In such case, the Participant's Employer Matching Account and
Discretionary Account (and, if applicable, his Money Purchase Pension Plan
Account or his Prior Employer Contribution Account) shall be restored first out
of forfeitures for such Plan Year and, if such forfeitures are insufficient to
restore such Accounts, the Employer shall make a special contribution to the
extent necessary so that the Participant's Accounts are fully restored.
(2) If a Participant's vested interest in his Employer Matching
Account and Discretionary Account (and, if applicable, his Money Purchase
Pension Plan Account or his Prior Employer Contribution Account) is not
distributed to him before the end of the second Plan Year in which his
employment terminated, any portion of such Accounts which is not vested shall be
forfeited after he incurs a five-year Period of Severance. If a Participant
receives a distribution of his Individual Account before a forfeiture is
permitted and at a time when he is not fully vested in his Employer Matching
Account and Discretionary Account (and, if applicable, his Money Purchase
Pension Plan Account or his Prior Employer Contribution Account) and is
reemployed as an Employee before incurring a five-year Period of Severance, his
vested interest in each such Account upon his subsequent reemployment shall be
determined by: (A) multiplying the applicable percentage from Section 5.5(a)
hereof by the sum of the value of the Participant's Account and the amount of
the distribution from such Account, and (B) subtracting the amount of the
distribution from the amount determined under (A).
(d) In the event a Participant who terminated his employment with an
Employer is reemployed as an Employee prior to receiving a distribution of his
Individual Account, he shall not be entitled to a distribution as provided in
this Section 5.5 due to such termination, but shall be entitled to a
distribution as determined herein upon any subsequent termination of employment
for any reason.
5.6 Method of Payment
(a) Normal Form
In the absence of the election of an optional method of payment as
provided in subsection (c) and subject to subsection (e), benefit payments
hereunder shall be made in a lump sum. Furthermore, distributions to a
Participant (or to his Beneficiary if the Participant dies before distribution
of his benefit has commenced), the value of the vested portion of whose
Individual Account does not exceed (or at the time
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of any prior distribution did not exceed) $3,500, automatically shall be made in
a lump sum. Payment from investments held in Employer Stock may be distributed
in cash or in stock, at the direction of the Participant. Payments from other
investment accounts shall be made only in cash.
(b) Election Procedures
(1) No less than seven and no more than 90 days before
distribution of a Participant's benefit commences, each Participant and his
spouse (if any) shall be given a written notice to the effect that (A) if the
Participant is married on the date of commencement of payments and has elected
an annuity under subsection (c)(2), (c)(3) or (c)(4), benefits will be payable
in the form of a "qualified joint and survivor annuity" under subsection (d)
unless the Participant, with the consent of his spouse, elects to the contrary
prior to the commencement of payments, and (B) if the Participant has a Money
Purchase Pension Plan Account, benefits attributable to such Money Purchase
Pension Plan Account will be paid in the automatic form specified in subsection
(e) unless the Participant, with the consent of his spouse (if any), elects to
the contrary prior to the commencement of benefits. The notice shall describe,
in a manner intended to be understood by the Participant and his spouse, the
terms and conditions of the qualified joint and survivor annuity, the financial
effect of the election of an optional form or absence of election, the rights of
the Participant to elect an optional form or to revoke such an election, and the
rights of the Participant's spouse to consent to an election of an optional
form. In addition, the notice shall inform the Participant that he has 30 days
to elect whether to have benefits paid in an optional form.
(2) During the 90-day period ending on the day his distribution
commences, each Participant whose Individual Account balance exceeds (or at the
time of any prior distribution exceeded) $3,500 may elect to have his benefit
hereunder paid under any one of the options set forth in subsection (c) in lieu
of the normal form provided for in subsection (a) (or, with respect to the Money
Purchase Pension Plan Account, in lieu of the automatic form provided for in
subsection (e)).
(3) A Participant or Beneficiary who desires to have his benefit
hereunder paid under one of the optional methods provided in subsection (c)
shall make such an election by written request to an authorized representative
of the Committee on forms provided by the Committee. An election by a
Participant to receive his retirement
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benefit under any of the optional methods of payment as provided in subsection
(c) may be revoked by such Participant in writing to an authorized
representative of the Committee at any time and any number of times during the
90-day period ending on the day his benefit payments commence. After retirement
benefit payments have commenced, no elections or revocations of an optional
method will be permitted under any circumstances.
(c) Available Options
(1) Monthly, quarterly or annual installments from the Trust Fund
over a period not to exceed the lesser of (A) 10 years, or (B) the life
expectancy of the Participant or the joint life expectancies of the Participant
and his Beneficiary, in either case determined at the time payments commence.
Life expectancies shall be determined when payments commence and shall not
thereafter be recalculated. If a Participant or Beneficiary elects installment
payments, his Individual Account shall be fully invested in the Fidelity Asset
Manager Fund (unless it is already so invested) as soon as practicable following
the election of installment payments, and shall remain fully invested in such
Fund throughout the payment period.
(2) Subject to subsection (d), an annuity contract, purchased from
an insurance company (or similar source) by the Committee utilizing the value of
the vested portion of the Participant's Individual Account, which provides for
equal monthly payments over the Participant's (or Beneficiary's) lifetime and
which contains such other terms and provisions as may be approved in writing by
such Participant or Beneficiary.
(3) Subject to subsection (d), an annuity contract, purchased from
an insurance company (or similar source) by the Committee utilizing the value of
the vested portion of the Participant's Individual Account, which provides for
equal monthly payments over the Participant's lifetime and for such monthly
payments (or one-half thereof) to be continued after his death to the
Participant's designated Beneficiary over the lifetime of the Beneficiary. If
the designated Beneficiary is not living at the death of the Participant, no
additional benefit shall be payable hereunder. Such annuity contract shall
contain such other terms and promises as may be approved in writing by the
electing Participant. (This optional method shall not be available to a
Beneficiary.)
(4) Subject to subsection (d), an annuity contract, purchased from
an insurance company (or similar source) by the Committee utilizing the value of
the vested
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portion of the Participant's Individual Account, which provides for equal
monthly payments over the Participant's lifetime and in the event of his death
before 120 monthly payments have fallen due, such payments shall be continued
to the Participant's designated Beneficiary until the remainder of the 120
monthly payments have been paid. Such annuity contract shall contain such other
terms and provisions as may be approved in writing by the electing Participant.
(This optional method shall not be available to a Beneficiary.)
(d) Qualified Joint and Survivor Annuity
If a Participant is married on the date distribution of his Individual
Account commences, no form of payment described in subsection (c)(2), (c)(3) or
(c)(4) may be elected unless (a) it is the joint and survivor annuity of
subsection (c)(3) with one-half of the Participant's lifetime amount payable
after his death to his surviving spouse (to whom he was married on the date
payments to the Participant first commenced) as his Beneficiary, or (2) the
Participant's spouse consents in writing to the form elected. Such consent shall
acknowledge its effect and be witnessed by a Committee member (or an authorized
representative) or a notary public. Spousal consent is not required if there is
no spouse, the spouse cannot be located or under such other circumstances as may
be prescribed by regulations. Any spousal consent shall only be applicable to
the spouse granting such consent.
(e) Money Purchase Pension Plan Accounts
Notwithstanding any other provision of this Article V to the contrary,
the value of the vested portion of a Participant's Money Purchase Pension Plan
Account (as determined under Section 5.9) shall be distributed in accordance
with this subsection (e). However, this subsection (e) shall not apply to a
Participant, the value of the vested portion of whose Individual Account does
not exceed (or at the time of any prior distribution did not exceed) $3,500.
(1) (A) Unless a married Participant, with the consent of his
spouse under subparagraph (B), has elected an optional form of payment under
subsection (c), the value of the vested portion of such Participant's Money
Purchase Pension Plan Account shall be paid in the form of the joint and
survivor annuity of subsection (c)(3) with one-half of his lifetime amount
payable after his death to his surviving spouse (to whom he was married on the
date payments to the Participant first commenced) as his
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Beneficiary. Such annuity shall be paid by the purchase of an insurance company
contract utilizing the vested portion of the Participant's Money Purchase
Pension Plan Account.
(B) The spouse of the Participant must consent in writing to
any form of payment of the Money Purchase Pension Plan Account other than a
joint and survivor annuity under subsection (c)(3) with the spouse as
Beneficiary. Such consent shall acknowledge its effect and be witnessed by a
Committee member (or an authorized representative) or a notary public. Spousal
consent is not required if there is no spouse, the spouse cannot be located or
under such other circumstances as may be prescribed by regulations. Any spousal
consent shall only be applicable to the spouse granting such consent.
(2) Unless an unmarried Participant has elected a different
optional form of payment under subsection (c), the value of the vested portion
of such Participant's Money Purchase Pension Plan Account shall be paid in the
form of the single life annuity of subsection (c)(2). Such annuity shall be paid
by the purchase of an insurance company contract utilizing the vested portion of
the Participant's Money Purchase Pension Plan Account.
5.7 Benefits to Minors and Incompetents
(a) In case any person entitled to receive payment under the Plan shall
be a minor, the Committee, in its discretion, may distribute such payment in any
one or more of the following ways:
(1) By payment thereof directly to such minor;
(2) By application thereof for the benefit of such minor;
(3) By payment thereof to either parent of such minor or to any
person who shall be legally qualified and shall be acting as guardian of the
person or the property of such minor, provided the parent or adult person to
whom any amount shall be paid shall have advised the Committee in writing that
he will hold or use such amount for the benefit of such minor.
(b) In the event a person entitled to receive payment under the Plan is
physically or mentally incapable of personally receiving and giving a valid
receipt for any payment due (unless prior claim therefor shall have been made by
a duly qualified legal representative of such person), such payment in the
discretion of the Committee may be
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made to the spouse, son, daughter, parent, brother or sister of the recipient or
to any other person who is responsible for the welfare of such recipient.
(c) Any payments made under subsections (a) or (b) shall, to the extent
of the payments, fully discharge the obligations of the Committee and the Plan
to any other person making a claim hereunder with respect to such payments.
5.8 Payment of Benefits
(a) Except as provided in subsection (b), in the event a Participant's
Individual Account shall be due and payable under this Article V and the
Participant has not elected otherwise in accordance with the Plan, any payment
of benefits to the Participant shall begin not later than 60 days after the
close of the Plan Year in which occurs the latest of:
(1) the date on which the Participant attains age 65;
(2) the 10th anniversary of the date in which the Participant
commenced participation in the Plan; and
(3) termination of employment of the Participant with the Employer.
(b) Notwithstanding subsection (a) above, distribution of a
Participant's benefit shall be made no later than April 1 of the calendar year
following the calendar year during which such Participant attains age 70 1/2,
regardless of whether or not he has terminated employment with the Employer.
Such distribution shall be made over a period not extending beyond the life or
life expectancy of the Participant or the joint lives or life expectancies of
the Participant and a designated Beneficiary. Life expectancies shall be
determined at the time payments commence and shall not thereafter be
recalculated.
(c) If a Participant dies before distribution of his benefit has
commenced, the Participant's entire benefit shall be distributed within five
years after his death. The preceding sentence shall not apply to any portion of
the Participant's benefit if the following requirements in paragraphs (1) and,
if applicable, (2) are met with respect to such portion:
(1) (A) if the portion of the Participant's benefit is payable to
or for the benefit of a designated Beneficiary;
(B) such portion will be distributed over a period not
extending beyond the life expectancy of such Beneficiary at the time payments
commence; and
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(C) such distributions begin not later than December 31 of the
calendar year following the calendar year of the Participant's death.
(2) If the designated Beneficiary referred to in paragraph (1)(A)
above is the surviving spouse of the Participant, then the date on which the
distributions are required to begin under paragraph (1)(C) shall not be earlier
than December 31 of the calendar year in which the Participant would have
attained age 70-.
If the surviving spouse dies before the distributions to such
spouse begin, this Section 5.8(c) (with the exception of paragraph (2)) shall be
applied as if the surviving spouse were the Participant.
This Section 5.8(c) shall not apply if the distribution of the
Participant's benefit has commenced prior to his death and the remaining portion
of the Participant's benefit will be distributed at least as rapidly as under
the method of distribution being used at the date of the Participant's death.
For purposes of this Section 5.8(c), under regulations to be
prescribed by the Secretary of the Treasury, any amount paid to a child shall be
treated as if it had been paid to the surviving spouse upon such child reaching
the age of majority (or other designated event prescribed under such
regulations).
(d) Distributions under this Article V shall be made in accordance with
regulations issued by the Secretary of the Treasury under Code Section
401(a)(9), including Treasury Regulation ss.1.401(a)(9)-2, which regulations
shall override any distribution options in this Plan inconsistent with Section
401(a)(9).
5.9 Valuation of Accounts
All distributions hereunder shall be based upon the value of the
Participant's Individual Account as determined under this Section 5.9.
(a) The value of a Participant's Individual Account upon a distribution
hereunder shall be the sum of paragraphs (1)-(10) below, where:
(1) is the sum of (A) the number of shares of the Blended Interest
Fund allocated to the Participant's Individual Account as of the last day of the
calendar month coincident with or next preceding the Valuation Date, and (B)
interest, if any, credited from the first day of the calendar month in which
falls the Valuation Date to the Valuation Date;
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(2) is the product of (A) the closing Net Asset Value of the
Fidelity Asset Manager Fund: Income on the Valuation Date, and (B) the number of
shares of such fund allocated to the Participant's Individual Account as of such
Valuation Date;
(3) is the product of (A) the closing Net Asset Value of the
Fidelity Asset Manager Fund on the Valuation Date, and (B) the number of shares
of such fund allocated to the Participant's Individual Account as of such
Valuation Date;
(4) is the product of (A) the closing Net Asset Value of the
Fidelity Asset Manager Fund: Growth on the Valuation Date, and (B) the number of
shares of such fund allocated to the Participant's Individual Account as of such
Valuation Date;
(5) is the product of (A) the closing Net Asset Value of the
Fidelity Balanced Fund on the Valuation Date, and (B) the number of shares of
such fund allocated to the Participant's Individual Account as of such Valuation
Date;
(6) is the product of (A) the closing Net Asset Value of the
Fidelity Contrafund on the Valuation Date, and (B) the number of shares of such
fund allocated to the Participant's Individual Account as of such Valuation
Date;
(7) is the product of (A) the closing Net Asset Value of the
Fidelity Equity-Income Fund on the Valuation Date, and (B) the number of shares
of such fund allocated to the Participant's Individual Account as of such
Valuation Date;
(8) is the product of (A) the closing Net Asset Value of the
Fidelity International Growth & Income Fund on the Valuation Date, and (B) the
number of shares of such fund allocated to the Participant's Individual Account
as of such Valuation Date;
(9) is the product of (A) the closing Net Asset Value of the
Fidelity Magellan Fund on the Valuation Date, and (B) the number of shares of
such fund allocated to the Participant's Individual Account as of such Valuation
Date; and
(10) is the product of (A) the per unit value of the Employer Stock
Fund, the Corning Stock Fund and the CPS Stock Fund on the Valuation Date, and
(B) the number of units of such fund allocated to the Participant's Individual
Account as of such Valuation Date.
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(b) If a Discretionary Contribution is made on behalf of a Participant
after the date on which his Individual Account is valued under subsection (a),
the Participant shall receive an additional distribution equal to the amount of
the Discretionary Contribution and any earnings or losses thereon. Such
additional distribution shall be valued in the same manner as the Participant's
Individual Account was valued under subsection (a), except that the Valuation
Date shall be a date that falls as soon as administratively feasible after the
Discretionary Contribution is made.
5.10 Direct Rollovers
(a) Notwithstanding any provision of the Plan to the contrary that
would otherwise limit a distributee's election under this Section, a distributee
may elect, at the time and in the manner prescribed by the Committee, to have
any portion of an eligible rollover distribution paid directly to an eligible
retirement plan specified by the distributee in a direct rollover.
(b) (1) An "eligible rollover distribution" is any distribution of all
or any portion of the balance to the credit of the distributee, except that an
eligible rollover distribution does not include: any distribution that is one of
a series of substantially equal periodic payments (not less frequently than
annually) made for the life (or life expectancy) of the distributee or the joint
lives (or joint life expectancies) of the distributee and the distributee's
designated beneficiary, or for a specified period of ten years or more; any
distribution to the extent such distribution is required under Section 401(a)(9)
of the Code; and the portion of any distribution that is not includible in gross
income (determined without regard to the exclusion for net unrealized
appreciation with respect to employer securities).
(2) An "eligible retirement plan" is an individual retirement
account described in section 408(a) of the Code, an individual retirement
annuity described in section 408(b) of the Code, an annuity plan described in
section 403(a) of the Code, or a qualified defined contribution plan described
in section 401(a) of the Code, that accepts the distributee's eligible rollover
distribution. However, in the case of an eligible rollover distribution to the
surviving spouse, an eligible retirement plan is an individual retirement
account or individual retirement annuity.
(3) A "distributee" includes an employee or former employee. In
addition, the employee's or former employee's surviving spouse and the
employee's or
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former employee's spouse or former spouse who is the alternate payee under a
qualified domestic relations order, as defined in Section 414(p) of the Code,
are distributees with regard to the interest of the spouse or former spouse.
(4) A "direct rollover" is a payment by the Plan to the eligible
retirement plan specified by the distributee.
5.11 Payment to Alternate Payee Under QDRO
Notwithstanding any other provision of this Plan, once the Committee
determines that a domestic relations order is a qualified domestic relations
order ("QDRO") within the meaning of Section 206(d)(3) of ERISA, unless the QDRO
specifically provides otherwise, the Committee shall direct the Trustee to
distribute, as soon as administratively feasible following the date on which the
Committee determines that the domestic relations order is a QDRO, to the
alternate payee named in the QDRO the benefit provided therein in a lump sum.
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ARTICLE VI
LOANS AND WITHDRAWALS
6.1 Loans to Participants
The Committee, upon the request of a Participant, may at its discretion
make loans from the Trust Fund to Participants who are "parties in interest" as
defined in ERISA Section 3(14). The following additional rules shall apply:
(a) A Participant may only have one loan outstanding at any time. The
minimum new loan amount shall be $1,000. If a Participant's Individual Account
balance is insufficient to support the minimum loan amount loan because of the
maximum loan restrictions set forth below, no loan shall be made. The maximum
amount of any loan, when added to the outstanding balance of any existing loan
from this Plan, shall be the lesser of (1) and (2):
(1) $50,000 reduced by the excess of the highest outstanding
balance of loans from the Plan during the one-year period ending on the day
before the date the loan is made over the outstanding balance of loans from the
Plan on the date the loan is made.
(2) One-half of the value of the vested portion of the
Participant's Individual Account on the date the loan is made.
(b) All loans shall be repayable over a period of not more than five
years, except that a loan used by the Participant to acquire any dwelling unit
which within a reasonable time is to be used (determined at the time the loan is
made) as a principal residence of the Participant shall be repayable over a
period of not more than 10 years.
(c) Each loan shall be secured by one-half of the value of the vested
portion of the Participant's Individual Account balance; shall bear interest at
a rate of one percent (1%) above the Prime Rate in effect on the last day of the
calendar quarter coincident with or next preceding the calendar quarter in which
the loan is applied for; shall be repaid by payroll deduction each pay period in
accordance with a reasonable repayment schedule requiring substantially level
payments of principal and interest; and shall be evidenced by a written
promissory note setting forth the terms of the loan. A Participant may prepay
the entire outstanding loan balance without penalty. To the extent a
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Participant's pay from the Employer is insufficient to make the payments due
under a loan, but such Participant is not covered by the provisions of
subsection (d), such Participant shall make his loan payments out of his own
personal funds.
(d) In the event of the death or termination of employment of a
Participant, the unpaid balance of any outstanding loan to such Participant,
together with accrued interest, shall be deducted from the amount otherwise due
him or his Beneficiary, notwithstanding the provisions of Section 12.5.
(e) The Committee shall apply the provisions of this Section in a
uniform and nondiscriminatory manner which is not inconsistent with Department
of Labor regulations at 29 C.F.R. ss.2550.408b-1.
(f) Each loan shall be considered a separate investment option of the
Individual Account of the Participant. Notwithstanding Section 4.1(c), when a
loan is made, the amount of the loan shall be withdrawn from sub-accounts within
the Participant Individual Account among the separate Investment Options in
which each sub-account is invested and transferred to a segregated loan account
maintained in his name. The loan amount shall be withdrawn from the sub-accounts
within the Individual Account in the following order: (1) the vested portion of
the Discretionary Account; (2) the vested portion of the Employer Matching
Account; (3) Rollover Account; (4) the vested portion of the Money Purchase
Pension Plan Account; (5) the vested portion of the Prior Employer Contribution
Account; (6) Prior Employer Qualified Account; (7) Employee Pre-Tax Account; and
(8) Employee After-Tax Account. Within each sub-account, the loan amount shall
be withdrawn from the separate Investment Options in the following order: (1)
Blended Interest Fund; (2) Fidelity Balanced Fund; (3) Fidelity Equity-Income
Fund; (4) Fidelity Asset Manager Fund: Income; (5) Fidelity Asset Manager Fund;
(6) Fidelity Asset Manager Fund: Growth; (7) Fidelity Contrafund; (8) Fidelity
Magellan Fund; (9) Fidelity International Growth & Income Fund; (10) CPS Stock
Fund; (11) Corning Stock Fund and (12) Employer Stock Fund. Payments of
principal and interest against a loan shall thereafter be allocated ratably
among the sub-accounts from which the loan was withdrawn and invested in
accordance with a Participant's outstanding Investment Option specification,
including the Employer Matching Account allocable to Employer Stock under
Section 3.2.
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(g) There may be an administrative charge imposed on each new loan in
an amount determined by the Committee.
(h) In the event a Participant defaults on a loan from this Plan, the
Plan shall foreclose on so much of the Participant's Individual Account as is
given as collateral for the loan when such amounts are otherwise available for
distribution under the terms of the Plan.
6.2 Hardship Withdrawals
(a) Upon request of the Participant, and with the approval of the
Committee, a Participant shall be allowed to withdraw all or part of the value
of his Individual Account which is available under subsection (e) while still
employed by the Employer. Withdrawn amounts may not be repaid to the Trust Fund.
Withdrawals shall be charged first against the Participant's Employee After-Tax
Account, then against his Rollover Account, then against his Employee Pre-Tax
Account, then against the vested portion of his Employer Matching Account, then
against the vested portion of his Discretionary Account, then against the vested
portion of his Prior Employer Contribution Account, and finally against his
Prior Employer Qualified Account. Within such Accounts, withdrawals shall be
charged against the separate Investment Options in the following order: (1)
Blended Interest Fund; (2) Fidelity Balanced Fund; (3) Fidelity Equity-Income
Fund; (4) Fidelity Asset Manager Fund: Income; (5) Fidelity Asset Manager Fund;
(6) Fidelity Asset Manager Fund: Growth; (7) Fidelity Contrafund; (8) Fidelity
Magellan Fund; (9) Fidelity International Growth & Income Fund; (10) CPS Stock
Fund; (11) Corning Stock Fund and (12) Employer Stock Fund.
(b) A Participant may only make a withdrawal under this Section 6.2 if
the withdrawal is made on account of an immediate and heavy financial need of
the Participant, as determined under subsection (c)(1), and is necessary to
satisfy the financial need, as determined under subsection (c)(2). The
determination of the existence of financial hardship and the amount necessary to
be withdrawn to satisfy the immediate financial need created by the hardship
shall be made by the Committee in a uniform and nondiscriminatory manner, in
accordance with the standards and restrictions set forth in subsection (c)
below. A Participant requesting a withdrawal hereunder may be required to submit
whatever documentation the Committee, in its sole discretion, deems necessary
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to establish the existence of financial hardship and the amount necessary to be
withdrawn to satisfy the financial need created by the hardship.
(c) (1) Immediate and heavy financial need. A withdrawal will be
considered to be made on account of an immediate and heavy financial need of the
Participant for purposes of subsection (b) only if it is on account of:
(A) Expenses for medical care described in Code Section 213(d)
previously incurred by the Participant, the Participant's spouse, or any
dependents of the Participant (as defined in Code Section 152) or necessary for
such persons to obtain medical care described in Code Section 213(d);
(B) Purchase (excluding mortgage payments) of a principal
residence for the Participant;
(C) Payment of tuition for the next 12 months of post-secondary
education for the Participant, his spouse, children, or dependents;
(D) The need to prevent the eviction of the Participant from
his principal residence or foreclosure on the mortgage of the Participant's
principal residence; or
(E) For any other reason which the Commissioner of Internal
Revenue deems to constitute such an immediate and heavy financial need in
accordance with Treasury Regulation ss.1.401(k)-1(d)(2)(iv)(C).
(2) Amount necessary to satisfy the need. A withdrawal will be
considered to be in an amount necessary to satisfy a Participant's need under
paragraph (1) for purposes of subsection (b) only if:
(A) It does not exceed the amount of the need under paragraph
(1);
(B) If the Participant's withdrawal is charged against any
portion of his Employee Pre-Tax Account, the Participant has obtained all
non-hardship distributions and non-taxable loans he is eligible for and is able
to provide collateral for under any plan the Employer may sponsor (including
this Plan);
(C) If the Participant's withdrawal is charged against any
portion of his Employee Pre-Tax Account, the Participant may not make any
Employee Pre-Tax Contributions under Section 3.1 for a period of 12 months after
his withdrawal, nor may he make any other elective contributions to any Employer
plan as described in Treasury
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Regulation ss.1.401(k)-1(d)(2)(iv)(B)(4) (but shall still be otherwise
considered an Eligible Employee during such suspension); and
(D) If the Participant's withdrawal is charged against any
portion of his Employee Pre-Tax Account, the Participant's maximum annual
Employee Pre-Tax Contributions under Section 3.1(c) for the calendar year
following the calendar year in which he receives his withdrawal are reduced by
the amount of Employee Pre-Tax Contributions he made in the calendar year in
which he receives his withdrawal.
Notwithstanding subparagraphs (A) through (D), a Participant's
withdrawal may be considered to be in an amount necessary to satisfy a need
under paragraph (1) if it satisfies a method prescribed by the Commissioner of
Internal Revenue under Treasury Regulation ss.1.401(k)-1(d)(2)(iv)(C).
(d) In addition to the amount necessary to meet the immediate financial
need created by the hardship, the Participant may, at his election, also
withdraw any amount necessary to cover withholding for federal income tax
purposes.
(e) A Participant's hardship withdrawal under this Section 6.2 shall be
limited to the aggregate of all his Employee Pre-Tax Contributions made prior to
the withdrawal (excluding earnings thereon allocated to his Employee Pre-Tax
Account as of a date after December 31, 1988), reduced by the amount of any
prior withdrawal of such Contributions, plus the value of his Rollover Account,
the value of his Employee After-Tax Account, the value of the vested portion of
his Employer Matching Account, the value of the vested portion of his
Discretionary Account, the value of the vested portion of his Prior Employer
Contribution Account, and finally the value of his Prior Employer Qualified
Account.
6.3 Non-Hardship Withdrawals
Upon request of the Participant, but no more than once in any 12-month
period, and with the approval of the Committee, a Participant shall be allowed
to withdraw all or part of the value of his Employee After-Tax Account for any
reason other than those set forth in subparagraphs (A)-(E) of Section 6.2(c)(1).
Within such Account, withdrawals shall be charged against the separate
Investment Options in the order set forth in Section 6.4(a). Withdrawn amounts
may not be repaid to the Trust Fund.
6.4 Other Withdrawals
(a) In addition to the withdrawals available under Sections 6.2 and
6.3, a Participant who was formerly a participant in the Maryland Medical
Laboratory Plan shall
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be allowed to withdraw all or part of the value of his Employee Pre-Tax Account
upon the age of 59 1/2 and shall be allowed to withdraw all or part of the value
of the vested portion of his Individual Account (pursuant to the hierarchy set
forth in Section 6.2(a)) upon the attainment of age 65.
(b) In addition to the withdrawals available under Sections 6.2 and
6.3, a Participant who was formerly a participant in the Podiatric Pathology
Laboratories Plan shall be allowed to withdraw all or part of the value of his
Individual Account (pursuant to the hierarchy set forth in Section 6.2(a)) upon
the attainment of age 59 1/2.
(c) In addition to the withdrawals available under Sections 6.2 and
6.3, a Participant who was formerly a participant in the Nichols Institute Plan
shall be allowed to withdraw all or part of the value of his Employee Pre-Tax
Account and his Rollover Account upon the attainment of age 59 1/2. Such
withdrawals shall be limited to one in each Plan Year.
(d) In no event may a Participant with a Money Purchase Pension Plan
Account be allowed to make a withdrawal from such Money Purchase Pension Plan
Account.
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ARTICLE VII
TRUST FUND/ESOP
7.1 Contributions
Contributions by the Employer and Participants as provided for in
Article III shall be paid over to the Trustee. All Contributions by the Employer
shall be irrevocable, except as otherwise provided in this Plan and may be used
only for the exclusive benefit of the Participants and their Beneficiaries. The
Employers' Contribution will be made either in cash or in Employer Stock, or
partially in each. Any Employer Stock comprising a portion of the Employer
Matching Contribution shall be valued at the fair-market value thereof at the
date or dates on which any contribution in that form is made. The fair-market
value shall be deemed to be the closing price of the stock as listed on a
national securities exchange on the business day prior to the date of which any
contribution is made.
7.2 Trustee
The Corporation will maintain an agreement with the Trustee whereunder
the Trustee will receive, invest and administer as a trust fund Contributions
made under this Plan in accordance with the Trust Agreement.
Such Trust Agreement is incorporated by reference as a part of the
Plan, and the rights of all persons entitled to benefits hereunder are subject
to the terms of the Trust Agreement. The Trust Agreement specifically provides,
among other things, for the investment and reinvestment of the Fund and the
income thereof, the management of the Fund, the responsibilities and obligations
of the Trustee, removal of the Trustee and appointment of a successor,
accounting by the Trustee and the disbursement of the Fund.
Subject to a Participant's Investment Option specification, the Trustee
shall, in accordance with the terms of such Trust Agreement, accept and receive
all sums of money paid to it from time to time by the Employer, and shall hold,
invest, reinvest, manage and administer such moneys and the increment, increase,
earnings and income thereof as a trust fund for the exclusive benefit of the
Participants and their Beneficiaries and for the payment of reasonable expenses
of administering the Plan.
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7.3 Employer Stock
The Employer Stock Fund shall be invested in the common stock of the
Employer, provided such stock qualifies as qualifying employer securities within
the meaning of ERISA Section 407(d)(5). The level of Plan assets invested in
such fund shall be determined by Participant Investment Option specifications,
and may consist of up to 100% of all Plan assets.
(a) Employer Stock Fund. Employer Stock received by the Plan as a
dividend with respect to Corning Stock in connection with the
spinoff of the Employer shall remain invested as Employer Stock.
Following the Distribution Date, consistent with the stated
purposes of the Plan, and subject to the provisions of Section 7.4,
the Trustee shall invest that portion of the assets of the Plan
consisting of the Employer Stock Matching Contribution in Employer
Stock to the end that, in the largest measure possible,
Participants may share in the earnings of the Employer and acquire
a proprietary interest in the Employer; provided, however, that all
Employer Stock Matching Contributions shall be used to make
payments on Exempt Loans to the extent provided in Sections A-7.
The Trustee will also invest any other assets attributable to
Participants' Individual Accounts in Employer Stock in accordance
with Participants' elections under subsection 2.4 and will invest
amounts invested in Corning Stock and CPS Stock in Employer Stock
in accordance with Section 7.4. Any Employer Stock acquired and
held in accordance with this Section will be known and referred to
as the "Employer Stock Fund".
(b) ESOP Stock. The portion of the Employer Stock Matching Account
(including amounts attributable to ESOP Loans) invested in Employer
Stock shall be held and invested in the "ESOP Stock Fund", which
may be a subaccount of this Employer Stock Fund.
7.4 Corning Stock Fund and CPS Stock Fund
Corning Stock and CPS Stock received by the Plan as a result of the
spinoff of the Company shall be invested in the "Corning Stock Fund" and the
"CPS Stock Fund", respectively. Subject to the following proviso, Corning Stock
held in the Corning Stock
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Fund and CPS Stock held in the CPS Stock Fund and allocated to a Participant's
Individual Account shall be invested in Investment Options as directed by the
Participant in accordance with Section 2.4. No new contributions shall be made
to the Corning Stock Fund or the CPS Stock Fund, except for dividends received
on such stock.
7.5 Dividends on ESOP Stock Attributable to Exempt Loan
It is anticipated that all dividends payable with respect to shares of
ESOP Stock held in the Suspense Account shall be used for the purpose of
repaying one or more Exempt Loans and will not be allocated to Participants'
Employer Matching Accounts invested in Employer Stock and that all dividends
payable with respect to all other Employer Stock held in the Trust Fund shall be
added to the Participants' Employer Stock Fund, subject to Section A-6.
Nevertheless, the Committee may, in its sole discretion, determine for any Plan
Year that dividends payable with respect to shares of ESOP Stock shall, if
payable in cash (i) paid currently to Participants or (ii) used for the purpose
of repaying one or more Exempt Loans if such use of said dividends so applied
meets the requirements of Code Section 404(k). Such discretion herein granted
may be exercised by the Committee independently, and in whole or in part, with
respect to the stock held from time to time in one or more of Employer Stock
Funds established under the Trust. Discretion so exercised for any Plan Year, or
for any portion thereof, may be changed by the Committee at any subsequent time.
Cash dividends which are to be paid to the Participants may be paid directly by
the Company or may be paid by the Trustee within ninety (90) days after the end
of the Plan Year or receipt by the Trustee.
