SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10/A
Amendment No. 3 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)
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Delaware 16-1387862
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
One Malcolm Avenue
Teterboro, New Jersey 07608
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(Address of principal executive offices) (Zip Code)
201 393 5000
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(Registrant's telephone number, including area code)
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Securities to be registered pursuant to Section 12(b) of the Act:
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Title of each class Name of each exchange on which
to be so registered each class is to be registered
Common Stock, with attached Preferred New York Stock Exchange
Stock Purchase Right
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Securities to be registered pursuant to Section 12(g) of the Act:
None
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(Title of class)
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CORNING CLINICAL LABORATORIES INC.
INTRODUCTION
This Registration Statement on Form 10 relates to the registration under the
Securities Exchange Act of 1934, as amended, of the common stock, with
attached Preferred Stock Purchase Right, of the Registrant which is being
issued as described in the Information Statement (the "Information Statement"),
dated November 25, 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.
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
2
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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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Exhibit
Number Description
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2.1 Form of Transaction Agreement among Corning Incorporated, Corning Life Sciences Inc., Corning
Clinical Laboratories Inc. (Delaware), Covance Inc. and Corning Clinical Laboratories Inc.
(Michigan), dated November 22, 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 of Corning Incorporated
dated November 25, 1996 (pages 2; 28-107; F-1-F-32)
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* Previously filed.
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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 25, 1996 By: /s/ Kenneth W. Freeman
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Kenneth W. Freeman, President
and Chief Executive Officer
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S&S DRAFT
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TRANSACTION AGREEMENT
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dated as of November 22, 1996
by and among
CORNING INCORPORATED,
CORNING LIFE SCIENCES INC.,
CORNING CLINICAL LABORATORIES INC. (Delaware),
COVANCE INC.,
and
CORNING CLINICAL LABORATORIES INC. (Michigan)
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TABLE OF CONTENTS
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Page
ARTICLE I
DEFINITIONS
SECTION 1.01. General................................................................................. 2
SECTION 1.02. References; Interpretation.............................................................. 7
ARTICLE II
DISTRIBUTIONS AND OTHER TRANSACTIONS; CERTAIN COVENANTS
SECTION 2.01. Conditions Precedent.................................................................... 7
SECTION 2.02. The Distributions and Other Transactions................................................ 8
SECTION 2.03. Treatment of Fractional Shares.......................................................... 12
SECTION 2.04. Certain Intercompany Financial and Other Arrangements................................... 12
SECTION 2.05. Certain Indebtedness and Capital Structure.............................................. 13
SECTION 2.06. Further Assurances...................................................................... 13
SECTION 2.07. No Representations or Warranties........................................................ 14
SECTION 2.08. Guarantees.............................................................................. 14
SECTION 2.09. Certain Transactions.................................................................... 15
SECTION 2.10. Insurance............................................................................... 15
ARTICLE III
INDEMNIFICATION
SECTION 3.01. Indemnification by Corning.............................................................. 15
SECTION 3.02. Indemnification by CCL.................................................................. 22
SECTION 3.03. Indemnification by Covance.............................................................. 23
SECTION 3.04. Adjustments for Indemnification Obligations............................................. 23
SECTION 3.05. Procedures for Indemnification - Third Party Claims..................................... 23
SECTION 3.06. Survival of Indemnities................................................................. 25
SECTION 3.07. Payments................................................................................ 25
ARTICLE IV
ACCESS TO INFORMATION
SECTION 4.01. Provision of Corporate Records.......................................................... 25
SECTION 4.02. Access to Information................................................................... 25
SECTION 4.03. Reimbursement........................................................................... 26
SECTION 4.04. Confidentiality......................................................................... 26
ARTICLE V
DISPUTE RESOLUTION
SECTION 5.01. Good Faith Negotiations................................................................. 27
SECTION 5.02. Procedure............................................................................... 27
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ii
ARTICLE VI
GENERAL PROVISIONS
SECTION 6.01. Expenses................................................................................ 28
SECTION 6.02. Notices................................................................................. 28
SECTION 6.03. Complete Agreement; Construction........................................................ 29
SECTION 6.04. Ancillary Agreements.................................................................... 29
SECTION 6.05. Counterparts............................................................................ 29
SECTION 6.06. Survival of Agreements.................................................................. 29
SECTION 6.07. Waiver.................................................................................. 29
SECTION 6.08. Amendments.............................................................................. 30
SECTION 6.09. Assignment.............................................................................. 30
SECTION 6.10. Successors and Assigns.................................................................. 30
SECTION 6.11. Termination............................................................................. 30
SECTION 6.12. Subsidiaries............................................................................ 30
SECTION 6.13. Third Party Beneficiaries............................................................... 30
SECTION 6.14. Headings................................................................................ 30
SECTION 6.15. Specific Performance.................................................................... 30
SECTION 6.16. Governing Law........................................................................... 31
SECTION 6.17. Public Announcements.................................................................... 31
SECTION 6.18. Severability............................................................................ 31
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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
(Covance CAPS into Covance)
Exhibit D Form of Insurance Agreement
Exhibit E Form of Services Agreement
Exhibit F Form of Spin-off Tax Indemnification Agreements
Exhibit G Form of Tax Sharing Agreement
Exhibit H Forms of Amended Charter and By-Laws of CCL
Exhibit I Forms of Amended Charter and By-Laws of Covance
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TRANSACTION AGREEMENT dated as of November 22, 1996, by and
among CORNING INCORPORATED, a New York corporation ("Corning"), CORNING LIFE
SCIENCES INC., a Delaware corporation ("CLSI"), CORNING CLINICAL LABORATORIES
INC., a Delaware corporation ("CCL"), COVANCE INC., a Delaware corporation
("Covance") and CORNING CLINICAL LABORATORIES INC., a Michigan corporation ("CCL
(MI)").
W I T N E S S E T H:
WHEREAS, Corning is the common parent of a consolidated group
which includes CLSI, CCL, Covance and CCL (MI);
WHEREAS, the Board of Directors of Corning has determined that
it is appropriate and desirable to distribute to the holders of shares of common
stock, par value $0.50 per share, of Corning (the "Corning Common Shares") all
the outstanding shares of common stock of CCL (the "CCL Common Stock") and,
immediately following such distribution, for CCL to distribute to the holders of
CCL Common Stock all the outstanding shares of common stock of Covance (the
"Covance Common Stock");
WHEREAS, each of Corning, CCL and Covance has determined that
it is necessary and desirable to set forth the principal corporate transactions
required to effect such distribution and to set forth other agreements that will
govern certain other matters following the distribution;
WHEREAS, each of Corning, CCL and Covance has determined that
it is necessary and desirable to allocate and assign responsibility for those
liabilities in respect of the activities of the businesses of such entities on
the Distribution Date (as defined herein) and those liabilities in respect of
other businesses and activities of Corning and its former subsidiaries and other
matters;
WHEREAS, Corning currently owns 100% of the stock of CLSI;
WHEREAS, CLSI currently owns 100% of the stock of CCL;
WHEREAS, CCL currently owns 100% of the stock of each
of Covance and CCL (MI);
WHEREAS, Covance currently owns 100% of the stock of
Covance Clinical and Periapproval Services Inc. (formerly
Corning Besselaar, Inc.) ("Covance CAPS"); and
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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, shares of voting preferred stock of
CCL and cash and will contribute to CCL (MI) certain of its obligations and
liabilities and Corning will cause CLSI to dissolve and Covance CAPS to be
merged with and into Covance.
NOW, THEREFORE, in consideration of the mutual agreements,
provisions and covenants contained in this Agreement, the parties hereby agree
as follows:
ARTICLE I
DEFINITIONS
SECTION 1.01. General. As used in this Agreement, the
following terms shall have the following meanings (such meanings to be equally
applicable to both the singular and plural forms of the terms defined):
"Action" shall mean any action, suit, arbitration, inquiry,
proceeding or investigation by or before any court, any governmental or other
regulatory or administrative agency, body or commission or any arbitration
tribunal.
"Affiliate" shall mean, when used with respect to a specified
person, another person that directly, or indirectly through one or more
intermediaries, will control or will be controlled by or will be under common
control with the person specified immediately following the Effective Time.
"Agent" shall have the meaning as defined in Section 2.02(g).
"Agreement Disputes" shall have the meaning as defined in
Section 5.01.
"Ancillary Agreements" shall mean the Insurance Agreement, the
Intellectual Property Agreement, the Services Agreement, the Spin-off
Tax Indemnification Agreements and the Tax Sharing Agreement.
"Assignee" shall have the meaning as defined in Section
2.02(i)(ii).
"CCL" shall mean Corning Clinical Laboratories Inc., a
Delaware corporation.
"CCL Business" shall mean all businesses and operations
conducted by (i) CLSI, MRL Nucor, Inc. and all current and former
subsidiaries of CLSI (other than Covance Biotechnology Services Inc.
(formerly CORNING Bio Inc.), Covance and its
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3
Subsidiaries, Pharmaceutical Laboratory Services, Inc., Quanterra Incorporated,
California Analytical Laboratory, Chemical Research Laboratories, Inc., Enseco
Incorporated, ERCO, Rocky Mountain Analytical Laboratory and Wadsworth/Alert
Laboratories, Inc.), including without limitation CCL (but excluding in any
event the environmental testing business previously conducted by CCL); and (ii)
any business entities acquired or established by or for CCL or any of its
Subsidiaries after the date of this Agreement.
"CCL Indemnitees" shall mean CCL, each Affiliate of CCL, each
of their respective directors and officers and each of the heirs, executors,
successors and assigns of any of the foregoing.
"CCL Liabilities" shall mean, collectively, (i) all the
Liabilities of CCL and its Subsidiaries under this Agreement and any of the
Ancillary Agreements, and (ii) all the Liabilities of the parties hereto or
their respective Subsidiaries (whenever arising whether prior to, at or
following the Effective Time) arising out of or in connection with or otherwise
relating to the management or conduct before or after the Effective Time of the
CCL Business.
"CCL (MI)" shall mean Corning Clinical Laboratories Inc., a
Michigan corporation.
"CCL Record Holders" shall mean all holders of CCL Common
Stock as of the Distribution Record Date, provided that the CCL Record Holders
shall be deemed to be determined immediately following the distribution of CCL
Common Stock to all Corning Record Holders.
"CLSI" shall mean Corning Life Sciences Inc., a Delaware
corporation.
"CLSI Revolver" shall mean the Revolving Credit Agreement
dated December 1, 1994 between Corning and CLSI.
"Code" shall mean the Internal Revenue Code of 1986, as
amended, and the Treasury regulations promulgated thereunder, including any
successor legislation.
"Commission" shall mean the Securities and Exchange
Commission.
"Company Policies" shall mean all Policies, current or past,
which are or at any time were maintained by or on behalf of or for the benefit
or protection of Corning or any of its predecessors which relate to the Corning
Business, the CCL Business or the Covance Business, or current or past
directors, officers, employees or agents of any of the foregoing Businesses.
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4
"Corning" shall mean Corning Incorporated, a New York
corporation.
"Corning Business" shall mean (i) all businesses and
operations of Corning and its subsidiaries other than the CCL Business and the
Covance Business and (ii) the environmental testing business previously
conducted by CCL and its Subsidiaries, including California Analytical
Laboratory, Chemical Research Laboratories, Inc., Enseco Incorporated, ERCO,
Quanterra Incorporated, Rocky Mountain Analytical Laboratory and Wadsworth/Alert
Laboratories, Inc.
"Corning Indemnitees" shall mean Corning, each Affiliate of
Corning, each of their respective directors and officers and each of the heirs,
executors, successors and assigns of any of the foregoing.
"Corning Liabilities" shall mean all the Liabilities of
Corning and its Subsidiaries under this Agreement and any of the Ancillary
Agreements, and all the Liabilities of Corning and its subsidiaries that are not
CCL Liabilities or Covance Liabilities including, without limitation, all
Liabilities under any employee benefit plans maintained by Corning and any stock
option employment or consulting agreements to which Corning is a party,
including any such benefit plans or agreements covering or with persons who are
or were employees of CCL or Covance and their respective Subsidiaries.
Notwithstanding the foregoing, the remaining payment obligations under the
Agreement dated June 7, 1995 among Corning, CLSI and Ralph H. Thurman and the
Consulting Agreement dated June 7, 1995 among Corning, CLSI and Ralph H. Thurman
shall be CCL Liabilities and not Corning Liabilities.
"Corning Record Holders" shall mean all holders of record of
Corning Common Shares as of the Distribution Record Date.
"Covance" shall mean Covance Inc., a Delaware corporation (formerly
known as Corning Pharmaceutical Services Inc.).
"Covance Business" shall mean all businesses and operations conducted
by (i) all current and former subsidiaries of Covance and by Covance
Biotechnology Services Inc. and Pharmaceutical Laboratory Services, Inc. prior
to the Effective Time; and (ii) any business entities acquired or established by
or for Covance or any of its Subsidiaries after the date of this Agreement.
"Covance Indemnitees" shall mean Covance, each Affiliate of
Covance, each of their respective directors and officers and each of the heirs,
executors, successors and assigns of any of the foregoing.
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5
"Covance Liabilities" shall mean, collectively, (i) all the
Liabilities of Covance and its Subsidiaries under this Agreement and any of the
Ancillary Agreements, and (ii) all the Liabilities of the parties hereto or
their respective Subsidiaries (whenever arising whether prior to, at or
following the Effective Time) arising out of or in connection with or otherwise
relating to the management or conduct before or after the Effective Time of the
Covance Business.
"Distribution Date" shall mean December 31, 1996 or such later
date as may hereafter be determined by Corning's Board of Directors as the date
as of which the Distributions shall be effected.
"Distribution Record Date" shall mean December 31, 1996 or
such later date as may hereafter be determined by Corning's Board of Directors
as the record date for the Distributions.
"Distributions" shall mean the two consecutive distributions
in the following order on the Distribution Date to (i) all Corning Record
Holders of the CCL Common Stock owned by Corning and (ii) all CCL Record Holders
of the Covance Common Stock owned by CCL.
"Effective Time" shall mean 11:59 p.m., New York time, on the
Distribution Date.
"Exchange Act" shall mean the Securities and Exchange Act of
1934, as amended.
"Indemnifiable Losses" shall mean any and all losses,
liabilities, claims, damages, demands, costs or expenses (including, without
limitation, reasonable attorneys' fees and any and all reasonable and necessary
out-of-pocket expenses) whatsoever, including any and all losses, liabilities,
claims, damages, demands, costs or expenses reasonably incurred in
investigating, preparing for or defending against any Actions or potential
Actions, provided, however, that such Indemnifiable Losses shall not include
Taxes or other amounts indemnified against under the Spin-off Tax
Indemnification Agreements and the Tax Sharing Agreement.
"Indemnifying Party" shall have the meaning as defined in
Section 3.04.
"Indemnitee" shall have the meaning as defined in
Section 3.04.
"Information Statement" shall mean the Information Statement
sent to all the Record Holders in connection with the Distributions, including
any amendment or supplement thereto.
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6
"Insurance Agreement" shall mean the Insurance Agreement among
Corning, CCL and Covance, in substantially the form attached hereto as Exhibit
D.
"Intellectual Property Agreement" shall mean the Intellectual
Property and Licensing Agreement among Corning, CCL and Covance, in a form to be
agreed upon by the parties to this Agreement.
"Liabilities" shall mean any and all debts, liabilities and
obligations, absolute or contingent, matured or unmatured, liquidated or
unliquidated, accrued or unaccrued, known or unknown, whenever arising,
including, without limitation, those debts, liabilities and obligations arising
under any law, rule, regulation, Action, threatened Action, order or consent
decree of any court, any governmental or other regulatory or administrative
agency or commission or any award of any arbitration tribunal, and those arising
under any contract, guarantee, commitment or undertaking.
"person" shall mean any natural person, corporation, business
trust, joint venture, association, company, partnership or government, or any
agency or political subdivision thereof.
"Policies" shall mean insurance policies and insurance
contracts of any kind (other than life and benefits policies or contracts),
including, without limitation, primary, excess and umbrella policies,
comprehensive general liability policies, fiduciary liability, automobile,
aircraft, property and casualty, workers' compensation and employee dishonesty
insurance policies, bonds and self-insurance and captive insurance company
arrangements, together with the rights, benefits and privileges thereunder.
"Record Holders" shall mean the CCL Record Holders and the
Corning Record Holders, collectively.
"Records" shall have the meaning as defined in Section 4.01.
"Registration Statements" shall mean the registration
statements on Form 10 in respect of the CCL Common Stock and the Covance Common
Stock required to be filed with the Commission pursuant to Rule 12(b) under the
Exchange Act.
"Rules" shall have the meaning as defined in Section 5.02.
"Services Agreement" shall mean the Services Agreement among
Corning, CCL and Covance, in substantially the form attached hereto as Exhibit
E.
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7
"Spin-off Tax Indemnification Agreement" shall mean each of
the Spin-off Tax Indemnification Agreements between or among two or more of
Corning, CCL and Covance, in substantially the form attached hereto as Exhibit
F.
"Subsidiary" shall mean any corporation, partnership or other
entity of which another entity (i) will own, immediately following the Effective
Time, directly or indirectly, ownership interests sufficient to elect a majority
of the board of directors (or persons performing similar functions)
(irrespective of whether at the time any other class or classes of ownership
interests of such corporation, partnership or other entity shall or might have
such voting power upon the occurrence of any contingency) or (ii) will be,
immediately following the Effective Time, a general partner or an entity
performing similar functions; provided that Bio Imaging Technologies Inc. will
be deemed to be a Subsidiary of Covance and, National Imaging Associates will be
deemed to be a Subsidiary of CCL, in each case, for all purposes of this
Agreement.
"Tax" shall mean all federal, state, local and foreign gross
or net income, gross receipts, withholding, franchise, transfer, estimated or
other tax or similar charges and assessments, including all interest, penalties
and additions imposed with respect to such amounts.