7.6 Voting and Tender Offer Rights on Employer Stock
Each Participant shall have the right to vote all shares of Employer
Stock held in the Participant's accounts. Each Participant shall also have the
right to direct the Trustee whether to tender such shares of Stock in the event
an offer is made by any person other than the Employer to purchase such shares.
The Committee shall make any such arrangements with the Trustee as may be
appropriate to pass such voting or tender offer rights through to a Participant.
In the event a Participant fails to vote his shares or fails to
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indicate his preference with respect to a tender offer, the Trustee shall vote
the Participant's shares or tender his shares in the same proportions as those
Plan Participants who did respond cast their votes or tendered their shares. The
Trustee shall also vote and exercise any tender offer rights with respect to
unallocated ESOP Stock held in a suspense account in the same proportions as
those Plan Participants who responded cast their votes or tendered their shares.
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ARTICLE VIII
FIDUCIARIES
8.1 General
Each Fiduciary who is allocated specific duties or responsibilities
under the Plan or any Fiduciary who assumes such a position with the Plan shall
discharge his duties solely in the interest of the Participants and
Beneficiaries and for the exclusive purpose of providing such benefits as
stipulated herein to such Participants and Beneficiaries, or of defraying
reasonable expenses of administering the Plan. Each Fiduciary in carrying out
such duties and responsibilities shall act with the care, skill, prudence, and
diligence under the circumstances then prevailing that a prudent person acting
in a like capacity and familiar with such matters would use in exercising such
authority or duties.
A Fiduciary may serve in more than one Fiduciary capacity and may
employ one or more persons to render advice with regard to his Fiduciary
responsibilities. If the Fiduciary is serving as such without compensation, all
expenses reasonably incurred by such Fiduciary shall be reimbursed by the
Employer or, at the Corporation's direction, from the assets of the Trust.
A Fiduciary may allocate any of his responsibilities for the operation
and administration of the Plan. In limitation of this right, a Fiduciary may not
allocate any responsibilities as contained herein relating to the management or
control of the Fund except (1) through the employment of an investment manager
as provided in Section 8.3 and in the Trust Agreement relating to the Fund, or
(2) to the extent Participants specify their own Investment Options.
8.2 Corporation
The Corporation established and maintains the Plan for the benefit of
its Employees and those of participating Employers and of necessity retains
control of the operation and administration of the Plan. The Corporation is the
Plan administrator within the meaning of ERISA Section 3(16)(A). The Corporation
in accordance with specific provisions of the Plan has, as herein indicated,
delegated certain of these rights and obligations to the Employer, the Trustee
and the Committee and these parties shall be solely responsible for these, and
only these, delegated rights and obligations.
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8.3 Employer
The Employer shall indemnify each member of the Board of Directors, the
Committee, and any of its employees to whom any fiduciary responsibility with
respect to the Plan is allocated or delegated, from and against any and all
liabilities, costs and expenses incurred by such persons as a result of any act
or omission to act in connection with the performance of their fiduciary duties,
responsibilities and obligations under the Plan and under ERISA, except for
liabilities and claims arising from such fiduciary's willful misconduct or gross
negligence. For such purpose, the Employer may obtain, pay for and keep current
a policy or policies of insurance. Where such policy or policies of insurance
are purchased, there shall be no right to indemnification under this Section
8.3, except to the extent of any deductible amount under the policy or policies
or with regard to covered claims in excess of the insured amount. No Plan assets
may be used for any indemnification.
The Employer shall supply such full and timely information for all
matters relating to the Plan as (a) the Committee, (b) the Trustee, and (c) the
accountant engaged on behalf of the Plan by the Corporation may require for the
effective discharge of their respective duties.
8.4 Trustee
The Trustee, in accordance with the Trust Agreement, shall have
authority to manage the Fund, except that (1) the Committee may in its
discretion employ at any time and from time to time an investment manager (as
defined in section 3(38) of ERISA) to direct the Trustee with respect to all or
a designated portion of the assets comprising the Fund, and (2) Participants may
specify their own Investment Options.
Each Participant in the Plan shall be a "named fiduciary" within the
meaning of section 402 of the Employee Retirement Income Security Act of 1974,
as amended ("ERISA"), to the extent that Employer Stock or shares of Corning or
CPS, whether or not allocated to his accounts, are voted or tendered according
to the Participant's directions.
8.5 Committee
The Board shall appoint a Benefits Administration Committee of not less
than three persons to hold office during the pleasure of the Corporation. No
compensation shall be paid members of the Committee from the Fund for service on
such Committee.
The Committee shall choose from among its members a chairman and a
secretary. Any action of the Committee shall be determined by the vote of a
majority of its members. Either the chairman or the secretary may execute any
certificate or other written direction on behalf of the Committee.
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The Committee shall hold meetings upon such notice, at such place or
places and at such time or times as the Committee may from time to time
determine. Meetings may be called by the chairman or any two members. A majority
of the members of the Committee at the time in office shall constitute a quorum
for the transaction of business. The Committee may also act by written consent
in lieu of a meeting.
A Committee member may resign at any time by giving written notice of
his resignation to the Corporation at least thirty days in advance, unless the
Corporation shall accept shorter notice. The Corporation shall appoint
replacement Committee members. Any Committee member who was employed by the
Employer when appointed to the Committee shall automatically be deemed to have
resigned from the Committee effective as of the date he ceases to be employed by
the Employer, unless the Corporation shall affirmatively act to keep said member
on the Committee.
Nothing herein shall prevent a Committee member from being a
Participant, or from acting on Plan matters which affect himself by virtue of
affecting all Participants generally. However, a Committee member shall not act
on any matter which affects himself specially. If application of the preceding
sentence results in there not being a quorum to act on any matter, the
Corporation shall appoint the necessary number of temporary Committee members to
take the action.
In accordance with the provisions hereof, the Committee has been
delegated certain administrative functions relating to the Plan with all powers
necessary to enable it properly to carry out such duties.
The Committee shall have discretionary authority to construe the Plan,
and to determine, consistent with the terms of the Plan, all questions that may
arise thereunder relating to (a) the eligibility of individuals to participate
in the Plan, (b) the amount of benefits to which any Participant or Beneficiary
may become entitled hereunder, and (c) any situation not specifically covered by
the provisions of the Plan. The determination of the Committee shall be final
and binding on all interested parties. All disbursements by the Trustee, except
for the ordinary expenses of administration of the Fund or the
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reimbursement of reasonable expenses at the direction of the Corporation as
provided herein, shall be made upon, and in accordance with, the written
directions of the Committee. When the Committee is required in the performance
of its duties hereunder to administer or construe, or to reach a determination
under any of the provisions of the Plan, it shall do so on a uniform, equitable
and nondiscriminatory basis.
8.6 Claims for Benefits
All claims for benefits under the Plan shall be submitted to the
Committee which shall have the responsibility for determining the eligibility of
any Participant or Beneficiary for benefits. All claims for benefits shall be
made in writing and shall set forth the facts which such Participant or
Beneficiary believes to be sufficient to entitle him to the benefit claimed. The
Committee may adopt forms for the submission of claims for benefits in which
case all claims for benefits shall be filed on such forms. The Committee shall
provide Participants and Beneficiaries with all such forms.
Upon receipt by the Committee of a claim for benefits, it shall
determine all facts which are necessary to establish the right of an applicant
to benefits under the provisions of the Plan and the amount thereof as herein
provided. The applicant shall be notified in writing by the Committee of its
decision with respect to such applicant's claim within 90 days after the receipt
of written request for benefits.
If any claim for benefits is denied, the notice shall be written in a
manner calculated to be understood by the applicant and shall include:
(a) The specific reason or reasons for the denial;
(b) Specific references to the pertinent Plan provisions on which the
denial is based;
(c) A description of any additional material or information necessary
for the applicant to perfect the claim and an explanation why such material or
information is necessary; and
(d) An explanation of the Plan's claim review procedures. If special
circumstances require an extension of time for processing the initial claim, a
written notice of the extension and the reason therefor shall be furnished to
the claimant by the Committee before the end of the initial 90-day period. In no
event shall such extension exceed 180 days after the receipt of the initial
claim for benefits.
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8.7 Denial of Benefits - Review Procedure
In the event a claim for benefits is denied or if the applicant has had
no response to such claim within 90 days of its submission (in which case the
claim for benefits shall be deemed to have been denied), the applicant or his
duly authorized representative, at the applicant's sole expense, may appeal the
denial by filing a written request for review with the Committee within 60 days
of the receipt of written notice of denial or 60 days from the date such claim
is deemed to be denied. In pursuing such appeal the applicant or his duly
authorized representative may review pertinent Plan documents, and may submit
issues and comments in writing.
The decision on review shall be made by the Committee within 60 days of
receipt of the request for review, unless special circumstances require an
extension of time for processing, in which case a decision shall be rendered as
soon as possible, but not later than 120 days after receipt of a request for
review. If such an extension of time is required, written notice of the
extension shall be furnished to the claimant before the end of the original 60
day period. The decision on review shall be in writing, shall be written in a
manner calculated to be understood by the claimant, and shall include specific
references to the provisions of the Plan on which such denial is based. If the
decision on review is not furnished within the time specified above, the claim
shall be deemed denied on review. The decision of the Committee upon review will
be final and binding on all parties.
8.8 Records
All acts and determinations of the Committee shall be duly recorded by
the secretary thereof and all such records, together with such other documents
as may be necessary in exercising its duties under the Plan shall be preserved
in the custody of such secretary. Such records and documents shall at all times
be open for inspection and for the purpose of making copies by any person
designated by the Corporation. The Committee shall provide such timely
information, resulting from the application of its responsibilities under the
Plan, as needed by the Trustee and the accountant engaged on behalf of the Plan
by the Corporation, for the effective discharge of their respective duties.
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8.9 Missing Persons
The Committee shall make a reasonable effort to locate all persons
entitled to benefits under the Plan. If such a person cannot be located, the
amount to which such a person otherwise would be entitled shall be retained by
the Trustee and treated in all respects as assets of the Trust, pending
disposition of such amount in accordance with regulations promulgated by the
Secretary of Labor or the Secretary of the Treasury. The Trustee may deposit any
such amounts into an "escheat fund" maintained by such Trustee but not within
the Trust.
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ARTICLE IX
AMENDMENT AND TERMINATION OF THE PLAN
9.1 Amendment of the Plan
The Corporation shall have the right at any time by action of the Board
to amend the Plan in whole or in part, including retroactively to the extent
necessary. The duties, powers and liability of the Trustee hereunder shall not
be increased without its written consent. The amount of benefits which at the
later of the adoption or effective date of such amendment shall have accrued for
any Participant or Beneficiary hereunder shall not be adversely affected
thereby. No such amendment shall have the effect of revesting in the Employer
any part of the principal or income of the Fund. No amendment may eliminate or
reduce any early retirement benefit or subsidy that continues after retirement
or optional form of benefit. Unless expressly provided for in an amendment, it
shall not affect the rights and obligations of any Participant who terminated
employment prior to the effective date of the amendment.
9.2 Termination of the Plan
The Corporation expects to continue the Plan indefinitely, but
continuance is not assumed as a contractual obligation and each Employer
reserves the right at any time by action of its board of directors to terminate
the Plan as applicable to itself. If an Employer terminates or partially
terminates the Plan or permanently discontinues its Contributions at any time,
each Participant affected thereby shall be then fully vested in his Individual
Account.
In the event of termination of the Plan by an Employer, the Committee
shall value the Fund as of the date of termination. That portion of the Fund
applicable to any Employer for which the Plan has not been terminated shall be
unaffected. The Individual Accounts of the Participants and Beneficiaries
affected by the termination, as determined by the Committee, shall continue to
be administered as a part of the Fund or distributed to such Participants or
Beneficiaries pursuant to Section 5.6 as the Committee, in its sole discretion,
shall determine. Any distributions upon plan termination of amounts attributable
to Employee Pre-Tax Contributions and amounts held in a Participant's Prior
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Employer Qualified Account shall only be made to the extent permissible by Code
Section 401(k)(10).
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ARTICLE X
PROVISIONS RELATIVE TO EMPLOYERS INCLUDED IN PLAN
10.1 Method of Participation
Any organization which is affiliated with the Corporation may with the
consent of the Board adopt the Plan. In order to adopt the Plan, appropriate
action is required by the board of directors (or other governing body) of the
adopting organization and by the Board. Any organization which becomes a party
to the Plan shall thereafter promptly deliver to the Trustee provided for in
Article VII hereof a certified copy of the resolutions or other documents
evidencing its adoption of the Plan or a similar plan and also a written
instrument showing the Board's approval of such organization's becoming a party
to the Plan.
10.2 Withdrawal
Any one or more of the Employers included in the Plan may withdraw from
the Plan at any time by giving six months advance notice in writing to the Board
and the Committee (unless a shorter notice shall be agreed to by the Board) of
its or their intention to withdraw. Upon receipt of notice of any such
withdrawal, the Committee shall certify to the Trustee the equitable share of
such withdrawing Employer in the Fund (to be determined by the Committee).
The Trustee shall thereupon set aside from the Fund then held by it
such securities and other property as it shall, in its sole discretion, deem to
be equal in value to such equitable share. If the Plan is to be terminated with
respect to such Employer, the amount set aside shall be dealt with in accordance
with the provisions of Section 9.2. If the Plan is not to be terminated with
respect to such Employer, the Trustee shall pay such amount to such trustee as
may be designated by such withdrawing Employer, and such securities and other
property shall thereafter be held and invested as a separate trust of the
Employer which has so withdrawn, and shall be used and applied according to the
terms of a new agreement and declaration of trust between the Employer so
withdrawing and the trustee so designated.
Neither the segregation of the Fund assets upon the withdrawal of an
Employer, nor the execution of any new agreement and declaration of trust
pursuant to any of the
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provisions of this Section 10.2, shall operate to permit any part of the corpus
or income of the Fund to be used for or diverted to purposes other than for the
exclusive benefit of Participants and Beneficiaries or to defray reasonable
costs of administering the Plan and Trust.
10.3 Adoption of ESOP by Participating Employer
Any Employer joining the Plan which is not 100 percent owned by the Employer
must expressly provide in said joiner agreement whether the leveraging
provisions of the ESOP are being adopted by such participating Employer. If the
leveraged ESOP is not so adopted, said participating Employer shall participate
in the ESOP provisions of this Plan as may be modified in said joiner agreement,
but all specific provisions applicable to Exempt Loans and the suspense account
established pursuant to the loan shall not apply. If the ESOP provisions of the
Plan are adopted by such a non-100 percent owned participating Employer, any
Exempt Loan applicable to said participating Employer and its Participants shall
be solely the obligation of said participating Employer, and not the Employer or
any other participating Employer under the Plan, and separate accounting shall
be maintained on behalf of said participating Employer and its Participants with
only Participants employed by said participating Employer entitled to
allocations from the fund maintained for said participating Employer's Exempt
Loan. The foregoing provisions governing separate Exempt Loans and separate
groups of Employees of non-100 percent owned participating Employers shall
similarly apply to an Exempt Loan of the Employer and its 100 percent owned
Participating Employers which join the Plan, and their respective Participants,
but for this purpose a 100 percent owned participating employer may, if so
provided in its joinder agreement, join in the Employer's Exempt Loan and in
such case all participating Employer contributions by the Employer and said
Participating Employers and all accounting for shares released from the suspense
account shall be combined for Participants employed by the Employer and each
such participating Employer.
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ARTICLE XI
TOP-HEAVY PROVISIONS
11.1 Determination of Top-Heavy
(a) (1) The Plan will be considered a Top-Heavy Plan for any Plan Year
if as of the Determination Date (A) the value of the Individual Accounts of
Participants who are Key Employees as of such Determination Date exceeds 60% of
the value of the Individual Accounts of all Participants determined as of such
Determination Date, excluding former Key Employees (the "60% Test") or (B) the
Plan is part of a Required Aggregation Group which is Top-Heavy. Notwithstanding
the results of the 60% Test, the Plan shall not be considered a Top-Heavy Plan
for any Plan Year in which the Plan is a part of a Required or Permissive
Aggregation Group which is not Top-Heavy.
(2) For purposes of the 60% Test,
(A) all distributions made from Individual Accounts within the
five-year period ending on the Determination Date shall be taken into account;
(B) if any Participant is a non-Key Employee with respect to
the Plan for any Plan Year, but such Participant was a Key Employee with respect
to the Plan for any prior Plan Year, the Individual Account of such Participant
shall not be considered; and
(C) If a Participant has not performed any service for the
Employer or any Affiliate which maintains the Plan at any time during the
five-year period ending on the Determination Date, the Individual Account of
such Participant shall not be considered.
(b) Minimum Allocations: Notwithstanding Sections 4.3 and 4.4, for any
Plan Year during which the Plan is a Top-Heavy Plan, the rate of Employer
Matching Contributions and Discretionary Contributions for such Plan Year
allocated to the Individual Accounts of Participants who are non-Key Employees
and who remain employed by the Employer (or any Affiliate) at the end of the
Plan Year (regardless of any such Participant's hours of service or level of
compensation during the Plan Year) shall be not less than the lesser of:
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(1) three percent (3%) of such non-Key Employee Participant's
Section 415 Compensation; or
(2) the highest aggregate percentage of Section 415 Compensation at
which Employer Matching Contributions, Discretionary Contributions, and Employee
Pre-Tax Contributions are made (or required to be made) and allocated under
Article IV for any Key Employee for the Plan Year.
If a Participant is covered by more than one defined contribution plan
on account of his employment with the Employer and/or any Affiliate, the minimum
allocation required by this Section shall be determined by aggregating the
allocations under all such plans.
(c) (1) Notwithstanding Section 5.5, for any Plan Year in which the
Plan is a Top-Heavy Plan, a Participant who has earned at least one hour of
service during such Plan Year shall have a vested interest in those portions of
his Individual Account which are not automatically one hundred percent (100%)
vested, including allocations made to those portions of the Account in Plan
Years prior to the Plan becoming Top-Heavy, determined as follows:
- --------------------------------------------------------------------------------
Years of Vesting Service Vested Interest
- --------------------------------------------------------------------------------
0 0%
- --------------------------------------------------------------------------------
1 20%
- --------------------------------------------------------------------------------
2 40%
- --------------------------------------------------------------------------------
3 60%
- --------------------------------------------------------------------------------
4 or more 100%
- --------------------------------------------------------------------------------
(2) If the Plan ceases to be a Top-Heavy Plan, the vesting rules
set forth in Section 5.5 shall again apply except that:
(A) any portion of a Participant's Individual Account that was
vested before the Plan ceased to be a Top-Heavy Plan shall remain vested, and
(B) any Participant with three or more years of service shall
have the option to continue to have his vested interest in those portions of his
Individual Account which are not automatically one hundred percent (100%) vested
determined under this Section 11.1(c).
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<PAGE>
11.2 Top-Heavy Definitions
Determination Date - With respect to any Plan Year, the last day of the
preceding Plan Year.
Key Employee - Any Employee or former Employee who at any time during
the Plan Year containing the Determination Date, or the four preceding Plan
Years, is or was (1) an officer of the Employer having annual Section 415
Compensation for such Plan Year which is in excess of 50 percent of the dollar
limit in effect under Code Section 415(b)(1)(A) for the calendar year in which
such Plan Year ends (but in no event shall the number of officers taken into
account as Key Employees exceed the lesser of (i) 50 or (ii) the greater of 3 or
10% of all employees); (2) an owner of (or considered as owning within the
meaning of Code Section 318) both more than a percent interest as well as one of
the ten largest interests in the Employer and having annual Section 415
Compensation greater than the dollar limit in effect under Code Section
415(c)(1)(A) for such Plan Year; (3) a five percent owner of the Employer; or
(4) a one percent owner of the Employer who has annual Section 415 Compensation
of more than $150,000. For purposes of determining five percent and one percent
owners, neither the aggregation rules nor the rules of subsections (b), (c) and
(m) of Code Section 414 apply. Beneficiaries of an Employee acquire the
character of the Employee who performed services for the Employer. Also,
inherited benefits will retain the character of the benefits of the Employee who
performed services for the Employer. A non-Key Employee is any Employee who is
not a Key Employee, or who is a former Key Employee.
Permissive Aggregation Group - Each employee pension benefit plan
maintained by the Employer (or any Affiliate) which is considered part of the
Required Aggregation Group, plus one or more other employee pension benefit
plans maintained by the Employer (or any Affiliate) that are not part of the
Required Aggregation Group but that satisfy the requirements of Section
401(a)(4) and Section 410 of the Code when considered together with the Required
Aggregation Group.
Required Aggregation Group - Each employee pension benefit plan
maintained by the Employer (or any Affiliate), whether or not terminated, in
which a Key Employee participates in the Plan Year containing the Determination
Date or any of the four preceding Plan Years, and each other employee pension
benefit plan maintained by the Employer (or any Affiliate), whether or not
terminated, in which no Key Employee
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participates but which during the same period enables any employee pension
benefit plan in which a Key Employee participates to meet the requirements of
Section 401(a)(4) or Section 410 of the Code.
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<PAGE>
ARTICLE XII
MISCELLANEOUS
12.1 Governing Law
The Plan shall be construed, regulated and administered according to
the laws of Massachusetts except in those areas preempted by the laws of the
United States of America.
12.2 Construction
The headings and subheadings in the Plan have been inserted for
convenience of reference only and shall not affect the construction of the
provisions hereof. In any necessary construction the masculine shall include the
feminine and the singular the plural, and vice versa.
12.3 Administration Expenses
The expenses of administering the Fund and the Plan may be paid either
by the Employer or from the Fund, as directed by the Corporation.
12.4 Participant's Rights; Acquittance
No Participant in the Plan shall acquire any right to be retained in
the Employer's employ by virtue of the Plan, nor, upon his dismissal, or upon
his voluntary termination of employment, shall he have any right or interest in
and to the Fund other than as specifically provided herein. The Employer shall
not be liable for the payment of any benefit provided for herein. All benefits
hereunder shall be payable only from the Fund.
12.5 Spendthrift Clause
Except as provided by a qualified domestic relations order within the
meaning of ERISA Section 206(d)(3), none of the benefits, payments, proceeds, or
distributions under this Plan shall be subject to the claim of any creditor of a
Participant or a Beneficiary hereunder or to any legal process by any creditor
of a Participant or Beneficiary. Neither a Participant or Beneficiary shall have
any right to alienate, commute, anticipate, or assign any of the benefits,
payments, proceeds or distributions under this Plan.
12.6 Merger, Consolidation or Transfer
In the event of the merger or consolidation of the Plan with another
plan or transfer of assets or liabilities from the Plan to another plan, each
then Participant or
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Beneficiary shall not, as a result of such event, be entitled on the day
following such merger, consolidation or transfer under the termination of the
Plan provisions to a lesser benefit than the benefit he was entitled to on the
day prior to the merger, consolidation or transfer if the Plan had then
terminated.
12.7 Mistake of Fact
Notwithstanding anything herein to the contrary, upon the Employer's
request, a Contribution which was made by a mistake of fact, or conditioned upon
initial qualification of the Plan or upon the deductibility of the Contribution
under Code Section 404, may be returned to the Employer by the Trustee within
one (1) year after the payment of the Contribution, the denial of the
qualification or the disallowance of the deduction (to the extent disallowed),
whichever is later. For purposes of the preceding sentence, all contributions to
the Plan made before receipt of a favorable determination letter on
qualification from the Internal Revenue Service shall be conditioned on the
Plan's initial qualification, and all contributions, whenever made, shall be
conditioned on their deductibility under Code Section 404.
12.8 Counterparts
The Plan and the Trust Agreement may be executed in any number of
counterparts, each of which shall constitute but one and the same instrument and
may be sufficiently evidenced by any one counterpart.
12.9 Transitional Rule
Notwithstanding any provision in this Plan to the contrary, no
contribution by or on behalf of any Participant shall be made under this Plan
for any period during which any contribution by or on behalf of such Participant
is made while such Participant is a participant in a Merged Plan.
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ARTICLE XIII
ADOPTION OF THE PLAN
Anything herein to the contrary notwithstanding, this amended and
restated Plan is adopted and maintained under the condition that it is qualified
by the Internal Revenue Service under Code Section 401(a) and that the Trust
hereunder is exempt under Code Section 501(a).
As evidence of its adoption of the Plan, Corning Clinical Laboratories
Inc. (DE) has caused this instrument to be signed by its authorized officer this
___ day of __________, 199__, effective as of [ ], except as otherwise provided
herein.
ATTEST: CORNING CLINICAL LABORATORIES INC. (DE)
___________________________ By:__________________________________(SEAL)
(Title)
Corning Clinical Laboratories Inc. (MI) hereby signifies its adoption
of this Plan.
ATTEST: CORNING CLINICAL LABORATORIES INC. (MI)
___________________________ By:__________________________________(SEAL)
(Title)
___________________________________________
(Date)
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<PAGE>
Corning Clinical Laboratories, Connecticut hereby signifies its
adoption of this Plan.
ATTEST: CORNING CLINICAL LABORATORIES, CONNECTICUT
___________________________ By:__________________________________(SEAL)
(Title)
___________________________________________
(Date)
Corning Clinical Laboratories of PA, Inc. hereby signifies its adoption
of this Plan.
ATTEST: CORNING CLINICAL LABORATORIES OF PA, INC.
___________________________ By:__________________________________(SEAL)
(Title)
___________________________________________
(Date)
DeYor CPF/MetPath Inc., a wholly-owned subsidiary of MetPath (PA) Inc.,
hereby signifies its adoption of this Plan.
ATTEST: DEYOR CPF/METPATH INC.
___________________________ By:__________________________________(SEAL)
(Title)
___________________________________________
(Date)
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<PAGE>
Southgate Medical Services, Inc., a wholly-owned subsidiary of MetPath
(PA) Inc., hereby signifies its adoption of this Plan.
ATTEST: SOUTHGATE MEDICAL SERVICES, INC.
___________________________ By:__________________________________(SEAL)
(Title)
___________________________________________
(Date)
MetWest Inc. hereby signifies its adoption of this Plan.
ATTEST: METWEST INC.
___________________________ By:__________________________________(SEAL)
(Title)
___________________________________________
(Date)
Corning Clinical Laboratories Inc. (MA) hereby signifies its adoption
of this Plan.
ATTEST: CORNING CLINICAL LABORATORIES INC. (MA)
___________________________ By:__________________________________(SEAL)
(Title)
___________________________________________
(Date)
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<PAGE>
Corning Clinical Laboratories Inc. (MD) hereby signifies its adoption
of this Plan.
ATTEST: CORNING CLINICAL LABORATORIES INC. (MD)
___________________________ By:__________________________________(SEAL)
(Title)
___________________________________________
(Date)
Nichols Institute Diagnostics hereby signifies its adoption of this
Plan.
ATTEST: NICHOLS INSTITUTE DIAGNOSTICS
___________________________ By:__________________________________(SEAL)
(Title)
___________________________________________
(Date)
Corning Nichols Institute Inc. hereby signifies its adoption of this
Plan.
ATTEST: CORNING NICHOLS INSTITUTE INC.
___________________________ By:__________________________________(SEAL)
(Title)
___________________________________________
(Date)
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<PAGE>
Supplement A
TO
THE PROFIT SHARING PLAN
OF
CORNING CLINICAL LABORATORIES INC.
EMPLOYEE STOCK OWNERSHIP PLAN (ESOP)
A-1 Purpose. The purpose of this Supplement A to the Plan is to set forth the
terms of the Plan as applied to the portion of the ESOP attributable to Exempt
Loans as described in subsection A-4.
A-2 Effective Date. The effective date of this Supplement A is December 31,
1996.
A-3 Participation. Each Participant in the Plan on the Effective Date of this
Supplement A shall immediately become a Participant in this Supplement A. Every
other person who thereafter becomes a Participant in the Plan shall at the same
time become a Participant in this Supplement A.
A-4 Exempt Loan. Any loan to the Plan or Trust not prohibited by section 4975(c)
of the Code, including a loan which meets the requirements set forth in section
4975(d)(3) of the Code and the regulations promulgated thereunder, the proceeds
of which are used to finance the acquisition of ESOP Stock or to refinance such
a loan. An Exempt Loan shall be for a specific term, shall bear a reasonable
rate of interest and shall not be payable on demand except in the event of
default. An Exempt Loan may be secured by a pledge of the financed shares so
acquired (or acquired with the proceeds of a prior Exempt Loan which is being
refinanced). No other Trust Fund assets may be pledged as collateral for an
Exempt Loan, and no lender shall have recourse against Trust Fund assets other
than any financed shares remaining subject to pledge. If the lender is a party
in interest (under ERISA), the Exempt Loan must provide for a transfer of Trust
Fund assets on default only upon and to the extent of the failure of the Trust
to meet the payment schedule of the Exempt Loan. Any pledge of financed shares
must provide for
-A1-
<PAGE>
the release of the shares so pledged as payments on the Exempt Loan are made by
the Trustee and such financed shares are allocated to Participants' accounts.
Payments of principal on any Exempt Loan shall be made by the Trustee (as
directed by the Committee) only from Employer contributions paid in cash under
the Plan to enable the Trust to repay such Exempt Loan, from earnings
attributable to such Employer contributions and from any cash dividends received
by the Trust on such financed shares or dividends on such other shares of
Employer Stock as is permitted under Code section 404(k).
A-5 Investment of Exempt Loan Proceeds. The Employer may direct the Trustee to
enter into one or more Exempt Loans to finance the acquisition of ESOP Stock.
Proceeds from an Exempt Loan may be used to acquire ESOP Stock from the
Employer's shareholders or directly from the Employer. If such shares are
purchased from the Employer, no commission may be charged with respect thereto
and the sale price shall not be more than the fair market value thereof, defined
for this purpose with respect to the Employer's common stock to be said common
stock's New York Stock Exchange (or other national stock exchange) closing price
on the first business day immediately preceding the date of sale. There shall be
no limit on the amount of stock of the Employer which may be held at any one
time by the Trustee in the Trust Fund regardless of the percentage which such
stock so held bears to the assets of the Trust Fund or to the outstanding shares
of stock of the Employer or for any other reason.
Notwithstanding any other provision of the Plan, all proceeds of an Exempt Loan
shall be used, within a reasonable time after receipt by the Trust Fund, for the
following purposes:
(a) To acquire ESOP Stock;
(b) To repay the same Exempt Loan; or
(c) To repay any previous Exempt Loan.
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<PAGE>
ESOP Stock acquired by the Trust Fund through an Exempt Loan shall be initially
maintained in a Suspense Account and shall thereafter be released from suspense
and allocated to Participants' ESOP Accounts as hereinafter provided.
A-6 Supplement A Cash Equivalents Fund. All cash dividends on Employer Stock
held in a Suspense Account which are not allocated to Participants' accounts or,
in the case of allocated shares, which the Employer directs are to be used to
make payments on Exempt Loans and all Employer Matching Contributions required
under Section A-7 shall be credited to the Supplement A Cash Equivalents Fund
pending their application to Exempt Loan payments. Except as provided under
Section 7.5, all such dividends and all earnings of the Supplement A Cash
Equivalents Fund shall be used to make principal payments on outstanding Exempt
Loans to the extent then due. In the event that the amount of such dividends and
earnings exceeds the amount of principal payable on that date, the excess shall
be applied until exhausted to interest payable on that date, and principal and
interest payments due thereafter. Notwithstanding the preceding sentences of
Section A-6, in lieu of making payments on outstanding Exempt Loans, the
Committee may direct that all or any amount of cash dividends received with
respect to Employer Stock allocated to participants' accounts shall be credited
proportionately to such Participants' Accounts pending investment in the
Employer Stock Fund. Any amount that is applied to make a payment on an
outstanding Exempt Loan after the last day of a plan year (the "prior plan
year"), but on or before the due date (including extensions thereof) for the
filing of the federal income tax return of the Employer for the tax year in
which the last day of such prior plan year occurs, may be designated by the
employers as a payment with respect to such prior plan year.
A-7 Coordination with Employer Contributions. For each Plan Year the Employer
shall make contributions under this Section A-7 which, after taking into account
the use of dividends and earnings in accordance with Section A-6, are sufficient
to meet all scheduled payments of principal and interest on outstanding Exempt
Loans. Employer contributions under Sections 3.2 (matching) and 3.3
(discretionary) shall be applied against payments on any Exempt Loan to the
extent the Committee in its sole discretion shall determine and ESOP Stock shall
then be released. An Employer's obligations to
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<PAGE>
contribute under Sections 3.2 and 3.3 shall be reduced for such month by the
fair market value as of the date of release of the ESOP Stock so released or
otherwise allocated as below provided. To the extent said fair market value is
less than said Employer's obligations under Sections 3.2 and 3.3 for any such
month, the Employer shall make further contributions to the Trust Fund to fully
meet said obligations. For each Plan Year, if for a calendar month the fair
market value as of the date of release of the shares so released is in excess of
the Employer's obligations to contribute under Sections 3.2 and 3.3 for such
month, the shares released for said month representing the excess ("excess
shares") shall continue to be held by the Trustee and shall thereafter be
allocated to the Participants' Employer Matching Accounts in the following
manner: first, if in a succeeding calendar month within said Plan Year, the fair
market value of the shares so released for said month are less than the
Employer's obligations to contribute under Sections 3.2 and 3.3 for said month,
then "excess shares" remaining unallocated for any prior calendar month in said
Plan Year shall be allocated to the Participants' Matching Contribution Accounts
to the extent that said Employer obligations exceed the value of the released
shares, and for this purpose said "excess shares" to be so allocated shall be
valued at the same value as the value of the shares released for said month; and
second, if as of the last day of the Plan Year there remain "excess shares"
which have not been allocated to Participants' Matching Contribution Accounts as
aforesaid, said "excess shares" shall be allocated as of the last day of the
Plan Year to the Participants' Matching Contribution Accounts, as the Committee
may determine in its sole discretion on a year-to-year basis, in direct
proportion to the value (determined as of the date allocated to the
Participants' Matching Contribution Accounts) of those shares released and
allocated to the Fund so determined by the Committee, together with all other
Employer contributions to Participants' Matching Contribution Accounts for said
Plan Year. In addition to the foregoing contributions, in any Plan Year, the
Employers may make supplemental contributions to be used by the Trustee to
prepay any Exempt loan, to pay expenses of the Plan and any related trust and to
satisfy the dividend requirements for that year with respect to Employer Stock
allocated to Participants' Employer Matching Accounts. All Employer Matching
Contributions shall be used to make payments on Exempt Loans to the extent
required to meet any scheduled payments of principal and interest after taking
into account the use of dividends and earnings in accordance with Section A-6.