"Tax Sharing Agreement" shall mean the Tax Sharing Agreement
among Corning, CCL and Covance, in substantially the form attached hereto as
Exhibit G.
"Third Party Claim" shall have the meaning as defined in
Section 3.05.
SECTION 1.02. References; Interpretation. References to an
"Exhibit" or to a "Schedule" are, unless otherwise specified, to one of the
Exhibits or Schedules attached to this Agreement, and references to a "Section"
are, unless otherwise specified, to one of the Sections of this Agreement.
ARTICLE II
DISTRIBUTIONS AND OTHER TRANSACTIONS; CERTAIN COVENANTS
SECTION 2.01. Conditions Precedent. Neither the Distributions
nor the related transactions set forth in this Agreement or in the Ancillary
Agreements shall become effective unless the following conditions have been
satisfied or waived by Corning on or before the Effective Time:
(a) The Registration Statements shall have been filed by
CCL and Covance, as applicable, with, and declared
effective by, the Commission and the Information
Statement shall have been mailed in a timely manner
to all holders of Corning Common Shares prior to the
Distribution Date.
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8
(b) Corning shall have received a favorable ruling from
the Internal Revenue Service to the effect that the
Distributions qualify as tax-free distributions under
Section 355 of the Code.
(c) Corning shall have received a favorable response from
the Commission to the "no-action request" letter
describing the Distributions filed by Corning with
the Commission.
(d) The New York Stock Exchange shall have approved the
CCL Common Stock and Covance Common Stock for listing
on its exchange, subject to official notice of
distribution.
(e) The financing arrangements among and between the
parties contemplated in the Information Statement
will have been consummated. CCL and Covance each
shall pay all of the expenses associated with their
respective financings.
SECTION 2.02. The Distributions and Other Transactions. (a)
Certain Transactions. Prior to the Distribution Date:
(i) Covance CAPS shall be merged with and into Covance
pursuant to the Certificate of Ownership and Merger between Covance
CAPS and Covance and the Certificate of Merger between Covance CAPS and
Covance, in substantially the forms attached hereto as Exhibit C, and
in accordance with all applicable filing requirements under the
Delaware General Corporation Law and the New Jersey Business
Corporation Act. As a result of the merger, Covance CAPS will cease to
exist and Covance will acquire the assets of Covance CAPS and assume
(or take the assets of Covance CAPS subject to) the liabilities of
Covance CAPS.
(ii) CLSI will contribute to CCL all of CLSI's assets other
than the stock of CCL and CLSI's rights under certain agreements that
CLSI agrees to transfer pursuant to Section 2.02(i) in exchange for
200,000 additional shares of CCL Common Stock, 1,000 shares of voting
preferred stock of CCL and $250,000 in cash from CCL pursuant to (A)
the Contribution Agreement between CLSI and CCL, (B) the Liabilities
Undertaking between CLSI and CCL (C) the Instrument of Assignment and
Assumption between CLSI and CCL and (D) the Bill of Sale and Assignment
between CLSI and CCL, each in substantially the forms attached hereto
as Exhibit A, and in accordance with all applicable filing requirements
under the Delaware General Corporation Law. As a result of such
transactions, CCL will acquire the assets of CLSI and assume (or take
the assets of CLSI subject to) the liabilities of CLSI other than (A)
such obligations and liabilities for which either Corning or Covance is
responsible under this Agreement or the Ancillary Agreements and (B)
any obligations that CCL(MI) assumes pursuant to
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9
the following sentence. CCL (MI) shall assume (A) the first $2 million
in principal amount of obligations of CLSI owed by CLSI to Corning
under the CLSI Revolver and (B) the first $2 million of CLSI's
obligations under Section 6.06(a) of the Agreement and Plan of Merger
among Corning, Opera Acquisition Corp. and CLSI (then known as Damon
Corporation). Following such contributions and assumptions, CLSI shall
adopt a plan of liquidation and dissolve pursuant to the Plan of
Liquidation and Dissolution of CLSI, substantially in the form attached
hereto as Exhibit B, and in accordance with all applicable filing
requirements under the Delaware General Corporation Law. As a result of
such liquidation and dissolution, CLSI will distribute to Corning its
remaining assets, which will consist largely of the capital stock of
CCL, and CLSI will cease to exist.
(iii) No earlier than one day following the effective date for
the transactions described in Section 2.02(a)(ii), CCL will transfer to
certain of its subsidiaries the following shares of common stock that
CCL will have received from CLSI pursuant to the transactions described
in Section 2.02(a)(ii): (A) the shares of common stock of Corning
Nichols Institute, (B) the shares of common stock of Corning Clinical
Laboratories Inc. (Mass.) and (C) the shares of common stock of Corning
Clinical Laboratories Inc. (MD).
(iv) No earlier than three (3) days following the later of the
effective dates for the transactions described in Sections 2.02(a)(i),
(ii) and (iii), CCL will transfer its Covance Common Stock, its entire
interest in Pharmaceutical Laboratory Services, Inc. and its entire
interest in Covance Biotechnology Services Inc. to Covance by
delivering to Covance stock certificates representing each of CCL's
share interests in such companies, accompanied by stock powers duly
endorsed by CCL and with all required stock transfer tax stamps
affixed. In connection therewith CCL shall deliver to Covance for
cancellation the share certificate currently held by it representing
Covance Common Stock and Covance shall issue to CCL new certificates
representing the total number of newly-issued shares of Covance Common
Stock sufficient in number to allow for an orderly and pro rata
distribution of such Covance Common Stock to the CCL common
shareholders.
(v) No earlier than three (3) days following the later of the
effective dates for the transactions described in Sections 2.02(a)(i),
(ii) and (iii), Corning will transfer its CCL Common Stock and its
entire interest in MRL Nucor, Inc. to CCL by delivering to CCL stock
certificates representing each of Corning's share interests in CCL and
MRL Nucor, Inc., accompanied by stock powers duly endorsed by Corning
and with all required stock transfer tax stamps affixed. In connection
therewith Corning shall deliver to CCL for cancellation the share
certificate then held by it representing CCL Common Stock and shall
receive new certificates representing the total number of newly-issued
shares of CCL Common Stock sufficient in number to
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10
allow for an orderly and pro rata distribution of such CCL Common Stock
to the Corning common shareholders.
(b) Ancillary Agreements. On or prior to the Distribution
Date, each of Corning, CCL and Covance shall have executed and
delivered to each of the others, each of the Ancillary Agreements.
(c) Charters; By-laws. On or prior to the Distribution Date:
(i) All necessary actions shall have been taken to provide for
the amendments of the Articles of Incorporation and By-laws for CCL,
such amendments to be in substantially the forms attached hereto as
Exhibit H.
(ii) All necessary actions shall have been taken to provide
for the amendments of the Articles of Incorporation and By-laws for
Covance, such amendments to be in substantially the forms attached
hereto as Exhibit I.
(d) Benefit Plans. On or prior to the Distribution Date, any
shareholder approvals deemed necessary for employee benefit plans shall
have been obtained.
(e) Directors. On or prior to the Distribution Date, Corning
as the sole shareholder of CCL, and CCL, as the sole shareholder of Covance,
shall have taken all necessary action by written consent on or prior to the
Distribution Date to elect to the Board of Directors of CCL and the Board of
Directors of Covance the individuals identified in the Information Statement as
directors of CCL and Covance, respectively.
(f) Consents. The parties hereto shall use their commercially
reasonable efforts to obtain any required consents to assignment of
agreements hereunder, if applicable.
(g) Delivery of Shares to Agent. Corning shall deliver to
Harris Trust and Savings Bank (the "Agent") the share certificates representing
the CCL Common Stock and CCL shall deliver to the Agent the share certificates
representing the Covance Common Stock and Corning and CCL shall instruct the
Agent to distribute, on or as soon as practicable following the Distribution
Date, such common stock to the Corning Record Holders and the CCL Record
Holders, as the case may be, as further contemplated by the Information
Statement and herein. CCL and Covance shall provide all share certificates that
the Agent shall require in order to effect the Distributions.
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11
(h) Sublease. Corning shall have entered into a sublease
agreement with National Imaging Associates, Inc. with respect to the
first floor of 10 Mountainview Road, Upper Saddle River, New Jersey.
(i) Transfer of Agreements. (i) CLSI hereby agrees that on or
prior to the date on which it is dissolved, subject to the limitations set forth
in this Section 2.02(i), it will assign, transfer and convey to Covance all of
CLSI's rights and obligations under (a) the Capital Contribution Agreement and
Shareholder Agreement dated February 22, 1995 among Corning BioPro Inc., CLSI,
Richard Hawkins, Dr. John Scarlett, Robert F. Amundsen and Dr. Nona Niland, (b)
any and all existing stock option agreements between CLSI, Corning Bio Inc. and
individual employees of Corning Bio Inc., (c) the Registration Agreement dated
as of February 22, 1995 by and between Corning BioPro Inc. and CLSI, (d) the
Joint Escrow Instructions dated February 22, 1995 by and between Corning BioPro
Inc., CLSI, Robert F. Amundsen and the Escrow Agent named therein, and (e) the
Joint Escrow Instructions dated February 22, 1995 by and between Corning BioPro
Inc., CLSI, Dr. John Scarlett and the Escrow Agent named therein. CLSI hereby
further agrees that on or prior to the date on which it is dissolved, subject to
the limitations set forth in this Section 2.02(i), it will assign, transfer and
convey to Corning all of its rights and obligations under the lease agreement
dated October 5, 1995 between 2154 Trading Corporation and CLSI with respect to
10 Mountainview Road, Upper Saddle River, New Jersey and a sublease to National
Imaging Associates with respect to a portion of such premises. CCL hereby agrees
that on or prior to the Distribution Date or as soon as reasonably practicable
thereafter, subject to the limitations set forth in this Section 2.02(i), it
will assign, transfer and convey to Corning all of CCL's rights and obligations
under the Asset Transfer Agreement dated as of May 2, 1994, as amended, among
CCL, International Technology Corporation, IT Corporation and Quanterra
Incorporated and the related closing documents thereunder, including without
limitation the General Instrument of Assignment and Assumption dated June 28,
1994 between CCL and Quanterra Incorporated. Corning hereby agrees that on or
prior to the Distribution Date or as soon as reasonably practicable thereafter,
subject to the limitations set forth in this Section 2.02(i), it will assign,
transfer and convey to Covance all of Corning's rights and obligations under
that certain Registration Agreement dated as of February 22, 1995 by and between
Corning, Dr. Nona Niland, Dr. John Scarlett, Robert F. Amundsen and Richard
Hawkins.
(ii) The assignee of any agreement assigned, in whole or in
part, hereunder (an "Assignee") shall assume and agree to pay, perform, and
fully discharge all obligations of the assignor under such agreement or such
Assignee's related portion of such obligations as determined in accordance with
the terms of the relevant agreement, where determinable on the face thereof, and
otherwise as determined in accordance with the practice of the parties prior to
the Distribution.
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12
(iii) Notwithstanding anything in this Agreement to the
contrary, this Agreement shall not constitute an agreement to assign any
agreement, in whole or in part, or any rights thereunder if the agreement to
assign or attempt to assign, without the consent of a third party, would
constitute a breach thereof or in any way adversely affect the rights of the
Assignee thereof. Until such consent is obtained, or if an attempted assignment
thereof would be ineffective or would adversely affect the rights of any party
hereto so that the Assignee would not, in fact, receive all such rights, the
parties will cooperate with each other in any arrangement designed to provide
for the Assignee the benefits of, and to permit the Assignee to assume
liabilities under, any such agreement.
(iv) Corning understands and agrees that approximately 10,968
Corning Common Shares are held to secure certain claims of CCL under that Escrow
Agreement dated as of October 9, 1994 (the "Escrow Agreement") among Corning,
The First National Bank of Boston and former shareholders of Moran Research
Labs, as amended, and will act at CCL's direction and at CCL's expense with
respect to those shares. The remaining Corning Common Shares held under the
Escrow Agreement are being held for the benefit of Corning.
(j) Other Transactions. On or prior to the Distribution Date,
each of Corning, CCL and Covance shall have consummated those other transactions
in connection with the Distributions that are contemplated by the Information
Statement and the ruling request submission by Corning to the Internal Revenue
Service dated June 17, 1996, as supplemented, and not specifically referred to
in subparagraphs (a)-(i) above.
SECTION 2.03. Treatment of Fractional Shares. As soon as
practicable after the Distribution Date, the Agent shall determine the number of
whole shares and fractional shares of CCL and Covance allocable to each Corning
Record Holder and CCL Record Holder, respectively, as of the Distribution Record
Date, to aggregate all such fractional shares and sell the whole shares obtained
thereby, in open market transactions or otherwise, in each case at then
prevailing trading prices, and to cause to be distributed to each such holder to
which a fractional share shall be allocable such holder's ratable share of the
proceeds of such sale, after making appropriate deductions of the amount
required to be withheld for federal income tax purposes and after deducting an
amount equal to all brokerage charges, commissions and transfer taxes attributed
to such sale. In determining the manner and timing of selling the aggregated
fractional shares, the Agent shall use its independent judgment and shall
neither consult with nor communicate its plans to Corning, CCL or Covance.
SECTION 2.04. Certain Intercompany Financial and Other
Arrangements. (a) Intercompany Accounts. Without limiting the terms of Section
2.05, all intercompany receivables, payables and loans (other than receivables,
payables and loans otherwise specifically provided for in any of the Ancillary
Agreements or hereunder), including, without limitation, in respect of any cash
balances, any cash balances representing deposited checks or drafts for which
only a provisional credit has been allowed or any cash held in any centralized
cash management system, between Corning, CCL, Covance or any of their respective
Subsidiaries, on the one hand, and Corning, CCL, Covance or any of their
respective Subsidiaries, on the other hand, shall, as of the Effective Time, be
settled or contributed to capital, in each case as may be agreed in writing
prior to the Effective Time by duly authorized representatives of Corning, CCL
or Covance, as applicable. Notwithstanding the foregoing, on or after the
Distribution Date, CCL shall make a payment to Corning in an amount equal to
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13
the excess, if any, of (i) the aggregate amount of cash and cash equivalents
held by CCL and its Subsidiaries on the Distribution Date over (ii) the sum of
the aggregate principal amount of Working Capital Loans and Swingline Loans
(each as defined in the credit agreement among CCL and the banks listed therein
to be entered into prior to the Distribution Date) outstanding on the
Distribution Date, plus $40,000,000 plus the net cash proceeds from the sales of
assets identified in the credit agreement received on or prior to the
Distribution Date. If the amount calculated in accordance with clause (ii) of
the preceding sentence, less $10,000,000, is greater than the amount calculated
in accordance with clause (i) then, on or after the Distribution Date, Corning
shall make a payment to CCL in an amount equal to the difference between such
calculations.
(b) Operations in Ordinary Course. Each of CCL and Covance
covenants and agrees that, except as otherwise provided in any Ancillary
Agreement, during the period from the date of this Agreement through the
Distribution Date, it will, and will cause any entity that is a Subsidiary of
such party at any time during such period to, conduct its business in a manner
substantially consistent with current and past operating practices and in the
ordinary course, including, without limitation, with respect to the payment and
administration of accounts payable and the administration of accounts
receivable, the purchase of capital assets and equipment and the management of
inventories.
SECTION 2.05. Certain Indebtedness and Capital Structure.
Corning, CCL and Covance each agree to use their respective commercially
reasonable efforts to achieve both an allocation of consolidated indebtedness of
Corning and a capital structure (including cash position) of each of CCL and
Covance so as to substantially reflect the respective capital structures after
the Distributions of CCL and Covance set forth in the Information Statement
under the headings "Capitalization of CCL" and "Capitalization of Covance".
SECTION 2.06. Further Assurances. In case at any time after
the Effective Time any further action is reasonably necessary or desirable to
carry out the purposes of this Agreement and the Ancillary Agreements, the
proper officers of each party to this Agreement shall take all such necessary
action. Without limiting the foregoing, Corning, CCL and Covance shall use their
commercially reasonable efforts to obtain all consents and approvals, to enter
into all amendatory agreements and to make all filings and applications that may
be required for the consummation of the transactions contemplated by this
Agreement and the Ancillary Agreements, including, without limitation, all
applicable governmental and regulatory filings.
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14
SECTION 2.07. No Representations or Warranties. Each of the
parties hereto understands and agrees that, except as otherwise expressly
provided, no party hereto is, in this Agreement, in any Ancillary Agreement or
in any other agreement or document contemplated by this Agreement or otherwise,
making any representation or warranty whatsoever, including, without limitation,
as to title, value or legal sufficiency.
SECTION 2.08. Guarantees. (a) Except as otherwise specified in
any Ancillary Agreement, Corning, CCL and Covance shall use their commercially
reasonable efforts to have, on or prior to the Distribution Date, or as soon as
practicable thereafter, Corning and any of its Subsidiaries removed as guarantor
of or obligor for any CCL Liability or Covance Liability, including, without
limitation, in respect of those guarantees set forth on Schedule 2.08(a), and to
the extent any such guarantee is not removed, CCL or Covance, as the case may
be, will indemnify Corning for all Indemnifiable Losses related to or arising
from such guarantee, in accordance with the procedures set forth in Section 3.05
and will pay Corning a fee reflecting Corning's continuing role as guarantor.
(b) Except as otherwise specified in any Ancillary Agreement,
Corning, CCL and Covance shall use their commercially reasonable efforts to
have, on or prior to the Distribution Date, or as soon as practicable
thereafter, CCL and any of its Subsidiaries removed as guarantor of or obligor
for any Corning Liability or Covance Liability, including, without limitation,
in respect of those guarantees set forth on Schedule 2.08(b), and to the extent
any such guarantee is not removed, Corning or Covance, as the case may be, will
indemnify CCL for all Indemnifiable Losses related to or arising from such
guarantee, in accordance with the procedures set forth in Section 3.05 and will
pay CCL a fee reflecting CCL's continuing role as guarantor.
(c) Except as otherwise specified in any Ancillary Agreement,
Corning, CCL and Covance shall use their commercially reasonable efforts to
have, on or prior to the Distribution Date, or as soon as practicable
thereafter, Covance and any of its Subsidiaries removed as guarantor of or
obligor for any Corning Liability or CCL Liability, including, without
limitation, in respect of those guarantees set forth on Schedule 2.08(c), and to
the extent any such guarantee is not removed, Corning or CCL, as the case may
be, will indemnify Covance for all Indemnifiable Losses related to or arising
from such guarantee, in accordance with the procedures set forth in Section 3.05
and will pay Covance a fee reflecting Covance's continuing role as guarantor.
<PAGE>
15
SECTION 2.09. Certain Transactions. (a) On or prior to the
Distribution Date, and in accordance to Section 2.02(b), Corning, CCL and
Covance shall enter into (i) the Tax Sharing Agreement which shall govern, among
other things, their respective rights and obligations with respect to Taxes of
CCL and Covance and each of their respective Subsidiaries for all periods
through the Distribution Date and certain other tax-related matters; and (ii)
the Spin-off Tax Indemnification Agreements which shall, among other things,
restrict CCL and Covance from engaging in certain activities that might
jeopardize the continuing tax-free treatment of the Distributions.
(b) Following the Distribution Date, Corning, CCL and Covance
shall each comply with and otherwise not take any action inconsistent with each
representation and statement made, or to be made, to the Commission in
connection with the "no-action request" letter describing the Distributions
filed by Corning with the Commission.
SECTION 2.10. Insurance. Except as contemplated by the
Insurance Agreement, any and all coverage of CCL, Covance and their respective
Subsidiaries under Company Policies has terminated or will terminate (and will
not be replaced by Corning) no later than the Effective Time.
ARTICLE III
INDEMNIFICATION
SECTION 3.01. Indemnification by Corning. (a) Except as
otherwise specifically set forth in any provision of this Agreement or of any
Ancillary Agreement, Corning shall indemnify and hold harmless the CCL
Indemnitees and the Covance Indemnitees from and against any and all
Indemnifiable Losses of the CCL Indemnitees and the Covance Indemnitees,
respectively, arising out of, by reason of or otherwise in connection with (i)
the Corning Liabilities or (ii) the breach by Corning of any provision of this
Agreement or any Ancillary Agreement.
(b) Corning shall indemnify and hold harmless CCL and its
Subsidiaries from and against any and all monetary payments by or on behalf of
CCL or any of its Subsidiaries (other than criminal fines or penalties imposed
upon former or current employees of CCL or its subsidiaries) to the United
States government or one of the States of the United States or any of their
respective departments, branches or agencies arising out of any investigation or
claim by or on behalf of the United States government or one of the States of
the United States or any of their respective departments, branches or agencies,
whether criminal, civil or administrative in nature which investigation or claim
has been settled prior to the Distribution Date or is pending as of the
Distribution Date pursuant to service of subpoena or other notice of such
investigation to Corning, CCL or any of its Subsidiaries, as well as any qui tam
proceeding for which a complaint was filed prior to the Distribution Date
whether or not Corning, CCL or any Subsidiary of CCL has been served with such
complaint or otherwise been notified of the pendency of such action, but only to
the extent such investigations or claims arise out of or are related to alleged
violations of (i) the federal civil False Claims Act (31 USC ss. 3729, et seq.)
and its criminal counterpart (18 USC ss. 287), (ii) Medicare and Medicaid fraud
(42 USC ss. 1320a-7(b)(a)(1)), (iii) the Civil Monetary Penalties Law (42 USC
ss.ss. 1320a-7a and 1320a-7(b)(b)), (iv) mail fraud and wire fraud statutes (18
USC ss.ss. 1341 and 1343), (v) false statements (18 USC ss. 1301), (vi)
conspiracy (18 USC ss. 371), (vii) money laundering (18 USC ss. 1956, et seq.),
(viii) RICO (18 USC ss. 1961), (ix) Title II of the Health Insurance Portability
and Accountability Act of 1996, (x) Title XVIII of the Social Security
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16
Act (42 USC ss.ss. 1395-1395ccc) (the Medicare statute), (xi) Title XIX of the
Social Security Act (42 USC ss.ss. 1396, et seq.) (the Medicaid statute), (xii)
the Programs Fraud Civil Remedies Act (31 USC ss.ss. 3801, et seq.); or (xiii)
the federal Anti-Kickback Act (42 USC ss.ss. 52, et seq.) arising out of the
billing or alleged overbilling by CCL or any past or present subsidiary of CLSI
(or any of their predecessors) of any federal program or agency, or any
federally supported state health care program or agency, or any beneficiary of
any of them, for services provided to any such beneficiary thereof by CCL, any
Subsidiary of CCL or any past or present subsidiary of CLSI (or any of their
predecessors).
(c) In the event that CCL or its Subsidiaries make monetary
payments in excess of forty-two million dollars ($42,000,000) within the period
beginning on the Distribution Date and ending five (5) years thereafter in
respect of claims by nongovernmental persons relating to or arising out of the
investigations or claims referred to in Section 3.01(b) and alleging
overbillings of such person or any beneficiary of such person by CCL, its
Subsidiaries or any past or present subsidiary of CLSI (or any of their
predecessors) for services provided prior to the Distribution Date to such
person or beneficiary thereof by CCL, its Subsidiaries or any past or present
subsidiary of CLSI (or any of their predecessors), then Corning shall indemnify
and hold harmless CCL and its Subsidiaries from and against fifty percent (50%)
of up to fifty million dollars ($50,000,000) in the aggregate of such monetary
payments actually paid by CCL or any Subsidiary of CCL in excess of such
forty-two million dollars ($42,000,000) in respect of such alleged overbillings.
(d) (i) Except as otherwise agreed by Corning and CCL or
unless otherwise required by a change in applicable law or regulations, a
contrary judicial decision, adverse determination by a Taxing authority, or a
contrary published ruling (in each case, subsequent to the date hereof), all
payments made by Corning to CCL, or to another party for the benefit of CCL,
pursuant to Section 3.01(b) and Section 3.01(c) shall be treated as nontaxable
capital contributions by Corning to CCL and the parties shall report the
payments consistent with such treatment for Tax purposes
(ii) Each amount indemnified against by Corning pursuant to
Section 3.01(b) and Section 3.01(c) shall be reduced by (1) the product of (x)
the amount of any Tax deduction used to reduce the Tax liability of CCL, any CCL
Subsidiary (CCL and the CCL Subsidiaries shall be referred to in this Section
3.01(d) individually as a "CCL Company" and collectively as the "CCL Companies")
or any combined or consolidated group which has any of the CCL Companies as a
member and which does not have Corning as a member (referred to in this Section
3.01(d) as the "CCL Group") to the extent such Tax deduction is attributable to
the portion of the payment, loss, expense or other item indemnified against by
Corning and (y) the maximum marginal statutory rate (exclusive of any surtax
rate or other marginal rate imposed in lieu of a surtax to eliminate the
benefits of a lower marginal rate) at which the Tax to which such deduction
relates is imposed for the taxable year in which the CCL Company or the CCL
Group uses the Tax deduction to reduce its Tax liability, and (2) the amount of
any other Tax
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17
credit, benefit or other similar item (a "Tax Benefit Item") used to reduce the
Tax liability of any CCL Company or the CCL Group to the extent the Tax Benefit
Item is attributable to the portion of the payment, loss, expense or other item
indemnified against by Corning.
(iii) For purposes of determining whether any Tax deduction or
Tax Benefit Item of any CCL Company attributable to the portion of a payment,
loss, expense or other item indemnified against by Corning (a "Corning
Deduction") is used to reduce the Tax liability of any CCL Company or the CCL
Group, it shall be assumed that all losses and deductions of such CCL Company or
the CCL Group (including carryforwards and carrybacks (unless otherwise excluded
below) of net operating losses or other items) other than Corning Deductions are
applied in reduction of such CCL Company's or the CCL Group's Tax liability
before any Corning Deductions are so applied, except that Tax deductions and Tax
Benefit Items attributable to the following items shall be deemed to be applied
to reduce such CCL Company's or the CCL Group's Tax liability after using (in
determining such Tax liability) all available Corning Deductions: (i) Special
Events (as defined below), (ii) claims against which Corning has partially
indemnified CCL pursuant to Section 3.01(c) (other than payments applied toward
the $42,000,000 threshold specified in Section 3.01(c)) and (iii) carrybacks of
losses or other Tax items from Tax years subsequent to the Tax year in which the
amount indemnified against under Sections 3.01(b) or (3.01(c) is paid by
Corning. Special Event shall mean a material event that is unusual in nature or
occurs infrequently (but not both) and is unrelated to normal operations
(including, without limitation, entering or exiting businesses, sales or other
dispositions, litigation or regulatory settlements, restructuring reserves), but
does not include operating items such as start-up expenses and receivable
reserves. For this purpose, material means an event or series of related events
involving amounts exceeding 5 percent of CCL's pre-tax income (determined on a
consolidated basis).
(iv) Corning shall make estimated payments to CCL, or another
party for the benefit of CCL, pursuant to Section 3.01(b) and Section 3.01(c)
(the "Estimated Payments") which shall be calculated in good faith by CCL and
Corning by taking into account the adjustments required by Section 3.02(d)(ii)
and Section 3.01(d)(iii) to the extent practical (based on information available
to the parties at the time the Estimated Payment is made as to the proper tax
treatment of the item, CCL's projected Tax liability (including for estimated
Tax payments), or losses for the year in which the Estimated Payment is made
(without taking into account the use of Corning Deductions in future years),
prior Tax return positions and other factors the parties deem relevant).
Estimated Payments shall be paid by Corning (1) if paid to a CCL Company, as
directed by CCL, within 15 business days after written notice from CCL to
Corning indicating that the underlying obligation indemnified against by Corning
has been paid by a CCL Company (which notice shall include any documentation
reasonably requested by Corning establishing the amount and Tax treatment of
such payment) or, (2) if paid directly by Corning for the benefit of a CCL
Company, within 15 business days after written notice from CCL that the
obligation has been settled or is otherwise due (which notice shall include to
whom such payment should be made, the amount of the payment, an executed copy of
the
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18
settlement or other agreement and any other documentation reasonably requested
by Corning establishing the amount and Tax treatment of such payment); provided,
however, that failure to give such notification shall not affect the
indemnification provided hereunder except to the extent Corning shall have been
actually prejudiced as a result of such failure.
(v) Within 60 business days following the close of the Tax
year in which an Estimated Payment is made and each tax year thereafter until
the Corning Deductions (as adjusted under Sections 3.01(d)(ii) and 3.01(d)(iii))
are fully used by the CCL Companies to reduce the Tax liability of the CCL Group
or any CCL Member, CCL shall compute the amount by which any reduction in the
Tax liability of a CCL Company or the CCL Group for such Tax year attributable
to a Corning Deduction decreases the after-Tax indemnity payable by Corning
under Sections 3.02(d)(ii) and (iii). CCL shall submit such computation in
writing to Corning (together with such other documentation as is reasonably
necessary to demonstrate how the reduction was computed) for review and approval
by Corning, which approval shall not be unreasonably withheld, within 20
business days of the receipt by Corning of such computation prepared by CCL. If
Corning does not approve of such computation and the parties cannot otherwise
agree on such computation, then the disagreement shall be resolved under Section
3.01(d)(ix). Promptly following agreement by the parties as to the computation
required under this paragraph, either CCL shall pay to Corning an adjusting
payment if the amount of such after-Tax indemnity payable by Corning under
Sections 3.01(d)(ii) and 3.01(d)(iii) is less than the aggregate amount of
Estimated Payments made to CCL for such Tax year and prior years (net of any
prior adjusting payments) or Corning shall pay to CCL an adjusting payment if
the amount of such after-Tax indemnity payable by Corning under Section
3.02(d)(ii) and (iii) exceeds the aggregate amount of Estimated Payments made to
CCL for such Tax year and prior years (net of any prior adjusting payments).
(vi) CCL shall consult with Corning and CCL and Corning shall
determine the Tax treatment by any CCL Company or the CCL Group of any payment,
loss, expense or other amount indemnified against by Corning under Section
3.01(b) or Section 3.01(c) provided that neither the CCL Group nor any CCL
Company nor Corning shall be required to take a position on any Tax return for
which there is no reasonable basis. If requested by CCL, Corning at its expense
will provide CCL with an opinion of independent tax counsel selected by Corning
(provided such counsel is not reasonably objected to by CCL) to the effect that
there exists a reasonable basis for the treatment proposed by Corning as part of
such determination. The parties shall report the payments consistent with the
treatment as determined by them for Tax purposes.
(vii) If any payments are made by Corning pursuant to Section
3.01(b) or Section 3.01(c), and calculated and paid pursuant to this Section
3.01(d), and the amount of the after-Tax indemnity payable by Corning pursuant
to such sections would have been different if the computation of such
indemnification payment were made at a later time (because of final settlements
or final dispositions of audit adjustments, administrative or judicial
proceedings,
<PAGE>
19
amended returns, utilization or disallowance of Corning Deductions in subsequent
Tax periods or other reasons), then the amount of such indemnification shall be
recomputed by CCL and Corning at such later time by taking into account such
subsequent events and the parties shall make an adjusting payment between each
other as is appropriate because of such recomputation within 15 business days of
their agreement as to the amount of such adjusting payment.
(viii) (A) CCL shall notify Corning promptly (and in any event
within 15 business days) after receipt by any CCL Company of written notice of
any demand or claim by a Taxing authority relating to the Tax treatment of a
payment, loss, expense or other item indemnified against by Corning under
Section 3.01(b) or Section 3.01(c). Such notice shall contain factual
information (to the extent known to any CCL Company) describing the asserted tax
treatment in reasonable detail and shall include copies of any notice or other
document received from any Taxing authority. If the Taxing authority proposes in
writing an adjustment to a Corning Deduction, which adjustment if sustained
would reduce the amount of a Corning Deduction or otherwise increase the amount
indemnified against by Corning, CCL shall notify Corning promptly of such
adjustment and of all action taken or proposed to be taken by the Taxing
authority; provided, however, that failure to give such notification shall not
affect the indemnification provided hereunder except to the extent Corning shall
have been actually prejudiced as a result of such failure.
(B) If Corning requests within 30 days (or sooner if
the nature of the proposed adjustment so requires) after CCL's notice that the
proposed adjustment to a Corning Deduction be contested, CCL shall contest the
proposed adjustment in good faith upon receipt of an opinion of independent tax
counsel selected by Corning (provided such counsel is not reasonably objected to
by CCL) to the effect that there exists a reasonable basis that CCL will prevail
in such contest; provided, that (i) CCL shall be required to contest any
proposed adjustment beyond the level of administrative proceedings only if the j
aggregate amount of the proposed adjustment (exclusive of penalties, interest
and additions to tax) exceeds $250,000, (ii) CCL shall determine the court of
competent jurisdiction in which to contest the proposed adjustment either before
or after payment of the Tax asserted to be payable as a result thereof, (iii)
Corning shall control with counsel selected by Corning (provided such counsel is
not reasonably objected to by CCL) the prosecution of any contested adjustment
or asserted deficiency in respect of a Corning Deduction arising from an amount
indemnified against by Corning under Section 3.01(b), and CCL shall control with
counsel selected by CCL (provided such counsel is not reasonably objected to by
Corning) the prosecution of any contested adjustment or asserted deficiency in
respect of a Corning Deduction arising from an amount indemnified against by
Corning under Section 3.01(c), (iv) the controlling party shall keep the other
party informed as to the progress of any contest or litigation and, if requested
by such other party, shall consult with such other party's tax counsel, and (v)
the controlling party shall not settle, compromise or otherwise concede the
adjustment or deficiency in respect of a Corning Deduction that the controlling
party is contesting without the consent of the other party, which consent shall
not be unreasonably withheld, provided, further, that any adverse
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20
court determination will be required to be appealed only upon receipt of an
additional opinion from independent tax counsel that there exists a reasonable
basis that the appellate court will reverse such adverse determination. CCL
shall not be required to take any action pursuant to this Section 3.01(viii)(B)
in respect of a contesting Corning Deduction relating to an amount indemnified
against by Corning under Section 3.01(b) unless Corning shall have agreed to pay
(with no net after-Tax cost to CCL) all penalties, interest and additions to tax
that CCL may incur in connection with contesting a proposed adjustment to such
Corning Deduction. The controlling party shall pay all out-of-pocket expenses
and other costs relating to a contest of an adjustment to a Corning Deduction
("Expenses"), including but not limited to fees for attorneys, accountants,
expert witnesses or other consultants retained by (or selected or controlled by)
the controlling party incurred at any time during which the controlling party is
controlling and directing the proceeding in respect of which such fees are
incurred; provided, however, that Corning shall pay CCL, in respect of a
proceeding controlled by CCL that relates to or involves a proposed adjustment
or asserted deficiency in respect of a Corning Deduction attributable to an
amount indemnified against by Corning under Section 3.01(c), that proportion of
the Expenses relating to the proceeding and involving such deduction as is equal
to the ratio of (i) the amount of the adjustment or deficiency that relates to
such Corning Deduction at issue in the proceeding and (ii) the total adjustments
at issue in the proceeding that relate to claims by nongovernmental persons
described in Section 3.01(c).