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<PAGE>
A-8 Release of Employer Stock From Suspense Account. As of the last day of each
Plan Year, of each calendar quarter in the case of the Employer Stock allocable
for the year as dividend replacements under paragraph A-9(a), or of such other
period provided under the terms of an Exempt Loan, throughout the duration of an
Exempt Loan, a portion of the Employer Stock acquired with the proceeds of such
Exempt Loan shall be withdrawn from the Suspense Account and allocated to
eligible Participants' Matching Contribution Accounts in accordance with the
provisions of Section A-9.
(a) Subject to the provisions of paragraph (b) below, the number
of shares of Employer Stock which shall be released from the
Suspense Account for any plan year (calculated separately with
respect to each Exempt Loan) shall be equal to the product of:
(i) the number of shares of Employer Stock acquired with
the proceeds of the Exempt Loan
Multiplied by
(ii) a fraction, the numerator of which is the amount of
principal and interest paid on that loan for that
Plan Year and the denominator of which is the amount
of principal and interest paid or payable on that
loan for that Plan Year and for all future years.
For purposes of determining the fraction in (ii), if the
interest rate under the Exempt Loan is variable, the interest
rate to be paid in future months shall be assumed to be equal
to the interest rate applicable as of the applicable month.
(b) Notwithstanding the provisions of paragraph (a) above, if
provided by the terms of an Exempt Loan or directed by the
Committee prior to the first payment of interest on any Exempt
Loan, the number of shares of Employer
-A5-
<PAGE>
Stock attributable to such Exempt Loan which are withdrawn
from the Suspense Account for any Plan Year shall be
proportionate to principal payments only, provided that:
(i) such withdrawal is consistent with the provisions of
the Exempt Loan with respect to the release of
Employer Stock as collateral, if any, for such loan;
(ii) the Exempt Loan provides for annual payments of
principal and interest at a cumulative rate that is
not less rapid at any time than level annual payments
of such amounts for ten years;
(iii) interest is disregarded for purposes of determining
such release only to the extent that it would be
determined to be interest under standard loan
amortization tables; and
(iv) the term of the ESOP Loan, together with any renewal,
extension or refinancing thereof, does not exceed ten
years.
(c) Notwithstanding the foregoing, in the event such Exempt Loan
shall be repaid with the proceeds of a subsequent Exempt Loan
(the "Substitute Loan"), such repayment shall not operate to
release all such ESOP Stock in the suspense account, but,
rather, such release shall be effected pursuant to the
foregoing provisions of this Section on the basis of payments
of principal and interest on such Substitute Loan.
(d) If at any time there is more than one Exempt Loan outstanding,
then separate Suspense Accounts may be established for each
such Loan. Each Exempt Loan for which a separate Suspense
Account is maintained may be treated separately for purposes
of the provisions governing the release of ESOP Stock from
suspense under this Section and for purposes of the
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<PAGE>
provisions governing the application of Employer contributions
to repay an Exempt Loan.
A-9 Allocation and Crediting of Employer Stock to Employer Match Accounts and
Application to Plan Limitations. Employer Stock released from the Suspense
Account during any Plan Year shall be allocated and credited as follows:
(a) To the extent that dividends on Employer Stock previously
allocated to the Individual Account of a Participant have been
used to make payments on an Exempt Loan, such account shall be
credited with Employer Stock with a fair market value
determined as of the last day of the month preceding the month
of the dividend payment date equal to the amount of such
dividend.
(b) As of each calendar month, any Employer Stock released from
the Suspense Account during the Plan Year ending on that date
and not credited in accordance with paragraph (a) shall be
credited to the Employer Matching Accounts of eligible
Participants pursuant to Section 4.3, in order to satisfy the
obligation under Section 3.2.
(c) For purposes of Section 4.6 of the Plan, Employer Matching
Contributions for any Plan Year which are utilized to make any
payment of principal or interest on an Exempt Loan shall be
deemed to have been allocated among Participants in the same
ratios as the number of shares of Employer Stock released from
the Suspense Account as credited in accordance with paragraph
(b) above, without regard to the value of the Employer Stock
released from the Suspense Account.
(d) All Employer Stock allocated to Participants in accordance
with paragraph (b) above shall be treated as Employer Matching
Contributions for purposes of Section 3.2 and as "Matching
Contributions" for purposes of section 401(m) of the Internal
Revenue Code.
-A7-
<PAGE>
(e) It is intended that the provisions of this Supplement A shall
be applied and construed in a manner consistent with the
requirements and provisions of Treasury Regulations Section
54.4975-7(b) (8), and any successor regulation thereto. The
number of shares allocable to a Participant's Matching
Contribution Account shall be the number of shares which bears
the same ratio to the total shares released for such month and
allocable to the contribution made by or on behalf of such
Participant by his participating Employer under Sections 3.2
and 3.3 for such month bears to the total Employer
contributions under Sections 3.2 and 3.3 made on behalf of all
such Participants for such month, provided, however, that the
fair market value of the shares so allocated as of the date of
such allocation shall not exceed the Employer's obligation to
contribute under such Sections on behalf of such Participant
for such month, and any shares in excess of said participating
Employer obligations ("excess shares") for all Participants
are to be then allocated as described above in Section A-7.
(f) Notwithstanding the foregoing provisions of this Section, if
more than one-third of the total allocations to Participants'
accounts with respect to a Plan Year would be allocated in the
aggregate to the accounts of Highly Compensated Employees and
attributable to the Employer Matching Contribution allocated
to Employer Stock, then the allocations to the accounts of
Highly Compensated Employees shall be reduced, pro rata, in an
amount sufficient to reduce the amounts allocated to the
accounts of such Participants to an amount not in excess of
one-third of the total allocations to Participants' accounts
with respect to such Plan Year and any shares of Employer
Stock which are prevented from being allocated due to said
restriction shall be allocated as though Highly Compensated
Employees did not participate in the Plan.
A-10 Diversification Election By Participants. A Qualified Participant is
eligible to elect a diversification of Employer Stock under the conditions
specified in Section 2.6.
-A8-
<PAGE>
Put Option. Employer Stock acquired with the proceeds of an Exempt Loan must be
subject to a put option, if at the time of its distribution it is either subject
to a trading limitation, or is not publicly traded. For purposes of this
paragraph (b), a "trading limitation" on a security is a restriction under any
Federal or state securities law, any regulation thereunder, or an agreement, not
prohibited by Treasury regulations Section 54.4975-7(b) affecting the security
so as to make the security not as freely tradable as one not subject to such a
restriction. The put option must be exercisable only by a Participant, a
Beneficiary or by any donee of the Participant or by a person to whom the
security passes by reason of a Participant's death. The put option must permit a
Participant to put the security to the Corporation, and it may grant the trust
an option to assume the rights and obligations of the Corporation at the time
that the put option is exercised, but under no circumstances may the put option
bind the Trust. If it is known at the time an Exempt Loan is made that Federal
or state law will be violated by the Corporation's honoring such a put option,
the put option must permit the security to be put, in a manner consistent with
such law, to a third party (for example but without limitation, to an Affiliate
or a shareholder other than the Trust) that has substantial net worth at the
time the Exempt Loan is made and whose net worth is reasonably expected to
remain substantial. A put option must be exercisable at any time during a period
or periods which include at least (A) sixty (60) days beginning on the date the
security subject to the put option is distributed by the Trustee and (B) sixty
(60) days in the next following Plan Year, in accordance with regulations issued
pursuant to Section 409 of the Code. In the case of a security that is publicly
traded without restriction when distributed, but ceases to be so traded within
the put option period(s) set forth above, the Corporation must notify each
security holder in writing on or before the tenth (10th) day after the date the
security ceases to be so traded that during the remainder of such period(s) the
security is subject to put option. The number of days between such tenth (10th)
day and the date on which notice is actually given, if later than the tenth
(10th) day, must be added to the duration of the put option. The notice must
inform distributees of the terms of the put options that they are to hold. The
price at which a put option must be exercisable is the value of the security, as
determined under Treasury Regulations Section 54.4975-11(d)(5). The provisions
for payment under a put option
-A9-
<PAGE>
must provide that the Corporation, or the Trust if the Plan so elects, shall
repurchase the Employer Securities as follows:
(A) If the distribution constitutes a total distribution within the
meaning of Section 409(h)(5) of the Code, payment of the fair
market value of the repurchased Employer Securities shall be
made in five (5) substantially equal annual payments, of which
the first shall be paid not later than thirty (30) days after
the Participant exercises the put option. The purchaser will pay
a reasonable rate of interest and provide adequate security on
amounts not paid after thirty (30) days;
(B) If the distribution does not constitute a total distribution,
the purchaser shall pay the Participant an amount equal to the
fair market value of the Employer Stock repurchased no later
than thirty (30) days after the Participant exercises the put
option.
-A10-
CORNING CLINICAL LABORATORIES INC.
EMPLOYEE EQUITY PARTICIPATION PROGRAM
<PAGE>
CORNING CLINICAL LABORATORIES INC.
EMPLOYEE EQUITY PARTICIPATION PROGRAM
1. Purpose
The Employee Equity Participation Program (the "Program") is intended to
encourage executive, managerial, technical and other employees of (i) Corning
Clinical Laboratories Inc. (the "Corporation"), (ii) any "subsidiary
corporation" of the Corporation within the meaning of Section 424 of the
Internal Revenue Code of 1986, as amended (the "Code") or of any successor
section, or (iii) any other entity in which the Corporation holds beneficially
at least one-half of the ownership interest (such entity or "subsidiary
corporation" being referred to herein as a "Subsidiary") to become owners of
stock of the Corporation in order to increase their proprietary interest in the
Corporation's success; to stimulate the efforts of certain key executive,
managerial, technical and other employees by giving suitable recognition to
services which contribute materially to the Corporation's success; and to
provide such employees with additional incentive and reward opportunity based,
in part, upon the attainment of predetermined goals over specified periods. The
Program shall consist of two plans: (a) the Stock Option Plan and (b) the
Incentive Stock Plan.
2. Administration
The Program shall be administered by a committee appointed by the Board of
Directors of the Corporation, to be known as the "Compensation Committee" (the
"Committee"), consisting of not less than three members of the Corporation's
Board of Directors, each member of which shall be a "non-employee director"
within the meaning of Rule 16b-3(d)(1) promulgated under the Securities Exchange
Act of 1934 (the "1934 Act") or any successor thereto and an "outside director"
within the meaning set forth in regulations promulgated under Section 162(m) of
the Code. Without limiting the foregoing, unless and to the extent those
definitions are amended, no member of the Committee shall be an officer or
employee of the Corporation or a subsidiary thereof, a former officer of the
Corporation, a former employee of the Corporation who receives compensation for
prior services (other than benefits under a tax-qualified retirement plan)
during the taxable year, any other person who receives directly or indirectly in
any capacity (other than as a director) remuneration in excess of the lesser of
$60,000 or 5 percent of the gross income realized by the entity employing such
member during such entity's taxable year ending with or within the Corporation's
taxable year or any person who is a member of a law firm retained by, or a
partner or executive officer of an investment banking firm that performs
services for, the Corporation. No member of the Committee shall have been
eligible to participate in the Program in the preceding year nor be eligible to
participate in the Program while serving on the Committee. The Committee shall
select periodically the executive, managerial, technical and other employees who
shall participate in the Program and the extent of their participation in any
particular Plan under the Program and shall report such selections and levels of
participation to the Board of Directors.
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The Committee's interpretation and construction of any provisions of this
Program or any Plan or any right, option or award granted or contract executed
under it shall be final unless otherwise determined by the Board of Directors,
which determination shall be final. No member of the Board of Directors or the
Committee shall be liable for any action or determination made in good faith.
3. Eligibility
The Committee shall from time to time select the executive, managerial,
technical and other employees (including officers and employees who are
directors) of the Corporation and of any Subsidiary who shall be eligible to
participate in any Plan under the Program.
4. Stock
The shares subject to options, grants or incentive stock rights under the
Program shall be shares of the Corporation's Common Stock par value $.50 per
share, either authorized but unissued or issued and held in treasury or such
other securities as may be issued by the Corporation in substitution therefor.
The total amount of the Common Stock of the Corporation which may be (i) sold
pursuant to options granted under the Stock Option Plan and (ii) granted, or
issued pursuant to incentive stock rights awarded, under the Incentive Stock
Plan shall not exceed 3,000,000 shares. There may be awarded under the Incentive
Stock Plan in lieu of shares the cash equivalent thereof valued at the date that
the Committee determines whether, or to what extent, performance objectives have
been met. In each case, the number of shares shall be subject to adjustment in
accordance with the provisions of Section 5.
Shares from the unexercised portion of the options which expire or of the
options which are terminated during the period when options may be granted and
shares forfeited or not earned under the Incentive Stock Plan may again either
(i) be the subject of an option under the Stock Option Plan or (ii) be awarded
or be the subject of rights granted under the Incentive Stock Plan. Shares of
the Common Stock of the Corporation used by an optionee as full or partial
payment to the Corporation for the purchase price of shares subject to an option
agreement, the terms of which explicitly provide for the grant of an additional
option as contemplated by Section 6(a)(i) hereof, shall again be made available
for use under the Program. Shares otherwise surrendered upon the exercise of
stock options may not again be the subject of options or awards granted under
the Program. Shares surrendered under the Program in payment of taxes due upon
the exercise of stock options or upon the recognition of income for shares
issued under the Incentive Stock Plan may not be issued again under the Program.
No single eligible employee under the Stock Option Plan may receive grants of
stock options covering in excess of 600,000, or 20% of the total, shares
authorized under the Program.
5. Recapitalization
The number of shares of Common Stock which may be granted, awarded or earned
under the Incentive Stock Plan or made subject to options granted under the
Stock Option Plan in the
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aggregate and to any single eligible employee, the number of shares covered by
each outstanding option, and the price per share thereunder, and the number of
shares granted or subject to incentive stock rights under the Incentive Stock
Plan shall all be proportionally adjusted for any increase or decrease in the
number of issued shares of Common Stock of the Corporation resulting from a
subdivision or consolidation of shares or other capital adjustment, the
distribution of shares of capital stock to stockholders of the Corporation, the
payment of a stock dividend or other increase or decrease in such shares
effected without receipt of consideration by the Corporation, or any
distribution or spin-off of assets (other than a normal cash dividend) to the
stockholders of the Corporation.
Subject to any required action by the stockholders, if the Corporation shall be
the surviving corporation in any merger or consolidation, any option granted
under the Stock Option Plan and any incentive stock right granted under the
Incentive Stock Plan shall apply to the securities to which a holder of the
number of shares of Common Stock subject to the option or such right, as the
case may be, would have been entitled before the occurrence of such event. A
dissolution or liquidation of the Corporation, or a merger or consolidation in
which the Corporation is not the surviving corporation, shall cause every option
outstanding under the Stock Option Plan to terminate, except that the surviving
corporation may, in its absolute and uncontrolled discretion, tender an option
or options to purchase its shares on terms and conditions, both as to number of
shares and otherwise, which will substantially preserve the rights and benefits
of any option then outstanding under the Stock Option Plan. Upon the dissolution
or liquidation of the Corporation, or upon the effective date of any merger or
consolidation in which the Corporation is not the survivor and in which the
survivor has not tendered options as provided in the preceding sentence, the
Corporation shall deliver to each optionee whose incentive stock options are
being terminated an amount in cash equal to the difference between the option
price and the fair market value of a share of the Corporation's Common Stock
determined in good faith by the Committee. In the case of such a merger or
consolidation in which the Corporation is not the survivor, the Corporation
shall also deliver to each person whose incentive stock options are being
terminated and to each person who had exercised an incentive stock option and
who was holding the shares so purchased for long-term capital gains treatment an
amount equal to the difference between the federal income tax which the person
would be required to pay as a result of being unable to hold such shares for
long-term capital gains purposes (assuming a sale price equal to the fair market
value as provided above) and the tax such person is required to pay as a result
of having to dispose of shares on account of such merger or consolidation.
In the event of a change in the Corporation's presently authorized Common Stock
which is limited to a change of authorized shares with par value into the same
number of shares with a different par value or into the same number of shares
without par value, the shares resulting from any such change shall be deemed to
be Common Stock within the meaning of the Program.
6. Stock Option Plan
(a) The Committee may from time to time grant options, including but not
limited to performance-based stock options and to incentive stock options
permitted by Section 422 of the Code, to purchase shares of Common Stock,
evidenced by agreements in such form
3
<PAGE>
as the Committee may, from time to time, approve, containing in substance
the following terms and conditions:
(i) The option price shall be payable in full upon the exercise of the
option and may be paid either in United States dollars, or under rules
established and maintained from time to time by the Committee, in
shares of the Common Stock of the Corporation owned by the optionee,
or a combination of cash and shares. Under such rules, an optionee
paying the purchase price of an option in already-owned, freely
transferable, unencumbered shares of Common Stock of the Corporation
may receive new options to purchase shares of Common Stock of the
Corporation at the then current market price (being the mean between
the high and low selling prices of the Corporation's Common Stock on
the New York Stock Exchange on the date of exercise) for the same
number of shares surrendered upon exercise of the original option. In
no circumstance will the total number of shares subject to the new
option granted exceed the number of shares surrendered upon exercise
of the original option, will the new option be exercisable within
twelve months of the date of exercise or will the new option have a
life beyond that of the original option.
Shares of the Corporation's Common Stock shall be valued at the mean
between the high and low selling prices of the Corporation's Common
Stock on the New York Stock Exchange on the date of exercise.
(ii) The option shall state the total number of shares to which it
pertains.
(iii) The option price shall be not less than 100% of the fair market value
of the shares on the date of the granting of the option.
(iv) Each option granted under the Stock Option Plan shall expire on the
date designated by the Committee but in no event more than ten years
from the date the option is granted.
(v) The Committee may in its discretion provide that an option may not be
exercised in whole or in part for any period or periods of time
specified by the Committee. Except as may be so provided by the
Committee and except as otherwise provided herein, any option may be
exercised in whole at any time or in part from time to time after the
option has vested in accordance with the terms of the applicable
agreement and during its term; provided, however, that in no
circumstance will an option under the Stock Option Plan become
exercisable in less than twelve months from the date of grant.
(vi) The aggregate fair market value (determined as of the time the option
is granted) of the stock for which any employee may be granted
incentive stock options under this Plan or any other plans of the
Corporation or any subsidiary of the Corporation shall not exceed
$100,000 (or such other limit as may be in effect from time to time
under Section 422 of the Code or any statutory successor thereto) in
any calendar year in
4
<PAGE>
which such option or any portion thereof first becomes exercisable
pursuant to the terms of the agreement between such employee and the
Corporation.
(vii) If, in the opinion of counsel for the Corporation, the listing,
registration or qualification of the shares subject to option under
any securities exchange or under any state or Federal law, or the
consent or approval of any governmental regulatory body, or an
exemption from registration, is necessary or desirable, each option
shall be subject to the requirement that such option may not be
exercised in whole or in part unless such listing, registration,
qualification, consent, approval or exemption shall have been effected
or obtained free of any conditions not acceptable to the Committee.
(viii) An optionee shall have no rights as a stockholder with respect to
shares covered by his option to purchase until the date of the
issuance or transfer of the shares to him and only after such shares
are fully paid. No adjustment will be made for dividends or other
rights for which the record date is prior to the date of such issuance
or transfer, except as provided in Section 5.
(ix) The option agreements authorized under the Stock Option Plan shall
contain such other provisions not inconsistent with this Program as
the Committee may deem advisable.
(b) Options may be granted under the Stock Option Plan from time to time in
substitution for stock options held by consultants to or directors or
employees of other corporations who are about to become and who do
concurrently with the grant of such options become consultants to or
directors or employees of the Corporation or a Subsidiary as the result of
a merger or consolidation of the employing corporation with the Corporation
or a Subsidiary, or the acquisition by the Corporation or a Subsidiary of
the assets of the employing corporation, or the acquisition by the
Corporation or a Subsidiary of stock of the employing corporation as the
result of which it becomes a Subsidiary. The terms and conditions of the
substitute options so granted may vary from the terms and conditions set
forth in Section 6 of this Program to such extent as the Committee at the
time of grant may deem appropriate to conform, in whole or in part, to the
provisions of the stock options in substitution for which they are granted.
Options granted under this paragraph (b) or pursuant to the terms of the
agreements contemplated by Section 6(a)(i) hereof shall not reduce the
shares available for options, grants or incentive stock rights under the
Program as set forth in Section 4 hereof.
(c) If the optionee's employment by the Corporation or a Subsidiary shall
terminate, his option shall terminate unless otherwise determined by the
Committee, or specific provision has been otherwise made as evidenced by
the terms of the option agreement approved by the Committee. The Committee
shall have full power and authority to determine whether, to what extent
and under what circumstances any option shall be exercisable, suspended or
canceled in the event of an optionee's termination of employment.
5
<PAGE>
If an optionee dies while in the employ of the Corporation or a Subsidiary,
or within three months after termination of employment with options
exercisable pursuant to action taken by the Committee or otherwise in
accordance with the preceding sentences, the optionee's estate, personal
representative or beneficiary shall have the right to exercise such option
in accordance with the terms of the option agreement with respect to all
shares subject to option on the date of death.
If an optionee shall be transferred from the Corporation to a Subsidiary or
from a Subsidiary to the Corporation or from a Subsidiary to another
Subsidiary, his employment shall not be deemed to have terminated. If an
optionee shall be employed by a corporation or an entity which ceases to be
a Subsidiary, the Committee may, subject to the provisions of clauses (iv)
and (v) of Paragraph (a) of this Section 6, permit the participant to
exercise options held for such period of time as it determines with respect
to all shares which were available for purchase by the optionee on the date
the corporation or entity ceased to be a Subsidiary.
7. Incentive Stock Plan
The Committee may from time to time award shares of Incentive Stock and grant
incentive stock rights, or either, to eligible employees on the terms set forth
herein.
(a) "Incentive Stock" shall be shares of the Corporation's Common Stock awarded
pursuant to the terms of the Incentive Stock Plan.
(b) An "incentive stock right" shall, subject to the terms, conditions and
limitations of this Section 7, give the holder thereof the right to receive
in consideration of services performed for, but without payment of cash to,
the Corporation such shares of Common Stock, cash or a combination of the
two as the Committee may determine.
(c) Subject to the limitations of Section 4, the Committee shall from time to
time select, and report to the Board of Directors, (i) the individual
employees who are to receive shares of Incentive Stock or incentive stock
rights, or a combination thereof, (ii) the number of shares of Incentive
Stock a designated employee is to receive, either directly or upon
maturation of an incentive stock right, (iii) whether ownership of, or any
portion of, such shares of Incentive Stock is to be vested in the
designated employee without the possibility of forfeiture or other
restrictions at the time of the Committee's action or at one or more
specified dates in the future, (iv) whether ownership of such, or any
portion of such, shares of Incentive Stock is to be vested in the
designated employee at the time of the Committee's action, but subject to
the possibility of forfeiture or other restrictions, and (v) the specific
dates from the date of the Committee's award over which the possibility of
forfeiture or other restrictions are to lapse.
Shares of Incentive Stock shall be issued in the name of, and distributed
to, those employees from time to time designated by the Board as recipients
of Incentive Stock as follows:
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<PAGE>
(1) Each employee designated as a recipient of shares of Incentive Stock
shall receive, promptly after the date or dates the Committee
determines the number of such shares which such employee is to receive
not subject to the possibility of forfeiture and other restrictions,
one or more stock certificates registered in the name of the
designated employee for such number of shares, the ownership of which
is vested non-forfeitably and without restriction in such employee;
and
(2) Certificates covering shares of Incentive Stock subject to the
possibility of forfeiture and other restrictions shall be issued
promptly after the date or dates the Committee determines the number
of such shares to be issued in the name of the designated employee but
held by the Corporation as provided in clause (e) below.
(d) The shares which are granted subject to restrictions and the possibility of
forfeiture (and all shares issued or distributed by means of dividends,
splits, combinations, reclassifications, or other capital changes thereon)
(i) may not be sold, assigned, transferred, pledged or otherwise
encumbered, except (a) for gifts to a spouse, ancestors, or descendants, or
to trusts for their benefit and (b) pursuant to the qualified domestic
relations orders referred to in Section 9 hereof, subject, however, in each
such case to the restrictions and possibility of forfeiture applicable to
such shares and (ii) except as otherwise provided in an agreement approved
by the Committee are to be forfeitable to the Corporation upon termination
of employment for any reason other than death, disability approved by the
Corporation or retirement with the consent of the Corporation. The
restrictions and possibility of forfeiture imposed by this clause (d) shall
lapse at such time and in such proportions as the Committee shall, subject
to limitations of clause (c) above, determine.
(e) Each certificate issued in respect of shares granted under the Incentive
Stock Plan subject to restrictions on transfer and the possibility of
forfeiture shall be registered in the name of the employee but shall be
held by the Corporation in safekeeping for the employee and until such
restrictions and the possibility of forfeiture shall lapse. Such
certificates shall bear a legend substantially as follows:
"The transferability of this certificate and the shares of stock
represented hereby are restricted and the shares are subject to the further
terms and conditions (including forfeiture) contained in the Incentive
Stock Plan of Corning Clinical Laboratories Inc. and an agreement executed
pursuant thereto. A copy of such Plan and such agreement are on file in the
office of the Secretary of Corning Clinical Laboratories Inc., Teterboro,
New Jersey."
(f) An employee who is to receive shares of Incentive Stock only upon the
expiration of certain specified periods or who is the holder of an
incentive stock right shall have no rights as a stockholder with respect to
any shares which may become vested in, or be awarded to, him, as the case
may be, until such shares have been actually issued.
(g) The value of shares of the Incentive Stock or the value of the shares of
Common Stock granted by the Corporation to the holder of an incentive stock
right shall be the mean between the high and low selling prices of the
Corporation's Common Stock on the New
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<PAGE>
York Stock Exchange on the date the Committee determines that the
applicable performance objectives were met or the date the possibility of
forfeiture shall terminate, as the case may be.
(h) At the time an incentive stock right is granted, the Committee shall
establish with respect to each holder one or more performance periods and
performance objectives. If the objectives have been met and are being
maintained at the end of the applicable performance period to the
satisfaction of the Committee, the holder of the incentive stock right
shall receive promptly the shares and/or cash which are subject to the
agreement referred to below.
(i) Any provisions hereof the contrary notwithstanding, the Committee shall
have the authority and the power to adjust performance periods, performance
objectives and the number of shares which may be awarded pursuant to an
incentive stock right if it determines that conditions so warrant. Such
conditions may include, but need not be limited to, changes in functional
responsibilities of a holder of an incentive stock right, changes in laws
or government regulations, changes in accounting treatment or in generally
accepted accounting principles, acquisitions, dispositions or distributions
deemed to be material, or extraordinary events which significantly impact
consolidated financial performance.
(j) Incentive stock rights shall be evidenced by agreements in such form and
not inconsistent with the Incentive Stock Plan as the Committee shall
approve from time to time, which agreements shall, among other things,
contain in substance the following terms, conditions and provisions:
(i) The number of shares to which the incentive stock right relates and
whether such rights are to be paid in shares, in cash or in a
combination or the two;
(ii) The length of the performance period or periods;
(iii) The performance objectives applicable to an individual granted an
incentive stock right, which objectives may relate, but shall not be
limited, to overall corporate performance measures, such as earnings
per share, return on stockholders' equity and return on capital, or to
divisional, subsidiary or other business unit performance measures, or
to a combination of each; and
(iv) Such other rules, as determined by the Committee, governing the
continuation of an incentive stock right after the holder terminates,
either voluntarily or involuntarily, his employment with the
Corporation.
(k) Unless otherwise determined by the Committee or set forth in the agreement
contemplated by subsection (j) above, if the holder of an incentive stock
right shall cease to be employed by the Corporation or a Subsidiary, his
incentive stock right shall terminate immediately. However, if employment
is terminated on account of death, retirement or termination of employment
with the consent of the Corporation (including termination by reason of
retirement, disability or a Subsidiary ceasing to be such), the Committee
may award to such employee such
8
<PAGE>
shares or cash at such time and under such conditions as it shall in its
sole discretion determine.
8. Amendment and Administration of the Program
The Board of Directors may, upon the recommendation of the Committee, from time
to time alter, amend, suspend, or discontinue the Program or either Plan
thereunder, except that no alteration or amendment shall, without the approval
of the holders of a majority of the outstanding shares entitled to vote thereon,
increase the total number of shares which may be sold or awarded under the
Program, decrease the price at which options may be granted, change the
standards of eligibility of employees eligible to participate, materially
increase the benefits of the Program or either Plan thereunder to participants,
or extend the term of the Program or of options granted thereunder. Adjustments
in the total number of shares purchasable or awardable under the Program or
optioned to any individual and adjustments of the option price may be made,
however, without stockholder approval pursuant to the adjustment provisions
described under the provisions of Section 5 hereof. No amendment or modification
shall apply to affect adversely any employee with respect to incentive stock or
incentive stock rights already awarded to him or an option already granted.
Anything to the contrary in this Section 8 notwithstanding, should the
provisions of Rule 16b-3, or any successor rule, under the 1934 Act be amended,
the Board may amend the Program in accordance with any modifications to such
Rule.
With respect to persons subject to Section 16 of the 1934 Act, transactions
under the Program are intended to comply with all applicable conditions of Rule
16b-3, or any successor rule, under the 1934 Act. To the extent any provision of
the Program or action by the Committee, the Board of Directors or any
administrator fails to so comply, it shall be deemed null and void, to the
extent permitted by law and deemed advisable by the Committee or the Board of
Directors.
9. Assignability
No option or right granted under the Program shall be assignable or transferable
except by Will, by the laws of descent and distribution, or except for an
incentive stock option pursuant to domestic relations orders as defined in or
meeting the requirements of the Code or Title I of the Employee Retirement
Income Security Act of 1974, as amended. During the lifetime of an optionee, an
option shall be exercisable only by him and any shares purchased upon the
exercise of an option shall be issued in the name of the optionee alone.
10. Effective Date and Term of Program.
The Program shall become effective when approved by a majority of the votes cast
at a meeting of the Corporation's stockholders by stockholders entitled to vote
thereon. No shares may be optioned or awarded (except upon the attainment of
performance goals contemplated by Section 7(h) hereof) and no incentive stock
rights may be granted under the Program after the fifth anniversary, plus 60
calendar days, of the Program's effective date.
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11. Use of Proceeds
Proceeds from the sale of stock under the Program shall constitute general funds
of the Corporation.
12. Withholding
Whenever under the Program shares are to be issued in satisfaction of options,
awards or rights granted thereunder, the Corporation shall have the right to
require the employee to remit to it an amount in cash, in shares of the
Corporation's Common Stock, or though the reduction of options, awards or rights
to be issued thereof, necessary to satisfy federal, state and local withholding
tax requirements prior to the delivery of any certificate or certificates for
shares. Whenever under the Program payments are to be made in cash, such payment
shall be net of an amount necessary to satisfy federal, state and local
withholding tax requirements.
10
CORNING CLINICAL LABORATORIES
TRANSFEREE PENSION PLAN
Effective as of the effective date of the divestiture by
Corning Incorporated of its interest in CORNING CLINICAL LABORATORIES, INC. (the
"Company"), the Company hereby establishes this CORNING CLINICAL LABORATORIES
TRANSFEREE PENSION PLAN (the "Plan") for the benefit of eligible Employees.
ARTICLE ONE
Definitions
1.1 "Board" means the Board of Directors of the Company.
1.2 "Change in Control" means one of the following circumstances:
(i) an offeror (other than the Company) purchases
shares of Common Stock of the Company pursuant to a
tender or exchange offer for such shares;
(ii) any person (as such term is used in Sections
13(d) and 14(d)(2) of the Securities Exchange Act of
1934) is or becomes the beneficial owner, directly or
indirectly, of securities of the Company representing
20% or more of the combined voting power of the
Company's then outstanding securities;
(iii) the membership of the Company's Board of
Directors changes as the result of a contested
election or elections, such that a majority of the
individuals who are directors at any particular time
were placed on the Board of Directors initially as a
result of such a contested election or elections
occurring within the previous two years; or
(iv) shareholders of the Company approve a merger,
consolidation, sale or disposition of all or
substantially all of the Company's assets, or approve
a plan of partial or complete liquidation.
1.3 "Code" means the Internal Revenue Code of 1986 as amended from
time to time.
1.4 "Committee" means the Committee appointed by the Company's
Board of Directors to administer this Plan.
<PAGE>
2
1.5 "Company" means Corning Clinical Laboratories, Inc. and its
successors.
1.6 "Corning" means Corning Incorporated.
1.7 "Effective Date" means the date of the divestiture by Corning
of its interest in the Company.
1.8 "Employee" means any employee of a Participating Company who
is within a select group of management or highly-compensated
employees as such employees are defined in Title I of ERISA.
1.9 "Final Average Compensation" means an eligible Employee's
average compensation (as compensation is defined in the
Qualified Plan) received from the Company or from Corning
consisting of the highest five consecutive calendar years, or
portions thereof, out of the 10 calendar years preceding the
Employee's termination of employment that produces the highest
such average.
1.10 "Normal Retirement Date" and "Early Retirement Date" shall
have the same meanings given these terms in the Qualified
Plan.
1.11 "Participating Company" means the Company and any related
entity which is approved by the Committee as a Participating
Company under this Plan.
1.12 "Plan" means this Corning Clinical Laboratories Transferee
Pension Plan.
1.13 "Qualified Plan" means The Corning Incorporated Pension Plan
for Salaried Employees.
1.14 "Years of Credited Service" means all years, and portions
thereof, of service with the Company, with Corning or with the
members of the controlled groups of either the Company or
Corning provided that no service shall be double counted for
the same period of time. The Committee, in its sole
discretion, may grant an Employee additional Years of Credited
Service for service with prior employers not affiliated with
the Company or with Corning.
ARTICLE TWO
Purpose and Intent of Plan
2.1 The purpose of this Plan is to preserve the previously
expected pension benefits of executives who transfer from
Corning to the Company and to attract and retain a
highly-motivated executive workforce by providing to
<PAGE>
3
eligible Employees retirement benefits in excess of those they
are entitled to receive under the Qualified Plan. The Plan is
intended to constitute an unfunded plan of deferred
compensation for a select group of management or
highly-compensated employees as provided for in Title I of
ERISA.
ARTICLE THREE
Eligible Employee
3.1 The Committee in its sole discretion shall designate those
Employees who shall be eligible to participate in this Plan.
All eligible Employees shall be identified in such records as
the Committee deems appropriate to establish and maintain.
An otherwise eligible Employee shall be ineligible to
participate and shall forfeit all rights to receive any future
benefit payment under this Plan if such employee:
o is terminated for cause, which determination shall be
in the sole discretion of the Committee and this
determination shall be final and binding on all
persons;
o terminates employment for any reason prior to
completing five full Years of Credited Service
measured from the eligible Employee's date of hire;
or
o without the prior consent of the Committee, engages
in any activity inimical to the interests of any
Participating Company at any time until the lapse of
36 months following the Employee's retirement.
ARTICLE FOUR
Benefits
4.1 Benefit Amount. The benefit payable to an eligible Employee
under this Plan on the Employee's Normal Retirement Date shall
be a straight life annuity equal to the excess of (a) over (b)
below where:
(a), the basic benefit formula, equals the aggregate amount
the eligible Employee would be entitled to receive, under the
following formula after application of the factors listed in
(1) through (7) after the formula:
<PAGE>
4
1.5% times the Employee's Final Average Compensation
up to Social Security Covered Compensation for the
year in which employment terminates, times the
Employee's Years of Credited Service
Plus
2.0% times the Employee's Final Average Compensation
in excess of such Social Security Covered
Compensation, times the Employee's Years of Credited
Service
The factors referred to in computing the basic benefit above
are as follows:
(1) the term Compensation means Compensation as used in
the Qualified Plan except there shall be added to
such Compensation, stock grants in lieu of bonuses
valued at the stock's fair market value and
compensation earned by an eligible Employee during a
year but deferred to a subsequent year. Such deferred
compensation shall not again be taken into account in
the year of receipt. The Committee in its sole
discretion may add to the items of includable
compensation other compensatory payments or benefits
earned by eligible Employees;
(2) the term Year of Credited Service means service
determined through the date the eligible Employee
terminates employment as such service is defined in
the Qualified Plan together with the modifications
set forth in the Corning Incorporated Supplemental
Pension Plan as if the Qualified Plan had covered the
Employee through the date he terminates employment as
a participant in this Plan;
(3) an eligible Employee's Covered Compensation means the
amount set forth in IRS Revenue Ruling 71-446 and
subsequent IRS updates determined as of the year the
eligible Employee terminates employment. If the IRS
ceases to update the covered compensation table,
covered compensation shall be determined by the
Qualified Plan's actuary using the same methodology
as in Revenue Ruling 71-446;
(4) for purposes of determining eligibility to receive
benefits (but not their amount), an eligible Employee
who has reached age 55 and whose age and Years of
Credited Service total at least 65 shall be deemed to
have satisfied all of the Qualified Plan's credited
service conditions for benefit eligibility;
<PAGE>
5
(5) all Code limits on compensation and benefit amounts
shall be disregarded;
(6) an early retirement benefit is payable from this Plan
if an eligible Employee meets the age and service
requirements for early retirement under the Qualified
Plan taking into account for this purpose all Years
of Credited Service under this Plan. In the event of
early retirement, the benefit amount shall be
determined pursuant to the benefit formula under this
Section 4.1 but applying the reduction factors
applicable to early retirement benefits prescribed by
the Qualified Plan; and
(7) no benefit shall be paid under this Plan unless an
eligible Employee has five or more Years of Credited
Service. An eligible Employee who has five or more
Years of Credited Service but is not eligible for an
early or normal retirement benefit shall be entitled
to receive a deferred vested benefit computed
generally under the provisions of this Section 4.1
except that the compensation and benefit limits of
Code Sections 401(a)(17) and 415 shall be taken into
account in applying these provisions, and where
(b), the offset to the basic benefit formula, equals the
aggregate amount the eligible Employee is actually entitled to
receive under the Qualified Plan and each of Corning's
non-qualified plans that supplement the Qualified Plan. The
amount of benefit used as an offset for the Corning qualified
and non-qualified plans shall be an eligible Employee's
accrued benefit (age 65 amount payable in the normal form)
earned as of the date the Employee terminates employment with
Corning but applying the reduction factors applicable to
deferred vested benefits prescribed by the Qualified Plan.
Pension improvements, retiree increases and past service
pension updates occurring in all Corning plans after the
Employee terminates employment with Corning shall not be taken
into account in determining the offset amounts for the Corning
plans. If an eligible Employee is not a participant in the
Qualified Plan but is a participant in a similar plan of a
prior employer and if the Committee elects to give the
Employee credit for Years of Credited Service under this Plan
for periods of time during which the Employee was covered by
the prior employer's plan, the Committee shall determine the
amount of the offset for the prior employer's plan. The
Committee shall determine the amount of the offset for the
prior employer's plan using principles similar to those
applied in determining the offset for the Corning plans.
4.2 Commencement of Benefits. A Participating Company shall pay
the benefits due under this Plan commencing within 30 days of
retirement, death or any
<PAGE>
6
other event that entitles an eligible Employee or the
Employee's beneficiary to receive benefits under the Qualified
Plan as if the Qualified Plan had covered the Employee during
the Employee's period of service while a participant in this
Plan.
4.3 Form of Payment. The benefit payable under this Plan shall be
a life annuity for unmarried Employees and a joint and 75
percent survivor annuity for married Employees.
Notwithstanding the foregoing, the Committee in its sole
discretion may elect to pay the entire benefit, or the present
value of the remaining installments, in a lump sum payment in
the event of the Employee's or his beneficiary's financial
need. The amount of the actual benefit paid from this Plan
shall be the straight life annuity calculated under Section
4.1 adjusted as appropriate by the actuarial assumptions used
in the Qualified Plan if a different form of benefit is paid,
provided that for lump sum payments the interest factor shall
be the average of the PBGC immediate interest rate in effect
as of the first day of each of the three months immediately
preceding the month in which the payment is made.
Notwithstanding the foregoing, any life annuity or joint and
survivor annuity shall be paid in the form of the six year
certain benefit described in Section 4.9 of the Qualified
Plan. No actuarial adjustments shall be made for such six year
certain benefit.
4.4 Death Benefits During Employment. If an eligible Employee dies
while still employed by a Participating Company but after
becoming entitled to receive a vested benefit, the eligible
Employee's spouse, if surviving, shall be entitled to a
monthly lifetime benefit equal to 50 percent of the benefit
the eligible Employee would have received under Section 4.1.
This benefit shall be payable at such time as in-service death
benefits are payable under the Qualified Plan as if the
Qualified Plan had covered the Employee during the Employee's
period of service while a participant in this Plan and
pursuant to such other terms and conditions as may apply to
benefits payable under the Qualified Plan. In the discretion
of the Committee, the value of this benefit may be paid out in
a lump sum or in another alternative form of benefit the
Committee may elect.
4.5 Unfunded Plan. This Plan is intended to be "unfunded" as this
term is used in Title I of ERISA. All benefits payable to an
eligible Employee under this Plan shall be paid by the
Participating Company that employs the eligible Employee out
of its general assets and shall not be otherwise funded.
Although the Company does not intend, as of the Effective
Date, to set aside any additional specific assets to meet its
obligation to pay benefits under this Plan, the
<PAGE>
7
Company may, in its discretion, set aside assets for meeting
its obligations, including, but not limited to, the
establishment of a rabbi or other grantor trust. In the event
such fund or trust is established, each Participating Company
shall be responsible for making contributions to provide for
the benefits of its own eligible Employees.
No Employee shall have any property rights in any such fund or
trust or in any other assets held by a Participating Company.
The right of an eligible Employee or his spouse or beneficiary
to receive any of the benefits provided by this Plan shall be
an unsecured claim against the general assets of a
Participating Company.
Employees are neither required nor permitted to make any
contributions to this Plan.
4.6 Change in Control. In the event of a Change in Control, all
eligible Employees shall become fully vested, and upon
termination of employment, or by action of the Committee in
anticipation of termination of employment, shall receive such
vested benefits in a single lump sum payment. For this
purpose, termination of employment shall mean termination of
the Employee's employment with a Participating Company within
four years following a Change in Control. A termination shall
be deemed to occur if during such period the Employee
determines in good faith that the position, duties,
responsibilities and status assigned to the Employee are
inconsistent with the position, duties, responsibilities and
status of the Employee with the Participating Company
immediately prior to the Change in Control. Such determination
shall be evidenced by the Employee in a writing delivered to
the Secretary of the Company promptly but in no event later
than 180 days after such determination.
In the case of a Change in Control and a termination of
employment as above described, an eligible Employee who has
not at such time attained the age of fifty-five (55) and whose
Qualified Plan benefits are therefore deferred shall
nevertheless be entitled to an immediate lump sum payment
under this Plan equal to the then present value of the benefit
that would have been payable at the time the Employee reached
age 55 but determined on the basis of Compensation and
Credited Service figures in effect on the date of the
Employee's termination of employment.
<PAGE>
8
ARTICLE FIVE
Administration
5.1 Committee as Administrator. This Plan shall be administered by
the Committee in accordance with the Plan's terms.
The Committee shall determine the benefits due each Employee
from this Plan and shall direct them to be paid by a
Participating Company.
The Committee shall inform each Employee of any elections
which the Employee may possess and shall record such choices
along with such other information as may be necessary to
administer the Plan.
5.2 Coordination with Qualified Plan. Since this Plan is intended
to operate in conjunction with the Qualified Plan, any
questions concerning plan administration or the calculation of
benefits that arise but are not specifically addressed by this
Plan shall be considered in light of the Qualified Plan. In
addition, unless the context requires otherwise, the terms
used in this Plan shall have the same meaning as the same
terms used in the Qualified Plan.
5.3 Committee Action Final. The Committee has sole discretion to
determine eligibility to participate in this Plan, to
determine the eligibility for and the amount of benefits, to
interpret the Plan and to take any other action it deems
appropriate to administer this Plan. The decisions made by and
the actions taken by the Committee shall be final and
conclusive on all persons.
Members of the Committee shall not be subject to individual
liability with respect to their actions under this Plan.
Notwithstanding the foregoing, the Company shall indemnify
each member of the Committee who may incur financial liability
for actions or failures to act with respect to the member's
Committee responsibilities.
ARTICLE SIX
Amendment and Termination
6.1 While the Company intends to maintain this Plan indefinitely,
the Board reserves the right to amend or terminate it at any
time for whatever reasons it may deem appropriate.
Notwithstanding the preceding paragraph, however, the Company
hereby makes a contractual commitment on behalf of itself, the
other Participating
<PAGE>
9
Companies and their successors to pay, or to require the other
Participating Companies to pay, the benefits accrued under
this Plan prior to its amendment or termination to the extent
it or the other Participating Companies are financially
capable of meeting such obligation.
ARTICLE SEVEN
Miscellaneous
7.1 No Contract of Employment. Nothing contained in this Plan
shall be construed as a contract of employment between a
Participating Company and an Employee, or as a right of any
Employee to be continued in the employment of a Participating
Company, or as a limitation of the right of a Participating
Company to discharge any of its Employees, with or without
cause.
7.2 No Transferability. The rights of an Employee under this Plan
shall not be transferable, voluntarily or involuntarily, other
than by will or the laws of descent and distribution and are
exercisable during the Employee's lifetime only by the
Employee or the Employee's guardian or legal representative.
7.3 Taxation. The benefits payable under this Plan shall be
subject to all federal, state and local income and employment
taxes to which benefits of this type are normally subject.
7.4 Indemnification. To the fullest extent authorized or permitted
by law, the Company shall indemnify any eligible Employee who
brings an action or proceeding, whether civil or criminal, or
who is made, or threatened to be made, a party to an action or
proceeding, whether civil or criminal, by reason of the fact
that he, his testator or intestate, is or shall be entitled to
benefits under this Plan and the Company has failed to make
payments hereunder when due or has otherwise failed to follow
the terms of the Plan or such eligible Employee has reasonable
cause to believe the Company shall fail or intends to fail to
perform its future obligations hereunder arising within a
reasonable time thereof, or with respect to any other matter
directly or indirectly related to this Plan, unless a judgment
or other final adjudication adverse to such eligible Employee
establishes that the Company was or is legally entitled to
fail to so perform its obligations hereunder. Without
limitation of the foregoing, such indemnification shall
include indemnification against all costs of whatever nature
or kind, including attorneys' fees and costs of investigation
or defense, incurred by any eligible Employee with respect to
any such action or proceeding and any appeal therein, and
which judgments, fines, amounts and
<PAGE>
10
expenses have not been recouped by him in any other manner.
All expenses incurred by a person in connection with an actual
or threatened action or proceeding with respect to which such
person is or may be entitled to indemnification under this
Section, shall, in the absence of a final adjudication adverse
to such person as described above, be promptly paid by the
Company to him, upon receipt of an undertaking by him to repay
the portion of such advances, if any, to which he may finally
be determined not to be entitled. The Company's obligations
under this Section 7.4 may be paid from any rabbi trust or
other fund established by the Company for the purpose of
paying such expenses. This Section may not without the consent
of an eligible Employee be amended or changed in any manner
adverse to such eligible Employee. The indemnification
provided by this Section shall not be deemed exclusive of any
other rights to which an eligible Employee may be entitled
other than pursuant to this Section.
Notwithstanding the foregoing, there shall be no
indemnification for persons who cease Plan participation and
forfeit all benefits on account of termination for cause as
described in Section 3.1.
7.5 Successors. This Plan shall be binding on the Company's
successors and assigns.
7.6 Governing Law. This Plan shall be interpreted and enforced in
accordance with the laws of the State of New Jersey.
<PAGE>
11
IN WITNESS WHEREOF, the Company has caused this Plan document
to be executed by its duly authorized officer this ___ day of __________, 1996.
CORNING CLINICAL LABORATORIES, INC.
By_____________________________________________
Title___________________________________________
QUEST DIAGNOSTICS INCORPORATED
RESTRICTED STOCK PLAN
FOR NON-EMPLOYEE DIRECTORS
1. Purpose
The Restricted Stock Plan for Non-Employee Directors (the "Plan") is to be
a part of the compensation paid by Quest Diagnostics Incorporated (the
"Corporation") for service as a director to individuals who are not
employees of (i) the Corporation, (ii) any subsidiary corporation of the
Corporation within the meaning of Section 425(f) of the Internal Revenue
Code of 1986, as amended (the "Code") or of any successor section (a
"Subsidiary") or (ii) any other entity in which the Corporation has at
least one half of the ownership interest (such persons being referred to
herein as "Non-Employee Directors"). The Plan is intended to increase the
proprietary interest of the Non-Employee Directors, as owners of additional
shares of the Common Stock of the Corporation, in the Corporation's success
and progress.
2. Stock Reserved Under Plan
There is hereby reserved for issuance under the Plan an aggregate of
100,000 shares of the Corporation's Common Stock. Shares awarded pursuant
to the Plan may be either authorized but unissued shares or treasury
shares. If any shares awarded hereunder are thereafter acquired by the
Corporation pursuant to rights reserved by the Corporation at the time of
transfer as hereinafter described, such shares may thereafter be reissued
under the Plan. The term "restricted stock" as used herein means the
Corporation's Common Stock awarded pursuant to the Plan.
3. Administration
The Plan shall be administered by the Nominating Committee of the Board of
Directors of the Corporation, which shall consist of at least three
directors who together shall have the authority to adopt rules and
regulations for carrying out the Plan and to interpret, construe and
implement the provisions of the Plan. The Committee may obtain such advice
or assistance as it deems appropriate from persons not serving on the
Committee.
4. Recapitalization
The aggregate number of shares of Common Stock which may be granted under
the Plan shall be proportionately adjusted for any increase or decrease in
the number of issued shares of Common Stock of the Corporation resulting
from a subdivision or consolidation of shares or other capital adjustment,
or the payment of a stock dividend or other increase or decrease in such
shares effected without receipt of consideration by the Corporation.
Subject to any required action by the stockholders, if the Corporation
shall be the surviving corporation in any merger or consolidation, any
stock granted under the Plan shall apply to the
<PAGE>
securities to which a holder of the number of shares of Common Stock would
have been entitled to receive in such merger or consolidation. If the
Corporation shall be dissolved or liquidated or if the Corporation shall
not be the surviving corporation in any merger or consolidation, any stock
granted under the Plan and then subject to forfeiture shall be vested in
the Participant on the effective date of such event and the restrictions on
transfer shall lapse.
In the event of a change in the corporation's presently authorized Common
Stock which is limited to a change of authorized shares with par value into
the same number of shares with a different par value or into the same
number of shares without par value, the shares resulting from any such
change shall be deemed to be Common Stock within the meaning of the Plan.
5. Awards
All Non-Employee Directors of the Corporation shall be participants in the
Plan. The Corporation shall make the following awards under the Plan.
(a) Each individual, on January 1, 1997 or, if later, upon initially being
elected a Non-Employee Director, shall be issued by the Corporation one or
more certificates representing in the aggregate five thousand (5,000)
shares of restricted stock. No individual shall be issued more than 5,000
restricted shares in his lifetime under this Section 5(a).
(b) Each individual, on January 1, 1997 and upon each subsequent election
or re-election as a Non-Employee Directors, shall be issued by the
Corporation one or more certificates representing in the aggregate seven
hundred fifty (750) shares of restricted stock for each year specified in
the term of office for which the director was elected (i.e., 2,250 shares
for a three year term, 1,500 shares for a two year term, and 750 shares for
a one year term).
6. Terms of Grants
a) Restrictions on Transfer - All shares granted to a Participant shall be
subject to restriction on transfer, and may not be sold, assigned,
transferred, pledged or otherwise encumbered, so long as the shares are
forfeitable under Section 6(b).
b) Forfeitability - In the event the participant ceases to be a
Non-Employee Director of the Corporation prior to the date that the
restricted shares granted to him/her are vested under Section 6(c) or 6(d),
such shares shall be forfeited and all rights of the Participant to such
shares shall terminate without further obligation on the part of the
Corporation; provided, however, if such cessation is on account of death or
medical or health reasons which render the Participant unable to perform
the duties and responsibilities owed to the Corporation in his/her capacity
as a director, the possibility of forfeiture shall lapse in its entirety
and all such shares shall be vested in him/her.
c) Vesting of Shares granted under Section 5(a) - Shares granted under
Section 5(a) shall vest
<PAGE>
(a) (i) one-third on the date on which the Participant has served for three
years as a Non-Employee Director, (ii) one-third on the date on which the
Participant has served for six years as a Non-Employee Director, and (iii)
one-third on the date on which the Participant has served for nine years as
a Non-Employee Director or (b) on the date such Participant terminates
service as a Non-Employee Director under circumstances approved by a
majority of the Nominating Committee. If a Participant terminates service
as a Non-Employee Director prior to meeting the requirements set forth in
the preceding sentence, the Board of Directors may, in its sole discretion,
remove the restrictions on transfer and the possibility of forfeiture from
such number of shares held by the Participant under the Plan as it
determines is equitable; provided, however, such number shall not exceed an
amount based upon the ratio that the number of years of service as a
Non-Employee Director at the time of termination (including service prior
to the date of initial grant) bears to nine years' service as a Director.
For purposes of the Plan, a year shall mean the period of time commencing
on the date of an annual meeting of stockholders of the Corporation and
ending on the earlier of (i) the passage of one year from the date of such
meeting or (ii) the day prior to the date of the next succeeding annual
meeting of stockholders. In the event of the election of a Non-Employee
Director by the Board, a year shall mean the period of time commencing on
the date of such election and ending on the earlier of (i) the day prior to
the date of the next succeeding annual meeting of stockholders or (ii) the
completion of the initial period of service specified at the time of such
election.
(d) Vesting of Shares granted under Section 5(b)- Shares granted under
Section 5(b) shall vest on the date on which the Participant completes the
term to which he/she has been elected.
e) Certificates - Each certificate representing the shares of Common Stock
awarded hereunder may be stamped or otherwise imprinted on the face thereof
with a legend in substantially the following form:
"The shares represented by this certificate have not been registered
under the Securities Act of 1933. This certificate and the shares
represented hereby are subject to the possibility of forfeiture under,
and may be sold, transferred or otherwise disposed of only in
accordance with, the terms of the Restricted Stock Plan for
Non-Employee Directors of Quest Diagnostics Incorporated, a copy of
which Plan is on file in the office of the Secretary of Quest
Diagnostics Incorporated."
f) Possession - Each certificate issued with respect to the shares of
Common Stock granted pursuant to the Plan shall be registered in the name
of the Participant but shall be held by the Corporation for safekeeping
until possibility of forfeiture and the restriction on transfer of the
shares lapse pursuant to the terms of the Plan. After the possibility of
forfeiture and the transfer restrictions applicable to shares registered in
the name of a Participant shall have lapsed, the Corporation shall deliver
to the Participant or to the Participant's beneficiary or estate one or
more certificates representing the number of shares then vested in the
Participant and free of restrictions.
<PAGE>
g) Stockholder Rights. A non-employee director who receives an award under
the Plan shall have rights as a stockholder with respect to the restricted
shares of the Corporation's Common Stock covered by such award and shall
receive dividends in cash or other property or other distributions or
rights in respect of such stock and shall vote such stock as the record
owner thereof, unless and until such stock is forfeited to the Corporation
hereunder.
7. Amendment or Termination
The Board shall have the power to terminate the Plan at any time and to
amend the Plan from time to time as it may deem proper; provided, however,
that no such amendment or termination shall (a) affect adversely any
outstanding awards, (b) increase the aggregate number of shares reserved
under the Plan, (c) change the provisions of paragraph 2 of the Plan
relating to the number of shares subject to each award or (d) change the
class of persons eligible to participate in the Plan.
8. Miscellaneous
a) Nothing in the Plan shall be deemed to create any obligation on the part
of the Board of Directors to nominate any director for re-election by the
Corporation's stockholders.
b) The Corporation shall have the right to require, prior to delivery of
any shares granted hereunder, payment by the Participant of cash or shares
of Common Stock of the Corporation to cover such taxes as are required by
law with respect to the issuance or delivery of such shares.
9. Effective Date and Term of Plan
The Plan shall become effective on [January 1, 1997], or, if later, when
approved by the vote of the Board of Directors of the Corporation and shall
continue until December 31, 2001, or if earlier, until terminated by such
Board.
Exhibit 21
CORNING CLINCAL LABORATORIES, INC. (DE)
LIST OF SUBSIDIARIES
CLMP Inc. (DE)
Corning Clinical Laboratories Inc. (MD)(1)
Corning Clinical Laboratories of Pennsylvania Inc. (DE)(2)
Southgate Medical Services, Inc. (OH)(1)
DeYor CPF/MetPath Inc. (OH)
Medical Management Systems Inc. (DE)
Associated Clincal Laboratories L.P. (PA)
Corning MRL Inc. (DE)(3)
Covance Inc.4 (DE)(and its subsidiaries)
Damon Clinical Laboratories Inc. (MA)
Corning Clinical Laboratories Inc. (CT)(1)
Corning Clinical Laboratories Inc. (MA)(1)
Damon Investment Holding, Inc. (DE)
DPD Holdings, Inc. (DE)
MetWest Inc. (DE)
Nichols Institute Diagnostics (CA)
Nichols Institute Sales Corporation (U.S.V.I.)
Nichols Institute Diagnostics Limited (U.K.)
Nichols Institute Diagnostics Trading S.A. (Switzerland)
Nichols Institute Diagnosticka GMBH (Germany)
Nichols Institute International Holding B.V. (Netherlands)
Nichols Institute Diagnostics B.V. (Netherlands)
Nomad-Massachusetts Inc. (MA)
Corning Laboratorios Clinicos, S.A. de C.V. (Mexico)
Analisis, S.A. (Mexico)
Laboratorios Clinicos de Mexico, S.A. de C.V. (Mexico)
Servicios de Laboratorio, S.A. de C.V. (Mexico)
Laboratorios de Frontera Polanco, S.A. de C.V. (Mexico)
Laboratorio de Analisis Biomedicos, S.A. (Mexico)
Quest Diagnostics Incorporated (CT)(5)
Quest Diagnostics Incorporated (DE)(5)
Quest Diagnostics Incorporated (MA)(5)
- --------------------------------
(1) Name will be changed to Quest Diagnostics Incorporated effective at 11:59
p.m. on December 31, 1996.
(2) Name will be changed to Quest Diagnostics of Pennsylvania Incorporated
effective at 11:59 p.m. on December 31, 1996.
(3) Expected to be contributed to Corning Clinical Laboratories Inc. in
connection with the Distributions on or about December 31, 1996. Name will
be changed to Quest MRL Inc. effective at 11:59 p.m. on December 31, 1996.
(4) Formerly known as Corning Pharmaceutical Services Inc., will be spun off as
an independdent corporation in connection with Distributions on or about
December 31, 1996.
(5) Formed recently as a name saving subsidiary, a certificate of merger
effective December 31, 1996 has been filed with the State Secretary of State
which will merge it into the Corning Clinical Laboratories Inc. that is also
incorporated in the State.
<PAGE>
Quest Diagnostics Incorporated (MD)(6)
Corning Clinical Laboratories Inc.(MD)(1)
Diagnostic Reference Services Inc.
Pathology Building Partnership (7)
Quest Diagnostics Incorporated (MI)(6)
Corning Nichols Institute Inc. (CA)(8)
Trans United Casualty and Indemnity Insurance Company
- --------------------------------
(6) Name will be changed to Quest Holdings Incorporated effective at 11:59 p.m.
on December 31, 1996.
(7) The other 50% partner of Pathology Building Partnership is Corning Clinical
Laboratories Inc. (MD)
(8) Expected to be contributed to Corning Clinical Laboratories Inc. (DE) which
will then contribute it to Quest Diagnostics Incorporated (MI). Name will be
changed to Quest Diagnostics Incorporated (CA) effective at 11:59 p.m. on
December 31, 1996.
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
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<CIK> 0001022079
<NAME> Corning Clinical Laboratories, Inc.
<MULTIPLIER> 1,000 1,000
<S> <C> <C>
<PERIOD-TYPE> YEAR 9-MOS
<FISCAL-YEAR-END> DEC-31-1995 DEC-31-1996
<PERIOD-START> JAN-1-1995 JAN-1-1996
<PERIOD-END> DEC-31-1995 SEP-30-1996
<CASH> 36,446 48,319
<SECURITIES> 0 0
<RECEIVABLES> 318,252 323,171
<ALLOWANCES> 147,947 116,996
<INVENTORY> 26,601 25,559
<CURRENT-ASSETS> 502,158 549,172
<PP&E> 296,116 293,490
<DEPRECIATION> 253,538 243,153
<TOTAL-ASSETS> 1,853,385 1,886,378
<CURRENT-LIABILITIES> 301,418 434,454
<BONDS> 0 0
0 0
0 0
<COMMON> 297,823 297,823
<OTHER-SE> (2,022) (165,153)
<TOTAL-LIABILITY-AND-EQUITY> 1,853,385 1,886,378
<SALES> 1,629,388 1,231,290
<TOTAL-REVENUES> 1,629,388 1,231,290
<CGS> 980,232 768,809
<TOTAL-COSTS> 1,503,503 1,140,248
<OTHER-EXPENSES> 6,221 (198)
<LOSS-PROVISION> 152,590 75,232
<INTEREST-EXPENSE> 82,016 59,887
<INCOME-PRETAX> (57,568) (202,149)
<INCOME-TAX> (5,516) (43,280)
<INCOME-CONTINUING> (52,052) (158,869)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
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<NET-INCOME> (52,052) (158,869)
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</TABLE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
-----
<S> <C>
THE RELATIONSHIP AMONG CORNING, QUEST DIAGNOSTICS AND COVANCE AFTER THE
DISTRIBUTIONS 28
QUEST DIAGNOSTICS INCORPORATED
RISK FACTORS 32
CAPITALIZATION OF Quest Diagnostics 38
SELECTED HISTORICAL FINANCIAL DATA OF Quest Diagnostics 39
PRO FORMA FINANCIAL INFORMATION OF Quest Diagnostics 43
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS OF Quest Diagnostics 50
BUSINESS OF Quest Diagnostics 59
MANAGEMENT OF Quest Diagnostics 82
SECURITY OWNERSHIP BY CERTAIN BENEFICIAL OWNERS AND MANAGEMENT OF Quest
Diagnostics 93
DESCRIPTION OF Quest Diagnostics CAPITAL STOCK 94
ANTITAKEOVER EFFECTS OF CERTAIN PROVISIONS OF THE Quest Diagnostics
CERTIFICATE OF INCORPORATION AND BY-LAWS 100
DESCRIPTION OF CERTAIN INDEBTEDNESS OF Quest Diagnostics 104
LIABILITY AND INDEMNIFICATION OF DIRECTORS AND OFFICERS OF Quest
Diagnostics 107
INDEX TO FINANCIAL STATEMENTS F-1
</TABLE>
2
<PAGE>
THE RELATIONSHIP AMONG CORNING, QUEST DIAGNOSTICS AND COVANCE
AFTER THE DISTRIBUTIONS
After the Distributions, Quest Diagnostics Incorporated ("Quest
Diagnostics") and Covance Inc. ("Covance") will be independent public
companies and Corning Incorporated ("Corning") will not have any ownership
interest in either Quest Diagnostics or Covance other than shares of Quest
Diagnostics' voting cumulative preferred stock. Corning, Quest Diagnostics
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 have been 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, Quest Diagnostics 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, Quest Diagnostics 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 Quest Diagnostics 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 Quest Diagnostics and Covance.
The Transaction Agreement will provide that Corning, Quest Diagnostics 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, Quest
Diagnostics and Covance as contemplated in the discussion under
"Capitalization of Quest Diagnostics" and "Capitalization of Covance." In
addition to the specific indemnity described below, Corning, Quest
Diagnostics and Covance are obligated under the Transaction Agreement to
indemnify and hold harmless each other in respect of Indemnifiable Losses (as
defined therein) arising out of or otherwise relating to the management or
conduct of their respective businesses or the breach of any provision of the
Transaction Agreement; provided, however, that Quest Diagnostics will have no
obligation to indemnify or hold harmless Corning in respect of Indemnifiable
Losses arising out of any governmental claims or investigations described in
the next paragraph.
As discussed under "Business of Quest Diagnostics--Government
Investigations and Related Claims," Quest Diagnostics is subject to several
governmental investigations. Any amounts paid by Quest Diagnostics 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 Quest
Diagnostics against all monetary penalties, fines or settlements arising out of
any governmental criminal, civil or administrative investigations or claims that
have been settled prior to or are pending as of the Distribution Date, pursuant
to service of subpoena or other notice of such investigation to Quest
Diagnostics, as well as any qui tam proceeding for which a complaint was filed
prior to the Distribution Date whether or not Quest Diagnostics has been served
with such complaint or otherwise been notified of the pendency of such action,
to the extent that such investigations or claims arise out of or are related to
alleged violations of federal laws by reason of Quest Diagnostics or any company
acquired by Quest Diagnostics billing any federal program or agency for services
rendered to beneficiaries of such program or agency. Corning will also indemnify
Quest Diagnostics for 50% of the aggregate of all judgment or settlement
payments made by Quest Diagnostics that are in excess of $42.0 million in
respect of claims by private parties (i.e., nongovernmental parties such as
private insurers) that relate to indemnified or previously settled governmental
claims and that allege overbillings by Quest Diagnostics or any existing
subsidiaries of Quest Diagnostics for services provided prior to the
Distribution Date; provided, however, such indemnification for private claims
will terminate five years after the Distribution Date (whether or not settled)
and will not exceed $25.0 million in the aggregate (reduced by certain tax
benefits as described below). Quest Diagnostics' aggregate reserve with respect
to all governmental and private claims, including litigation costs, was $215
million at September 30, 1996 and is estimated to be reduced to $85 million at
the Distribution Date as a result of the payment of settled claims, primarily
the Damon Settlement of $119 million.
28
<PAGE>
Corning will not indemnify Quest Diagnostics against any governmental
claims that arise after the Distribution Date, even though relating to events
prior to the Distribution Date, or to any private claims that do not relate
to the indemnified or previously settled governmental claims or
investigations or investigations that relate to post- Distribution Date
billings. Corning will not indemnify Quest Diagnostics 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 Quest Diagnostics will be calculated on
a net after-tax basis by taking into account any deductions and other tax
benefits realized by Quest Diagnostics (or a consolidated group of which
Quest Diagnostics is a member after the Distributions (the "Quest Diagnostics
Group")) in respect of the underlying settlement, judgment payment, or other
loss (or portion thereof) indemnified against by Corning generally at the
time and to the extent such deductions or tax benefits are deemed to reduce
the tax liability of Quest Diagnostics or the Quest Diagnostics Group under
the Transaction Agreement.