(C) If asserted liabilities unrelated to the
matters contemplated herein become grouped with contests arising hereunder, the
parties shall use their respective best efforts to cause the contest arising
hereunder to be the subject of a separate proceeding. If such severance is not
possible, Corning shall control only the prosecution of any contested adjustment
or asserted deficiency in respect of a Corning Deduction arising from an amount
indemnified against by Corning under Section 3.01(b), and CCL shall have sole
discretion to determine the court of competent jurisdiction in which to contest
the proposed adjustment either before or after payment of the tax asserted to be
payable, provided that CCL shall not settle, compromise or otherwise concede any
such contested adjustment or asserted deficiency without the consent of Corning,
which consent shall not be unreasonably withheld. If CCL pays a disputed amount
of Taxes resulting from a disallowed Corning Deduction arising from an amount
indemnified against by Corning under Section 3.01(b) or Section 3.01(c), and
brings suit for refund, Corning shall advance the disputed amount of Taxes (but
only to the extent of the portion of such disputed Taxes as is attributable to
the disallowance of such Corning Deduction) to CCL within 15 business days of
such payment by CCL. If CCL subsequently receives a refund or credit, of all or
a part of the amount of disputed Taxes advanced by Corning, CCL shall promptly
pay (and in any event within 15 business days) to Corning an amount equal to the
portion of such refund or credit attributable to a Corning Deduction together
with any interest received (including by offset) by CCL from the Taxing
authority with respect to such portion. With respect to matters arising
hereunder controlled by Corning, and where deemed necessary by Corning, CCL
shall itself, and shall compel any
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21
CCL Subsidiary to, authorize by appropriate powers of attorney such persons as
Corning shall designate to represent CCL, or such CCL Subsidiary, with respect
to such matters.
(ix) If Corning and CCL are unable to agree on the proper
calculation or treatment of a payment or other obligation, a Tax deduction or
Tax Benefit Item or any other item described in this Section 3.01(d), then such
disputed item or items shall be resolved by a nationally recognized accounting
or law firm chosen and mutually acceptable to both parties. Such accounting or
law firm shall resolve the dispute within 30 days of having the item or items
referred to it and such resolution shall be binding on the parties. The costs,
fees and expenses of the accounting or law firm shall be borne equally by
Corning and CCL. In the event the parties are not able to agree on an accounting
or law firm, each party shall select its own nationally recognized law firm (and
bear the costs, fees and expenses thereof) and such law firms shall select a
nationally recognized accounting or law firm which accounting or law firm shall
be deemed to be mutually acceptable to both parties for the purpose of applying
this provision. Nothing in this Section 3.01(d) shall require either party to
take any position on a Tax return or for Tax purposes for which there is no
reasonable basis.
(x) All payments under Sections 3.01(b), 3.01(c) and 3.01(d)
shall be made without gross-up for Taxes, except if (A) the Tax liability of
Corning or a consolidated or combined group which has Corning as a member and
which does not have CCL as a member (the "Corning Group") is actually reduced by
a Tax deduction attributable to the payment by Corning of an amount indemnified
against by Corning under Sections 3.01(b) or 3.01(c) in any tax year that ends
after the Distribution Date because such payment is properly treated as an
deduction against ordinary income for Corning or the Corning Group in computing
its Taxable income for such year (a "CCL Payment Deduction") and (B) the Tax
Liability of any CCL Company or the CCL Group for such year is actually
increased by such payment because such payment is properly treated as an item of
ordinary income for any CCL Company or the CCL Group, then Corning shall pay to
CCL an amount equal to the lesser of the amount of such Corning Tax reduction
and the amount of such CCL Tax increase, within 15 business days after the
parties agree on the amount of the Corning Tax reduction and CCL Tax increase,
provided, however, any payment by Corning to CCL shall be net of Taxes imposed
on Corning or the Corning Group in respect of amounts paid by CCL to Corning
under Section 3.01(d). For purposes of computing a Corning Tax increase, it
shall be assumed that all losses and deductions other than the CCL Payment
Deduction are applied to reduce the Tax Liability of Corning or the Corning
Group before the CCL Payment Deduction is so applied.
(e) Notwithstanding anything to the contrary in this
agreement, Corning shall not indemnify, defend or hold harmless CCL or any
Subsidiary of CCL against (x) costs and expenses relating to the investigations
or claims referred to in Sections 3.01(b) and (c) (including, without
limitation, fees and expenses of attorneys, consultants and other agents of CCL
or any Subsidiary of CCL), or (y) losses of revenues or profits that may arise
as a consequence of the claims or investigations referred to in Sections 3.01(b)
or 3.01(c) or the
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22
settlements entered into or judgments rendered as a result thereof or as a
consequence of any exclusion from participation in any federal or state health
care program, or (z) any other consequential or incidental damages that may be
incurred by CCL or any Subsidiary of CCL, in each case which relates to the
billing of any person or any beneficiary of such person by CCL, any Subsidiary
of CCL or any past or present subsidiary of CLSI (or any of their predecessors)
for services provided to any such person or beneficiary thereof by CCL, any
Subsidiary of CCL or any past or present subsidiary of CLSI (or any of their
predecessors).
(f) All indemnification obligations of Corning pursuant to
this Section 3.01 may be made or assumed by an Affiliate of Corning to the
extent deemed necessary or desirable by Corning in its sole discretion;
provided, however, that Corning shall remain liable for such obligations.
SECTION 3.02. Indemnification by CCL. Except as otherwise
specifically set forth in any provision of this Agreement or of any Ancillary
Agreement, CCL shall indemnify and hold harmless the Corning Indemnitees and the
Covance Indemnitees from and against any and all Indemnifiable Losses of the
Corning Indemnitees and the Covance Indemnitees, respectively, arising out of,
by reason of or otherwise in connection with (i) the CCL Liabilities or (ii) the
breach by CCL of any provision of this Agreement or any Ancillary Agreement;
provided, however, that CCL is under no obligation to indemnify or hold harmless
Corning from and against any Indemnifiable Losses arising out of, or by reason
of or otherwise in connection with any and all monetary payments by Corning in
respect of (i) the investigations or claims referred to in Section 3.01(b) or
(ii) claims referred to in Section 3.01(c) as to which no CCL Indemnitee is a
party.
SECTION 3.03. Indemnification by Covance. Except as otherwise
specifically set forth in any provision of this Agreement or of any Ancillary
Agreement, Covance shall indemnify and hold harmless the Corning Indemnitees and
the CCL Indemnitees from and against any and all Indemnifiable Losses of the
Corning Indemnities and the CCL Indemnitees, respectively, arising out of, by
reason of or otherwise in connection with (i) the Covance Liabilities or (ii)
the breach by Covance of any provision of this Agreement or any Ancillary
Agreement.
SECTION 3.04. Adjustments for Indemnification Obligations. If
the amount that any party (an "Indemnifying Party") is or may be required to pay
to any other person (an "Indemnitee") pursuant to Section 3.01, Section 3.02 or
Section 3.03, as applicable, shall, at any time subsequent to the payment
required by this Agreement, be reduced by insurance or other recovery,
settlement or otherwise, the amount of such reduction, less any expenses
incurred in connection therewith, shall promptly be repaid by the Indemnitee to
the Indemnifying Party, up to the aggregate amount of any payments received from
such Indemnifying Party pursuant to this Agreement in respect of such
Indemnifiable Loss.
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23
SECTION 3.05. Procedures for Indemnification - Third Party
Claims. If a claim or demand is made against an Indemnitee by any person who is
not a party to this Agreement (a "Third Party Claim") as to which such
Indemnitee is entitled to indemnification pursuant to this Agreement, such
Indemnitee shall notify the Indemnifying Party in writing, and in reasonable
detail, of the Third Party Claim promptly (and in any event within 15 business
days) after receipt by such Indemnitee of written notice of the Third Party
Claim; provided, however, that failure to give such notification shall not
affect the indemnification provided hereunder except to the extent the
Indemnifying Party shall have been actually prejudiced as a result of such
failure (except that the Indemnifying Party shall not be liable for any expenses
incurred during the period in which the Indemnitee failed to give such notice).
If a Third Party Claim is made against an Indemnitee, the
Indemnifying Party shall be entitled to participate in the defense thereof and,
in the case of an Indemnifying Party's obligation to indemnify the Indemnitee
pursuant to Section 3.01(a), Section 3.01(b), Section 3.02 or Section 3.03, if
the Indemnifying Party so chooses and acknowledges in writing its obligation to
indemnify the Indemnitee therefor, to assume the defense thereof with counsel
selected by the Indemnifying Party; provided, however, that such counsel is not
reasonably objected to by the Indemnitee. Should the Indemnifying Party so elect
to assume the defense of a Third Party Claim, the Indemnifying Party shall not
be liable to the Indemnitee for legal or other expenses subsequently incurred by
the Indemnitee in connection with the defense thereof. If the Indemnifying Party
assumes such defense, the Indemnitee shall have the right to participate in the
defense thereof and to employ counsel, at its own expense, separate from the
counsel employed by the Indemnifying Party, it being understood that the
Indemnifying Party shall control such defense. The Indemnifying Party shall be
liable for the fees and expenses of counsel employed by the Indemnitee for any
period during which the Indemnifying Party has failed to assume the defense
thereof. If the Indemnifying Party so elects to assume the defense of any Third
Party Claim, all of the Indemnitees shall cooperate with the Indemnifying Party
in the defense or prosecution thereof.
If the Indemnifying Party acknowledges in writing liability
for a Third Party Claim, then in no event will the Indemnitee admit any
liability with respect to, or settle, compromise or discharge, any Third Party
Claim without the Indemnifying Party's prior written consent, which consent
shall not be unreasonably withheld or delayed; provided, however, that the
Indemnitee shall have the right to settle, compromise or discharge such Third
Party Claim without the consent of the Indemnifying Party if the Indemnitee
releases the Indemnifying Party from its indemnification obligation hereunder
with respect to such Third Party Claim and such settlement, compromise or
discharge would not otherwise adversely affect the Indemnifying Party. If the
Indemnifying Party acknowledges in writing liability for a Third Party Claim,
the Indemnitee will agree to any settlement, compromise or discharge of a Third
Party Claim that the Indemnifying Party may recommend which by its terms (i)
obligates the Indemnifying Party to pay the full amount of its indemnification
obligation in connection with such Third Party Claim and (ii) releases the
Indemnitee completely in
<PAGE>
24
connection with such Third Party Claim and which would not otherwise adversely
affect the Indemnitee; and provided further that the Indemnitee may refuse to
agree to any such proposed settlement, compromise or discharge if the Indemnitee
agrees that the Indemnifying Party's indemnification obligation with respect to
such Third Party Claim shall not exceed the amount that would be required to be
paid by or on behalf of the Indemnifying Party in connection with such proposed
settlement, compromise or discharge.
Notwithstanding the foregoing, the Indemnifying Party shall
not be entitled to assume the defense of any Third Party Claim (and shall be
liable for the fees and expenses of counsel incurred by the Indemnitee in
defending such Third Party Claim) if the Third Party Claim seeks an order,
injunction or other equitable relief or relief for other than money damages
against the Indemnitee which the Indemnitee reasonably determines, after
conferring with its counsel, cannot be separated from any related claim for
money damages. If such equitable relief or other relief portion of the Third
Party Claim can be so separated from that for money damages, the Indemnifying
Party shall be entitled to assume the defense of the portion relating to money
damages.
The provisions contained in Section 3.01(d) shall control in
the situations described particularly in that section.
SECTION 3.06. Survival of Indemnities. The obligations of
Corning, CCL and Covance under this Article III shall survive the sale or other
transfer by any of them of any assets or businesses, with respect to any
Indemnifiable Loss of any Indemnitee related to such assets or businesses.
SECTION 3.07. Payments. All payments under this Agreement
shall be made without gross-up for Taxes except as provided in Section
3.01(d)(x).
ARTICLE IV
ACCESS TO INFORMATION
SECTION 4.01. Provision of Corporate Records. From and after
the Distribution Date, upon the prior written request by Corning, CCL or Covance
for specific and identified agreements, documents, books, records or files
(collectively, "Records") relating to or affecting Corning, CCL or Covance, as
applicable, Corning, CCL or Covance, as the case may be, shall arrange, as soon
as reasonably practicable following the receipt of such request, for the
provision of appropriate copies of such Records (or other originals thereof if
the party making the request has a reasonable need for such originals) then in
the possession of Corning, CCL or Covance, as the case may be, or any of their
Subsidiaries, but only to the extent such items are not already in the
possession of the requesting party; provided, however, that nothing in this
Section 4.01 shall obligate a party to retain any records except to the extent
required by
<PAGE>
25
law or by an Ancillary Agreement or to provide Records if the party reasonably
determines that such provision of Records would prevent it from claiming that
the Records were privileged or otherwise not subject to disclosure in any
Action.
SECTION 4.02. Access to Information. (a) From and after the
Distribution Date, each of Corning, CCL and Covance shall afford to the other
and its authorized accountants, counsel and other designated representatives
reasonable access during normal business hours, subject to appropriate
restrictions for classified, privileged or confidential information, to the
personnel, properties, books and records of such party and its Subsidiaries
insofar as such access is reasonably required by the other party.
(b) For a period of five years following the Distribution
Date, each of Corning, CCL and Covance shall provide to the other, promptly
following such time at which such documents shall be filed with the Commission,
all documents that shall be filed by it and by any of its respective
Subsidiaries with the Commission pursuant to the periodic and interim reporting
requirements of the Exchange Act, and the rules and regulations of the
Commission promulgated thereunder.
SECTION 4.03. Reimbursement. Except to the extent otherwise
contemplated by any Ancillary Agreement, a party providing Records or access to
information to the other party under this Article IV shall be entitled to
receive from the recipient, upon the presentation of invoices therefor, payments
for such amounts, relating to supplies, disbursement and other out-of-pocket
expenses, as may be reasonably incurred in providing such Records or access to
information.
SECTION 4.04. Confidentiality. (a) Each of (i) Corning and its
Subsidiaries, (ii) CCL and its Subsidiaries and (iii) Covance and its
Subsidiaries shall not use or permit the use of (without the prior written
consent of the other) and shall hold, and shall cause its directors, officers,
employees, agents, consultants and advisors to hold, in strict confidence, all
information concerning the other parties in its possession, its custody or under
its control (except to the extent that (x) such information has been in the
public domain through no fault of such party, (y) such information has been
later lawfully acquired from other sources by such party or (z) this Agreement,
any Ancillary Agreement or any other agreement entered into pursuant hereto
permits the use or disclosure of such information) to the extent such
information (i) was obtained prior to or relates to periods prior to the
Effective Time, (ii) relates to any Ancillary Agreement or (iii) is obtained in
the course of performing services for the other party pursuant to any Ancillary
Agreement, and each party shall not (without the prior written consent of the
other) otherwise release or disclose such information to any other person,
except such party's auditors and attorneys, unless compelled to disclose such
information by judicial or administrative process or unless such disclosure is
required by law and such party has used commercially reasonable efforts to
consult with the other affected party or parties prior to such disclosure.
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26
(b) To the extent that a party hereto is compelled by judicial
or administrative process to disclose otherwise confidential information under
circumstances in which any evidentiary privilege would be available, such party
agrees to assert such privilege in good faith prior to making such disclosure.
Each of the parties hereto agrees to consult with each relevant other party in
connection with any such judicial or administrative process, including, without
limitation, in determining whether any privilege is available, and further
agrees to allow each such relevant party and its counsel to participate in any
hearing or other proceeding (including, without limitations, any appeal of an
initial order to disclose) in respect of such disclosure and assertion of
privilege.
ARTICLE V
DISPUTE RESOLUTION
SECTION 5.01. Good Faith Negotiations. In the event of a
controversy, dispute or claim arising out of, in connection with, or in relation
to the interpretation, performance, nonperformance, validity or breach of this
Agreement or otherwise arising out of, or in any way related to this Agreement,
including, without limitation, any claim based on contract, tort or statute
(collectively, "Agreement Disputes"), the general counsels of the relevant
parties shall negotiate in good faith for a reasonable period of time to settle
such Agreement Dispute.
SECTION 5.02. Procedure. If after such reasonable period such
general counsels are unable to settle such Agreement Dispute (and in any event
after 60 days have elapsed from the time the relevant parties began such
negotiations), such Agreement Dispute shall be determined, at the request of any
relevant party, by arbitration conducted in New York City, before and in
accordance with the then-existing Rules for Commercial Arbitration of the
American Arbitration Association (the "Rules"), and any judgment or award
rendered by the arbitrator shall be final, binding and nonappealable (except
upon grounds specified in 9 U.S.C. ss. 10(a) as in effect on the date hereof),
and judgment may be entered by any state or federal court having jurisdiction
thereof in accordance with Section 6.16 hereof. Unless the arbitrator otherwise
determines, the pre-trial discovery of the then-existing Federal Rules of Civil
Procedure and the then-existing Rules 46 and 47 of the Civil Rules for the
United States District Court for the Southern District of New York shall apply
to any arbitration hereunder. Any controversy concerning whether an Agreement
Dispute is an arbitrable Agreement Dispute, whether arbitration has been waived,
whether an assignee of this Agreement is bound to arbitrate, or as to the
interpretation of enforceability of this Article V shall be determined by the
arbitrator. The arbitrator shall be a retired or former judge of any United
States District Court or Court of Appeals or such other qualified person as the
relevant parties may agree to designate, provided, however, such individual has
had substantial professional experience with regard to settling sophisticated
commercial disputes. The parties intend that the provisions to arbitrate set
forth herein be valid, enforceable and irrevocable. The designation of a situs
or a
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27
governing law for this Agreement or the arbitration shall not be deemed an
election to preclude application of the Federal Arbitration Act, if it would be
applicable. In his or her award the arbitrator shall allocate, in his or her
discretion, among the parties to the arbitration all costs of the arbitration,
including, without limitation, the fees and expenses of the arbitrator and
reasonable attorneys' fees, costs and expert witness expenses of the parties.