The Transaction Agreement provides that, in the case of any claims for
which Corning, Quest Diagnostics or Covance are entitled to indemnification,
the indemnified party will control the defense of any claim unless the
indemnifying party elects to assume such defense. However, in the case of all
private claims related to indemnified governmental claims related to alleged
overbillings, Quest Diagnostics will control the defense. Disputes under the
Transaction Agreement are subject to binding arbitration. 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 Quest Diagnostics will enter into a tax indemnification
agreement (the "Corning/Quest Diagnostics Spin-Off Tax Indemnification
Agreement") pursuant to which (1) Quest Diagnostics will represent to Corning
that, to the best of its knowledge, the materials relating to Quest
Diagnostics 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) Quest Diagnostics 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) Quest Diagnostics will covenant and agree
that for a period of two years following the Distribution Date (the
"Restricted Period"), (i) Quest Diagnostics will continue to engage in the
clinical laboratory testing business, (ii) Quest Diagnostics 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 Quest
Diagnostics, 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 Quest
Diagnostics Common Stock (including options and other instruments convertible
into Quest Diagnostics Common Stock) which would exceed fifty percent (50%)
of the outstanding shares of Quest Diagnostics Common Stock immediately after
the Distribution Date; (B) the issuance of any other instrument that would
constitute equity for federal tax purposes ("Disqualified Quest Diagnostics
Stock"); (C) the issuance of options and other instruments convertible into
Disqualified Quest Diagnostics Stock; (D) any repurchases of Quest
Diagnostics Common Stock, unless such repurchases satisfy certain
requirements; (E) the dissolution, merger, or complete or partial liquidation
of Quest Diagnostics or any announcement of such action; or (F) the waiver,
amendment, termination or modification of any provision of the Quest
Diagnostics Rights Plan (as defined therein) in connection with, or in order
to permit or facilitate, any acquisition of Quest Diagnostics Common Stock or
other equity interest in Quest Diagnostics, and (4) Quest Diagnostics 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 (A)
an acquisition of 20% or more of the stock of Quest Diagnostics by a person
or related persons during the Restricted Period or (B) the commencement of a
tender or purchase offer by a third party for 20% or more of Quest
Diagnostics stock. If obligations of Quest Diagnostics 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"), Quest Diagnostics would be required to indemnify Corning
for Taxes imposed and such indemnification obligations could exceed the net
asset value of Quest Diagnostics 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,
29
<PAGE>
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 as a result of
(A) an acquisition of 20% or more of the stock of Covance by a person or
related persons during the Restricted Period or (B) the commencement of a
tender or purchase offer by a third party for 20% or more of Covance stock.
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.
Quest Diagnostics and Covance will enter into a tax indemnification
agreement (the "Quest Diagnostics/ 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 Quest Diagnostics 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 Quest
Diagnostics for Taxes imposed and such indemnification obligations could
exceed the net asset value of Covance at such time. Quest Diagnostics and
Covance will enter into a second tax indemnification agreement (the
"Covance/Quest Diagnostics Spin-Off Tax Indemnification Agreement") which
will be essentially the same as the Corning/Quest Diagnostics Spin-Off Tax
Indemnification Agreement except that Quest Diagnostics will make
representations to and indemnify Covance as opposed to Corning. If
obligations of Quest Diagnostics 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, Quest Diagnostics would be required to
indemnify Covance for Taxes imposed and such indemnification obligations
could exceed the net asset value of Quest Diagnostics at such time.
The Spin-Off Tax Indemnification Agreements will also require (i) Quest
Diagnostics to take such actions as Corning may reasonably request and (ii)
Covance to take such actions as Corning and Quest Diagnostics 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, Quest Diagnostics 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 Quest Diagnostics and Covance and their
subsidiaries, provided, however, that Quest Diagnostics 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 Quest Diagnostics 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
30
<PAGE>
consolidated federal income tax or certain other tax returns prepared by
Corning which includes Quest Diagnostics 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, Quest Diagnostics or Covance as a result of such failure are to be
allocated among Corning, Quest Diagnostics and Covance in such a manner as
will take into account the extent to which the actions or inactions of each
may have contributed to such failure, and Corning, Quest Diagnostics 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, Quest Diagnostics and Covance, the
liability so allocated to Quest Diagnostics or Covance could exceed the net
asset value of Quest Diagnostics or Covance, respectively.
Voting Cumulative Preferred Stock of Quest Diagnostics
After the Distributions, Corning will retain 1,000 shares of Quest
Diagnostics' voting 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 Quest Diagnostics voting cumulative preferred
stock, see "Description of Quest Diagnostics Capital Stock--Voting Cumulative
Preferred Stock."
31
<PAGE>
QUEST DIAGNOSTICS INCORPORATED
RISK FACTORS
Corning shareholders should be aware that the Distributions and ownership of
the Quest Diagnostics Common Stock involve certain risks, including those
described below, which could adversely affect the value of their holdings.
Neither Corning nor Quest Diagnostics makes, nor is any other person
authorized to make, any representations as to the future market value of
Quest Diagnostics 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, Quest Diagnostics 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 Quest Diagnostics
Financial Impact of the Distributions on Quest Diagnostics. While Quest
Diagnostics has a substantial operating history, it has not operated as an
independent company since 1982. As a Corning subsidiary, Quest Diagnostics'
working capital requirements have been financed by Corning and Quest
Diagnostics' major acquisitions have been financed through the issuance of
Corning common stock and borrowings from Corning. Subsequent to the
Distributions, Quest Diagnostics' activities will no longer be financed by
Corning. In addition, it is anticipated that the rating of Quest Diagnostics'
long-term debt will be non-investment grade. This may impact, among other
things, Quest Diagnostics' ability to raise capital, fund working capital
requirements or expand, through acquisitions or otherwise, and could thereby
have an adverse effect on Quest Diagnostics' 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 Quest
Diagnostics Credit Facility (as defined below) and the issuance of Notes (as
defined below) in the Quest Diagnostics Notes Offering (as defined below),
Quest Diagnostics will have substantial debt. At September 30, 1996, after
giving effect to the transactions and adjustments described in "Pro Forma
Financial Information of Quest Diagnostics," Quest Diagnostics would have had
$517 million of total debt and total capitalization of $1,120 million, on a
pro forma basis, and Quest Diagnostics' total debt as a percentage of total
capitalization would have been approximately 46%. In addition to creating
significant debt service obligations for Quest Diagnostics, the terms of the
Quest Diagnostics Credit Facility will contain customary affirmative and
negative covenants that will, among other things, require Quest Diagnostics
to maintain certain financial tests and ratios and will restrict Quest
Diagnostics' 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 Quest Diagnostics is leveraged could have important
consequences to holders of Quest Diagnostics Common Stock, including the
following: (1) Quest Diagnostics' 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 Quest Diagnostics' and its subsidiaries' cash
flow from operations must be dedicated to the payment of the principal of and
interest on its indebtedness; (iii) the Quest Diagnostics Credit Facility
will contain certain restrictive financial and operating covenants,
including, among others, requirements that Quest Diagnostics satisfy certain
financial ratios; (iv) a significant portion of borrowings will be at
floating rates of interest, causing Quest Diagnostics to be vulnerable to
increases in interest rates; (v) Quest Diagnostics' degree of leverage may
make it more vulnerable in a downturn in general economic conditions; and
(vi) Quest Diagnostics' 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 Quest
Diagnostics-- Liquidity and Capital Resources" and "Description of Certain
Indebtedness of Quest Diagnostics."
Intense Competition. The independent clinical laboratory industry in the
United States is intensely competitive. Quest Diagnostics believes that in
1995 approximately 56% of the revenues of the clinical laboratory testing
industry
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<PAGE>
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 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
Quest Diagnostics that provide a broader range of tests and services. Quest
Diagnostics 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 Quest Diagnostics. There are also many independent
clinical laboratories that operate regionally and that compete with Quest
Diagnostics 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
Quest Diagnostics' 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 Quest Diagnostics--The
Clinical Laboratory Testing Industry" and "Business of Quest
Diagnostics--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
Quest Diagnostics--Customers and Payors" and "Business of Quest
Diagnostics--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 Quest Diagnostics' net revenues from
clinical laboratory testing and approximately 15% of the tests performed by
Quest Diagnostics. Quest Diagnostics 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 Quest Diagnostics
will be able to increase the prices charged to managed care organizations or
that Quest Diagnostics 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. Quest Diagnostics 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
Quest Diagnostics' 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. Quest Diagnostics'
business and financial results depend substantially on reimbursements paid to
Quest Diagnostics under these programs. Quest Diagnostics 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
33
<PAGE>
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. Quest Diagnostics 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 Quest Diagnostics. See "Business of Quest
Diagnostics--Regulation and Reimbursement--Regulation of Reimbursement for
Clinical Laboratory Services." A failure of Quest Diagnostics to properly and
promptly process its bills to Medicare may result in an increase in Quest
Diagnostics' bad debt expense. See "Business of Quest Diagnostics-- Billing"
and "Management's Discussion and Analysis of Financial Condition and Results
of Operations of Quest Diagnostics--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 Quest Diagnostics--Regulation and Reimbursement."
At the federal level, Quest Diagnostics' 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 Quest Diagnostics 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
Quest Diagnostics--Regulation and Reimbursement."
Government Investigations and Related Claims. As discussed under "Business
of Quest Diagnostics-- Government Investigations and Related Claims," Quest
Diagnostics has settled various government and private claims (i.e.,
nongovernmental claims such as those by private issuers) totalling
approximately $195 million relating primarily to industry-wide billing and
marketing practices that had been substantially discontinued by late 1992.
Specifically, Quest Diagnostics has entered into, (i) for an aggregate of
approximately $180 million, five settlements with the OIG and the DOJ and two
settlements with state governments with respect to Medicare and Medicaid
marketing and billing practices of Quest Diagnostics and certain companies
acquired by Quest Diagnostics prior to their acquisition and (ii) thirteen
settlements relating to private claims totalling approximately $15 million.
In addition, there are pending investigations by the OIG and DOJ into billing
and marketing practices at three regional laboratories operated by Nichols
prior to its acquisition by Quest Diagnostics. There are no private claims
presently pending. By issuance of civil subpoenas in August 1993, the
government began a formal investigation of Nichols. The investigation of
Nichols remains open. Remedies available to the government include exclusion
from participation in the Medicare and Medicaid programs, criminal fines,
civil recoveries plus civil penalties and asset forfeitures. Although
application of such remedies and penalties could materially and adversely
affect Quest Diagnostics' business, financial condition, results of
operations and prospects management believes that the
34
<PAGE>
possibility of this happening is remote. Quest Diagnostics derived
approximately 23% and 22% of its net revenues for the year ended December 31,
1995 and the nine months ended September 30, 1996, respectively, from
Medicare and Medicaid programs.
In connection with the Distributions, Corning will agree to indemnify
Quest Diagnostics against all monetary penalties, fines or settlements for any
governmental claims relating to billing practices of Quest Diagnostics and its
predecessors that have been settled or are pending on the Distribution Date.
Corning will also agree to indemnify Quest Diagnostics for 50% of the aggregate
of all judgment or settlement payments made by Quest Diagnostics that are in
excess of $42.0 million in respect of claims by private parties (i.e.,
nongovernmental parties such as private insurers) that relate to indemnified or
previously settled governmental claims and that allege overbillings by Quest
Diagnostics or any existing subsidiaries of Quest Diagnostics, for services
provided prior to the Distribution Date; provided, however, such indemnification
will not exceed $25.0 million in the aggregate and all amounts indemnified
against by Corning for the benefit of Quest Diagnostics will be calculated on a
net after-tax basis. However, such indemnification will not cover (i) any
governmental claims that arise after the Distribution Date pursuant to service
of subpoena or other notice of such investigation after the Distribution Date,
(ii) any nongovernmental claims unrelated to the indemnified governmental claims
or investigations, (iii) any nongovernmental claims not settled prior to five
years after the Distribution Date, (iv) 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 (v) the fees and expenses of litigation. Quest Diagnostics will
control the defense of any governmental claim or investigation unless Corning
elects to assume such defense. However, in the case of all nongovernmental
claims related to indemnified governmental claims related to alleged
overbillings, Quest Diagnostics will control the defense. All disputes under the
Transaction Agreement are subject to binding arbitration. See "The Relationship
Among Corning, Quest Diagnostics and Covance After the
Distributions--Transaction Agreement."
Quest Diagnostics' aggregate reserve with respect to all governmental and
private claims, including litigation costs of approximately $6.6 million, was
$215 million at September 30, 1996 and is estimated to be reduced to $85
million as of the Distribution Date. Based on information available to
management and Quest Diagnostics' experience with past settlements management
believes that its current level of reserves is adequate. However, 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 Quest Diagnostics' results of
operation and, for non-indemnified claims, Quest Diagnostics' cash flows in
the period in which such claims are settled. While none of the governmental
or nongovernmental investigations or claims is covered by insurance Quest
Diagnostics does not believe that these matters will have a material adverse
effect on Quest Diagnostics' overall financial condition.
Recent Losses. Quest Diagnostics 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 net 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
net 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 to write off capitalized software as a result of its
decision to abandon the billing system which had been intended as a new
company-wide billing system. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations of Quest Diagnostics." There
can be no assurance that Quest Diagnostics' operations will be profitable in
the future.
Billing. Quest Diagnostics' 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 Quest Diagnostics' growth through acquisitions. Quest
Diagnostics' standard billing system has been implemented in seven of its 22
billing sites, which seven sites account for 35% of Quest Diagnostics' net
revenues. Quest Diagnostics is beginning to convert the remaining
non-standard billing systems to the standard SYS system. See "Business of
Quest Diagnostics--Information Systems" and "Business of Quest
Diagnostics--Billing." Standardizing its billing systems presents conversion
risk to Quest Diagnostics 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
35
<PAGE>
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 Quest Diagnostics' client base. Quest Diagnostics
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 and Related Claims" and "Business of Quest
Diagnostics--Government Investigations and Related Claims." While there can
be no assurance, Quest Diagnostics management believes that the levels of
coverage are adequate to cover currently estimated exposures. Although Quest
Diagnostics believes that it will be able to obtain adequate insurance
coverage in the future at acceptable costs, there can be no assurance that
Quest Diagnostics will be able to obtain such coverage or will be able to do
so at an acceptable cost or that Quest Diagnostics will not incur significant
liabilities in excess of policy limits.
Absence of Dividends; Restrictions on Dividends Imposed by the Quest
Diagnostics Credit Facility and the Indenture. It is currently contemplated
that, following the Distributions, Quest Diagnostics will not pay cash
dividends on the Quest Diagnostics Common Stock in the foreseeable future,
but will retain earnings to provide funds for the operation and expansion of
its business. In addition, the Quest Diagnostics Credit Facility prohibits
Quest Diagnostics from paying cash dividends on the Quest Diagnostics Common
Stock. Further, the Indenture under which the Notes will be issued will
restrict Quest Diagnostics' ability to pay cash dividends based on a
percentage of Quest Diagnostics' cash flow. See "Description of Certain
Indebtedness of Quest Diagnostics" and "Description of Quest Diagnostics
Capital Stock."
Potential Liability under the Spin-Off Tax Indemnification
Agreements. Quest Diagnostics will enter into the Corning/Quest Diagnostics
Spin-Off Tax Indemnification Agreement that will prohibit Quest Diagnostics
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 Quest Diagnostics
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 Quest Diagnostics. Quest Diagnostics may also have indemnification
obligations under the Spin-Off Tax Indemnification Agreements in the case of
the acquisition of, or tender or purchase offer by another person for, 20% or
more of the outstanding Quest Diagnostics Common Stock. The Corning/Quest
Diagnostics Spin- Off Tax Indemnification Agreement will also require Quest
Diagnostics 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. Quest Diagnostics and Covance
will enter into the Covance/Quest Diagnostics Spin-Off Tax Indemnification
Agreement, that will be essentially the same as the Corning/Quest Diagnostics
Spin-Off Tax Indemnification except that Quest Diagnostics will make
representations to and indemnify Covance as opposed to Corning. If
obligations of Quest Diagnostics under either agreement were breached and
primarily as a result thereof the Distributions do not receive favorable tax
treatment under Code section 355, Quest Diagnostics 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 Quest
Diagnostics at such time. See "The Relationship Among Corning, Quest
Diagnostics 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 Quest Diagnostics Common Stock. Although it is
expected that the Quest Diagnostics Common Stock will be approved for listing
on the NYSE, there is no existing market for the Quest Diagnostics Common
Stock and there can be no assurance as to the liquidity of any markets that
may develop, the ability of Quest Diagnostics stockholders to sell their
shares of Quest Diagnostics Common Stock or at what price Quest Diagnostics
stockholders will be able to sell their shares of Quest Diagnostics Common
Stock. Future trading prices will depend on many factors including, among
other things, prevailing interest rates, Quest Diagnostics' operating results
and the market for similar securities.
Potential Volatility of Stock Price. The market price of Quest Diagnostics
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, Quest Diagnostics
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 Quest
Diagnostics 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
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<PAGE>
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 Quest Diagnostics 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 Quest Diagnostics 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 Quest
Diagnostics." These market fluctuations could have an adverse effect on the
market price of Quest Diagnostics Common Stock. Quest Diagnostics
stockholders should be aware, and must be willing to bear the risk, of such
fluctuations in earnings and stock price.
Dependence on Key Employees. Quest Diagnostics' affairs are managed by a
small number of key management personnel, the loss of any of whom could have
an adverse impact on Quest Diagnostics. There can be no assurance that Quest
Diagnostics 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 Quest Diagnostics--Recent Organizational Changes"
and "Management of Quest Diagnostics."
Certain Antitakeover Effects. Quest Diagnostics' amended and restated
certificate of incorporation (the "Quest Diagnostics Certificate") and
by-laws (the "Quest Diagnostics 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 Quest
Diagnostics in a transaction not approved by the board of directors of Quest
Diagnostics (the "Quest Diagnostics Board"), or, in certain circumstances, by
the disinterested members of the Quest Diagnostics Board. In addition, an
acquisition of certain securities or assets of Quest Diagnostics within two
years after the Distribution Date might jeopardize the tax treatment of the
Distributions and could result in Quest Diagnostics 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 Quest Diagnostics Certificate of Incorporation and
By-Laws."
37
<PAGE>
CAPITALIZATION OF QUEST DIAGNOSTICS
The following table sets forth Quest Diagnostics' capitalization as of
September 30, 1996 giving effect to (i) the consummation of the Quest
Diagnostics Notes Offering and the estimated initial borrowings under the
Quest Diagnostics Credit Facility, (ii) the Distributions and (iii) the Quest
Diagnostics Accounting Policy Change (as defined below), as if such
transactions occurred on such date. This table should be read in conjunction
with the Quest Diagnostics Financial Statements and notes thereto and the
Quest Diagnostics 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 Quest Diagnostics'
future capitalization as an independent company. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations of Quest
Diagnostics" and "Business of Quest Diagnostics."
<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, Quest Diagnostics 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 Quest Diagnostics,
immediately prior to the Quest Diagnostics 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 Quest Diagnostics Credit Facility and the Notes, respectively.
(c) The Quest Diagnostics Credit Facility will include a revolving credit
facility of $100 million which can be used to fund working capital and
investment activities. Quest Diagnostics management believes that the
entire revolving credit 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 Quest
Diagnostics of the estimated remaining intercompany borrowings.
(e) The pro forma adjustment to contributed capital and accumulated deficit
represents costs directly related to the Quest Diagnostics Spin-Off
Distribution that Quest Diagnostics expects to record coincident with the
Quest Diagnostics 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
Quest Diagnostics 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 "The Relationship Among Corning, Quest
Diagnostics and Covance After the Distributions--Transaction Agreement."
As a result of funding settled claims, primarily the Damon settlement of
$119 million, the receivable from Corning is estimated to approximate $25
million at the Distribution Date.
(g) Coincident with the Quest Diagnostics Spin-Off Distribution, Quest
Diagnostics will adopt a new accounting policy for evaluating and
measuring the recoverability of intangible assets based on a fair value
approach (the "Quest Diagnostics Accounting Policy Change"). The pro forma
adjustment to accumulated deficit represents the estimated impact of the
Quest Diagnostics Accounting Policy Change. Quest Diagnostics 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.
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<PAGE>
SELECTED HISTORICAL FINANCIAL DATA OF QUEST DIAGNOSTICS
The following table presents selected historical financial data of Quest
Diagnostics 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
Quest Diagnostics (the "Audited Quest Diagnostics 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
"Quest Diagnostics Interim Financial Statements" and, together with the
Audited Quest Diagnostics Financial Statements, the "Quest Diagnostics
Financial Statements") and the years ended December 31, 1992 and 1991 have
been derived from the unaudited combined financial statements of Quest
Diagnostics. 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 Quest
Diagnostics Financial Statements and notes thereto, and the Quest Diagnostics
Pro Forma Financial Information and notes thereto included elsewhere herein.
Historical combined financial data may not be indicative of Quest
Diagnostics' future performance as an independent company. See the Quest
Diagnostics Financial Statements and notes thereto and Quest Diagnostics Pro
Forma Financial Information. See also "Management's Discussion and Analysis
of Financial Condition and Results of Operations of Quest Diagnostics" and
"Business of Quest Diagnostics."
39
<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:
Net cash provided by operating
activities $ 25,236 $ 38,202 $ 41,937 $ 53,789
Net cash used in investing activities (7,904) (17,044) (53,097) (77,911)
Net cash provided by (used in)
financing activities (6,618) (18,006) 23,033 32,311
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 42)
40
<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:
Net cash provided by operating
activities $ 85,828 $ 37,963 $ 99,614 $ 101,077 $ -- (h)
Net cash used in investing activities (93,087) (46,186) (473,687) (203,884) -- (h)
Net cash provided by (used in)
financing activities 4,986 7,532 392,956 99,267 -- (h)
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 42)
41
<PAGE>
- -------------
(Footnotes for preceding pages)
(a) In August 1993, Quest Diagnostics 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, Quest Diagnostics 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. Quest Diagnostics 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 Quest Diagnostics, 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 Quest Diagnostics Financial Statements and Notes 2 and 3 to the
Quest Diagnostics 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 September 30, Nine months Ended September 30, Year Ended December 31,
-------------------------------- ------------------------------- -----------------------
<S> <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 and depreciation and amortization. EBITDA is presented because
management believes it is an 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.
(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 Quest
Diagnostics' capital to fund the settlement of billing issues related to
Damon and has agreed to indemnify Quest Diagnostics 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.
42
<PAGE>
PRO FORMA FINANCIAL INFORMATION OF QUEST DIAGNOSTICS
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 Quest Diagnostics assuming that the
Distributions and the Quest Diagnostics 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
Quest Diagnostics assuming that the Distributions and the Quest Diagnostics
Accounting Policy Change had been completed on that date. In the opinion of
Quest Diagnostics 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 "Quest Diagnostics Pro Forma Financial
Information") includes all material adjustments necessary to restate Quest
Diagnostics' historical results. The adjustments required to reflect such
assumptions are described in the Notes to the Quest Diagnostics Pro Forma
Financial Information and are set forth in the "Pro Forma Adjustments"
column.
The Quest Diagnostics Pro Forma Financial Information should be read in
conjunction with the Quest Diagnostics Financial Statements and notes thereto
included elsewhere herein. The Quest Diagnostics 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 Quest Diagnostics Accounting Policy Change occurred as
assumed herein, or had Quest Diagnostics been operated as an independent
company during the periods shown.
43
<PAGE>
QUEST DIAGNOSTICS INCORPORATED
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.
44
<PAGE>
QUEST DIAGNOSTICS INCORPORATED
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.
45
<PAGE>
QUEST DIAGNOSTICS INCORPORATED
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.
46
<PAGE>
QUEST DIAGNOSTICS INCORPORATED
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.
47
<PAGE>
QUEST DIAGNOSTICS INCORPORATED
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 Quest Diagnostics' behalf and reflect all of
its costs of doing business. Quest Diagnostics 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
Quest Diagnostics Spin- Off Distribution. Quest Diagnostics will borrow,
immediately prior to the Quest Diagnostics 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 borrowings under the Quest Diagnostics Credit Facility and $150
million of Notes to be issued under the Quest Diagnostics Notes Offering.
The assumed interest rates on these new borrowings are 7.50% and 11.50%
for the Quest Diagnostics Credit Facility and the Notes, respectively. If
the interest rate on the Quest Diagnostics Credit Facility fluctuates by
1/8%, interest expense fluctuates by approximately $440,000 annually.
Depending on market conditions at the time of the Quest Diagnostics Notes
Offering and the consummation of the Quest Diagnostics Credit Facility,
the total combined debt amount, the interest rates, and the amounts of
each of the Quest Diagnostics 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 Quest
Diagnostics Accounting Policy Change. Most of Quest Diagnostics'
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
Quest Diagnostics' intangible assets to be significantly less than their
carrying value. Quest Diagnostics 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. Quest Diagnostics believes
fair value is a better indicator of the extent to which the intangible
assets may be recoverable and therefore may be impaired. Quest
Diagnostics 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 Quest Diagnostics
management's current estimate of the number of shares to be outstanding
after the Quest Diagnostics Spin-Off Distribution. Management's estimate
includes (a) the issuance of approximately 28.0 million shares of Quest
Diagnostics Common Stock at an exchange ratio of one share of Quest
Diagnostics 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. Quest
Diagnostics 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 Quest Diagnostics 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 Quest Diagnostics' historical capital structure is not comparable to
periods subsequent to the Quest Diagnostics Spin-Off Distribution.
Balance Sheet
(g) Historically, Quest Diagnostics 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.
48
<PAGE>
(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 Quest Diagnostics, immediately prior to the Quest
Diagnostics 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 Quest Diagnostics
Credit Facility and $150 million of Notes to be issued under the Quest
Diagnostics Notes Offering.
(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 obligations relating to
governmental claims under the Transaction Agreement. The receivable from
Corning is estimated to approximate $25 million at the Distribution Date.
The reduction from $150 million at September 30, 1996 to $25 million at
the Distribution Date is due to the funding by Corning of indemnified
claims, primarily the Damon settlement of $119 million, during the fourth
quarter of 1996. The remaining receivable will be paid by Corning upon
the settlement of the underlying, indemnified claims which is expected to
occur within the next twelve months.
(j) The pro forma adjustment to intangible assets, net and accumulated
deficit represents the estimated impact of the Quest Diagnostics
Accounting Policy Change. Quest Diagnostics 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 Quest Diagnostics' 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 Quest Diagnostics Spin-Off Distribution
that Quest Diagnostics expects to record coincident with the Quest
Diagnostics 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 Quest
Diagnostics 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 Quest
Diagnostics of the estimated remaining intercompany borrowings.
49
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS OF QUEST DIAGNOSTICS
Overview
In the last several years, Quest Diagnostics' 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, Quest Diagnostics'
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 Quest Diagnostics 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 Quest
Diagnostics' 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 "Risk Factors--Risks Relating to Quest
Diagnostics--Role of Managed Care" and "Business of Quest Diagnostics--
Effect of the Growth of the Managed Care Sector on the Clinical Laboratory
Business."
A substantial portion of Quest Diagnostics' 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, Quest Diagnostics has recorded a number of special
charges for restructuring and integration costs since 1993. See Note 5 to the
Audited Quest Diagnostics Financial Statements.
The MML, Nichols Institute and Bioran transactions were accounted for as
poolings of interests. The accompanying financial statements of Quest
Diagnostics 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 4 to the Audited Quest
Diagnostics Financial Statements.
The clinical laboratory industry is subject to seasonal fluctuations in
operating results. Quest Diagnostics' 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
Quest Diagnostics' 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
50
<PAGE>
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.
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 Quest Diagnostics'
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. Quest Diagnostics has
established, and maintains, rigorous programs to improve the effectiveness of
Quest Diagnostics' 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 Quest Diagnostics 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, Quest Diagnostics 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 Quest
Diagnostics. Subsequent to the third quarter, Quest Diagnostics 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. Quest Diagnostics' 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 reduced to $85 million at the Distribution Date as a result of the payment
of settled claims, primarily the Damon settlement of $119.0 million. 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 Quest Diagnostics's results of operation
and, for non-indemnified claims, Quest Diagnostics' cash flows in the periods
in which such claims are settled. Quest Diagnostics does not believe that
these matters will have a material adverse effect on Quest Diagnostics'
overall financial condition. See "Risk Factors--Risks Relating to Quest
Diagnostics--Government Investigations and Related Claims" and "Business of
Quest Diagnostics--Government Investigations and Related Claims."
Additionally, in the third quarter Quest Diagnostics recorded a charge of
$13.7 million to write off capitalized software as a result of its decision
to abandon the billing system which had been intended as its company-wide
billing system. Management now plans to standardize billing systems using a
system already implemented in seven of its sites. See "Risk Factors--Risks
Relating to Quest Diagnostics--Billing," "Business of Quest Diagnostics--
Information Systems" and "-- Billing" and Note 3 to the Quest Diagnostics
Interim Financial Statements.
- -------------
* This is a forward looking statement and is based on current expectations.
Actual results may vary materially from those projected. See "Business of
Quest Diagnostics--Important Factors Regarding Forward Looking Statements."
In particular see factors (c), (d), (j) and (k).
51
<PAGE>
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.
Quest Diagnostics' 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.
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
Quest Diagnostics' 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. Quest Diagnostics has established,
and maintains, rigorous programs to improve the effectiveness of Quest
Diagnostics' 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 Quest Diagnostics 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 Quest Diagnostics 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 Quest Diagnostics.
Quest Diagnostics 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 Quest Diagnostics 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 Quest Diagnostics. Subsequent
to the third quarter, Quest Diagnostics entered into an
- -------------
* This is a forward looking statement and is based on current expectations.
Actual results may vary materially from those projected. See "Business of
Quest Diagnostics--Important Factors Regarding Forward Looking Statements."
In particular see factors (c), (d), (j) and (k).
52
<PAGE>
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. Quest Diagnostics' 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 reduced to $85 million at the Distribution Date as a result of the payment
of settled claims, primarily the Damon settlement of $119.0 million. 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 Quest Diagnostics' results of operation
and, for non-indemnified claims, Quest Diagnostics' cash flows in the periods
in which such claims are settled. Quest Diagnostics does not believe that
these matters will have a material adverse effect on Quest Diagnostics'
overall financial condition. See "Risk Factors--Risks Relating to Quest
Diagnostics--Government Investigations and Related Claims" and "Business of
Quest Diagnostics--Government Investigations and Related Claims."
In the third quarter Quest Diagnostics recorded a charge of $13.7 million
to write off capitalized software as a result of its decision to abandon the
billing system which had been intended as its company-wide billing system.
Management now plans to standardize billing systems using a system already
implemented in seven of its sites. See "Risk Factors--Risks Relating to Quest
Diagnostics--Billing," "Business of Quest Diagnostics--Information Systems"
and "--Billing" and Note 3 to the Quest Diagnostics Interim Financial
Statements.
In the second quarter of 1995, Quest Diagnostics 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 Quest Diagnostics 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.
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.
Quest Diagnostics' 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 Quest Diagnostics 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 associated with the elimination of duplicative
facilities, personnel and administrative functions of acquired entities,
including Damon, MML and Nichols.
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
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of bad debt expense during 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.
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. This increase
resulted from an increase in ongoing bad debt expense of $31.0 million
throughout 1995 and a $62.0 million charge to increase bad debt reserves in
the third quarter of 1995.
During 1995, ongoing bad debt expense increased from 4.4% of net revenues
in the first quarter to 6.4% of net revenues in the fourth quarter. This
increase is due principally to four developments that have 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.
In addition to the changes in the billing process, in mid-1995, Quest
Diagnostics experienced problems integrating billing operations from recent
acquisitions into existing billing operations and experienced significant
problems implementing a new billing system at its largest facility in
Teterboro, New Jersey. These factors, along with the significant changes in
the billing process discussed in the preceding paragraph, contributed to a
significant increase in the backlog of unbilled receivables and a significant
deterioration in the collection of receivables during the third quarter of
1995. As a result, Quest Diagnostics recorded a charge of $62 million in the
third quarter to increase accounts receivable reserves. Quest Diagnostics has
put in place a rigorous program to improve the effectiveness of its billing
and collection operations and has stabilized the current billing system in
Teterboro. See "Risk Factors--Risks Relating to Quest Diagnostics--Billing"
and "Business of Quest Diagnostics--Information Systems" and "--Billing."
In the second quarter of 1995, Quest Diagnostics 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, Quest Diagnostics 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, Quest Diagnostics 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
Quest Diagnostics 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.
Amortization expense increased principally due to additional intangible
assets arising from acquisitions completed in 1994 and 1995. Quest
Diagnostics' 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 Quest Diagnostics in 1995 while increasing
the overall tax rate in 1994. See Note 4 to the Audited Quest Diagnostics
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
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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 Quest Diagnostics 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, Quest Diagnostics 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 Quest Diagnostics and Nichols Institute, MML or Bioran facilities
existed at the time of the acquisitions. In the third quarter of 1993, Quest
Diagnostics 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
Quest Diagnostics' 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, Quest Diagnostics did not admit any wrongdoing in
connection with its marketing or business practices. See "Risk Factors--Risks
Relating to Quest Diagnostics--Government Investigations and Related Claims,"
"Business of Quest Diagnostics--Government Investigations and Related Claims"
and Note 5 to the Audited Quest Diagnostics 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.
Quest Diagnostics' 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 Quest Diagnostics Financial Statements.