The undersigned agree to comply with any award made in any such arbitration
proceedings that has become final in accordance with the Rules and agree to the
entry of a judgment in any jurisdiction upon any award rendered in such
proceedings becoming final under the Rules. The arbitrator shall be entitled if
appropriate, to award any remedy in such proceedings, including, without
limitation, monetary damages, specific performance and all other forms of legal
and equitable relief; provided, however, the arbitrator shall not be entitled to
award punitive damages.
ARTICLE VI
GENERAL PROVISIONS
SECTION 6.01. Expenses. Except as otherwise set forth in this
Agreement or any Ancillary Agreement, each of Corning, CCL and Covance shall
bear its own costs and expenses incurred on or prior to the Distribution Date
(whether or not paid on or prior to the Distribution Date) in connection with
the preparation, execution, delivery and implementation of this Agreement and
any Ancillary Agreement, the Information Statement, the Registration Statements
and the Distributions and the consummation of the transactions contemplated
thereby and the parties to this Agreement shall agree on an equitable allocation
of costs and expenses where any item is not clearly allocable to Corning, CCL or
Covance. Except as otherwise set forth in this Agreement or any Ancillary
Agreement, each party shall bear its own costs and expenses incurred after the
Distribution Date.
SECTION 6.02. Notices. All notices, requests, claims,
demands and other communications hereunder shall be in writing and shall be
given or made (and shall be deemed to have been duly given or made upon receipt)
by delivery in person, by courier service, by cable, by telecopy, by telegram,
by telex or by registered or certified mail (postage prepaid, return receipt
requested) to the respective parties at the addresses (or at such other address
for a party as shall be specified in a notice given in accordance with this
Section 6.02) listed below (with copies to Shearman & Sterling at 599 Lexington
Avenue, New York, New York 10022, Attn: Creighton Condon):
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28
(a) To Corning Incorporated:
One Riverfront Plaza
Corning, New York 14831
Telecopy: (607) 974-8656
Attn: General Counsel
(b) To CCL:
One Malcolm Avenue
Teterboro, New Jersey 07608
Telecopy: (201) 462-4795
Attn: General Counsel
(c) To Covance:
210 Carnegie Center
Princeton, New Jersey 08540-6233
Telecopy: (609) 452-9865
Attn: General Counsel
SECTION 6.03. Complete Agreement; Construction. This
Agreement, including the Exhibits and Schedules, and the Ancillary Agreements
shall constitute the entire agreement between the parties hereto with respect to
the subject matter hereof and shall supersede all prior agreements and
undertakings, both written and oral, between the parties with respect to the
subject matter hereof and thereof. In the event of any inconsistency between
this Agreement and any Schedule hereto, the Schedule shall prevail.
Notwithstanding any other provisions in this Agreement to the contrary, in the
event and to the extent that there shall be a conflict between the provisions of
this Agreement and the provisions of any Ancillary Agreement, such Ancillary
Agreement shall control.
SECTION 6.04. Ancillary Agreements. This Agreement is not
intended to address, and should not be interpreted to address, the matters
specifically and expressly covered by the Ancillary Agreements.
SECTION 6.05. Counterparts. This Agreement may be executed in
one or more counterparts, and by the different parties hereto in separate
counterparts, each of which when executed shall be deemed to be an original but
all of which taken together shall constitute one and the same agreement.
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29
SECTION 6.06. Survival of Agreements. Except as otherwise
contemplated by this Agreement, all covenants and agreements of the parties
contained in this Agreement shall survive the Distribution Date.
SECTION 6.07. Waiver. The parties to this Agreement may (a)
extend the time for the performance of any of the obligations or other acts of
the other party or parties, (b) waive any inaccuracies in the representations
and warranties of the other party or parties contained herein or in any document
delivered by the other party or parties pursuant hereto or (c) waive compliance
with any of the agreements or conditions of the other party or parties contained
herein. Any such extension or waiver shall be valid only if set forth in an
instrument in writing signed by the party to be bound thereby. Any waiver of any
term or condition shall not be construed as a waiver of any subsequent breach or
a subsequent waiver of the same term or condition, or a waiver of any other term
or condition, of this Agreement. The failure of any party to assert any of its
rights hereunder shall not constitute a waiver of any such rights.
SECTION 6.08. Amendments. Subject to the terms of Section 6.11
hereof, this Agreement may not be amended or modified except (a) by an
instrument in writing signed by, or on behalf of, the parties or (b) by a waiver
in accordance with Section 6.07.
SECTION 6.09. Assignment. This Agreement may not be assigned
by operation of law or otherwise without the express written consent of the
other parties (which consent may be granted or withheld in the sole discretion
of the parties), and any attempt to assign any rights or obligations arising
under this Agreement without such consent shall be void.
SECTION 6.10. Successors and Assigns. The provisions of this
Agreement shall be binding upon, inure to the benefit of and be enforceable by
the parties and their respective successors and permitted assigns.
SECTION 6.11. Termination. This Agreement (including, without
limitation, Article III hereof) may be terminated and the Distributions may be
amended, modified or abandoned at any time prior to the Distributions by and in
the sole discretion of Corning without the approval of CCL or Covance or the
shareholders of Corning. In the event of such termination, no party shall have
any liability of any kind to any other party or any other person. After the
Distributions, this Agreement may not be terminated except by an agreement in
writing signed by the parties; provided, however, that Article III shall not be
terminated or amended after the Distributions in respect of the third party
beneficiaries thereto without the consent of such persons.
SECTION 6.12. Subsidiaries. Each of the parties hereto
shall cause to be performed, and hereby guarantees the performance of, all
actions, agreements and obligations
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30
set forth herein to be performed by any Subsidiary of such party or by any
entity that is contemplated to be a Subsidiary of such party on and after the
Distribution Date.
SECTION 6.13. Third Party Beneficiaries. Except as provided in
Article III relating to Indemnitees, this Agreement shall be binding upon and
inure solely to the benefit of the parties hereto and their respective
Subsidiaries, Affiliates and assigns and nothing herein, express or implied, is
intended to or shall confer upon any third parties any legal or equitable right,
benefit or remedy of any nature whatsoever under or by reason of this Agreement.
SECTION 6.14. Headings. The descriptive headings contained
in this Agreement are for convenience of reference only and shall not affect in
any way the meaning or interpretation of this Agreement.
SECTION 6.15. Specific Performance. The parties hereto agree
that irreparable damage would occur in the event any provision of this Agreement
was not performed in accordance with the terms hereof and that the parties shall
be entitled to specific performance of the terms hereof, in addition to any
other remedy at law or equity.
SECTION 6.16. Governing Law. This Agreement shall be governed
by, and construed in accordance with, the laws of the State of New York,
applicable to contracts executed in and to be performed entirely within that
state. Without limiting the provisions of Article V, all actions and proceedings
arising out of or relating to this Agreement shall be heard and determined in
any New York state or federal court sitting in the City of New York.
SECTION 6.17. Public Announcements. (a) Prior to the Effective
Time, neither CCL nor Covance shall make, or cause to be made, any press release
or public announcement in respect of this Agreement or the transactions
contemplated hereby or otherwise communicate with any news media without the
prior written consent of Corning.
(b) Following the Effective Time, no party to this Agreement
shall make, or cause to be made, any press release or public announcement in
respect of this Agreement or the transactions contemplated hereby or otherwise
communicate with any news media without prior consultation with the other
parties, and the parties shall cooperate as to the timing and contents of any
such press release or public announcement.
SECTION 6.18. Severability. If any term or other provision of
this Agreement is invalid, illegal or incapable of being enforced by any law or
public policy, all other terms and provisions of this Agreement shall
nevertheless remain in full force and effect so long as the economic or legal
substance of the transactions contemplated hereby is not affected in any manner
materially adverse to any party. Upon such determination that any term or other
provision is invalid, illegal or incapable of being enforced, the parties hereto
shall negotiate in good faith to modify this Agreement so as to effect the
original intent of the parties as closely
<PAGE>
31
as possible in an acceptable manner in order that the transactions contemplated
hereby are consummated as originally contemplated to the greatest extent
possible.
IN WITNESS WHEREOF, the parties have caused this Agreement to
be executed as of the date first written above by their respective officers
thereunto duly authorized.
CORNING INCORPORATED
by________________________________
Name:
Title:
CORNING LIFE SCIENCES INC.
by_________________________________
Name:
Title:
CORNING CLINICAL LABORATORIES INC.
(Delaware)
by__________________________________
Name:
Title:
COVANCE INC.
by__________________________________
Name:
Title:
CORNING CLINICAL LABORATORIES INC.
(Michigan)
by__________________________________
Name:
Title:
32
This is the text of a common stock certificate as issued by Quest Diagnostics
Incorporated. There is a patterned background. There are circular designs in the
upper left corner with a representation of the DNA chemical chain printed on
top. Below this patterned area is a small circular graphic rendering of a
chemist pouring from a bottle into a vial. There are several bottles in the
foreground.
COMMON STOCK
NUMBER SHARES
CUSIP 74834L100
SEE REVERSE FOR CERTAIN DEFINITIONS
Quest
Diagnostics
Incorporated
[Seal of Quest Diagnostics Incorporated]
Corporate 1990 Delaware
Incorporated under the law of the State of Delaware
This is to Certify that
is the owner of
Fully-paid and non-assessable shares of the Common Stock of
Quest Diagnostics Incorporated transferable in person or by duly
authorized attorney upon surrender of this Certificate properly endorsed.
This Certificate is not valid until countersigned by the transfer agent
and registered by the Registrar.
Witness, the facsimile seal of the Corporation and
the facsimile signatures of its duly authorized officers.
Countersigned and Registered: Chairman and Secretary
Harris Trust and Savings Bank Chief Executive Officer
Transfer Agent and Registrar
Authorized Signature This Certificate is transferable in the
City of Chicago, IL or New York, NY
Dated
[Draft--11/17/96]
- --------------------------------------------------------------------------------
CREDIT AGREEMENT
dated as of
November [ ], 1996
among
Corning Clinical Laboratories Inc.
The Banks Listed Herein
NationsBank, N.A., as Issuing Bank,
Wachovia Bank of Georgia, N.A.,
as Swingline Bank,
and
Morgan Guaranty Trust Company of New York,
as Administrative Agent
------------------------------
Morgan Guaranty Trust Company of New York
NationsBank, N.A.
Wachovia Bank of Georgia, N.A.,
as Arranging Agents
- --------------------------------------------------------------------------------
[Ref No. 1385-308]
<PAGE>
TABLE OF CONTENTS*
Page
----
ARTICLE I
Definitions
-----------
SECTION 1.01 Definitions.................................................. 1
1.02 Accounting Terms and Determinations.......................... 26
1.03 Types of Borrowings.......................................... 26
ARTICLE II
The Credits
-----------
SECTION 2.01 Commitments to Lend.......................................... 27
2.02 Notice of Borrowing.......................................... 27
2.03 Notice to Banks; Funding of Loans............................ 28
2.04 Swingline Loans.............................................. 30
2.05 Notes........................................................ 31
2.06 Interest Rate Elections...................................... 32
2.07 Interest Rates............................................... 34
2.08 Fees......................................................... 37
2.09 Termination or Reduction of
Commitments................................................ 38
2.10 Maturity of Loans............................................ 38
2.11 Optional Prepayments; Mandatory
Prepayments................................................ 41
2.12 General Provisions as to Payments............................ 43
2.13 Funding Losses; Prepayment Premium........................... 44
2.14 Computation of Interest and Fees............................. 45
2.15 Letters of Credit............................................ 45
ARTICLE III
Conditions
----------
SECTION 3.01 Effectiveness................................................ 52
3.02 Each Credit Event............................................ 56
- --------
*The Table of Contents is not a part of this
Agreement.
<PAGE>
2
ARTICLE IV
Representations and Warranties
------------------------------
SECTION 4.01 Corporate Existence and Power.............................. 57
4.02 Corporate and Governmental
Authorization; No Contravention.......................... 57
4.03 Binding Effect............................................. 58
4.04 Financial Information...................................... 58
4.05 Litigation................................................. 59
4.06 Compliance with ERISA...................................... 59
4.07 Environmental Matters...................................... 60
4.08 Taxes...................................................... 60
4.09 Subsidiaries............................................... 60
4.10 Regulatory Restriction on Borrowing........................ 61
4.11 Full Disclosure............................................ 61
4.12 Compliance with Laws and Agreements........................ 61
4.13 Governmental Approvals..................................... 61
4.14 Solvency................................................... 62
ARTICLE V
Covenants
---------
SECTION 5.01 Information................................................ 62
5.02 Payment of Obligations..................................... 66
5.03 Maintenance of Property; Insurance......................... 66
5.04 Conduct of Business and Maintenance
of Existence............................................. 67
5.05 Compliance with Laws....................................... 67
5.06 Inspection of Property, Books and
Records.................................................. 67
5.07 Additional Subsidiaries.................................... 68
5.08 Amendment of Certain Documents;
Post-Closing Transaction Documents....................... 68
5.09 Investments................................................ 69
5.10 Negative Pledge............................................ 70
5.11 Consolidations, Mergers, Acquisitions
and Sales of Assets...................................... 71
5.12 Use of Proceeds and Letters of
Credit................................................... 73
5.13 Further Assurances......................................... 74
5.14 Transactions with Affiliates............................... 74
5.15 Restrictions Affecting Subsidiaries........................ 74
5.16 Restricted Payments........................................ 75
5.17 Debt....................................................... 76
5.18 Leverage Ratio............................................. 78
<PAGE>
3
5.19 Debt Coverage Ratio........................................ 78
5.20 Coverage Ratio............................................. 79
5.21 Consolidated Capital Expenditures ......................... 80
5.22 Relationships with Corning Companies
and CPS Companies........................................ 80
ARTICLE VI
Defaults
--------
SECTION 6.01 Events of Default.......................................... 81
6.02 Notice of Default.......................................... 84
ARTICLE VII
The Agent and Arranging Agents
------------------------------
SECTION 7.01 Appointment and Authorization.............................. 85
7.02 Agent and Affiliates....................................... 85
7.03 Action by Agent............................................ 85
7.04 Consultation with Experts.................................. 85
7.05 Liability of Agent......................................... 85
7.06 Indemnification............................................ 86
7.07 Credit Decision............................................ 86
7.08 Successor Agent............................................ 87
7.09 Agent's Fees............................................... 87
7.10 Arranging Agents........................................... 87
ARTICLE VIII
Change in Circumstances
-----------------------
SECTION 8.01 Basis for Determining Interest
Rate Inadequate or Unfair................................ 87
8.02 Illegality................................................. 88
8.03 Increased Cost and Reduced Return.......................... 89
8.04 Taxes...................................................... 90
8.05 Base Rate Loans Substituted for
Affected Euro-Dollar Loans............................... 93
<PAGE>
4
ARTICLE IX
Miscellaneous
-------------
SECTION 9.01 Notices..................................................... 94
9.02 No Waivers.................................................. 95
9.03 Expenses; Indemnification................................... 95
9.04 Sharing of Setoffs.......................................... 96
9.05 Amendments and Waivers...................................... 97
9.06 Successors and Assigns...................................... 98
9.07 Collateral..................................................100
9.08 Governing Law; Submission to
Jurisdiction..............................................101
9.09 Counterparts; Integration...................................101
9.10 WAIVER OF JURY TRIAL........................................101
Exhibits:
- ---------
Exhibit A -- Form of Term Note
Exhibit B -- Form of Working Capital Note
Exhibit C -- Form of Guarantee Agreement
Exhibit D -- Form of Indemnity, Subrogation
and Contribution Agreement
Exhibit E -- Form of Pledge Agreement
Exhibit F -- Form of Security Agreement
Exhibit G -- Forms of opinions of Borrower's counsel
Exhibit H -- Form of opinion of Agent's counsel
Exhibit I -- Form of Issuing Bank Agreement
Exhibit J -- Form of Corning Subordination Agreement
Schedules:
- ----------
Schedule 1 -- Commitments
Schedule 1.01(a) -- Certain Lease
Schedule 1.01(b) -- Post-Closing Spin-Off Transactions
Schedule 1.01(c) -- Quadrant Properties
Schedule 1.01(d) -- Qualified Joint Venture
Schedule 4.09 -- Subsidiaries
Schedule 5.09 -- Investments
Schedule 5.10 -- Existing Liens
Schedule 5.11 -- Assets
Schedule 5.15 -- Restrictions Affecting Subsidiaries
Schedule 5.17 -- Existing Debt
<PAGE>
CREDIT AGREEMENT
AGREEMENT dated as of November [ ], 1996,
among CORNING CLINICAL LABORATORIES INC., the BANKS
listed on the signature pages hereof, NATIONSBANK,
N.A., as Issuing Bank, WACHOVIA BANK OF GEORGIA,
N.A., as Swingline Bank, MORGAN GUARANTY TRUST
COMPANY OF NEW YORK, as Administrative Agent, and
MORGAN GUARANTY TRUST COMPANY OF NEW YORK,
NATIONSBANK, N.A. and WACHOVIA BANK OF GEORGIA, N.A.,
as Arranging Agents.
The parties hereto agree as follows:
ARTICLE I
Definitions
-----------
SECTION 1.01. Definitions. The following terms,
as used herein, have the following meanings:
"Adjusted Consolidated Net Income" means, for any period, the
net income of the Borrower and its Consolidated Subsidiaries, determined on a
consolidated basis for such period, exclusive of the effect of (i) any
extraordinary or other nonrecurring gain or loss, (ii) charges aggregating
$46,000,000 during the quarter ended June 30, 1996, and $142,000,000 during the
quarter ended September 30, 1996, to establish reserves related to claims
arising out of billing practices, (iii) a charge aggregating $13,700,000 during
the quarter ended September 30, 1996, to write-off certain development costs,
(iv) non-recurring charges not exceeding $25,000,000 associated with the
Spin-Off Transactions as disclosed in the Spin-Off Information, (v) non-cash
charges coincident with the Spin-Off Distributions associated with the write-off
of intangible assets in connection with certain changes in accounting policies
as disclosed in the Spin-Off Information, (vi) any charges taken by the Borrower
after the Effective Date, to the extent that the Borrower is reimbursed for the
after-tax cash portion of such charges pursuant to the Transaction Agreement,
and (vii) non-cash charges associated with the issuance by the Borrower of
shares of its common stock to its employees.
<PAGE>
2
"Adjusted London Interbank Offered Rate" has the
meaning set forth in Section 2.07(b).
"Administrative Questionnaire" means, with respect to each
Bank, an administrative questionnaire in the form prepared by the Agent and
submitted to the Agent (with a copy to the Borrower) duly completed by such
Bank.
"Affiliate" means (i) any Person that directly, or indirectly
through one or more intermediaries, controls the Borrower (a "Controlling
Person") or (ii) any Person (other than the Borrower or a Subsidiary) which is
controlled by or under common control with a Controlling Person. As used herein,
the term "control" means possession, directly or indirectly, of the power to
vote 10% or more of any class of voting securities of a Person or to direct or
cause the direction of the management or policies of a Person, whether through
the ownership of voting securities, by contract or otherwise. The Corning
Companies and the CPS Companies shall be deemed to be Affiliates prior to
consummation of the Spin-Off Distributions.
"Agent" means Morgan Guaranty Trust Company of New York in its
capacity as administrative agent for the Banks hereunder, and its successors in
such capacity.
"Applicable Lending Office" means, with respect to any Bank,
(i) in the case of its Base Rate Loans, its Domestic Lending Office and (ii) in
the case of its Euro-Dollar Loans, its Euro-Dollar Lending Office.
"Applicable Percentage" of any Bank means the percentage of
the aggregate Working Capital Commitments represented by such Bank's Working
Capital Commitment.
"Arranging Agents" means Morgan Guaranty Trust
Company of New York, NationsBank, N.A. and Wachovia Bank of
Georgia, N.A.
"Asset Sale" means any sale or other disposition (including
any sale and leaseback) by the Borrower or any of its Subsidiaries of any asset
or assets, other than (i) any sale or other disposition of inventory or used or
surplus equipment including, without limitation, motor vehicles, in each case in
the ordinary course of business, or (ii) any sale or other disposition of
surplus real estate; provided that sales and dispositions of surplus real estate
shall constitute "Asset Sales" to the extent that the aggregate
<PAGE>
3
cumulative amount of Net Cash Proceeds of all sales and dispositions of such
real estate on and after the Effective Date exceed $5,000,000.
"Asset Swap" means (a) any direct exchange by the Borrower or
any of its Subsidiaries of assets comprising (without limitation) one or more
Quadrant Four Properties for assets comprising (without limitation) one or more
Quadrant One Properties, Quadrant Two Properties or Quadrant Three Properties or
(b) any series of transactions involving a sale by the Borrower or any of its
Subsidiaries of assets comprising (without limitation) one or more Quadrant Four
Properties combined with the acquisition by the Borrower or any of its
Subsidiaries of assets comprising (without limitation) one or more Quadrant One
Properties, Quadrant Two Properties or Quadrant Three Properties; provided that:
(i) prior to consummating any such transaction (and prior to
consummating the first of any series of such transactions) the Borrower
shall notify the Agent of all clinical laboratories to be exchanged,
sold or acquired in connection with such transactions and the material
terms of such transactions;
(ii) within five Domestic Business Days after consummating the
first of any series of such transactions, the Borrower shall deliver to
the Agent copies of executed contracts or letters of intent with
respect to all other transactions involved in such series of
transactions; and
(iii) all transactions involved in any such series of
transactions shall be consummated within six months after consummation
of the first transaction in such series.
If all transactions in a series of transactions intended to qualify as an Asset
Swap are not consummated within six months after the first such transaction,
then none of such transactions shall be considered to be part of an Asset Swap
(except to the extent that the completed transactions alone would constitute an
Asset Swap).
"Assignee" has the meaning set forth in Section 9.06(c).
"Bank" means each Person (other than the Borrower) listed on
the signature pages hereof, each Assignee which
<PAGE>
4
becomes a Bank pursuant to Section 9.06(c), and their respective successors.
References herein to a Bank or Banks may include the Issuing Banks or the
Swingline Bank or both as the context requires.
"Base Rate" means, for any day, a rate per annum equal to the
higher of (i) the Prime Rate for such day and (ii) the sum of 1/2 of 1% plus the
Federal Funds Rate for such day.
"Base Rate Loan" means (i) a Loan which bears interest at the
Base Rate pursuant to the applicable Notice of Borrowing or Notice of Interest
Rate Election or the provisions of Article VIII or (ii) an overdue amount which
was a Base Rate Loan immediately before it became overdue.
"Benefit Arrangement" means at any time an employee benefit
plan within the meaning of Section 3(3) of ERISA which is not a Plan or a
Multiemployer Plan and which is maintained or otherwise contributed to by any
member of the ERISA Group.
"Borrower" means Corning Clinical Laboratories Inc. (to be
renamed Quest Diagnostics Incorporated), a Delaware corporation, and its
successors.
"Borrowing" has the meaning set forth in Section 1.03.
"Calculation Period" means a period of four consecutive fiscal
quarters of the Borrower.
"CCL/CPS Spin-Off Tax Indemnification Agreement" means the tax
indemnification agreements to be entered into between CPS and the Borrower as
contemplated by the Spin-Off Information.
"Class" has the meaning set forth in Section 1.03.
"CLSI" means Corning Life Sciences Inc.
"Commitment" means, with respect to each Bank, its Tranche A
Commitment, Tranche B Commitment or Working Capital Commitment or any
combination thereof, as the context may require.
"Commitment Fee Rate" has the meaning set forth in
Section 2.07(a).
<PAGE>
5
"Consolidated Capital Expenditures" means, for any period, (i)
the additions to property, plant and equipment and other capital expenditures of
the Borrower and its Consolidated Subsidiaries for such period, as the same are
or would be set forth in a consolidated statement of cash flows of the Borrower
and its Consolidated Subsidiaries for such period and (ii) capital lease
obligations incurred during such period.
"Consolidated EBIT" means, for any period, Adjusted
Consolidated Net Income for such period plus, to the extent deducted in
determining Adjusted Consolidated Net Income for such period, the aggregate
amount of (i) Consolidated Interest Expense and (ii) income tax expense.
"Consolidated EBITDA" means, for any period, Consolidated EBIT
for such period plus, to the extent deducted in determining Adjusted
Consolidated Net Income for such period, the aggregate amount of depreciation
and amortization.
"Consolidated Interest Expense" means, for any period, the
interest expense of the Borrower and its Consolidated Subsidiaries determined on
a consolidated basis for such period.
"Consolidated Rental Expense" means, for any period, the sum
of (a) the aggregate rental expense of the Borrower and its Consolidated
Subsidiaries determined on a consolidated basis for such period in accordance
with generally acceptable accounting principles plus (b) rentals during such
period under the lease described in Schedule 1.01(a) to the extent paid by the
Borrower or its Subsidiaries.
"Consolidated Subsidiary" means at any date any Subsidiary or
other entity the accounts of which would be consolidated with those of the
Borrower in its consolidated financial statements if such statements were
prepared as of such date.
"Consolidated Total Capitalization" means at any date the sum
of (a) Consolidated Total Debt at such date and (b) the consolidated
stockholders' equity of the Borrower at such date adjusted to exclude all
write-ups (other than write-ups of assets of a going concern business made
within twelve months after the acquisition of such business)
<PAGE>
6
subsequent to the Effective Date in the book value of any asset owned by the
Borrower or a Consolidated Subsidiary.
"Consolidated Total Debt" means at any date the aggregate
principal amount of the Debt (excluding any Excess Corning Debt) of the Borrower
and its Consolidated Subsidiaries, determined on a consolidated basis at such
date.
"Corning" means Corning Incorporated, a New York corporation,
and its successors.
"Corning Companies" means Corning and its subsidiaries other
than the Borrower, its Subsidiaries and the CPS Companies.
"Corning Subordination Agreement" means a Subordination
Agreement among Corning, the Borrower and the Agent substantially in the form of
Exhibit J, as the same may be amended from time to time.
"Coverage Ratio" means, for any Calculation Period, the ratio
of (i) the sum of (a) Consolidated EBITDA plus (b) Consolidated Rental Expense
to (ii) the sum of Consolidated Interest Expense (excluding interest, if any, on
Excess Corning Debt) and Consolidated Rental Expense for such Calculation
Period.
"CPS" means Covance Inc. (formerly known as Corning
Pharmaceutical Services Inc.), a Delaware corporation.
"CPS Capitalization Transactions" means (i) the contribution
by the Corning Companies and the Borrower and its Subsidiaries to the CPS
Companies of all properties and other assets (including, without limitation, the
capital stock of all corporations that are to be subsidiaries of CPS) that are
to be properties and assets of CPS and its subsidiaries at the time of the
Spin-Off Distributions as contemplated by the Spin-Off Information, (ii) the
capitalization of CPS and its subsidiaries as contemplated by the Spin-Off
Information (including, without limitation, the elimination of all Debt and
other intercompany balances between the Corning Companies, the Borrower and its
Subsidiaries, on the one hand, and the CPS Companies, on the other hand) and
(iii) the transfer by the CPS Companies to the Borrower and/or its Subsidiaries
of any and all properties and other assets held by the CPS Companies that
<PAGE>
7
are to be properties and assets of the Borrower and its Subsidiaries after
giving effect to the Spin-Off Distributions as contemplated by the Spin-Off
Information.
"CPS Companies" means CPS and the corporations and other
entities that are to be subsidiaries of CPS at the time of the Spin-Off
Distributions as contemplated by the Spin-Off Information.
"Debt" of any Person means at any date, without duplication,
(i) all obligations of such Person for borrowed money, (ii) all obligations of
such Person evidenced by bonds (other than bid and performance bonds),
debentures, notes or other similar instruments, (iii) all obligations of such
Person to pay the deferred purchase price of property or services, except trade
accounts payable arising in the ordinary course of business, (iv) all
obligations of such Person as lessee which are capitalized in accordance with
generally accepted accounting principles, (v) all non- contingent obligations
(and, for purposes of Section 5.17 and the definitions of Material Debt and
Material Financial Obligations, all contingent obligations) of said Person to
reimburse any bank or other person in respect of amounts paid under a letter of
credit or similar instrument, (vi) all Debt secured by a Lien on any asset of
such Person, whether or not such Debt is otherwise an obligation of such Person,
and (vii) all Debt of others Guaranteed by such Person.
"Debt Coverage Ratio" means, at any time, the ratio of (i)
Consolidated Total Debt at such time to (ii) Consolidated EBITDA for the most
recent Calculation Period ended at or prior to such time.
"Default" means any condition or event which constitutes an
Event of Default or which with the giving of notice or lapse of time or both
would, unless cured or waived, become an Event of Default.
"Derivatives Obligations" of any Person means all obligations
of such Person in respect of any rate swap transaction, basis swap, forward rate
transaction, commodity swap, commodity option, equity or equity index swap,
equity or equity index option, bond option, interest rate option, foreign
exchange transaction, cap transaction, floor transaction, collar transaction,
currency swap transaction, cross-currency rate swap transaction, currency option
or any other similar transaction (including any option with respect
<PAGE>
8
to any of the foregoing transactions) or any combination of the foregoing
transactions.
"Domestic Business Day" means any day except a Saturday,
Sunday or other day on which commercial banks in New York City are authorized by
law to close.
"Domestic Lending Office" means, as to each Bank, its office
located at its address set forth in its Administrative Questionnaire (or
identified in its Administrative Questionnaire as its Domestic Lending Office)
or such other office as such Bank may hereafter designate as its Domestic
Lending Office by notice to the Borrower and the Agent.
"Effective Date" means the date on which the obligations of
the Banks to make Loans and of the Issuing Banks to issue Letters of Credit
under this Agreement become effective in accordance with Section 3.01.
"Environmental Laws" means all laws, rules, regulations,
codes, ordinances, orders, decrees, judgments, injunctions, notices or binding
agreements issued, promulgated or entered into by any governmental body, agency
or official, relating in any way to the protection of the environment,
preservation or reclamation of natural resources, the management, release or
threatened release of any Hazardous Material or to health and safety matters.
"Environmental Liability" means any liability, contingent or
otherwise (including any liability for damages, costs of environmental
remediation, fines, penalties or indemnities), of the Borrower or any Subsidiary
directly or indirectly resulting from or based upon (a) violation of any
Environmental Law, (b) the generation, use, handling, transportation, storage,
treatment or disposal of any Hazardous Materials, (c) exposure to any Hazardous
Materials, (d) the release or threatened release of any Hazardous Materials into
the environment or (e) any contract, agreement or other consensual arrangement
pursuant to which liability is assumed or imposed with respect to any of the
foregoing.
"ERISA" means the Employee Retirement Income Security Act of
1974, as amended, or any successor statute.
"ERISA Group" means the Borrower, any Subsidiary
and all members of a controlled group of corporations and
<PAGE>
9
all trades or businesses (whether or not incorporated) under common control
which, together with the Borrower or any Subsidiary, are treated as a single
employer under Section 414 of the Internal Revenue Code.
"Euro-Dollar Business Day" means any Domestic Business Day on
which commercial banks are open for international business (including dealings
in dollar deposits) in London.
"Euro-Dollar Lending Office" means, as to each Bank, its
office, branch or affiliate located at its address set forth in its
Administrative Questionnaire (or identified in its Administrative Questionnaire
as its Euro-Dollar Lending Office) or such other office, branch or affiliate of
such Bank as it may hereafter designate as its Euro-Dollar Lending Office by
notice to the Borrower and the Agent.
"Euro-Dollar Loan" means (i) a Loan which bears interest at a
Euro-Dollar Rate pursuant to the applicable Notice of Borrowing or Notice of
Interest Rate Election or (ii) an overdue amount which was a Euro-Dollar Loan
immediately before it became overdue.
"Euro-Dollar Margin" has the meaning set forth in
Section 2.07(b).
"Euro-Dollar Rate" means a rate of interest determined
pursuant to Section 2.07(b) on the basis of the Adjusted London Interbank
Offered Rate.
"Euro-Dollar Reserve Percentage" means, for any day, that
percentage (expressed as a decimal) which is in effect on such day, as
prescribed by the Board of Governors of the Federal Reserve System (or any
successor) for determining the maximum reserve requirement for a member bank of
the Federal Reserve System in New York City with deposits exceeding five billion
dollars in respect of "Eurocurrency liabilities" (or in respect of any other
category of liabilities which includes deposits by reference to which the
interest rate on Euro-Dollar Loans is determined or any category of extensions
of credit or other assets which includes loans by a non-United States office of
any Bank to United States residents).
"Event of Default" has the meaning set forth in Section 6.01.
<PAGE>
10
"Excluded Subsidiary" means (a) each of National Imaging
Associates Inc. and Nichols Institute Diagnostics and (b) each other Subsidiary
existing on the date of this Agreement identified on Schedule 4.09 as an
Excluded Subsidiary unless and until either (i) such Subsidiary has consolidated
assets in excess of $ 1,000,000 or (ii) such Subsidiary's consolidated revenues
for any fiscal year of the Borrower exceeds 1.0% of the Borrower's consolidated
revenues for such fiscal year. Each Subsidiary listed in clause (a) of this
definition shall cease to be an Excluded Subsidiary on the first anniversary of
the date of this Agreement.
"Excess Corning Debt" means any Debt of the Borrower or any of
its Subsidiaries to any of the Corning Companies that remains outstanding on the
Effective Date after giving effect to a repayment of such Debt to be made on the
Effective Date, but excluding Permitted Subordinated Debt.
"Existing Letters of Credit" means the letters of
credit identified on Schedule 5.17.
"Federal Funds Rate" means, for any day, the rate per annum
(rounded upward, if necessary, to the nearest 1/100th of 1%) equal to the
weighted average of the rates on overnight Federal funds transactions with
members of the Federal Reserve System arranged by Federal funds brokers on such
day, as published by the Federal Reserve Bank of New York on the Domestic
Business Day next succeeding such day, provided that (i) if such day is not a
Domestic Business Day, the Federal Funds Rate for such day shall be such rate on
such transactions on the next preceding Domestic Business Day as so published on
the next succeeding Domestic Business Day, and (ii) if no such rate is so
published on such next succeeding Domestic Business Day, the Federal Funds Rate
for such day shall be the average rate quoted to Morgan Guaranty Trust Company
of New York on such day on such transactions as determined by the Agent.
"Financing Transactions" means the execution and delivery of
the Loan Documents and the performance of the transactions contemplated by the
Loan Documents, including the borrowing of the Loans, the issuance of Letters of
Credit and the grant of security interests under the Security Documents.
<PAGE>
11
"Foreign Subsidiary" means a Subsidiary existing on the date
of this Agreement identified on Schedule 4.09 as a Foreign Subsidiary.
"Group of Loans" means at any time a group of Loans of the
same Class consisting of (i) all Loans of such Class which are Base Rate Loans
at such time and (ii) all Euro-Dollar Loans of such Class having the same
Interest Period at such time, provided that, if a Loan of any particular Bank is
converted to or made as a Base Rate Loan pursuant to Article VIII, such Loan
shall be included in the same Group or Groups of Loans from time to time as it
would have been in if it had not been so converted or made.
"Guarantee" by any Person means any obligation, contingent or
otherwise, of such Person directly or indirectly guaranteeing any Debt of any
other Person and, without limiting the generality of the foregoing, any
obligation, direct or indirect, contingent or otherwise, of such Person (i) to
purchase or pay (or advance or supply funds for the purchase or payment of) such
Debt (whether arising by virtue of partnership arrangements, by agreement to
keep-well, to purchase assets, goods, securities or services, to take-or-pay, or
to maintain financial statement conditions or otherwise) or (ii) entered into
for the purpose of assuring in any other manner the holder of such Debt of the
payment thereof or to protect such obligee against loss in respect thereof (in
whole or in part), provided that the term Guarantee shall not include
endorsements for collection or deposit in the ordinary course of business. The
term "Guarantee" used as a verb has a corresponding meaning.