Liquidity and Capital Resources
After the Distributions
Concurrently with the Quest Diagnostics Spin-Off Distribution, Quest
Diagnostics' debt will be restructured and equity recapitalized. Quest
Diagnostics plans to complete the Quest Diagnostics Notes Offering of
approximately $150 million principal amount of Notes, and incur approximately
$350 million of borrowings under the Quest Diagnostics Credit Facility. The
proceeds from these borrowings will 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 Quest Diagnostics' capital. As a result of
these actions, management estimates that Quest Diagnostics' long-term debt
will be reduced by approximately $720 million to approximately $515 million,
and annual interest expense will be reduced by approximately $31 million. The
Quest Diagnostics 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.
Quest Diagnostics 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,
of which approximately $10 to $15 million relates to the conversion of
billing and laboratory systems to Quest Diagnostics' standard systems (see
"Business of Quest Diagnostics--Information Systems"). Quest Diagnostics
expects to expand its operations principally through internal growth and
accelerated growth in strategic markets and related lines of business. Quest
Diagnostics expects such activities will be funded from existing cash and
cash equivalents, cash flow from operations, and borrowings under the
revolving credit facility. Quest Diagnostics believes that the revolving
credit facility will be sufficient to meet both its short-term and its
long-term financing needs. As a result, Quest Diagnostics believes it has
sufficient financial flexibility and sufficient access to funds to meet
seasonal working capital requirements, capital expenditures and growth
opportunities.
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Quest Diagnostics does not anticipate paying dividends on the Quest
Diagnostics Common Stock in the foreseeable future. In addition, the Quest
Diagnostics Credit Facility prohibits Quest Diagnostics from paying cash
dividends on the Quest Diagnostics Common Stock. Further, the Indenture under
which the Notes will be issued will restrict Quest Diagnostics' ability to
pay cash dividends on the Quest Diagnostics Common Stock based on a
percentage of Quest Diagnostics' cash flow.
Coincident with the Distributions, Quest Diagnostics 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 Quest Diagnostics as a separate publicly traded entity. The
amount of the charge is subject to change based on the price of the Quest
Diagnostics Common Stock on the Distribution Date.
Although Quest Diagnostics has no present acquisition agreements or
arrangements, there may be acquisitions or other growth opportunities which
will require additional external financing, and Quest Diagnostics 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 Quest Diagnostics. See "Risk Factors --
Risks Relating to Quest Diagnostics -- Potential Liability under the Spin-Off
Tax Indemnification Agreements" and "The Relationship Among Corning, Quest
Diagnostics and Covance After the Distributions--Spin-Off Tax Indemnification
Agreements."
Quest Diagnostics management believes that the recapitalization of Quest
Diagnostics 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, Quest Diagnostics
management believes that these actions, together with Quest Diagnostics'
leading market position or low cost provider status in a number of geographic
regions accounting for the majority of its net revenues, will aid Quest
Diagnostics 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. Quest Diagnostics' actual performance
may vary 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 Quest
Diagnostics' available cash flows, such as unexpected operating losses,
restructuring activities and cash payments or losses of revenues related to
settlement of claims by private entities that arise out of the governmental
investigations or other claims which are instituted after the Distribution
Date (which are not covered by Corning's indemnity).
Prior to the Distributions
Historically, Quest Diagnostics 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 Quest Diagnostics.
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 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 Quest Diagnostics 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.
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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
Quest Diagnostics 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 Quest Diagnostics Spin-Off Distribution, Quest
Diagnostics 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 Quest
Diagnostics' 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 Quest Diagnostics' intangible assets to be
significantly less than carrying value. Quest Diagnostics 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. Quest Diagnostics
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 Quest Diagnostics recording a charge of between $400 million and
$450 million coincident with the Quest Diagnostics 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 Quest Diagnostics Financial Statements.
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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. Quest Diagnostics 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
Quest Diagnostics 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 QUEST DIAGNOSTICS
Overview
Quest Diagnostics 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. Quest
Diagnostics currently processes approximately 60 million requisitions each
year.
Quest Diagnostics 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 Quest Diagnostics, which had been organized
in 1990 as a holding company for the clinical laboratory testing business and
contract research business. In 1994, Quest Diagnostics 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. Upon the consummation of
the Distributions, Corning Clinical Laboratories Inc. will adopt the name
Quest Diagnostics Incorporated.
Since its founding in 1967, Quest Diagnostics' 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,
Quest Diagnostics 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 Quest Diagnostics, 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 Quest Diagnostics' acquisition program.
Under his direction, Quest Diagnostics began to refocus on its core clinical
laboratory testing business and reorganize its senior management team. As a
result, Quest Diagnostics is implementing the best practices in each region
throughout Quest Diagnostics; 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 Quest
Diagnostics--Management-- Executive Officers of Quest Diagnostics." Quest
Diagnostics believes that this new management structure will greatly enhance
Quest Diagnostics' 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
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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 Quest Diagnostics and propel its growth
in the future.
This three-prong management structure is designed to implement Quest
Diagnostics' business strategy to make Quest Diagnostics the best supplier
(i.e., lowest-cost, highest quality) of quality testing services; the
preferred provider of fairly priced and useful health care services and
information; and the industry's leading innovator of new clinical tests,
methodologies and services.
Business Strategy
Quest Diagnostics' 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, Quest
Diagnostics has set several strategic goals and put in place organizational
structures to implement them.
Best Supplier. Quest Diagnostics 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 Quest
Diagnostics' net revenues are from laboratories that Quest
Diagnostics believes are the lowest cost providers in their
respective markets. Management believes that these laboratories
are the lowest cost providers in their respective markets based
on its knowledge of such markets and information obtained in
acquiring other laboratories. Quest Diagnostics currently
receives approximately 60 million requisitions for testing each
year. Currently, Quest Diagnostics' 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, Quest Diagnostics has begun to
replicate the best practices from each region throughout its
national network. Standardization of equipment and supplies, as
well as leveraging of Quest Diagnostics' purchasing power, is
also part of this strategy. While Quest Diagnostics' overall
program of standardization is in a preliminary stage, Quest
Diagnostics 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. Quest Diagnostics 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. Quest Diagnostics believes that implementation
of best practices already developed in certain regions will
permit Quest Diagnostics to be viewed by its customers as the
highest quality provider of clinical testing services. For
example, as part of its best practices policy, Quest Diagnostics
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, Quest Diagnostics' experience has
been that the regions with the highest quality of services have
also had the lowest costs.
Preferred Provider. Quest Diagnostics 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. Quest Diagnostics
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)
Quest Diagnostics continues to pursue its primary strategy of becoming the
highest quality, lowest cost provider. To achieve this, Quest Diagnostics
will employ a rigorous national and regional process to identify prospective
customers and to efficiently allocate resources to support these efforts.
Quest Diagnostics will also pursue innovative alliances and seek to assist
its partners in achieving their business objectives.
- -------------
* This is a forward looking statement and is based on current expectations.
Actual results may vary materially from those projected. See "--Important
Factors Regarding Forward Looking Statements." In particular see factors
(c), (d), (g) and (j).
** This is a forward looking statement and is based on current expectations.
Actual results may vary materially from those projected. See "--Important
Factors Regarding Forward Looking Statements." In particular see factors (b),
(c), (d), (f) and (j).
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(bullet) Account Profitability. Quest Diagnostics intends to refocus its
sales efforts on pursuing and keeping profitable accounts. Quest
Diagnostics 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.
Quest Diagnostics 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. 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. Quest Diagnostics 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 Quest
Diagnostics' revenues and almost all of its EBITDA is generated
from markets in which Quest Diagnostics believes that it has the
leading market share. In most of these markets, Quest Diagnostics
believes that it also is the lowest cost provider. Quest
Diagnostics 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. Quest Diagnostics believes that, while the clinical
laboratory industry is becoming national in scope, Quest
Diagnostics can subcontract with other clinical laboratories to
perform testing for national accounts in any markets in which
Quest Diagnostics chooses not to compete. Quest Diagnostics may
also make selected local acquisitions where appropriate.
Leading Innovator. Quest Diagnostics 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, Quest Diagnostics believes it is one
of the leaders in transferring innovation from academic biotechnology
laboratories to the market. For example, Quest Diagnostics (through its
subsidiary Nichols) has been informed by its licensors that it is currently
the only independent 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. Quest Diagnostics 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.
Quest Diagnostics 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 Quest Diagnostics, and physician-
- -------------
* This is a forward looking statement and is based on current expectations.
Actual results may vary materially from those projected. See "--Important
Factors Regarding Forward Looking Statements." In particular see factors
(a), (b), (c), (d), (f) and (j).
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office laboratories. Quest Diagnostics 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.
Quest Diagnostics believes that consolidation will continue in the
clinical laboratory testing business. In addition, Quest Diagnostics 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 referrals and the ownership of laboratories
as well as increased regulation of laboratories are expected to contribute to
the continuing consolidation of the industry.
Quest Diagnostics 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.
Quest Diagnostics 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. Quest Diagnostics has formulated strategies to address these
challenges. See "--Business Strategy."
Services
Quest Diagnostics' laboratory business is comprised of routine testing,
which Quest Diagnostics management estimates currently generates
approximately 88% of Quest Diagnostics' net revenues; and esoteric testing,
which is performed at the Nichols facility in San Juan Capistrano and which
Quest Diagnostics management estimates generates approximately 10% of Quest
Diagnostics' net revenues. The balance of Quest Diagnostics' net revenues is
derived principally from the manufacture of clinical laboratory test kits.
Routine Testing Services and Operations. Routine tests, which are
performed at Quest Diagnostics' 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.
Quest Diagnostics 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. Quest Diagnostics 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 Quest
Diagnostics 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 Quest Diagnostics, typically in or near a
medical professional building, to which patients can be referred by
physicians for specimen collection.
Quest Diagnostics operates 24 hours a day, 365 days a year, utilizing a
fully integrated collection and processing system. Quest Diagnostics
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, Quest Diagnostics processes
approximately 220,000 requisitions. Quest Diagnostics provides daily pickup
of specimens from most customers principally through an in-house courier
system. The specimens are sent to one of Quest Diagnostics' laboratories
(generally a regional or branch laboratory) where one or more tests are
performed.
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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 Quest Diagnostics' computerized testing equipment
is directly linked with Quest Diagnostics' 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 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 Quest Diagnostics'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, Quest
Diagnostics 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 Quest Diagnostics 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. Quest Diagnostics management estimates
that net revenues from such testing accounted for less than 1% of Quest
Diagnostics' net revenues in 1995.
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Diagnostics. Through its Nichols Institute Diagnostics ("NID")
subsidiaries, which were acquired as a result of the acquisition of Nichols
Institute in August 1994, Quest Diagnostics manufactures and markets clinical
laboratory kits primarily for esoteric testing. Test kits are sold
principally to hospital and clinical laboratories.
Customers and Payors
Quest Diagnostics provides testing services to a broad range of health care
providers. The primary types of customers served by Quest Diagnostics 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 Quest Diagnostics' clinical laboratory business. Fees for
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, Quest Diagnostics 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
Quest Diagnostics 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. Quest Diagnostics serves approximately 3,000 hospitals with
services that vary from providing esoteric testing to management contracts,
where Quest Diagnostics 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 Quest
Diagnostics.
Other Institutions. Quest Diagnostics 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 Quest Diagnostics' testing capabilities. These
institutions are typically charged on a negotiated or bid fee-for- service
basis. Quest Diagnostics' 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 Quest Diagnostics' net revenues. Quest Diagnostics believes
that the loss of any one of its customers would not have a material adverse
effect on Quest Diagnostics' 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.
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The following table sets forth current estimates of the breakdown by payor
of Quest Diagnostics' 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>
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 Quest Diagnostics' 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
Quest Diagnostics 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. Quest Diagnostics'
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 Quest Diagnostics. Quest
Diagnostics 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."
Quest Diagnostics' 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 Quest Diagnostics. Account representatives are compensated with a
combination of salaries and bonuses commensurate with each individual's
qualifications and responsibilities.
Quest Diagnostics 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
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by managed care organizations, integrated health delivery systems, insurance
plans, employers and by patients themselves. In view of these changes, Quest
Diagnostics has completed a rigorous regional market strategy process and has
reorganized its sales and marketing organization structure to support these
strategies and emerging customers.
Quest Diagnostics 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 Quest
Diagnostics 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. Quest Diagnostics believes that there are potential
opportunities for large, low-cost, clinical laboratories such as Quest
Diagnostics 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
Quest Diagnostics, 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 Quest Diagnostics. 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. Quest Diagnostics
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 Quest Diagnostics' net revenues from clinical laboratory testing and
approximately 15% of the number of tests performed by Quest Diagnostics.
Quest Diagnostics believes that the prices charged by the independent
clinical laboratory testing companies to managed care organizations can and
must be increased. Quest Diagnostics 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 Quest Diagnostics will be able to increase the prices
charged to managed care organizations or that Quest Diagnostics 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. Quest Diagnostics believes that the growth of the managed
care sector presents both challenges and opportunities. Quest Diagnostics, 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.
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Expansion Opportunities
Quest Diagnostics believes that there are several expansion opportunities.
Quest Diagnostics 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 "--Effect of the Growth of the Managed
Care Sector on the Clinical Laboratory Business," many health 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 Quest Diagnostics 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,
Quest Diagnostics 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. Quest
Diagnostics believes that in many cases, by managing a hospital laboratory or
entering into a joint venture with a hospital, Quest Diagnostics 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. Quest Diagnostics 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 Quest Diagnostics' laboratory facilities. Quest
Diagnostics 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, Quest Diagnostics
believes that only a small percentage of the hospitals in the United States
have entered into such arrangements with independent clinical laboratories.
Nonetheless, Quest Diagnostics 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, Quest Diagnostics is beginning to market consulting support and
technical solutions for integrating diverse laboratory infrastructures,
systems and data.
Employer Market. Quest Diagnostics 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. Quest Diagnostics
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, Quest Diagnostics created the Quest Diagnostics Medical
Informatics ("QDMI") division which focuses solely on the medical information
needs of managed care organizations, integrated healthcare delivery networks
and other large customers. Through internal development, Quest Diagnostics
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.
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As market interest has increased, the QDMI 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. Quest Diagnostics believes
that health care customers will increasingly see value in the information
obtained from clinical laboratory results.
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 Quest Diagnostics'
information systems staff. Quest Diagnostics has historically not
standardized the billing, laboratory and other information systems at
laboratories that it has acquired. As a result, Quest Diagnostics has
numerous different information systems to handle billing, test result
reporting and financial data and transactions. Quest Diagnostics believes
that the efficient handling of information involving customers, patients,
payors, and other parties will be critical to Quest Diagnostics' future
success.
To this end, Quest Diagnostics has chosen standard billing and laboratory
systems. During the third quarter of 1996, Quest Diagnostics recorded a
charge of $13.7 million to write off capitalized software as a result of its
decision to abandon the billing system which had been intended as its
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 Quest Diagnostics' net revenues.
The standard laboratory system is already operational in nine of its 22
billing sites, which account for 30% of Quest Diagnostics' net revenues. Such
sites are not necessarily the same sites as those with standard billing
systems. Quest Diagnostics 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
and is expected to be converted by early 1998. The conversion costs are
expected to average approximately $3 million per billing system and $1
million to $3 million per laboratory system. As more billing sites are
converted to the standard billing system, consolidation of billing sites is
expected to occur, which will reduce overall conversion costs and improve
billing efficiencies. Quest Diagnostics anticipates that the cost of
converting all billing and laboratory systems to the standard systems over
the next several years will cost between approximately $55 million and $85
million, depending on the number of billing consolidations that occur.* Quest
Diagnostics does not anticipate that the conversion costs will result in a
significant increase in capital expenditures over the levels spent during the
last several years.
Quest Diagnostics 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. Quest Diagnostics 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 Quest Diagnostics receives either do not provide all the
necessary data or provide incorrect data. Quest Diagnostics believes that
this experience is similar to that of its primary competitors. Quest
Diagnostics 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. Quest Diagnostics 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 Quest
Diagnostics and the payor, disputes between payors as to the party
responsible
- -------------
* This is a forward looking statement and is based on current expectations.
Actual results may vary materially from those projected. See "--Important
Factors Regarding Forward Looking Statements." In particular see factors
(d), (j) and (k).
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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.
Quest Diagnostics' 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 Operations of Quest Diagnostics." Quest
Diagnostics' billing has also been hampered by the existence of multiple
billing information systems. In 1995 Quest Diagnostics 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 Quest Diagnostics' 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,
Quest Diagnostics recorded a charge to bad debt of $62 million in time of
charge, the backlog of unbilled requisitions was estimated 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 Quest
Diagnostics and Quest Diagnostics is in the process of integrating a billing
system with proven reliability throughout its network. The SYS system is in
use at seven of Quest Diagnostics' 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 Quest Diagnostics 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. Quest Diagnostics, however, has already
completed seven conversions to this system and has retained key people who
have been involved in those conversions.
Quest Diagnostics 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 Quest Diagnostics had
experienced during the first two quarters of 1996. See "--Regulation and
Reimbursement--Regulation of Reimbursement for Clinical Laboratory Services."
Acquisitions and Dispositions
MetPath, Quest Diagnostics' predecessor, originally commenced operations in
1967 with laboratories only in the New York metropolitan area. Most of Quest
Diagnostics' other regional laboratories have been added through
acquisitions. Principally as the result of the acquisitions discussed below
that were completed in 1993 and 1994, Quest Diagnostics' revenues have almost
tripled since 1991. However, this increase in revenues is not reflected in
the Quest Diagnostics 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 Quest
Diagnostics could concentrate on the integration of the laboratory networks
that had been acquired in 1993 and 1994. Quest Diagnostics may resume making
acquisitions in the future, most likely focusing on acquisitions of smaller
laboratories that can be folded into existing laboratories where Quest
Diagnostics can expect to achieve
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significant cost savings and other benefits resulting from the elimination of
redundant facilities and equipment and reductions in staffing or personnel.
Quest Diagnostics 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, Quest Diagnostics acquired the clinical
testing laboratories of Unilab in Dallas, Denver and Phoenix, in exchange for
Quest Diagnostics' then 43% ownership of Unilab and the assumption of
approximately $70 million of indebtedness of Unilab. In a separate
transaction, Quest Diagnostics transferred to Unilab Quest Diagnostics'
investment in J.S. Pathology PLC, a clinical testing laboratory based in the
United Kingdom, in exchange for a small equity interest in Unilab. Quest
Diagnostics currently owns approximately 4% of Unilab's outstanding common
stock. In May 1993, Corning acquired and contributed to Quest Diagnostics
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 Quest
Diagnostics' consolidated financial statements for prior periods have not
been restated since this acquisition is not material. See Note 3 to the
Audited Quest Diagnostics Financial Statements. In addition to the
acquisitions discussed above, since January 1993 Quest Diagnostics 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. Quest
Diagnostics 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: Quest
Diagnostics, 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. Quest
Diagnostics 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: Quest
Diagnostics, 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 effct 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 Quest Diagnostics.
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, Quest Diagnostics
competes on a regional basis with many smaller regional independent clinical
laboratories as well as laboratories owned by hospitals and physicians. Quest
Diagnostics 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 Quest Diagnostics' net revenues and almost all of its
EBITDA currently is generated from markets in which Quest Diagnostics
believes that it has the largest market share. In most of these markets Quest
Diagnostics believes that it also is the lowest cost provider. Quest
Diagnostics does not generally compete in the California routine testing
market other than in the San Diego metropolitan area.
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Quest Diagnostics 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. Quest Diagnostics 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."
Quest Diagnostics believes that consolidation will continue in the
clinical laboratory testing business. In addition, Quest Diagnostics 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
Quest Diagnostics 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.
The Quest Diagnostics 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, Quest Diagnostics administers an
extensive internal program of "blind" proficiency testing. These samples are
processed through the Quest Diagnostics 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 Quest Diagnostics comprehensive quality
assurance program includes performance of internal process audits.
External Proficiency Testing and Accreditation. All Quest Diagnostics
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 Quest Diagnostics 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 Quest
Diagnostics 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, Quest Diagnostics believes that reductions in
reimbursement for Medicare services will continue to be implemented from time
to time. Reductions in the
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reimbursement rates of other third-party payors are likely to occur as well.
Quest Diagnostics 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 Quest Diagnostics'
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 Quest Diagnostics 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 Quest Diagnostics 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 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 Quest
Diagnostics.
Quest Diagnostics 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
Quest Diagnostics' laboratories are subject to the State of New York's
clinical laboratory regulations, which contain provisions that are
significantly more stringent than federal law.
Quest Diagnostics 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 Quest
Diagnostics' laboratories perform such testing, each must be certified by HHS
as meeting SAMHSA standards. Seven of Quest Diagnostics' 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 Quest Diagnostics laboratories using controlled substances for
testing purposes are licensed by the DEA.
Medical Wastes and Radioactive Materials. Quest Diagnostics 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 Quest Diagnostics laboratories are operated in material
compliance with applicable federal and state laws and regulations relating to
disposal of all laboratory specimens. Quest Diagnostics utilizes outside
vendors for disposal of specimens. Although Quest Diagnostics believes that
it is currently in compliance in all material respects with such federal,
state and local laws, failure to comply could subject Quest Diagnostics 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.
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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, Quest Diagnostics
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 Quest
Diagnostics' net earnings and cash flows. Quest Diagnostics 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 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. Quest Diagnostics 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 Quest Diagnostics, 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 Quest
Diagnostics, but are generally higher than Quest Diagnostics' 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 Quest
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Diagnostics, 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 Quest Diagnostics. 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 Quest
Diagnostics. Quest Diagnostics 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 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-
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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. Quest Diagnostics 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 Quest Diagnostics 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
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 Quest Diagnostics, 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.
Government Investigations and Related Claims
Quest Diagnostics has settled various government and private claims (i.e.,
nongovernmental claims such as those by private insurers) totalling
approximately $195 million relating primarily to industry-wide billing and
marketing practices that had been substantially discontinued by late 1992.
Specifically, Quest Diagnostics has entered into, (i) for an aggregate of
approximately $180 million, five settlements with the OIG and the DOJ
(including, the MetPath and the Damon settlements discussed below) and two
settlements with state governments with respect to Medicare and Medicaid
marketing and billing practices of Quest Diagnostics and certain companies
acquired by Quest Diagnostics prior to their acquisition and (ii) thirteen
settlements relating to private claims totalling approximately $15 million.
In addition, there are pending investigations by the OIG and DOJ into billing
and marketing practices at three regional laboratories operated by Nichols
prior to its acquisition by Quest Diagnostics. There are no private claims
presently pending.
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Government Settlements
The MetPath Settlement. In September 1993, Quest Diagnostics (under the name
MetPath Inc.) entered into an agreement with the DOJ and the OIG pursuant to
which Quest Diagnostics paid a total of $36.5 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.
The Damon Settlement. By issuance of civil subpoenas in August 1993, the
government began a formal investigation of Damon, a company acquired by
Corning in August 1993. Subsequent to September 1993, several additional
subpoenas were issued. By a plea agreement and civil settlement 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 Quest Diagnostics by Corning. At the time Quest Diagnostics
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. Reserves established for such settlements in the second quarter
of 1996 were based on Quest Diagnostics' and its counsel's belief that the
merits of its factual and legal arguments would be given more weight 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 Quest Diagnostics from future participation in any federal health
care programs on account of Damon's practices.
Other Governmental Settlements. In addition to the MetPath settlement and
the Damon settlement, since 1992 Quest Diagnostics has settled five other
federal and state billing-related claims for a total of approximately $25
million.
Ongoing Government Investigations
The Nichols Investigation. By issuance of civil subpoenas in August 1993,
the government began a formal investigation of Nichols, a company acquired by
Corning in August 1994. The investigation of Nichols remains open. While
Quest Diagnostics has established reserves in respect of the Nichols
investigations, at present there are no settlement discussions pending
between DOJ and Quest Diagnostics regarding Nichols, and it is too early to
predict the outcome of this investigation. Remedies available to the
government include exclusion from participation in the Medicare and Medicaid
programs, criminal fines, civil recoveries plus civil penalties and asset
forfeitures. Although application of such remedies and penalties could
materially and adversely affect Quest Diagnostics' business, financial
condition, results of operations and prospects, management believes that the
possibility of this happening is remote. Quest Diagnostics derived
approximately 23% and 22% of its net revenues for the year ended December 31,
1995 and the nine months ended September 30, 1996, respectively, from
Medicare and Medicaid programs. However, in light of the Corporate Integrity
Agreement referred to below entered into between Quest Diagnostics and the
OIG in connection with the Damon settlement, the fact that the matters being
investigated were corrected on or before Quest Diagnostics' acquisition of
Nichols and Quest Diagnostics' cooperation in this investigation, Quest
Diagnostics believes the prospect of such exclusion on account of the
investigation is remote. As discussed below, Corning has agreed to indemnify
Quest Diagnostics against any monetary penalties, fines or settlements for
any governmental claims that may arise as a result of the Nichols
investigations.
The Damon Officer Investigations. Quest Diagnostics 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, Quest Diagnostics 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 Quest Diagnostics and will not be
indemnified by Corning. In addition, as part of the Damon settlement, Corning
agreed to cooperate with DOJ in its continuing investigation of individuals
formerly associated with Damon and, in connection therewith, Quest
Diagnostics is providing additional information pursuant to several
subpoenas.
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Other Government Investigations. In December 1995, Quest Diagnostics
received a subpoena from the OIG seeking information as to Quest Diagnostics'
policies in instances in which specimens were received and tested by a
laboratory without first receiving or verifying specific test requisitions.
While compliance with the subpoena is ongoing, Quest Diagnostics 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, Quest Diagnostics voluntarily
self-reported to the government a few isolated events, involving billings of
approximately $16 million, that may have resulted in overpayment by Medicare
and Medicaid to Quest Diagnostics. It is Quest Diagnostics' policy to
internally investigate all such incidents and to self-report and reimburse
payors as appropriate. Although Quest Diagnostics 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
below, Corning has agreed to indemnify Quest Diagnostics against any monetary
penalties, fines or settlements for any governmental claims that may arise as
a result of the investigations described in this paragraph.
Outlook for Future Government 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 Quest Diagnostics'
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 substantially increased
funding, powers and remedies to pursue suspected fraud and abuse. In
connection with the Damon settlement, Quest Diagnostics signed a Corporate
Integrity Agreement pursuant to which Quest Diagnostics 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 Quest
Diagnostics' 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 Quest
Diagnostics, but also gives Quest Diagnostics the opportunity to obtain
clearer guidance on matters of compliance and to resolve compliance issues
directly with OIG. Importantly, the agreement gives Quest Diagnostics the
opportunity to cure any asserted breaches and to otherwise initiate
corrective actions, which Quest Diagnostics believes should help to avoid
enforcement actions outside of the process provided in the agreement. See
"--Compliance Program."
Private Settlements and Claims
Since 1992 Quest Diagnostics has settled thirteen private actions relating
to the governmental settlements described above for an aggregate of
approximately $15 million. There are no private claims presently pending.
Corning Indemnity
In connection with the Distributions, Corning will agree to indemnify Quest
Diagnostics against all monetary penalties, fines or settlements for any
governmental claims relating to billing practices of Quest Diagnostics and its
predecessors that have been settled or are pending on the Distribution Date.
This includes the settlements described under "--Government Settlements" above
and the claims described under "--Ongoing Government Investigations--The Nichols
Investigation" and "--Other Government Investigations." Corning will also agree
to indemnify Quest Diagnostics for 50% of the aggregate of all judgment or
settlement payments made by Quest Diagnostics that are in excess of $42.0
million in respect of claims by private parties (i.e., nongovernmental parties
such as private insurers) that relate to indemnified or previously settled
governmental claims (such as the Damon settlement) and that allege overbillings
by Quest Diagnostics or any existing subsidiaries of Quest Diagnostics, for
services provided prior to the Distribution Date; provided, however, such
indemnification will not exceed $25.0 million in the aggregate and that all
amounts indemnified against by Corning for the benefit of Quest Diagnostics will
be calculated on a net after-tax basis by taking into account any deductions and
other tax benefits realized by Quest Diagnostics (or a consolidated group of
which Quest Diagnostics is a member after the Distributions (the "Quest
Diagnostics Group")) in respect of the underlying settlement, judgment payment,
or other loss (or portion thereof) indemnified against by Corning generally at
the time and to the extent such deductions or tax benefits are deemed to reduce
the tax liability of Quest Diagnostics or the Quest Diagnostics Group.
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Corning will not indemnify Quest Diagnostics against (i) any governmental
claims that arise after the Distribution Date pursuant to service of subpoena
or other notice of such investigation after the Distribution Date, (ii) any
nongovernmental claims unrelated to the indemnified governmental claims or
investigations, (iii) any nongovernmental claims not settled prior to five
years after the Distribution Date, (iv) 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 (v) the fees and expenses of litigation. Quest
Diagnostics will control the defense of any governmental claim or
investigation unless Corning elects to assume such defense. However, in the
case of all nongovernmental claims related to indemnified governmental claims
related to alleged overbillings, Quest Diagnostics will control the defense.
All disputes under the Transaction Agreement are subject to binding
arbitration. See "The Relationship Among Corning, Quest Diagnostics and
Covance After the Distributions--Transaction Agreement."
Quest Diagnostics' Reserves
Quest Diagnostics' aggregate reserve with respect to all governmental and
private claims, including litigation costs of approximately $6.6 million, was
$215 million at September 30, 1996 and is estimated to be $85 million at the
Distribution Date. The $130 million reduction in the reserve is due to the
subsequent payment of the Damon settlement ($119 million), the settlement of
an investigation into billing of certain hematology indices (reserved at $7
million) and the settlement of a private claim (reserved at $4 million).
These settlements have been or will be funded by contributions to Quest
Diagnostics' capital by Corning. The $85 million reserve represents amounts
for future government and private settlements of matters which are either
presently pending or anticipated as a consequence of the government and
private settlements and self-reported matters described above. Based on
information available to management and Quest Diagnostics' experience with
past settlements, especially the Damon settlement, management believes that
its current level of reserves is adequate. However, 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 Quest Diagnostics' results of operations
and, for non-indemnified claims, Quest Diagnostics' cash flows in the period
in which such claims are settled. While none of the governmental or
nongovernmental investigations or claims is covered by insurance, Quest
Diagnostics does not believe that these matters will have a material adverse
effect on Quest Diagnostics' 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. Quest Diagnostics 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 Quest
Diagnostics. Quest Diagnostics' current compliance plan establishes a
Compliance Committee of the Quest Diagnostics 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 Quest Diagnostics in the future.
Quest Diagnostics 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 Quest
Diagnostics representatives that Quest Diagnostics' compliance program,
coupled with corrective action taken by Quest Diagnostics 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 Quest Diagnostics
from future participation in governmental health care programs. Pursuant to
the Damon settlement, Quest Diagnostics signed a five year Corporate
Integrity Agreement with the OIG pursuant to which Quest Diagnostics 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 Quest
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Diagnostics the opportunity to cure any asserted breaches and to otherwise
initiate corrective actions, which Quest Diagnostics believes should help to
avoid enforcement actions outside of the process provided in the agreement.
The agreement gives Quest Diagnostics the opportunity to obtain clearer
guidance on matters of compliance and to resolve compliance issues directly
with the OIG. Quest Diagnostics 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 Quest Diagnostics. None of the
undertakings included in the agreement is expected to have any material
adverse affect on Quest Diagnostics' business, financial condition, results
of operations and prospects. The clinical laboratory testing industry is,
however, subject to extensive regulation. Quest Diagnostics 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
Quest Diagnostics. Potential sanctions for violation of these statutes and
regulations include significant fines and the loss of various licenses,
certificates and authorizations.
Insurance
Quest Diagnostics 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 future exposure,
management believes that the present levels of coverage are adequate to cover
currently estimated exposures. Although Quest Diagnostics believes that it
will be able to obtain adequate insurance coverage in the future at
acceptable costs, there can be no assurance that Quest Diagnostics will be
able to obtain such coverage or will be able to do so at an acceptable cost
or that Quest Diagnostics will not incur significant liabilities in excess of
policy limits.
Employees
At September 30, 1996, Quest Diagnostics employed approximately 18,700
people. These include approximately 16,500 full-time employees and
approximately 2,200 part-time employees. Quest Diagnostics 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
Quest Diagnostics--Overview."
Properties
Quest Diagnostics'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
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Leased or Owned
Location Type of Laboratory 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
Lincoln, Nebraska Regional Managed (hospital)
Teterboro, New Jersey/New York, New York Regional Owned
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 Branch Leased by joint 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>
Quest Diagnostics executive offices are located in Teterboro, New Jersey
in the building that serves as Quest Diagnostics' regional laboratory in the
New York City metropolitan area. Quest Diagnostics owns its branch laboratory
facility in Mexico City. Quest Diagnostics believes that, in general, its
laboratory facilities are suitable and adequate for its current and
anticipated future levels of operation. Quest Diagnostics 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 "--Government Investigations
and Related Claims," Quest Diagnostics is involved in various legal
proceedings arising in the ordinary course of business. Some of the
proceedings against Quest Diagnostics involve claims that are substantial in
amount. Although it is not feasible to predict the outcome of such
proceedings or any claims made against Quest Diagnostics, it does not
anticipate that the ultimate liability of such proceedings or claims will
have a material adverse effect on Quest Diagnostics' financial position or
results of operations as they primarily relate to professional liability for
which Quest Diagnostics believes it has adequate insurance coverage. Quest
Diagnostics maintains professional liability insurance for its professional
liability claims. See "--Insurance."
IMPORTANT FACTORS REGARDING FORWARD LOOKING STATEMENTS
Quest Diagnostics wishes to caution stockholders that the following
factors are hereby identified as important factors that could cause Quest
Diagnostics' actual financial results to differ materially from those
projected, forecast, estimated, or budgeted by Quest Diagnostics in
forward-looking statements.