"Guarantee Agreement" means a Guarantee Agreement among the
Agent and the Guarantors substantially in the form of Exhibit C, as the same may
be amended from time to time.
"Guarantor" means each Person that is or becomes party to the
Guarantee Agreement as a Guarantor and their respective successors.
"Hazardous Materials" means all explosive or radioactive
substances or wastes, all hazardous or toxic substances, wastes or other
pollutants, and all other substances or wastes of any nature regulated pursuant
to any Environmental Law, including petroleum or petroleum distillates, asbestos
or asbestos containing materials,
<PAGE>
12
polychlorinated biphenyls, radon gas, infectious or medical wastes.
"Indemnity, Subrogation and Contribution Agreement" means an
Indemnity, Subrogation and Contribution Agreement among the Borrower, the
Subsidiaries and the Security Agent, substantially in the form of Exhibit D
hereto, as the same may be amended from time to time.
"Initial Guarantors" means the Subsidiaries listed on Schedule
4.09, other than Subsidiaries identified on such Schedule as Excluded
Subsidiaries, Foreign Subsidiaries, Qualified Joint Ventures and Joint Venture
Holding Companies.
"Initial Pricing Period" means the period commencing on the
Effective Date and ending on the date on which the Borrower's financial
statements for the period ended December 31, 1996, shall have been delivered to
the Agent.
"Interest Period" means with respect to each Euro- Dollar
Loan, the period commencing on the date of borrowing specified in the applicable
Notice of Borrowing or on the date specified in the applicable Notice of
Interest Rate Election and ending one, two, three or six months thereafter, as
the Borrower may elect in the applicable notice; provided that:
(a) any Interest Period which would otherwise end on a day
which is not a Euro-Dollar Business Day shall be extended to the next
succeeding Euro-Dollar Business Day unless such Euro-Dollar Business
Day falls in another calendar month, in which case such Interest Period
shall end on the next preceding Euro-Dollar Business Day;
(b) any Interest Period which begins on the last Euro-Dollar
Business Day of a calendar month (or on a day for which there is no
numerically corresponding day in the calendar month at the end of such
Interest Period) shall, subject to clause (c) below, end on the last
Euro-Dollar Business Day of a calendar month; and
(c) any Interest Period which would otherwise end after the
Maturity Date (in the case of Term Loans) or the Termination Date (in
the case of Working Capital
<PAGE>
13
Loans) shall end on the Maturity Date or the Termination Date, as
applicable.
"Internal Revenue Code" means the Internal Revenue Code of
1986, as amended, or any successor statute.
"Investment" means any investment in any Person, whether by
means of share purchase, capital contribution, loan, Guarantee, time deposit or
otherwise (but not including any demand deposit or any account receivable
arising in the ordinary course of business).
"IRS Ruling Letter" means the private letter ruling dated
November 5, 1996, from the Internal Revenue Service to Corning.
"Issuing Bank" means (i) NationsBank, N.A. and (ii) any other
Bank that shall enter into an Issuing Bank Agreement as provided in Section
2.15(l), in each case in their respective capacities as the issuers of Letters
of Credit, and their respective successors in such capacity.
"Issuing Bank Agreement" has the meaning set forth
in Section 2.15(l).
"Joint Venture Holding Company" means a Subsidiary the only
non-cash asset of which is its ownership interest in a Qualified Joint Venture
and the cash assets of which are promptly distributed.
"Letter of Credit" means any letter of credit
issued pursuant to Section 2.15.
"Letter of Credit Disbursement" means a payment or
disbursement made by an Issuing Bank pursuant to a Letter of Credit.
"Letter of Credit Exposure" means at any time the sum of (i)
the aggregate undrawn amount of all outstanding Letters of Credit plus (ii) the
aggregate amount of all Letter of Credit Disbursements not yet reimbursed by the
Borrower as provided in Section 2.15. The Letter of Credit Exposure of any Bank
at any time shall mean its Applicable Percentage of the aggregate Letter of
Credit Exposure at such time.
<PAGE>
14
"Letter of Credit Sublimit Amount" means the lesser of
$20,000,000 and the total amount of the Working Capital Commitments.
"Level I Pricing Period" means any period (other than the
Initial Pricing Period) during which the Borrower's Debt Coverage Ratio as of
the end of the most recent Calculation Period is less than 2.0 to 1.0. Any such
period shall commence on (and include) the date of delivery to the Agent of
financial statements demonstrating that such period has commenced and shall
terminate on (and exclude) the date of delivery to the Agent of financial
statements demonstrating that such period has terminated.
"Level II Pricing Period" means any period (other than the
Initial Pricing Period) during which the Borrower's Debt Coverage Ratio as of
the end of the most recent Calculation Period is 2.0 to 1.0 or greater but less
than 2.25 to 1.0. Any such period shall commence on (and include) the date of
delivery to the Agent of financial statements demonstrating that such period has
commenced and shall terminate on (and exclude) the date of delivery to the Agent
of financial statements demonstrating that such period has terminated.
"Level III Pricing Period" means any period (other than the
Initial Pricing Period) during which the Borrower's Debt Coverage Ratio as of
the end of the most recent Calculation Period is 2.25 to 1.0 or greater but less
than 2.5 to 1.0. Any such period shall commence on (and include) the date of
delivery to the Agent of financial statements demonstrating that such period has
commenced and shall terminate on (and exclude) the date of delivery to the Agent
of financial statements demonstrating that such period has terminated.
"Level IV Pricing Period" means any period (other than the
Initial Pricing Period) during which the Borrower's Debt Coverage Ratio as of
the end of the most recent Calculation Period is 2.5 to 1.0 or greater but less
than 2.75 to 1.0. Any such period shall commence on (and include) the date of
delivery to the Agent of financial statements demonstrating that such period has
commenced and shall terminate on (and exclude) the date of delivery to the Agent
of financial statements demonstrating that such period has terminated.
<PAGE>
15
"Level V Pricing Period" means any period (other than the
Initial Pricing Period) during which the Borrower's Debt Coverage Ratio as of
the end of the most recent Calculation Period is 2.75 to 1.0 or greater but less
than 3.0 to 1.0. Any such period shall commence on (and include) the date of
delivery to the Agent of financial statements demonstrating that such period has
commenced and shall terminate on (and exclude) the date of delivery to the Agent
of financial statements demonstrating that such period has terminated.
"Level VI Pricing Period" means (i) the Initial Pricing Period
and (ii) any other period during which the Borrower's Debt Coverage Ratio as of
the end of the most recent Calculation Period is 3.0 to 1.0 or greater but less
than 3.5 to 1.0. Any such period referred to in clause (ii) above shall commence
on (and include) the date of delivery to the Agent of financial statements
demonstrating that such period has commenced and shall terminate on (and
exclude) the date of delivery to the Agent of financial statements demonstrating
that such period has terminated.
"Level VII Pricing Period" means any period that is not a
Level I Pricing Period, a Level II Pricing Period, a Level III Pricing Period, a
Level IV Pricing Period, a Level V Pricing Period or a Level VI Pricing Period.
"Leverage Ratio" means, at any time, the ratio of (i)
Consolidated Total Debt at such time to (ii) Consolidated Total Capitalization
at such time.
"Lien" means, with respect to any asset, any mortgage, lien,
pledge, charge, security interest or encumbrance of any kind, or any other type
of preferential arrangement that has the practical effect of creating a security
interest, in respect of such asset. For the purposes of this Agreement, the
Borrower or any Subsidiary shall be deemed to own subject to a Lien any asset
which it has acquired or holds subject to the interest of a vendor or lessor
under any conditional sale agreement, capital lease or other title retention
agreement relating to such asset.
"Loan" means a Base Rate Loan or a Euro-Dollar Loan of either
Class or a Swingline Loan and "Loans" means any combination of the foregoing.
"Loan Documents" means this Agreement, the Guarantee
Agreement, the Security Documents, the Corning
<PAGE>
16
Subordination Agreement, the Notes and any Issuing Bank Agreement.
"London Interbank Offered Rate" has the meaning set forth in
Section 2.07(b).
"Margin Stock" has the meaning given to such term under
Regulation U.
"Material Adverse Effect" means (i) a materially adverse
effect on the business, assets, liabilities, operations or condition (financial
or otherwise) of the Borrower and its Consolidated Subsidiaries considered as a
whole (after giving effect to any insurance proceeds under existing insurance
policies and indemnification payments by Corning or CPS under the Transaction
Documents), (ii) material impairment of the ability of the Borrower or any
Subsidiary to perform any of its obligations under any Loan Document to which it
is or will be a party, or (iii) material impairment of the rights of or benefits
available to the Agent, the Security Agent or the Banks under any Loan Document.
"Material Debt" means Debt (other than the Notes) of the
Borrower and/or one or more of its Subsidiaries, arising in one or more related
or unrelated transactions, in an aggregate principal amount equal to or
exceeding $10,000,000.
"Material Financial Obligations" means a principal or face
amount of Debt and/or payment or collateralization obligations in respect of
Derivatives Obligations of the Borrower and/or one or more of its Subsidiaries,
arising in one or more related or unrelated transactions, equal to or exceeding
in the aggregate $10,000,000.
"Material Plan" means at any time a Plan or Plans having
aggregate Unfunded Liabilities in excess of $10,000,000.
"Multiemployer Plan" means at any time an employee pension
benefit plan within the meaning of Section 4001(a)(3) of ERISA to which any
member of the ERISA Group (i) is then making or accruing an obligation to make
contributions or (ii) has within the preceding five plan years made
contributions, including for these purposes any Person which ceased to be a
member of the ERISA Group during such five year period; provided, however, that
clause (ii)
<PAGE>
17
shall apply solely to the extent that any member of the ERISA Group as of such
time has incurred or could reasonably be expected to incur liability under Title
IV of ERISA with respect to such plan.
"Net Cash Proceeds" means (a) in connection with any sale or
other disposition of any asset or any settlement by, or receipt of payment in
respect of, any property or casualty insurance claim or condemnation award in
respect thereof, the cash proceeds (including any cash payments received by way
of deferred payment of principal pursuant to a note or installment receivable or
purchase price adjustment receivable or otherwise, but only as and when
received) of such sale, settlement or payment, net of reasonable and documented
attorneys' fees, accountants' fees, investment banking fees, amounts required to
be applied to the repayment of Debt secured by a Lien expressly permitted
hereunder on any asset which is the subject of such sale, insurance claim or
condemnation award in respect thereof (other than any Lien in favor of the
Security Agent for the benefit of the Banks), any amounts required to be
escrowed or reserved by the Borrower or its Subsidiaries with respect to
liabilities retained by the Borrower or its Subsidiaries in connection with such
sale or disposition, including any indemnification or purchase price adjustments
(provided that if and to the extent any such amounts are released to the
Borrower or any of its Subsidiaries from escrow or such reserve, such amounts
will be treated as Net Cash Proceeds) and other customary fees and other costs
and expenses actually incurred in connection therewith and net of taxes paid or
reasonably estimated to be payable as a result thereof (after taking into
account any tax sharing arrangements) and (b) in connection with any issuance or
sale by the Borrower or any of its Subsidiaries to any Person other than the
Borrower or any of its Subsidiaries of equity securities or debt securities or
instruments or the incurrence of loans, the cash proceeds received from such
issuance or incurrence, net of investment banking fees, reasonable and
documented attorneys' fees, accountants' fees, underwriting discounts and
commissions and other customary fees and other costs and expenses actually
incurred in connection therewith.
"Note" means a promissory note of the Borrower substantially
in the form of Exhibit A or B, evidencing the obligation of the Borrower to
repay Loans, and "Notes" means any or all of such promissory notes issued
hereunder.
<PAGE>
18
"Notice of Borrowing" has the meaning set forth in
Section 2.02.
"Notice of Interest Rate Election" has the meaning set forth
in Section 2.06.
"Obligations" has the meaning set forth in the Guarantee
Agreement.
"Parent" means, with respect to any Bank, any Person
controlling such Bank.
"Participant" has the meaning set forth in Section 9.06(b).
"PBGC" means the Pension Benefit Guaranty Corporation or any
entity succeeding to any or all of its functions under ERISA.
"Permitted Preferred Stock" means the 1,000 shares of
cumulative preferred stock of the Borrower described in the Spin-Off Information
to be acquired by Corning.
"Permitted Subordinated Debt" means up to $150,000,000
aggregate principal amount of unsecured subordinated Debt of the Borrower in the
form of the Senior Subordinated Notes or the Senior Subordinated Bridge Loans
or, if the Corning Subordination Agreement has been executed and delivered, Debt
of the Borrower to Corning.
"Person" means an individual, a corporation, a limited
liability company, a partnership, an association, a trust or any other entity or
organization, including a governmental or political subdivision or an agency or
instrumentality thereof.
"Plan" means at any time an employee pension benefit plan
(other than a Multiemployer Plan) which is covered by Title IV of ERISA or
subject to the minimum funding standards under Section 412 of the Internal
Revenue Code and either (i) is maintained, or contributed to, by any member of
the ERISA Group for employees of any member of the ERISA Group or (ii) has at
any time within the preceding five years been maintained, or contributed to, by
any Person which was at such time a member of the ERISA Group for employees of
any Person which was at such time a member of the ERISA Group; provided,
however, that clause (ii) shall
<PAGE>
19
apply solely to the extent that any member of the ERISA Group as of such time
has incurred or could reasonably be expected to incur liability under Title IV
of ERISA with respect to such plan.
"Pledge Agreement" means a Pledge Agreement among the
Borrower, the Subsidiaries (other than Qualified Joint Ventures, Joint Venture
Holding Companies, Foreign Subsidiaries and Excluded Subsidiaries) and the
Security Agent, substantially in the form of Exhibit E hereto, as the same may
be amended from time to time.
"Preliminary Spin-Off Transactions" means the Spin-Off
Transactions other than the transactions described in Schedule 1.01(b).
"Pricing Period" means a Level I Pricing Period, a Level II
Pricing Period, a Level III Pricing Period, a Level IV Pricing Period, a Level V
Pricing Period, a Level VI Pricing Period or a Level VII Pricing Period.
"Prime Rate" means the rate of interest publicly announced by
Morgan Guaranty Trust Company of New York in New York City from time to time as
its Prime Rate.
"Quadrant One Property" means any clinical laboratory a
substantial majority of the business of which is derived from a geographical
region identified as a "Quadrant One Property" in Schedule 1.01(c).
"Quadrant Two Property" means any clinical laboratory a
substantial majority of the business of which is derived from a geographical
region identified as a "Quadrant Two Property" in Schedule 1.01(c).
"Quadrant Three Property" means any clinical laboratory a
substantial majority of the business of which is derived from a geographical
region identified as a "Quadrant Three Property" in Schedule 1.01(c).
"Quadrant Four Property" means any clinical laboratory a
substantial majority of the business of which is derived from a geographical
region identified as a "Quadrant Four Property" in Schedule 1.01(c).
"Qualified Joint Venture" means any of (i) Associated Clinical
Laboratories L.P., (ii) the joint venture described in Schedule 1.01(d) and
(iii) one
<PAGE>
20
additional joint venture that the Borrower or any of its Subsidiaries may enter
into in accordance with clause (d) of Section 5.09.
"Quarterly Dates" means each March 31, June 30, September 30
and December 31.
"Reference Banks" means the principal London offices of
NationsBank, N.A., Wachovia Bank of Georgia, N.A. and Morgan Guaranty Trust
Company of New York, and "Reference Bank" means any one of such Reference Banks.
"Regulation U" means Regulation U of the Board of Governors of
the Federal Reserve System, as in effect from time to time.
"Required Banks" means at any time Banks having at least 51%
of the sum of the outstanding Loans, Letter of Credit Exposure and unused
Commitments at such time.
"Restricted Payment" means (i) any dividend or other
distribution (whether in cash, securities or other property) on any shares of
the capital stock of the Borrower (except dividends or distributions payable
solely in shares of its capital stock), (ii) any payment (whether in cash,
securities or other property) in respect of any Permitted Subordinated Debt or
Excess Corning Debt, whether on account of principal, interest, premium or
otherwise, or (iii) any payment (whether in cash, securities or other property),
including any sinking fund or similar deposit, on account of the purchase,
redemption, retirement or acquisition of (a) any shares of the capital stock of
the Borrower or any Subsidiary owned by any Person other than the Borrower or
any Subsidiary, (b) any option, warrant or other right to acquire shares of the
capital stock of the Borrower or any Subsidiary (but not including payments of
principal, premium (if any) or interest made pursuant to the terms of
convertible debt securities prior to conversion), or (c) any Permitted
Subordinated Debt or Excess Corning Debt.
"Security Agent" means [J. P. Morgan Delaware] in its capacity
as security agent under the Security Documents, and its successors in such
capacity.
"Security Agreement" means a Security Agreement among the
Borrower, its Subsidiaries (other than Qualified Joint Ventures, Joint Venture
Holding Companies, Foreign Subsidiaries and Excluded Subsidiaries) and the
Security
<PAGE>
21
Agent, substantially in the form of Exhibit F hereto, as the same may be amended
from time to time.
"Security Documents" means the Pledge Agreement, the Security
Agreement and all other security agreements and other documents and instruments
executed and delivered pursuant to Section 5.13 in order to secure any
Obligations.
"Senior Subordinated Bridge Loans" means $150,000,000
aggregate principal amount of unsecured senior subordinated loans to the
Borrower.
"Senior Subordinated Notes" means $150,000,000 aggregate
principal amount of unsecured senior subordinated notes of the Borrower.