(a) Heightened competition, including the intensification of price
competition. See "Risk Factors--Risks Relating to Quest
Diagnostics--Intense Competition."
(b) Impact of changes in payor mix, including the shift from traditional,
fee-for-service medicine to managed- cost health care. See "Risk
Factors--Risks Relating to Quest Diagnostics--Role of Managed Care."
(c) Adverse actions by governmental or other third-party payors, including
unilateral reduction of fee schedules payable to Quest Diagnostics.
(d) The impact upon Quest Diagnostics' collection rates or general or
administrative expenses resulting from compliance with Medicare
administrative policies, including specifically the recent
requirements of Medicare
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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. See "Risk Factors--Risks
Relating to Quest Diagnostics--Reliance on Medicare/Medicaid
Reimbursements" and "--Government Regulation."
(e) Adverse results from pending governmental investigations, including in
particular significant monetary damages and/or exclusion from the
Medicare and Medicaid programs and/or other significant litigation
matters. Also, the absence of indemnification from Corning for private
claims unrelated to the indemnified governmental claims or
investigations and for private claims that are not settled within five
years of the Distribution Date. See "Risk Factors--Risks Relating to
Quest Diagnostics--Government Investigations and Related Claims."
(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 Quest
Diagnostics's clinical laboratories under CLIA, by HCFA for Medicare
and Medicaid programs or other federal, state and local agencies. See
"Risk Factors--Risks Relating to Quest Diagnostics--Government
Regulation."
(i) Adverse publicity and news coverage about Quest Diagnostics or the
clinical laboratory industry.
(j) Computer or other system failures that affect the ability of Quest
Diagnostics to perform tests, report test results or properly bill
customers. See "Risk Factors--Risks Relating to Quest
Diagnostics--Billing."
(k) Development of technologies that substantially alter the practice of
laboratory medicine.
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MANAGEMENT OF QUEST DIAGNOSTICS
Management
Directors. Certain information with respect to the persons who will serve as
directors of Quest Diagnostics following the Distributions is set forth
below. Prior to the closing of the Quest Diagnostics Notes Offering and the
Quest Diagnostics Spin-Off Distribution, one of the current directors will
resign and the prospective directors listed below will be elected. As
provided in the Quest Diagnostics Certificate, the Quest Diagnostics Board
will be divided into three classes effective upon the Distributions and one
class of the Quest Diagnostics 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.
Quest Diagnostics is contemplating the selection of additional directors,
which selection may occur prior to the Distributions. Quest Diagnostics 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
Quest Diagnostics in May 1995 and has been a director of Quest Diagnostics
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
Quest Diagnostics 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 Quest
Diagnostics from October 1994 to July 1996 and was re-elected a director of
Quest Diagnostics in October 1996.
Directors' Compensation. Each director of Quest Diagnostics, other than a
director who is an employee of Quest Diagnostics, will receive $18,000
annually for service as a director and will also be paid $1,000 for each
meeting of the Quest Diagnostics Board and $500 for each meeting of any
committee thereof which he attends.
Quest Diagnostics 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 base rate of Citibank, N.A. in effect on certain specified
dates, (ii) a market value account, the value of which will be based upon the
market value of Quest Diagnostics 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.
Quest Diagnostics has adopted, effective the Distribution Date, a
restricted stock plan for non-employee directors, pursuant to which Quest
Diagnostics will issue to each non-employee director elected 750 shares of
Quest Diagnostics 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.
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Committees of the Board of Directors. Prior to the Distributions, the
Quest Diagnostics Board is expected to establish and designate specific
functions and areas of oversight to an Audit and Finance Committee, a
Compensation Committee ("Quest Diagnostics Compensation Committee") and a
Compliance Committee. The Audit and Finance Committee will examine and
consider matters relating to the financial affairs of Quest Diagnostics,
including reviewing Quest Diagnostics' annual financial statements, the scope
of the independent and internal audits and the independent auditor's letter
to management concerning the effectiveness of Quest Diagnostics's internal
financial and accounting controls. The Quest Diagnostics Compensation
Committee will make recommendations to the Quest Diagnostics Board with
respect to programs for human resource development and management
organization and succession, determine senior executive compensation, make
recommendations to the Quest Diagnostics Board with respect to compensation
matters and policies and employee benefit and incentive plans, administer
such plans, and administer Quest Diagnostics' stock option and equity based
plans and grant stock options and other rights under such plans. The
Compliance Committee will oversee Quest Diagnostics' 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 Quest
Diagnostics--Compliance Program."
Executive Officers of Quest Diagnostics. In addition to Mr. Freeman, the
following persons will serve as executive officers of Quest Diagnostics 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 Quest Diagnostics.
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 Quest Diagnostics in 1992 as Treasurer and served
as Chief Financial Officer from 1994 through 1995. In 1995 Mr. Chambers
assumed his current responsibilities overseeing Quest Diagnostics' billing
process. At the Distribution Date, Mr. Chambers will also assume
responsibility for investor relations.
Gregory C. Critchfield, M.D. (45) is Senior Vice President, and Chief
Medical and Science Officer. Dr. Critchfield joined Quest Diagnostics 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 Quest Diagnostics, 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 Quest Diagnostics 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 Quest Diagnostics 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 Quest Diagnostics as a senior medical advisor.
Don M. Hardison, Jr. (45) is Senior Vice President-Sales and Marketing,
with overall responsibility for all commercial activities. Mr. Hardison
joined Quest Diagnostics in January 1996. Prior to joining Quest Diagnostics,
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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.
Paul A. Krieger, M.D. (50) is Vice President-Anatomic Pathology. Dr.
Krieger joined Quest Diagnostics in 1975 and served as Vice President,
Director of Anatomic Pathology at Quest Diagnostics' regional laboratory in
Teterboro, New Jersey until 1995, when he was appointed to his present
position. Concurrent with his employment with Quest Diagnostics, 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 Quest
Diagnostics 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 Quest Diagnostics 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 Corning's Life Sciences division in 1990, Senior
Vice President-Finance and New Business Development of Quest Diagnostics in
1993 and Executive Vice President and Chief Financial Officer of Quest
Diagnostics 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 Quest
Diagnostics and its subsidiaries to each of the chief executive officer and
the four other most highly compensated executive officers (the "named
executive officers") of Quest Diagnostics 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.
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SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Long-Term Compensation
----------------------------------
Annual Compensation Awards Payouts
----------------------------------- ---------------------- --------
Restricted Securities Incentive
Name and Salary Bonus Other Annual Stock Underlying Plan All Other
Principal Position Year (1) (2) Compensation(3) Awards(4) Options Payouts Compensation(5)
- ------------------------ ------- ------- ------- ------------- --------- --------- -------- ---------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Kenneth W. Freeman, 1996 385,000 211,750 10,440 -- -- -- 16,690
President and Chief 1995 316,667 249,918 7,200 326,926 87,000 -- 14,057
Executive Officer 1994 240,000 244,634 6,900 406,766 20,000 162,679 13,376
Robert A. Carothers, 1996 250,000 136,714 1,800 -- -- -- 8,254
Vice President and 1995 173,000 68,337 -- -- 16,500 -- 8,561
Chief Financial Officer 1994 165,250 84,180 -- -- 6,092 -- 7,557
Gregory C. Critchfield, 1996 310,000 182,900 40,909 -- 2,000 -- 65,690
Senior Vice President 1995 (6) 70,000 122,920 -- -- 3,000 -- 2,370
and Chief Medical and
Science Officer
Donald M. Hardison, Jr., 1996 260,000 159,467 2,880 -- 24,000 -- 17,123
Senior Vice President-
Sales and Manufacturing
Douglas M. VanOort, 1996 325,000 178,750 2,880 -- -- -- 4,750
Senior Vice President- 1995 251,912 56,754 7,200 98,626 60,000 -- 4,620
Operations 1994 228,333 165,969 6,900 109,652 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.
(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 Quest Diagnostics and in part if such officer's employment is
terminated by Quest Diagnostics. 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, except for 50% of such shares held by Mr. Freeman, will be
forfeited, and in lieu thereof restricted shares and/or options to
purchase shares of Quest Diagnostics Common Stock will thereafter be
granted pursuant to the terms of the Quest Diagnostics Employee Equity
Participation 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 Quest Diagnostics to
the Quest Diagnostics 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 Quest Diagnostics 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 Quest Diagnostics and was made to assist Dr. Critchfield in
relocating to the New Jersey area.
(6) Dr. Critchfield commenced employment with Quest Diagnostics 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 Quest Diagnostics 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
Quest Diagnostics 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 Quest Diagnostics 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 Quest Diagnostics Common
Stock ("New Options") under the Quest Diagnostics 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 Quest Diagnostics
Stock Option Plan.
The exercise prices and the number of shares of Quest Diagnostics 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 Quest
Diagnostics 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
85
<PAGE>
exercise of such option through the surrender of previously owned shares of
Quest Diagnostics 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.
OPTION/SAR GRANTS IN FISCAL YEAR 1995 (1)
<TABLE>
<CAPTION>
Potential Realizable Value at
Assumed Annual Rates of Stock
Price Appreciation for
Individual Grants Option Term (3)
------------------------------------------------- -----------------------------------
Number of % of Total
Securities Options
Underlying Granted
Options to Employees Gain
Granted in Fiscal Exercise Expiration at Gain at Gain at
Name (2) Year Price Date 0% (4) 5% 10%
- ---------------------------- ---------- ------------ ------- --------- ------ ---------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Kenneth W. Freeman 87,000 2.6% 31.25 12/5/2005 0 1,709,807 4,332,987
Robert A. Carothers 1,500 0.0% 31.75 6/7/2005 0 29,951 75,902
15,000 0.4% 31.25 12/5/2005 0 294,794 747,067
Gregory C. Critchfield 3,000 0.1% 27.50 10/3/2005 0 51,884 131,484
Donald M. Hardison, Jr. 24,000 0.7% 33.69 2/6/2006 0 508,499 1,288,636
Douglas M. VanOort 60,000 1.8% 31.25 12/5/2005 0 1,179,177 2,988,267
All Optionees as a Group (4) 3,389,100 100.0% 31.34 2005 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 Common Stock.
(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.
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<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 Quest Diagnostics'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.
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
of Number of Vesting Date
Grant Shares Performance of Shares Shares 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. Quest Diagnostics 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 Quest Diagnostics. 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
87
<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 Quest Diagnostics Compensation Committee sets the target for
the performance year. The Quest Diagnostics 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. Quest Diagnostics has adopted,
effective upon the Distributions, the Employee Equity Participation Program
(the "Program") consisting of two plans: (a) a stock option plan (the "Quest
Diagnostics Stock Option Plan") and (b) an incentive stock plan (the "Quest
Diagnostics Incentive Stock Plan"). The Program is designed to provide a
flexible mechanism to permit key employees of Quest Diagnostics and of any
subsidiary to obtain significant equity ownership in Quest Diagnostics,
thereby increasing their proprietary interest in the growth and success of
Quest Diagnostics.
The Program, which will be administered by the Quest Diagnostics
Compensation Committee, provides for the grant to eligible employees of
either non-qualified or "incentive stock" options, or both, to purchase
shares of Quest Diagnostics Common Stock at no less than fair market value on
the date of grant. The Quest Diagnostics 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 Quest Diagnostics by the optionee in full prior
to delivery of the stock. The optionee may pay the option price in cash or
with shares of Quest Diagnostics 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 Quest Diagnostics
Compensation Committee may grant options pursuant to which an optionee who
uses shares of Quest Diagnostics 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 Quest Diagnostics 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 Quest Diagnostics
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 Quest Diagnostics Compensation Committee to
award to eligible employees shares, or the right to receive shares, of Quest
Diagnostics Common Stock, the equivalent value in cash or a combination
thereof (as determined by the Quest Diagnostics Compensation Committee). The
Quest Diagnostics 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 Quest Diagnostics 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 Quest Diagnostics 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 Quest Diagnostics 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 Quest Diagnostics Common
Stock which may be optioned or granted to eligible employees will be
3,000,000. Shares from expired or terminated options under the Quest
Diagnostics Stock Option Plan will be available again for option grant under
the Program. Shares which are
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<PAGE>
issued but not earned, or which are forfeited under the Quest Diagnostics
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 Quest Diagnostics resulting from any recapitalization, stock
or unusual cash dividend, stock distribution, stock split or any other
increase or decrease effected without receipt of consideration by Quest
Diagnostics, or a merger or consolidation in which Quest Diagnostics 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 Quest Diagnostics 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 Quest Diagnostics Common Stock.
Quest Diagnostics believes that the federal income tax consequences of the
Program are as follows. An optionee who exercises a non-qualified option
granted under the Quest Diagnostics 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 Quest Diagnostics 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 Quest Diagnostics 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 Quest Diagnostics 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
Quest Diagnostics 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 Quest Diagnostics Common Stock which are not subject to
restrictions and possibility of forfeiture and which are awarded to an
employee under the Quest Diagnostics 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 Quest Diagnostics 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 Quest Diagnostics 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
Quest Diagnostics 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 Quest Diagnostics upon a participant's disposition of
shares acquired under the Program, except that Quest Diagnostics 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 Quest Diagnostics are
currently active participants in a qualified defined benefit plan of Quest
Diagnostics.
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
89
<PAGE>
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
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 Quest
Diagnostics 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
25 and 15 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, $256,170 and $165,332, 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 20,500 27,300 34,100 41,000 47,800 55,300
200,000 43,000 57,300 71,600 86,000 100,300 115,300
300,000 65,500 87,300 109,100 131,000 152,800 175,300
400,000 88,000 117,300 146,600 176,000 205,300 235,300
500,000 110,500 147,300 184,100 221,000 257,800 295,300
600,000 133,000 177,300 221,600 266,000 310,300 355,300
700,000 155,500 207,300 259,100 311,000 362,800 415,300
800,000 178,000 237,300 296,600 356,000 415,300 475,300
900,000 200,500 267,300 334,100 401,000 467,800 535,300
1,000,000 223,000 297,300 371,600 446,000 520,300 595,300
1,100,000 245,500 327,300 409,100 491,000 572,800 655,300
1,200,000 268,000 357,300 446,600 536,000 625,300 715,300
</TABLE>
Quest Diagnostics Profit Sharing Plan. Most of the employees of Quest
Diagnostics and its subsidiaries have been eligible to participate in a
tax-qualified, defined contribution plan known as the Quest Diagnostics
Profit Sharing Plan (the "Quest Diagnostics 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, Quest Diagnostics Common Stock will be added as an investment
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<PAGE>
fund and a portion of the employer matching contributions will automatically
be invested in Quest Diagnostics Common Stock. Corning Common Stock will no
longer be available as an investment fund except with respect to amounts
already so invested under the Quest Diagnostics Profit Sharing Plan.
Effective as of the Distribution Date, the Quest Diagnostics Profit
Sharing Plan will be amended to permit participating employees' employers to
make discretionary contributions, other than matching contributions, to the
Quest Diagnostics Profit Sharing Plan for the benefit of such employees,
which contributions may be invested in Quest Diagnostics Common Stock.
Quest Diagnostics Employee Stock Ownership Plan. Quest Diagnostics 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 Quest Diagnostics Employee Stock Ownership Plan (the "Quest
Diagnostics ESOP").
Most employees of Quest Diagnostics and its subsidiaries will become
participants in the Quest Diagnostics ESOP after accruing six months of
service. To the extent permitted under the Quest Diagnostics ESOP, Quest
Diagnostics will contribute as of the Distribution Date an amount equal to a
portion of each participating employee's annual compensation. Quest
Diagnostics may in its discretion from time to time make additional
contributions to the Quest Diagnostics ESOP for the benefit of participating
employees. The assets of the Quest Diagnostics ESOP will be invested
primarily in shares of Quest Diagnostics Common Stock.
Amounts contributed to the Quest Diagnostics ESOP for the benefit of
participating employees will be 100% vested at age 65, the normal retirement
age specified in the Quest Diagnostics ESOP, or at death, disability or
termination of employment following completion of two years of credited
service. Contributions to the Quest Diagnostics 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. Quest Diagnostics has adopted, as of the
Distribution Date, the Employee Stock Purchase Plan (the "Quest Diagnostics
Stock Purchase Plan"), pursuant to which Quest Diagnostics 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 Quest Diagnostics Stock Purchase Plan, which will be administered by
the Quest Diagnostics Compensation Committee, is designed to give eligible
employees (generally, employees of Quest Diagnostics and its subsidiaries)
the opportunity to purchase shares of Quest Diagnostics 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 Quest Diagnostics
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 Quest
Diagnostics 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 Quest Diagnostics 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 Quest Diagnostics Common Stock until such shares are actually
purchased by him.
Under the Quest Diagnostics Stock Purchase Plan, the maximum number of
shares of Quest Diagnostics 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 Quest Diagnostics resulting from any
recapitalization, stock dividend, stock split or any other increase or
decrease effected without receipt of consideration by Quest Diagnostics or a
merger or consolidation in which Quest Diagnostics is the surviving
corporation.
The Quest Diagnostics Stock Purchase Plan has a term of five years and no
shares of Quest Diagnostics Common Stock may be offered for sale or sold
under the Quest Diagnostics Stock Purchase Plan after the fifth anniversary
of the effective date. The Quest Diagnostics Board is authorized to terminate
or amend the Quest Diagnostics Stock Purchase Plan, except that it may not
increase the number of shares of Quest Diagnostics Common Stock available
thereunder, decrease the price at which such shares may be offered for sale
or extend
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the term of the Quest Diagnostics Stock Purchase Plan without the approval of
the holders of a majority of the shares of the capital stock of Quest
Diagnostics cast at a meeting at which such matter is considered.
Employment Agreements; Severance Arrangements. It is anticipated that Mr.
Freeman will enter into an employment agreement with Quest Diagnostics. The
agreement will expire on or before December 31, 1999. The agreement will include
provisions for an annual salary of no less than $500,000, with increases subject
to the discretion of the Quest Diagnostics Board; annual target participation in
the Variable Compensation Plan of Quest Diagnostics in amounts no less than 65%
of annual salary in effect at the time performance goals are established; and
severance payments following a termination by Mr. Freeman for "Good Reason" or
by Quest Diagnostics, without cause in accordance with the severance policy
described below, except that Mr. Freeman will receive three times his base
annual salary and three times his annual award of variable compensation. "Good
Reason" is defined as assignment of Mr. Freeman to mutually inconsistent duties
or responsibilities, a failure to re-elect Mr. Freeman to the position of
President and Chief Executive Officer, a greater than 75 mile office relocation
and a Change of Control (as detailed in the next paragraph). The agreement will
also include provision for reimbursement of up to $10,000 per month until the
earlier of Mr. Freeman's obtaining suitable housing in the New York metropolitan
area or June 30, 1998; eligibility for a $400,000 interest-free relocation loan
to be forgiven over a five-year period; a retirement pension benefit equivalent
to benefits under the Corning Salaried Pension Plan and the Executive
Supplemental Plan based on not less than 34 years of credited service in the
event of termination for reasons other than cause, which benefits are intended
to be secured in some form such as a letter of credit or insurance policy, and,
in the event the agreement is not renewed upon its expiration, a payment equal
to two times the highest annual cash compensation paid to Mr. Freeman during the
term of the agreement and health benefits for eighteen months following
expiration of the agreement.
On or before the Distribution Date, Quest Diagnostics will adopt a
severance policy pursuant to which it will provide to each executive officer,
including the named executive officers, upon the termination of employment by
Quest Diagnostics other than for cause upon a determination that the business
needs of Quest Diagnostics require the replacement of such executive officer
and other than in connection with a change of control, compensation equal to
two times the executive officer's base annual salary at the annual rate in
effect on the date of termination and two times the annual award of variable
compensation at the most recent target level. Such executive officer will
also be entitled to participate in Quest Diagnostics' 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
Quest Diagnostics will provide to each executive officer upon the termination
of employment by Quest Diagnostics other than for cause, compensation equal
to three times annual base salary and three times the award of annual
variable compensation at the most recent target level and such officer will
be entitled to participate in Quest Diagnostics' 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 Quest Diagnostics; the
membership of the Quest Diagnostics Board changes as a result of a contested
election such that a majority of the Quest Diagnostics Board members at any
particular time were initially placed on the Quest Diagnostics Board as a
result of such contested election; or approval by Quest Diagnostics'
stockholders of a merger or consolidation in which Quest Diagnostics is not
the survivor thereof, or a sale or disposition of all or substantially all of
Quest Diagnostics' assets or a plan of partial or complete liquidation.
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SECURITY OWNERSHIP BY CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT OF QUEST DIAGNOSTICS
All of the outstanding shares of Quest Diagnostics Common Stock are
currently held by CLSI, which is wholly owned by Corning. The following table
sets forth the number of shares of Quest Diagnostics Common Stock that are
projected to be beneficially owned after the Quest Diagnostics Spin-Off
Distribution by the directors, by the named executive officers and by all
directors and executive officers of Quest Diagnostics 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 Quest Diagnostics 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 Quest Diagnostics Common Stock, the number reflects
the distribution ratio of one share of Quest Diagnostics 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
Quest Diagnostics will not affect the security ownership of Quest Diagnostics
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 Quest
Diagnostics Common Stock.
<TABLE>
<CAPTION>
Number of Shares
Beneficially Number of
Name Owned (1) Exercisable Options
- ---------------------------- ----------------- -------------------
<S> <C> <C>
Van C. Campbell 132,457
Robert A. Carothers 12,483
Gregory C. Critchfield 1,500
David A. Duke 82,000
Kenneth W. Freeman 103,500
Donald M. Hardison, Jr. 0
Douglas M. VanOort 11,500
All Directors and Executive
Officers as a Group 398,562
</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.
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DESCRIPTION OF QUEST DIAGNOSTICS CAPITAL STOCK
General
The following is a brief summary of certain provisions of the Quest
Diagnostics Certificate, as the restated certificate of incorporation will be
amended immediately prior to the Quest Diagnostics Spin-Off Distribution, and
does not relate to or give effect to provisions of statutory or other law
except as specifically stated. The Quest Diagnostics Certificate authorizes
the issuance of 100,000,000 shares of Quest Diagnostics Common Stock.
Approximately 28,901,735 shares of Quest Diagnostics Common Stock are
expected to be outstanding immediately following the Quest Diagnostics
Spin-Off Distribution. The rights of holders of shares of Quest Diagnostics
Common Stock are governed by the Quest Diagnostics Certificate, the Quest
Diagnostics By-Laws and by the DGCL.
Voting Rights
Subject to the voting of any shares of Quest Diagnostics Series Preferred
Stock (as defined below) that may be outstanding, voting power is vested in
the Quest Diagnostics Common Stock, each share having one vote, and the Quest
Diagnostics Voting Cumulative Preferred Stock, each $1,000 liquidation
preference of which has one vote, voting together as a single class.
Preemptive Rights
The Quest Diagnostics Certificate provides that no holder of shares of Quest
Diagnostics Common Stock or Quest Diagnostics Series Preferred Stock shall
have any preemptive rights except as the Quest Diagnostics Board may
determine from time to time. No such rights have been granted by the Quest
Diagnostics Board.
Quest Diagnostics Common Stock
Liquidation Rights. Subject to the preferential rights of any outstanding
Quest Diagnostics Series Preferred Stock and the Quest Diagnostics Voting
Cumulative Preferred Stock, in the event of any liquidation of Quest
Diagnostics, holders of shares of Quest Diagnostics Common Stock then
outstanding are entitled to share ratably in the assets of Quest Diagnostics
available for distribution to such holders.
Dividend Policy. Subject to any preferential rights of any outstanding
Quest Diagnostics Series Preferred Stock or Quest Diagnostics Voting
Cumulative Preferred Stock, such dividends as may be determined by the Quest
Diagnostics Board may be declared and paid on the shares of Quest Diagnostics
Common Stock from time to time out of any funds legally available therefor.
It is currently contemplated that, following the Distributions, Quest
Diagnostics 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 Quest
Diagnostics and such other considerations as the Quest Diagnostics Board
deems relevant. In addition, the Quest Diagnostics Credit Facility prohibits
Quest Diagnostics from paying cash dividends on the Quest Diagnostics Common
Stock. Further, the Indenture under which the Notes will be issued will limit
Quest Diagnostics' ability to pay cash dividends on the Quest Diagnostics
Common Stock based on 50% of Quest Diagnostics' net income, plus a credit for
issuances of capital stock.
Other Provisions. The shares of Quest Diagnostics Common Stock have no
redemption, sinking fund or conversion privileges applicable thereto and
holders of shares of Quest Diagnostics 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 Quest Diagnostics Common Stock although a "when
issued" market is expected to develop prior to the Distribution Date.
Application has been made to list the Quest Diagnostics Common Stock on the
NYSE, subject to official notice of the Distributions, under the trading
symbol " ." Prices at which Quest Diagnostics Common Stock may trade prior
to the Distributions on a "when-issued" basis or after the Distributions
cannot be predicted. Until shares of the Quest Diagnostics 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 Quest
Diagnostics 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 Quest Diagnostics Common Stock, investor
perceptions of Quest Diagnostics,
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the clinical laboratory testing business, and general economic and market
conditions. Quest Diagnostics initially will have approximately 18,000
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 Quest Diagnostics Common Stock will be Harris Trust and
Savings Bank. For certain information regarding options to purchase Quest
Diagnostics Common Stock that may become outstanding after the Distributions,
see "Management of Quest Diagnostics."
Quest Diagnostics Series Preferred Stock
The Quest Diagnostics Certificate authorizes the issuance of up to
10,000,000 shares of Quest Diagnostics Series Preferred Stock, par value
$1.00 per share (the "Quest Diagnostics Series Preferred Stock"). The Quest
Diagnostics Board has the authority to issue such shares from time to time,
without stockholder approval, and to determine the designations, preferences,
rights, including voting rights, and restrictions of such shares, subject to
the DGCL. Pursuant to this authority, the Quest Diagnostics Board has
designated shares of Quest Diagnostics Series Preferred Stock as Quest
Diagnostics Series A Preferred Stock and 1,000 shares of Quest Diagnostics
Nonvoting Cumulative Preferred Stock. No other class of Quest Diagnostics
Series Preferred Stock has been designated by the Quest Diagnostics Board.
Voting Cumulative Preferred Stock
General. Prior to the Quest Diagnostics Spin-off Distribution, Quest
Diagnostics will issue to Corning 1,000 shares of Voting Cumulative Preferred
Stock, liquidation preference $1,000 per share (the "Quest Diagnostics Voting
Cumulative Preferred Stock") without further stockholder approval.
Dividend Policy. Holders of shares of Quest Diagnostics Voting Cumulative
Preferred Stock will be entitled to receive, when, as and if declared by the
Quest Diagnostics 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 Quest Diagnostics Voting Cumulative Preferred Stock
votes together with the Quest Diagnostics Common Stock as a single class and
will have one vote per $1,000 liquidation preference. The Quest Diagnostics
Cumulative Preferred Stock also votes as a separate class on any amendment to
the Certificate of Incorporation which adversely affects the rights of the
Quest Diagnostics Voting Cumulative Preferred Stock; provided, however, that
any increase in the amount of authorized Quest Diagnostics 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 adversely
affect the rights of the Quest Diagnostics Voting Cumulative Preferred Stock.
Certain Restrictions. Whenever quarterly dividends or other dividends or
distributions payable on the Quest Diagnostics Voting Cumulative Preferred
Stock are in arrears, thereafter and until all accrued and unpaid dividends
and distributions, whether or not declared, on shares of Quest Diagnostics
Voting Cumulative Preferred Stock outstanding shall have been paid in full,
Quest Diagnostics 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 Quest Diagnostics Voting
Cumulative Preferred Stock;
(ii) declare or pay dividends, or make any other distributions, on any
shares of Parity Preferred Stock (as defined below) 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;
(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 Quest Diagnostics Voting Cumulative
Preferred Stock, provided that Quest Diagnostics may at any time redeem,
purchase or otherwise acquire shares of any such junior stock in exchange
for shares of any stock of Quest Diagnostics ranking junior (either as to
dividends or upon dissolution, liquidation or winding-up) to the Quest
Diagnostics Voting Cumulative Preferred Stock; or
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(iv) redeem or purchase or otherwise acquire for consideration any
shares of Quest Diagnostics Voting Cumulative Preferred Stock, or any
Parity Preferred Stock, except in accordance with a purchase offer made in
writing or by publication (as determined by the Quest Diagnostics Board)
to all holders of such shares upon such terms as the Quest Diagnostics
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.
Quest Diagnostics shall not permit any subsidiary of Quest Diagnostics to
purchase or otherwise acquire for consideration any shares of stock of Quest
Diagnostics unless Quest Diagnostics could purchase or otherwise acquire such
shares at such time and in such manner.
Liquidation Preference. The shares of Quest Diagnostics Voting Cumulative
Preferred Stock shall rank, as to liquidation, dissolution or winding-up of
Quest Diagnostics, prior to the shares of Quest Diagnostics Common Stock and
any other class of stock of Quest Diagnostics ranking junior to the Quest
Diagnostics Voting Cumulative Preferred Stock as to rights upon liquidation,
dissolution or winding-up of Quest Diagnostics, so that in the event of any
liquidation, dissolution or winding-up of Quest Diagnostics, whether
voluntary or involuntary, the holders of the Quest Diagnostics Voting
Cumulative Preferred Stock shall be entitled to receive out of the assets of
Quest Diagnostics available for distribution to its shareholders, whether
from capital, surplus or earnings, before any distribution is made to holders
of shares of Quest Diagnostics Common Stock or any other such junior stock,
an amount equal to $1,000 per share (the "Liquidation Preference" of a share
of Quest Diagnostics Voting 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 Quest Diagnostics Voting Cumulative Preferred
Stock to the date of final distribution. The holders of the Quest Diagnostics
Voting 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 Quest Diagnostics ranking senior to the Quest
Diagnostics Voting 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
Quest Diagnostics Voting Cumulative Preferred Stock will not be entitled to
any further participation in any distribution of assets by Quest Diagnostics.
If, upon any liquidation, dissolution or winding-up of Quest Diagnostics, the
assets of Quest Diagnostics, or proceeds thereof, distributable among the
holders of the shares of Quest Diagnostics Voting 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 Quest Diagnostics with or into any other
corporation, nor a merger of any other corporation with or into Quest
Diagnostics, nor a sale or transfer of all or any part of Quest Diagnostics'
assets for cash or securities shall be considered a liquidation, dissolution
or winding-up of Quest Diagnostics.
Conversion. The Quest Diagnostics Voting Cumulative Preferred Stock is not
convertible into shares of any other class or series of stock of Quest
Diagnostics.
Optional Redemption. The shares of the Quest Diagnostics Voting Cumulative
Preferred Stock may be redeemed at the option of Quest Diagnostics, 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 Quest
Diagnostics Voting Cumulative Preferred Stock shall not be redeemable prior
to December 31, 2002. Subject to the foregoing, on or after such date, shares
of the Quest Diagnostics Voting 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:
Year Percentage
- ---- ----------
2003 106.000%
2004 104.000%
2005 102.000%
2006 and thereafter 100.000%
If Quest Diagnostics effects such redemption, it shall do so ratably
according to the number of shares held by each holder of Quest Diagnostics
Voting Cumulative Preferred Stock.
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Mandatory Redemption. On January 1, 2022, Quest Diagnostics shall redeem
all of the then outstanding shares of Quest Diagnostics Voting 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 Quest Diagnostics Voting 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 Quest Diagnostics Voting Cumulative Preferred Stock shall be required
for (a) the creation of any indebtedness of any kind of Quest Diagnostics,
(b) the creation, or increase or decrease in the amount, of any class or
series of stock of Quest Diagnostics ranking on a parity with, senior to or
junior to the Quest Diagnostics Voting 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 Quest Diagnostics Voting Cumulative Preferred Stock will rank
senior to the Quest Diagnostics Common Stock and the Series A Preferred
Stock, on a parity with any series of preferred stock ranking on a parity
with the Quest Diagnostics Voting 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 Quest Diagnostics Voting Cumulative Preferred Stock.
Preferred Share Purchase Rights
Attached to each share of Quest Diagnostics Common Stock is one right
("Quest Diagnostics Right"), which entitles the registered holder to purchase
from Quest Diagnostics one one-hundredth of a share of Quest Diagnostics
Series A Preferred Stock at a price of $35 per one-hundredth of a share of
Quest Diagnostics Series A Preferred Stock (the "Exercise Price"), subject to
adjustment. The Quest Diagnostics Rights expire on December 31, 2006 (the
"Final Expiration Date"), unless the Final Expiration Date is extended or
unless the Quest Diagnostics Rights are earlier exercised.
The Quest Diagnostics Rights represented by the certificates for shares of
Quest Diagnostics Common Stock are not exercisable, and are not transferable
apart from the shares of Quest Diagnostics Common Stock, until the earlier of
(1) ten days following the public announcement by Quest Diagnostics or an
Acquiring Person (as defined below) that a person or group has acquired
beneficial ownership of 20% or more of the shares of Quest Diagnostics Common
Stock (an "Acquiring Person") or (2) ten business days (or such later date as
the Quest Diagnostics 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 Quest Diagnostics Common Stock (the earlier of such
dates being called the "Rights Distribution Date"). The Quest Diagnostics
Board has the authority to determine that a person that has inadvertently
acquired beneficial ownership of 20% of the shares of Quest Diagnostics
Common Stock is not an Acquiring Person if such person promptly reduces its
ownership interest to below 20%. Separate certificates for the Quest
Diagnostics Rights will be mailed to holders of record of the shares of Quest
Diagnostics Common Stock as of such date. The Quest Diagnostics Rights could
then begin trading separately from the shares of Quest Diagnostics Common
Stock.
Generally, in the event that a person or group becomes an Acquiring
Person, each Quest Diagnostics Right (other than the Quest Diagnostics Rights
owned by the Acquiring Person and certain affiliated persons) will thereafter
entitle the holder to receive, upon exercise of the Quest Diagnostics Right,
shares of Quest Diagnostics Common Stock having a value equal to two times
the Exercise Price of the Quest Diagnostics 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 Quest
Diagnostics Common Stock), the Quest Diagnostics Board may exchange each
Quest Diagnostics Right and each one one-hundredth of a share of Quest
Diagnostics Series A Preferred Stock (other than Quest Diagnostics Rights and
Quest Diagnostics Series A Preferred Stock owned by the Acquiring Person and
certain affiliated persons) for one share of Quest Diagnostics Common Stock.
In the event that Quest Diagnostics is acquired in a merger, consolidation,
or other business combination transaction or more than 50% of Quest
Diagnostics' assets, cash flow or earning power is sold or transferred, each
Quest Diagnostics Right (other than the Quest Diagnostics Rights owned by an
Acquiring Person and certain affiliated persons) will thereafter entitle the
holder thereof to receive, upon the exercise of the Quest Diagnostics Right,
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common stock of the acquiring corporation having a value equal to two times
the Exercise Price of the Quest Diagnostics Right.
The Quest Diagnostics Rights are redeemable in whole, but not in part, at
$.01 per Quest Diagnostics Right at any time prior to any person or group
becoming an Acquiring Person. The right to exercise the Quest Diagnostics
Rights terminates at the time that the Quest Diagnostics Board elects to
redeem the Quest Diagnostics Rights. Notice of redemption shall be given by
mailing such notice to the registered holders of the Quest Diagnostics
Rights. At no time will the Quest Diagnostics Rights have any voting rights.
The Quest Diagnostics Rights Agent is Harris Trust and Savings Bank (the
"Quest Diagnostics Rights Agent").
The exercise price payable, and the number of shares of Quest Diagnostics
Series A Preferred Stock or other securities or property issuable, upon
exercise of the Quest Diagnostics 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 Quest
Diagnostics Series A Preferred Stock, (ii) upon the grant to holders of the
shares of Quest Diagnostics Series A Preferred Stock of certain rights or
warrants to subscribe for or purchase shares of Quest Diagnostics Series A
Preferred Stock at a price, or securities convertible into shares of Quest
Diagnostics Series A Preferred Stock with a conversion price, less than the
then current market price of the shares of Quest Diagnostics Series A
Preferred Stock or (iii) upon the distribution to holders of the shares of
Quest Diagnostics 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 Quest Diagnostics Series
A Preferred Stock) or of subscription rights or warrants (other than those
referred to above).
The number of outstanding Quest Diagnostics Rights and the number of one
one-hundredths of a share of Quest Diagnostics Series A Preferred Stock
issuable upon exercise of each Quest Diagnostics 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 Quest Diagnostics
Common Stock prior to the Quest Diagnostics 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 Quest Diagnostics Rights, no fractional shares of
Quest Diagnostics 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 Quest Diagnostics, be evidenced by depository
receipts) and in lieu thereof an adjustment in cash will be made.
The Quest Diagnostics Rights have certain antitakeover effects. The Quest
Diagnostics Rights may cause substantial dilution for a person or group that
attempts to acquire Quest Diagnostics on terms not approved by the Quest
Diagnostics Board, except pursuant to an offer conditioned on a substantial
number of Quest Diagnostics Rights being acquired. The Quest Diagnostics
Rights should not interfere with any merger or other business combination
approved by the Quest Diagnostics Board since the Quest Diagnostics Rights
may be redeemed by Quest Diagnostics at $.01 per Quest Diagnostics Right
prior to the acquisition by a person or group of beneficial ownership of 20%
or more of the shares of Quest Diagnostics Common Stock.
The shares of Quest Diagnostics Series A Preferred Stock purchasable upon
exercise of the Quest Diagnostics Rights will rank junior to all other series
of Quest Diagnostics'preferred stock or any similar stock that specifically
provides that they shall rank prior to the shares of Quest Diagnostics Series
A Preferred Stock. The shares of Quest Diagnostics Series A Preferred Stock
will be nonredeemable. Each share of Quest Diagnostics 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 Quest Diagnostics Common Stock. In the event
of liquidation, the holders of the shares of Quest Diagnostics 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 Quest Diagnostics Common Stock. Each
share of Quest Diagnostics Series A Preferred Stock will have 100 votes,
voting together with the shares of Quest Diagnostics Common Stock. In the
event of any merger, consolidation or other transaction in which shares of
Quest Diagnostics Common Stock are exchanged, each share of Quest Diagnostics
Series A Preferred Stock will be entitled to receive 100 times the amount and
type of consideration received per share of Quest Diagnostics Common Stock.
These rights are protected by customary antidilution provisions. Because of
the nature of the Quest Diagnostics Series A Preferred Stock's dividend,
liquidation and voting rights, the value of the interest in a share of Quest
Diagnostics Series A Preferred Stock
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purchasable upon the exercise of each Quest Diagnostics Right approximates
the value of one share of Quest Diagnostics Common Stock.
The foregoing description of the Quest Diagnostics Rights, which describes
all of the material terms of the Quest Diagnostics Rights, does not purport
to be complete and is qualified in its entirety by reference to the
description of the Quest Diagnostics Rights contained in the Quest
Diagnostics Rights Agreement, dated as of December 31, 1996 between Quest
Diagnostics and the Quest Diagnostics Rights Agent, which agreement has been
filed as an exhibit to Quest Diagnostics' registration statement on Form 10
(the "Quest Diagnostics Form 10") that Quest Diagnostics has filed with the
Commission. Prior to the Quest Diagnostics Rights Distribution Date, the
Quest Diagnostics Rights Agreement may be amended in any respect. After the
Quest Diagnostics Rights Distribution Date, the Quest Diagnostics Rights
Agreement may be amended in any respect that does not adversely affect the
Quest Diagnostics Rights holders.
Restrictions on Transfer
Shares of the Quest Diagnostics 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 Quest Diagnostics 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 Quest Diagnostics after the Quest
Diagnostics Spin-off Distribution generally include individuals or entities
that control, are controlled by, or are under common control with Quest
Diagnostics and may include certain officers and directors of Quest
Diagnostics as well as principal stockholders of Quest Diagnostics. Persons
who are affiliates of Quest Diagnostics will be permitted to sell their
shares of Quest Diagnostics 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 Quest Diagnostics
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 Quest
Diagnostics 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
QUEST DIAGNOSTICS CERTIFICATE OF INCORPORATION AND BY-LAWS
General
In addition to the Quest Diagnostics Rights, the Quest Diagnostics
Certificate and the Quest Diagnostics By- Laws contain other provisions that
may discourage a third party from seeking to acquire Quest Diagnostics, 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
Quest Diagnostics Board and in the policies formulated by the Quest
Diagnostics Board and to discourage certain types of transactions that may
involve an actual or threatened change of control of Quest Diagnostics. These
provisions are designed to reduce the vulnerability of Quest Diagnostics 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 Quest Diagnostics 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 Quest
Diagnostics. See "Risk Factors--Risks Relating to Quest Diagnostics-- Certain
Antitakeover Effects."
Board of Directors
The Quest Diagnostics Certificate provides that, effective as of the Quest
Diagnostics Spin-Off Distribution, the Quest Diagnostics 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 Quest
Diagnostics; the second class has a term expiring at the 1999 annual meeting
of stockholders of Quest Diagnostics; and the third class has a term expiring
at the 2000 annual meeting of stockholders of Quest Diagnostics. At each
annual meeting of stockholders, one class of the Quest Diagnostics 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 Quest
Diagnostics Board. At least two annual meetings of stockholders, instead of
one, generally will be required to effect a change in the majority of the
Quest Diagnostics Board. The Quest Diagnostics Board believes that the longer
time required to elect a majority of a classified board will help ensure the
continuity and stability of Quest Diagnostics' management and policies,
because in most cases a majority of the directors at any given time will have
had prior experience as directors of Quest Diagnostics.
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 Quest Diagnostics Certificate provides that a
director of Quest Diagnostics is only removable by the stockholders for
cause. The Quest Diagnostics Certificate limits the number of directors to
twelve and requires that any vacancies on the Quest Diagnostics Board be
filled only by a majority of the entire Quest Diagnostics Board. The
provisions of the DGCL and the Quest Diagnostics Certificate relating to the
removal of directors and the filling of vacancies on the Quest Diagnostics
Board preclude a third party from removing incumbent directors without cause
and simultaneously gaining control of the Quest Diagnostics 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 Quest Diagnostics, to remove incumbent directors and to fill
vacancies on the Quest Diagnostics Board without the support of the incumbent
directors.
Stockholder Action and Special Meetings
The Quest Diagnostics 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 Quest Diagnostics
stockholders and precludes a stockholder of Quest Diagnostics from conducting
any form of consent solicitation. The Quest Diagnostics Certificate also does
not permit stockholders of Quest Diagnostics to call special meetings of
stockholders.
Advance Notice Requirements for Stockholder Proposals and Director
Nominations
The Quest Diagnostics By-Laws contain an advance notice procedure with
respect to the nomination, other than by or at the direction of the Quest
Diagnostics Board or a committee thereof, of candidates for election as
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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 Quest Diagnostics 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. Although the notice
provisions do not give the Quest Diagnostics Board any power to approve or
disapprove stockholder nominations or proposals for action by Quest
Diagnostics, 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 Quest Diagnostics 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 Quest Diagnostics and its stockholders. The
purpose of requiring advance notice is to afford the Quest Diagnostics 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 Quest Diagnostics Board, to inform stockholders about those
matters.
Business Combinations with Interested Stockholders
Paragraph 6 of the Quest Diagnostics 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 Quest Diagnostics entitled
to vote generally in the election of directors (the "Quest Diagnostics 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 Quest Diagnostics 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 Quest Diagnostics or any subsidiary with an
Interested Stockholder; (ii) the sale or other disposition by Quest
Diagnostics 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
Quest Diagnostics 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 Quest Diagnostics
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 Quest Diagnostics 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 Quest
Diagnostics Board who is not an Interested Stockholder or affiliated or
associated with an Interested Stockholder and was a director of Quest
Diagnostics 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 Quest
Diagnostics Board, or (ii) any person who was a director of Quest Diagnostics
as of the Distribution Date and any successor thereto who was recommended or
elected by a majority of the Continuing Directors then on the Quest
Diagnostics 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 Quest Diagnostics
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 Quest
Diagnostics' stockholders, the consideration required, in the case of each
class
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of Quest Diagnostics 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 Quest Diagnostics 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 Quest Diagnostics 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 in acquiring any shares of Quest Diagnostics 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 Quest Diagnostics 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 Quest Diagnostics'
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 Quest Diagnostics Series Preferred Stock are entitled in
the event of a voluntary or involuntary liquidation of Quest Diagnostics.
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 Quest Diagnostics' 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 Quest
Diagnostics, 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 Quest Diagnostics Voting Stock,
directly from Quest Diagnostics 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 Quest Diagnostics (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 Quest Diagnostics Certificate
Amendment or repeal of the provisions of the Quest Diagnostics Certificate
described above or the adoption of any provision inconsistent therewith would
require the affirmative vote of at least 80% of the Quest Diagnostics Voting
Stock unless the proposed amendment or repeal or the adoption of the
inconsistent provisions are approved by two-thirds of the entire Quest
Diagnostics 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
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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, 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 Quest Diagnostics Certificate and the Quest Diagnostics By-Laws
do not exclude Quest Diagnostics 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 Quest Diagnostics capital stock or assets of Quest
Diagnostics for a period of time following the Quest Diagnostics 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 Quest
Diagnostics. See "The Relationship Among Corning, Quest Diagnostics and
Covance After the Distributions--Tax Sharing Agreement" and "The Relationship
Among Corning, Quest Diagnostics and Covance After the Distributions--Spin-
Off Tax Indemnification Agreements."
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DESCRIPTION OF CERTAIN INDEBTEDNESS OF QUEST DIAGNOSTICS
Description of Quest Diagnostics Credit Facility
In order to pay approximately $350 million of the Intercompany Debt owed by
Quest Diagnostics in connection with the Quest Diagnostics Spin-Off
Distribution, and to meet its future capital requirements including the
funding of operating activities and further acquisitions, Quest Diagnostics
is negotiating with several banks for a credit agreement (the "Credit
Agreement") providing for a $450 million credit facility (the "Quest
Diagnostic Credit Facility"). Morgan Guaranty Trust Company of New York
("J.P. Morgan"), NationsBank, N.A. ("NationsBank") and Wachovia Bank of
Georgia, N.A. ("Wachovia") are arranging the Quest Diagnostics Credit
Facility. A copy of the proposed form of the Credit Agreement has been filed
as an exhibit to the Quest Diagnostics Form 10. This summary of the material
terms and conditions of the Quest Diagnostics Credit Facility and the Credit
Agreement does not purport to be complete, and is qualified in its entirety
by references to such proposed form, including the definitions therein.
The $450 million commitment under the Quest Diagnostics Credit Facility
will be comprised of three sub- facilities: (i) a $300 million six-year
amortizing term loan (the "Tranche A Loan"), (ii) a seven-year $50 million
term loan with minimal amortization until the seventh year (the "Tranche B
Loan") and (iii) a $100 million six-year revolving working capital credit
facility (the "Working Capital Facility"). Under the Working Capital
Facility, up to $20 million may be used for Letters of Credit to be issued by
one or more Issuing Banks (initially NationsBank), and up to $10 million may
be used to borrow from Wachovia, as the Swingline Bank, under a Swingline
Facility. All Working Capital Banks are required to ratably share the
exposure of the Issuing Banks under the Letters of Credit and, at the request
of the Swingline Bank, must purchase ratable participations in the Swingline
Loans. With the exception of Swingline borrowings and Letters of Credit,
borrowings under the Working Capital Facility must be at least $10 million
for LIBOR based borrowings and $5 million for Base Rate based borrowings.
Under the Swingline Facility, borrowings must be at least $1 million. The
Quest Diagnostics Credit Facility will be secured by substantially all
accounts receivable of Quest Diagnostics and by a guaranty from, and a pledge
of all capital stock and accounts receivable (including intercompany loans)
of, substantially all of Quest Diagnostics' present and future material U.S.
Subsidiaries, excluding certain Joint Ventures, Covance and Covance's
Subsidiaries. The borrowings under the Quest Diagnostics Credit Facility will
rank senior in priority of repayment to any Notes and to Quest Diagnostics'
remaining debt to Corning. At the time of the Distributions, Quest
Diagnostics' debt to Corning must be extinguished except for $150 million of
Subordinated Debt in the event the Notes are not issued.
Interest Rate Calculations. Interest will be payable on each sub-facility
quarterly, or at the end of the relevant interest period, if earlier, at a
per annum rate equal to the Base Rate or (except for Swingline Loans) the
Eurodollar Rate plus the relevant Applicable Margin. The Base Rate is a
fluctuating rate calculated on a daily basis as the higher of (a) the rate of
interest publicly announced by Morgan Guaranty Trust Company of New York for
the day in question and (b) 0.5% over the weighted average of the rates,
rounded up to the nearest basis point, on overnight Federal Funds
transactions with members of the Federal Reserve System as arranged by
Federal Funds brokers on the day in question. The Eurodollar Rate is the
average of the annual rate at which deposits in U.S. dollars are offered to
each of the Reference Banks in the London interbank market, adjusted for
reserve requirements ("Adjusted LIBOR"). The initial Applicable Margin
payable for Adjusted LIBOR borrowings will be 1.75% per annum for the Tranche
A Loan and the Working Capital Loan and 2.25% per annum for the Tranche B
Loan. The initial Applicable Margin payable for Base Rate borrowings will be
0.75% per annum for the Tranche A Loan and the Working Capital Loan and 1.25%
per annum for the Tranche B Loan. After December 31, 1996, the Applicable
Margin will be determined by a pricing formula based on Quest Diagnostics'
Debt Coverage Ratio. The Applicable Margin range for the Tranche A Loan and
the Working Capital Loan may vary, depending on the Debt Coverage Ratio, from
0% to 1% for Base Rate Advances, and from 0.5% to 2% per annum for Eurodollar
Rate Advances. The Swingline Loans will accrue interest at a rate equal to
the Base Rate plus the relevant Applicable Margin for the Tranche A and
Working Capital Loans. The Applicable Margin for the Tranche B Loan will
remain fixed throughout the life of the loan at the initial Applicable Margin
levels. Any overdue principal or interest payable on any Eurodollar loan will
incur interest at the greater of Adjusted LIBOR or LIBOR plus the Applicable
Margin plus 2% per annum. Any overdue principal or interest payable on a Base
Rate loan will incur interest at the Base Rate plus the Applicable Margin
plus 2% per annum.
The Credit Agreement also requires the payment of a quarterly Commitment
Fee on the average daily unused portion of the Banks' aggregate commitments
under the Working Capital Facility. The initial Commitment Fee Rate
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will be 0.375% per annum. After December 31, 1996, the Commitment Fee Rate
will be determined based on Quest Diagnostics' Debt Coverage Ratio, and will
range from 0.175% to 0.5% per annum.
Quest Diagnostics shall also pay the Issuing Banks in proportion to their
Letter of Credit Exposure a fee of 0.125% per annum on any amounts
outstanding on undrawn Letters of Credit. Additionally, Quest Diagnostics
shall pay directly to the Issuing Bank all customary fees connected with the
issuing of a Letter of Credit.
Quest Diagnostics will also pay J.P. Morgan a negotiated fee for its
services as agent under the Quest Diagnostics Credit Facility.
Covenants and Conditions. The Credit Agreement includes covenants which,
subject to certain specific exceptions and limitations, require Quest
Diagnostics and its Subsidiaries to: (i) provide certain financial
information to the Banks including, Quest Diagnostics' consolidated audited
financial reports, financial ratio data, annual business plans and
projections and certification that no defaults have occurred; (ii) pay or
discharge all material obligations and liabilities; (iii) keep property in
good working order and maintain sufficient insurance coverage on all
property; (iv) maintain corporate existence; (v) pursue the same or
substantially similar lines of business to the ones in which they are
currently engaged; (vi) comply with all laws, including ERISA and
environmental regulations; (vii) allow any Bank to inspect accounting
records; (viii) not permit modification to or waiver of any Transaction
Documents including any documents connected with the Permitted Subordinated
Debt or the Permitted Preferred Stock; (ix) not hold or acquire any
investments other than those allowed by the Credit Agreement; (x) not create
or allow to be created any liens other than those permitted by the Credit
Agreement; (xi) refrain from engaging in a consolidation, acquisition, merger
or sale of assets except as allowed in the Credit Agreement; (xii) not engage
in any transaction with or for the benefit of any Affiliate other than
certain arm's-length transactions; (xiii) prevent the existence of any
agreement that prevents Quest Diagnostics' Subsidiaries from paying dividends
or other distributions on capital stock; (xiv) refrain from making certain
Restricted Payments as detailed below; (xv) not incur Debt other than Debt
allowed under the Credit Agreement; (xvi) maintain certain financial ratios
as detailed below; and (xvii) not to make Consolidated Capital Expenditures
in excess of $95,000,000 (less the consideration paid for certain
acquisitions) in any fiscal year.
Quest Diagnostics may, subject to certain limitations and exceptions
contained in the Credit Agreement, make certain Restricted Payments so long
as there are no current or continuing Defaults, and the otherwise Restricted
Payment would not cause a Default. Allowed payments include: (i) the
repayment of Permitted Subordinated Debt from the proceeds of either any
newly issued Senior Subordinated Notes, (ii) interest and fees on the Senior
Subordinated Notes, (iii) dividends paid on any Permitted Preferred Stock,
(iv) repurchases of shares pursuant to certain employee benefit and
compensation plans and (v) any payment to Corning required to be made
pursuant to the Spin-Off Transactions. Restricted Payments include: (i) any
dividend or distribution on any of the shares of capital stock of Quest
Diagnostics or its Subsidiaries except dividends paid solely in shares of
Quest Diagnostics capital stock, (ii) any other payment on Subordinated Debt
and (iii) any payment, including those to sinking funds, made to redeem,
repurchase, acquire or retire any of the Subordinated Debt or the shares of
capital stock, or the rights to acquire shares, of Quest Diagnostics or its
Subsidiaries.
Quest Diagnostics will be required to maintain: (i) at all times during
any Calculation Period in question, a ratio (the "Leverage Ratio") of (A)
Consolidated Total Debt to (B) Consolidated Total Capitalization equal to or
below between 0.55 and 0.45 to 1.00; (ii) at all times during any Calculation
Period in question, a ratio (the "Debt Coverage Ratio") of (A) Consolidated
Total Debt to (B) Consolidated EBITDA equal to or below between 3.8 and 2.0
to 1.0; and (iii) at the end of any Calculation Period in question, a ratio
of (A) the sum of (1) Consolidated EBITDA and (2) Consolidated Rental Expense
to (B) the sum of (1) Consolidated Interest Expense and (2) Consolidated
Rental Expense equal to or above between 1.8 and 3.0 to 1.0. Quest
Diagnostics is required to have a Leverage Ratio no greater than .55 to 1.00
through December 31, 1977, a Debt Coverage Ratio of less than 3.80 to 1.00
through June 30, 1997 and a Coverage Ratio of at least 1.80 to 1.00 from
January 1, 1997 through June 30, 1997. After giving pro forma effect to the
Distributions, $350 million of borrowings under the Credit Facility and the
issuance of the Notes, Quest Diagnositcs would have had a Leverage Ratio of
to 1.00 at September 30, 1996, a Debt Coverage Ratio of to 2.00 for the
quarter ended September 30, 1996 and a Coverage Ratio of to 1.00 for the
quarter ended September 30, 1996.
Events of Default. Events of Default include: (i) the failure to make
payment of any principal when due or any interest, fees or other amounts
within three business days after becoming due; (ii) any representation,
warranty,
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certification or statement made by Quest Diagnostics proving to have been
incorrect in any material respect when made; (iii) the failure by Quest
Diagnostics or its Subsidiaries to perform or observe any term, covenant or
agreement under the Credit Agreement (subject to certain cure periods); (iv)
the failure of Quest Diagnostics to make payment on any Material Financial
Obligation (totalling in aggregate more than $10 million) within the
applicable grace period; (v) the occurrence of an event that causes the
acceleration of, or enables another of Quest Diagnostics' creditors to
accelerate, any of Quest Diagnostics' other Material Debt (totalling in
aggregate more than $10 million); (vi) the commencement of a voluntary or
involuntary bankruptcy proceeding by or against Quest Diagnostics; (vii) the
failure to pay when due ERISA obligations in excess of $10 million; (viii)
the rendering of a judgment or judgments against Quest Diagnostics the
aggregate amounts of which are in excess of $10 million and remain
unsatisfied or unstayed for more than 30 days, or the placing by a judgment
creditor of a levy on the assets of Quest Diagnostics or its Subsidiaries;
(ix) at any time after the Spin-Off, a person or group obtains beneficial
ownership of 20% or more of the common stock of Quest Diagnostics, or, during
any period of 12 calendar months, the individuals who constituted the members
of the board of directors of Quest Diagnostics on the first day of that
period no longer constitute a majority of the board; or (x) any security
interest that was purported to be created by the related security documents
ceases to exist or be valid.
If an Event of Default occurs and continues beyond the allowed time period
for curing the default in question, the Banks, by a vote of more than 50% of
the aggregate Commitments, may terminate their Commitments to lend to Quest
Diagnostics. The Banks may further choose, by a separate vote representing
more than 50% of the aggregate principal amount of all of the Loans, to
accelerate the outstanding principal and interest. Additionally, during an
Event of Default the Letter of Credit Participants, by a more than 50% vote
of the amount of the total outstanding of the Letter of Credit Exposure, may
require that Quest Diagnostics fully cash collateralize the outstanding
Letter of Credit Exposure. In the case of a voluntary or involuntary
bankruptcy proceeding, all credit facilities shall terminate and all
outstanding amounts shall become immediately due and payable without any
action by the Banks.
Description of Notes
Prior to the Distributions, Quest Diagnostics will offer (the "Quest
Diagnostics Notes Offering") $150 million aggregate principal amount of
senior subordinated notes (the "Notes").
General. The Notes will be senior subordinated obligations of Quest
Diagnostics, and will be guaranteed on a senior subordinated basis by Quest
Diagnostics' present and future Restricted Subsidiaries (as defined) on a
joint and several basis. The guarantees will automatically terminate if the
related guarantees of the Quest Diagnostics 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 Quest
Diagnostics, prior to December 15, 2001. On or after such date, the Notes
will be redeemable, in whole or in part, at specified redemption prices.
Quest Diagnostics will also be entitled to redeem the Notes, as a whole
and not in part, in the event that the Distributions do not occur as a result
of an event outside of the control of Quest Diagnostics, Corning and Covance.
Quest Diagnostics 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 Quest Diagnostics 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 (as defined) 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 Quest Diagnostics' ability to pay
cash dividends on the Quest Diagnostics Common Stock based on 50% of Quest
Diagnostics' net income, plus a credit for issuances of capital stock.
106
<PAGE>
LIABILITY AND INDEMNIFICATION OF
DIRECTORS AND OFFICERS OF QUEST DIAGNOSTICS
Limitation on Liability of Directors
Pursuant to authority conferred by Section 102 of the DGCL, Paragraph 11 of
the Quest Diagnostics Certificate ("Paragraph 11") eliminates the personal
liability of Quest Diagnostics' directors to Quest Diagnostics or its
stockholders for monetary damages for breach of fiduciary duty, including
without limitation, directors serving on committees of the Quest Diagnostics
Board. Directors remain liable for (1) any breach of the duty of loyalty to
Quest Diagnostics 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 Quest Diagnostics' 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 Quest Diagnostics or (2) by reason of the fact that, while they
are or were directors or officers of Quest Diagnostics, they are or were
serving at the request of Quest Diagnostics 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 Quest Diagnostics 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. Quest Diagnostics may not indemnify or make advance
payments to any person in connection with proceedings initiated against Quest
Diagnostics by such person without the authorization of the Quest Diagnostics
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 Quest
Diagnostics 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 Quest Diagnostics Certificate, any agreement
or vote of stockholders or disinterested directors or otherwise, and allows
Quest Diagnostics 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, Quest Diagnostics 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 Quest Diagnostics Certificate authorizes Quest Diagnostics to purchase
insurance for directors and officers of Quest Diagnostics and persons who
serve at the request of Quest Diagnostics 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 Quest Diagnostics would have the power to indemnify such
persons against such expense or liability under the DGCL. Quest Diagnostics
intends to maintain insurance coverage of its officers and directors as well
as insurance coverage to reimburse Quest Diagnostics for potential costs of
its corporate indemnification of directors and officers.
107
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
---------
<S> <C>
FINANCIAL STATEMENTS OF CORNING CLINICAL LABORATORIES INC.
(to be renamed Quest Diagnostics Incorporated)
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 Accountants 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. (to be renamed Quest
Diagnostics Incorporated) 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."
/s/ Price Waterhouse LLP
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.
/s/ Deloitte & Touche LLP
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.
/s/ Ernst & Young LLP
Ernst & Young LLP
Baltimore, Maryland
May 19, 1994
F-4
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
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.
/s/ Leverone & Company
Leverone & Company
Billerica, Massachusetts
November 10, 1994
F-5
<PAGE>
CORNING CLINICAL LABORATORIES INC.
(to be renamed Quest Diagnostics Incorporated)
(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.
(to be renamed Quest Diagnostics Incorporated)
(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.
(to be renamed Quest Diagnostics Incorporated)
(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.
(to be renamed Quest Diagnostics Incorporated)
(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
Retained Translation Valuation Stockholder's
Contributed 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.
(to be renamed Quest Diagnostics Incorporated)
(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. Coincident with the Spin-Off Distribution, the Company
will be renamed Quest Diagnostics Incorporated.
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.
(to be renamed Quest Diagnostics Incorporated)
(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. Investments in equity securities are not material to
the Company.
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.
(to be renamed Quest Diagnostics Incorporated)
(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 Federal income tax return liability so computed.
F-12
<PAGE>
CORNING CLINICAL LABORATORIES INC.
(to be renamed Quest Diagnostics Incorporated)
(a wholly-owned business of Corning Incorporated)
NOTES TO COMBINED FINANCIAL STATEMENTS (Continued)
(dollars in thousands, unless otherwise indicated)
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>
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.
F-13
<PAGE>
CORNING CLINICAL LABORATORIES INC.
(to be renamed Quest Diagnostics Incorporated)
(a wholly-owned business of Corning Incorporated)
NOTES TO COMBINED FINANCIAL STATEMENTS (Continued)
(dollars in thousands, unless otherwise indicated)
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 government investigations of billing
practices by Nichols prior to its acquisition by the Company. 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>
F-14
<PAGE>
CORNING CLINICAL LABORATORIES INC.
(to be renamed Quest Diagnostics Incorporated)
(a wholly-owned business of Corning Incorporated)
NOTES TO COMBINED FINANCIAL STATEMENTS (Continued)
(dollars in thousands, unless otherwise indicated)
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.
6. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment at December 31, 1995 and 1994 consist of the
following:
1995 1994
------------ ------------
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
============ ============
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:
1995 1994
---------- ----------
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
========== ==========
F-15
<PAGE>
CORNING CLINICAL LABORATORIES INC.
(to be renamed Quest Diagnostics Incorporated)
(a wholly-owned business of Corning Incorporated)
NOTES TO COMBINED FINANCIAL STATEMENTS (Continued)
(dollars in thousands, unless otherwise indicated)
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>
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:
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
==========
F-16
<PAGE>
CORNING CLINICAL LABORATORIES INC.
(to be renamed Quest Diagnostics Incorporated)
(a wholly-owned business of Corning Incorporated)
NOTES TO COMBINED FINANCIAL STATEMENTS (Continued)
(dollars in thousands, unless otherwise indicated)
Future minimum payments under capital leases and the present value thereof
are as follows:
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
===========
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:
1995 1994 1993
--------- -------------------
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
F-17
<PAGE>
CORNING CLINICAL LABORATORIES INC.
(to be renamed Quest Diagnostics Incorporated)
(a wholly-owned business of Corning Incorporated)
NOTES TO COMBINED FINANCIAL STATEMENTS (Continued)
(dollars in thousands, unless otherwise indicated)
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:
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
==========
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.
F-18
<PAGE>
CORNING CLINICAL LABORATORIES INC.
(to be renamed Quest Diagnostics Incorporated)
(a wholly-owned business of Corning Incorporated)
NOTES TO COMBINED FINANCIAL STATEMENTS (Continued)
(dollars in thousands, unless otherwise indicated)
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.
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 amounts which are
probable 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
to write off capitalized software as a result of its decision to abandon the
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.
F-19
<PAGE>
CORNING CLINICAL LABORATORIES INC.
(to be renamed Quest Diagnostics Incorporated)
(a wholly-owned business of Corning Incorporated)
NOTES TO COMBINED FINANCIAL STATEMENTS (Continued)
(dollars in thousands, unless otherwise indicated)
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.
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 to operations
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. Management's estimate of fair value will primarily be based on
multiples of forecasted revenue or multiples of forecasted EBITDA. The
multiples will primarily be determined based upon publicly available
information regarding comparable publicly-traded companies in the industry,
but will also consider (i) the financial projections of each regional
laboratory, (ii) the future prospects of each regional laboratory, including
its growth opportunities, managed care concentration and likely operational
improvements, and (iii) comparable sales prices, if available.
On a quarterly basis, CCL management will perform a review of each
regional laboratory to determine if events or changes in circumstances have
occurred which could have an other than temporary material adverse effect on
the fair value of the business and its intangible assets.
F-20
<PAGE>
CORNING CLINICAL LABORATORIES INC.
(to be renamed Quest Diagnostics Incorporated)
Schedule II--Valuation Accounts and Reserves
(amounts in thousands)
<TABLE>
<S> <C> <C> <C> <C>
Balance at Net Deductions Balance at
Year ended December 31, 1995 1-1-95 Additions and Other 12-31-95
------------ ------------ ---------------- ------------
Doubtful accounts and allowances $ 74,829 $152,590 $ 79,472 $147,947
Balance at Net Deductions Balance at
Year ended December 31, 1994 1-1-94 Additions and Other 12-31-94
------------ ------------ ---------------- ------------
Doubtful accounts and allowances $71,991 $59,480 $56,642 $74,829
Balance at Net Deductions Balance at
Year ended December 31, 1993 1-1-93 Additions and Other 12-31-93
------------ ------------ ---------------- ------------
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.
(to be renamed Quest Diagnostics Incorporated)
(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.
(to be renamed Quest Diagnostics Incorporated)
(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.
(to be renamed Quest Diagnostics Incorporated)
(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.
(to be renamed Quest Diagnostics Incorporated)
(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. Coincident with the Spin-Off Distribution, the Company
will be renamed Quest Diagnostics Incorporated.
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.
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. 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-26
<PAGE>
CORNING CLINICAL LABORATORIES INC.
(to be renamed Quest Diagnostics Incorporated)
(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 amounts which are
probable 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 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
to write off capitalized software as a result of its decision to abandon the
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.
(to be renamed Quest Diagnostics Incorporated)
(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 to operations
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. Management's estimate of fair value will primarily be based on
multiples of forecasted revenue or multiples of forecasted EBITDA. The
multiples will primarily be determined based upon publicly available
information regarding comparable publicly-traded companies in the industry,
but will also consider (i) the financial projections of each regional
laboratory, (ii) the future prospects of each regional laboratory, including
its growth opportunities, managed care concentration and likely operational
improvements, and (iii) comparable sales prices, if available.
On a quarterly basis, CCL management will perform a review of each
regional laboratory to determine if events or changes in circumstances have
occurred which could have an other than temporary material adverse effect on
the fair value of the business and its intangible assets.
F-28