"Spin-Off Distributions" means (i) the distribution by Corning
of all the capital stock of the Borrower (other than the Permitted Preferred
Stock) to the holders of Corning's common stock and (ii) the distribution by the
Borrower of all the capital stock of CPS to the holders of the Borrower's common
stock.
"Spin-Off Information" means the information disclosed in (a)
the Transaction Agreement, (b) the draft dated November [5], 1996, of the
Information Statement and (c) the IRS Ruling Letter, each of which has been
delivered to the Banks prior to the execution and delivery of this Agreement.
"Spin-Off Tax Indemnification Agreement" means the tax
indemnification agreement to be entered into between Corning and the Borrower as
contemplated by the Spin-Off Information.
"Spin-Off Transactions" means the transactions contemplated by
the Spin-Off Information to occur on or before the date of the Spin-Off
Distributions, including without limitation (i) the contribution by the Corning
Companies to the Borrower and its Subsidiaries of all properties and other
assets (including, without limitation, the capital stock of all corporations
that are to be Subsidiaries) that are to be properties and assets of the
Borrower and its Subsidiaries at the time of the Spin-Off Distributions as
contemplated by the Spin-Off Information and the assumption by the Borrower of
liabilities of CLSI not to exceed $250,000,000 (or the transfer to the Borrower
of assets of CLSI subject to such liabilities), (ii) the
<PAGE>
22
capitalization of the Borrower and its Subsidiaries as contemplated by the
Spin-Off Information (including, without limitation, the elimination of all Debt
and other intercompany balances between the Corning Companies, on the one hand,
and the Borrower and its Subsidiaries, on the other hand), (iii) the CPS
Capitalization Transaction and (iv) execution and delivery of the Transaction
Documents by the parties thereto; provided that clause (ii) above shall not be
construed to require the elimination of the Debt owed by the Borrower or its
Subsidiaries to the Corning Companies that is to be repaid (a) on the Effective
Date as contemplated by clause (o) of Section 3.01, (b) with the proceeds of the
Senior Subordinated Bridge Loans or the Senior Subordinated Notes as
contemplated by clause (a) of Section 5.16 or (c) as contemplated by clause (g)
of Section 5.16.
"Subordinated Debt Documents" means (i) any indenture, loan
agreement, note purchase agreement or other agreement pursuant to which any
Permitted Subordinated Debt is issued or incurred, (ii) any debt securities,
promissory notes or other instruments evidencing any Permitted Subordinated Debt
and (iii) any other agreements, instruments or documents governing any of the
terms or conditions of any Permitted Subordinated Debt or any Guarantee of any
Permitted Subordinated Debt.
"subsidiary" means, as to any Person, any corporation or other
entity of which securities or other ownership interests having ordinary voting
power to elect a majority of the board of directors or other persons performing
similar functions are at the time directly or indirectly owned by such Person.
"Subsidiary" means a subsidiary of the Borrower; provided that
the CPS Companies shall be deemed not to be "Subsidiaries" prior to the
consummation of the Spin-Off Distributions.
"Swingline Bank" means Wachovia Bank of Georgia, N.A., in its
capacity as lender of Swingline Loans hereunder, and its successors in such
capacity.
"Swingline Exposure" means at any time the aggregate principal
amount of all Swingline Loans outstanding at such time. The Swingline Exposure
of any Bank at any time shall mean its Applicable Percentage of the Swingline
Exposure at such time.
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23
"Swingline Loan" means a loan made by the Swingline Bank
pursuant to Section 2.04.
"Tax Sharing Agreement" means the tax sharing agreement to be
entered into among Corning, CPS and the Borrower as contemplated by the Spin-Off
Information.
"Temporary Cash Investment" means any Investment in (i) direct
obligations of the United States or any agency thereof, or obligations fully
guaranteed or insured by the United States or any agency or instrumentality
thereof having maturities of not more than one year, (ii) time deposits with,
including certificates of deposit issued by, any office located in the United
States of any commercial bank which is organized under the laws of the United
States or any state thereof and has capital and surplus exceeding $500,000,000
and having a peer group rating of B or better (or the equivalent thereof) by
Thompson Bank Watch, Inc. or outstanding long-term debt rated BBB or better (or
the equivalent thereof) by Standard & Poor's Rating Group or Baa or better (or
the equivalent thereof) by Moody's Investors Service Inc. or (iii) repurchase
obligations with a term of not more than seven days for underlying securities
described in clause (i) and (ii) above entered into with an office of a bank
meeting the criteria specified in clause (ii) above, or (iv) commercial paper
(other than commercial paper issued by an Affiliate of the Borrower) rated at
least A-1 (or the equivalent thereof) by Standard & Poor's Ratings Group and P-1
(or the equivalent thereof) by Moody's Investors Service, Inc., in each case
maturing within 90 days.
"Term Loan" means a Tranche A Term Loan or a Tranche B Term
Loan.
"Termination Date" means the last day of the Working Capital
Availability Period.
"Total Commitments" means at any time the sum of the Banks'
Commitments at such time.
"Tranche A Commitment" means, as to any Bank, the obligation
of such Bank to make Tranche A Term Loans to the Borrower in an aggregate
principal amount not exceeding the amount set forth opposite such Bank's name in
Schedule 1 hereto under the caption "Tranche A Commitment".
"Tranche A Bank" means a Bank with a Tranche A Commitment or
an outstanding Tranche A Term Loan.
<PAGE>
24
"Tranche A Maturity Date" means November [ ], 2002.
"Tranche A Term Loan" means a loan made by a Tranche A Bank
pursuant to clause (i) of Section 2.01(a).
"Tranche B Commitment" means, as to any Bank, the obligation
of such Bank to make Tranche B Loans to the Borrower in an aggregate principal
amount not exceeding the amount set forth opposite such Bank's name in Schedule
1 hereto under the caption "Tranche B Commitments".
"Tranche B Bank" means a Bank with a Tranche B Commitment or
an outstanding Tranche B Term Loan.
"Tranche B Maturity Date" means November [ ], 2003.
"Tranche B Term Loan" means a loan made by a Tranche B Bank
pursuant to clause (ii) of Section 2.01(a).
"Transaction Agreement" means the Transaction Agreement dated
as of November [ ], 1996, among Corning, CPS, CLSI and the Borrower.
"Transactions" means the Financing Transactions,
the Spin-Off Transactions and the Spin-Off Distributions.
"Transaction Documents" means (i) the Transaction Agreement,
the CCL/CPS Spin-Off Tax Indemnification Agreement, the Spin-Off Tax
Indemnification Agreement, the Tax Sharing Agreement and (ii) any other
contracts and agreements between the Borrower or any Subsidiary, on the one
hand, and any Corning Company or CPS Company, on the other hand, in effect on
the Effective Date or contemplated by Schedule 1.01(b) (other than any such
contracts and agreements relating solely to the purchase or sale of inventory or
services in the ordinary course of business on terms no less favorable to the
Borrower and its Subsidiaries than they would obtain in a comparable arm's
length transaction).
"Type" has the meaning set forth in Section 1.03.
"Unfunded Liabilities" means, with respect to any Plan at any
time, the amount (if any) by which (i) the value of all benefit liabilities
under such Plan, determined on a plan termination basis using the assumptions
prescribed by
<PAGE>
25
the PBGC for purposes of Section 4044 of ERISA, exceeds (ii) the fair market
value of all Plan assets allocable to such liabilities under Title IV of ERISA
(excluding any accrued but unpaid contributions), all determined as of the then
most recent valuation date for such Plan, but only to the extent that such
excess represents a potential liability of a member of the ERISA Group to the
PBGC or any other Person under Title IV of ERISA.
"United States" means the United States of America, including
the States and the District of Columbia, but excluding its territories and
possessions.
"Working Capital Availability Period" means the period from
and including the Effective Date to but excluding the Working Capital Maturity
Date or such earlier date as the Working Capital Commitments shall have expired
or been terminated.
"Working Capital Bank" means a Bank with a Working Capital
Commitment or, if the Working Capital Commitments have terminated or expired, a
Bank with Working Capital Exposure.
"Working Capital Commitment" means, as to any Bank, the
obligation of such Bank to make Working Capital Loans to the Borrower and to
acquire participations in Letters of Credit in an aggregate principal amount at
any one time outstanding not exceeding the amount set forth opposite such Bank's
name in Schedule 1 hereto under the caption "Working Capital Commitment", as the
same may be reduced from time to time pursuant to Section 2.09 and subject to
the limitations of Sections 2.01(b) and 2.15.
"Working Capital Exposure" means, with respect to any Bank at
any time, the sum of the aggregate principal amount of such Bank's Working
Capital Loans outstanding at such time and its Letter of Credit Exposure and
Swingline Exposure at such time.
"Working Capital Loan" means a loan made by a Bank pursuant to
Section 2.01(b).
"Working Capital Maturity Date" means November [ ], 2002.
<PAGE>
26
SECTION 1.02. Accounting Terms and Determinations. Unless
otherwise specified herein, all accounting terms used herein shall be
interpreted, all accounting determinations hereunder shall be made, and all
financial statements required to be delivered hereunder shall be prepared in
accordance with United States generally accepted accounting principles as in
effect from time to time, applied on a basis consistent (except for changes
concurred in by the Borrower's independent public accountants) with the most
recent audited consolidated financial statements of the Borrower and its
Consolidated Subsidiaries delivered to the Banks; provided that, if the Borrower
notifies the Agent that the Borrower wishes to amend the calculation of the
Borrower's Debt Coverage Ratio for purposes of determining Pricing Periods or to
amend any covenant in Article V, in either case to eliminate the effect of any
change in generally accepted accounting principles on the operation of such
calculation or covenant (or if the Agent notifies the Borrower that the Required
Banks wish to amend any such calculation or covenant for such purpose), then
such calculation or the Borrower's compliance with such covenant, as the case
may be, shall be determined on the basis of generally accepted accounting
principles in effect immediately before the relevant change in generally
accepted accounting principles became effective, until either such notice is
withdrawn or such calculation or covenant is amended in a manner satisfactory to
the Borrower and the Required Banks.
SECTION 1.03. Types of Borrowings. Borrowings and Loans
hereunder are distinguished by "Type" and by "Class". The Type of a Loan refers
to whether such Loan is a Base Rate Loan or a Euro-Dollar Loan. The "Class" of a
Loan (or a Commitment to make such a Loan or a Borrowing comprising such Loans)
refers to whether such Loan is a Tranche A Term Loan, a Tranche B Term Loan, a
Working Capital Loan or a Swingline Loan, each of which constitutes a Class. The
term "Borrowing" denotes the aggregation of Loans of one or more Banks to be
made to the Borrower pursuant to Article II on the same date, all of which Loans
are of the same Type (subject to Article VIII) and Class and, in the case of
Euro-Dollar Loans, have the same initial Interest Period. Borrowings are
classified for purposes of this Agreement either by reference to the Type of
Loans comprising such Borrowing (e.g., a "Euro-Dollar Borrowing" is a Borrowing
comprised of Euro-Dollar Loans) or by reference to the Class of such Loans
(e.g., a "Term Borrowing" is a Borrowing comprised of Term Loans) or both
<PAGE>
27
(e.g., a "Euro-Dollar Working Capital Borrowing" is a Borrowing comprised of
Working Capital Loans that are Euro- Dollar Loans).
ARTICLE II
The Credits
-----------
SECTION 2.01. Commitments to Lend. (a) Term Loans. Each Bank
severally agrees, on the terms and conditions set forth in this Agreement, to
make (i) a Tranche A Term Loan to the Borrower on the Effective Date in an
aggregate principal amount not exceeding its Tranche A Commitment and (ii) a
Tranche B Term Loan to the Borrower on the Effective Date in an aggregate
principal amount not exceeding its Tranche B Commitment.
(b) Working Capital Loans. Each Bank severally agrees, on the
terms and conditions set forth in this Agreement, to make loans to the Borrower
from time to time during the Working Capital Availability Period; provided that
the aggregate principal amount of such Bank's loans at any one time outstanding
under this subsection (b) shall not exceed the excess of (i) its Working Capital
Commitment at such time over (ii) the sum of its Letter of Credit Exposure at
such time, plus its Swingline Exposure at such time, plus the aggregate amount
of the Existing Letters of Credit outstanding at such time. Within the foregoing
limits, the Borrower may borrow under this subsection (b), repay or (to the
extent permitted by Section 2.11) prepay loans made under this subsection (b)
and reborrow at any time during the Working Capital Availability Period under
this subsection (b).
(c) Borrowings Ratable. Each Borrowing under this Section
shall be made from the Banks ratably in proportion to their respective
Commitments of the relevant Class.
(d) Euro-Dollar Borrowings. There shall not at any time be
more than a total of seven Euro-Dollar Borrowings outstanding.
SECTION 2.02. Notice of Borrowing. The Borrower shall give the
Agent notice (a "Notice of Borrowing") not later than 10:30 A.M. (New York City
time) on (x) the date
<PAGE>
28
of each Base Rate Borrowing, and (y) the third Euro-Dollar Business Day before
each Euro-Dollar Borrowing, specifying:
(i) the date of such Borrowing, which shall be a Domestic
Business Day in the case of a Base Rate Borrowing or a Euro-Dollar
Business Day in the case of a Euro-Dollar Borrowing;
(ii) the aggregate amount of such Borrowing, which shall be (x)
in the case of a Euro-Dollar Borrowing, $10,000,000 and (y) in the case
of a Base Rate Borrowing, $5,000,000, or in each case a larger multiple
of $1,000,000;
(iii) the Class and Type of such Borrowing; and
(iv) in the case of a Euro-Dollar Borrowing, the duration of the
Interest Period applicable thereto, subject to the provisions of the
definition of Interest Period.
This Section 2.02 shall not apply to Swingline Loans.
SECTION 2.03. Notice to Banks; Funding of Loans. (a) Upon
receipt of a Notice of Borrowing, the Agent shall promptly notify each Bank that
is to participate in such Borrowing of the contents thereof and of such Bank's
share of such Borrowing and such Notice of Borrowing shall not thereafter be
revocable by the Borrower.
(b) Not later than 12:00 Noon (New York City time) on the date
of each Borrowing, each Bank participating therein shall (except as provided in
subsection (d) of this Section) make available its share of such Borrowing, in
Federal or other funds immediately available in New York City, to the Agent at
its address referred to in Section 9.01. Unless the Agent determines that any
applicable condition specified in Article III has not been satisfied, the Agent
will make the funds so received from the Banks available to the Borrower at the
Agent's aforesaid address.
(c) If an Issuing Bank has not received from the Borrower a
payment required by Section 2.15(g) to be made to such Issuing Bank by 1:00 P.M.
(New York City time) on the date on which such payment is due, as provided in
Section 2.15(g), such Issuing Bank shall promptly notify the Agent
<PAGE>
29
thereof and, promptly following receipt of such notice, the Agent will notify
each Bank that has a participation in such Letter of Credit of the Letter of
Credit Disbursement and such Bank's Applicable Percentage of such Letter of
Credit Disbursement. Not later than 3:00 P.M. (New York City time) on such date,
each Bank shall make available such Bank's Applicable Percentage of such Letter
of Credit Disbursement, in Federal or other funds immediately available in New
York City, to the Agent at its address specified in or pursuant to Section 9.01,
and the Agent will promptly make such funds available to such Issuing Bank.
Thereafter, any payments made by the Borrower in respect of such Letter of
Credit Disbursement shall be paid to the Agent (and such Issuing Bank shall
promptly remit such payments to the Agent if received by such Issuing Bank) and
the Agent will promptly remit to each Bank that shall have made such funds
available its Applicable Percentage of any amounts subsequently received by the
Agent from such Issuing Bank or the Borrower in respect of such Letter of Credit
Disbursement (excluding interest for the account of such Issuing Bank for the
period prior to the date that such Bank shall have made such funds available).
(d) If any Bank (including the Swingline Bank) makes a new
Loan to the Borrower hereunder on a day on which the Borrower is to repay all or
any part of an outstanding Loan from such Bank, such Bank shall apply the
proceeds of its new Loan to make such repayment and only an amount equal to the
difference (if any) between the amount being borrowed and the amount being
repaid shall be made available by such Bank to the Agent as provided in
subsection (c) of this Section, or remitted by the Borrower to the Agent as
provided in Section 2.12, as the case may be.
(e) Unless the Agent shall have received notice from a Bank
prior to the date of any Borrowing, or prior to the time of any required payment
by such Bank in respect of a Letter of Credit Disbursement, that such Bank will
not make available to the Agent such Bank's share of such Borrowing or payment,
the Agent may assume that such Bank has made such share available to the Agent
on the date of such Borrowing or payment in accordance with subsection (b) or
(c), as applicable, of this Section and the Agent may, in reliance upon such
assumption, make available to the Borrower or the applicable Issuing Bank, as
the case may be, on such date a corresponding amount. If and to the extent that
such Bank shall not have so made such share available to the Agent, such Bank
and the Borrower severally agree to
<PAGE>
30
repay to the Agent forthwith on demand such corresponding amount together with
interest thereon, for each day from the date such amount is made available to
the Borrower or the applicable Issuing Bank until the date such amount is repaid
to the Agent, at (i) in the case of the Borrower, a rate per annum equal to the
higher of the Federal Funds Rate and the interest rate applicable thereto
pursuant to Section 2.07 or Section 2.15(g), as applicable, and (ii) in the case
of such Bank, the Federal Funds Rate. In the case of a Borrowing, if such Bank
shall repay to the Agent such corresponding amount, such amount so repaid shall
constitute such Bank's Loan included in such Borrowing for purposes of this
Agreement.
SECTION 2.04. Swingline Loans. (a) During the Working Capital
Availability Period the Swingline Bank agrees, on the terms and conditions set
forth in this Agreement, to lend to the Borrower from time to time amounts that
will not result in (i) the aggregate principal amount of outstanding Loans under
this Section 2.04 at any time exceeding $10,000,000 or (ii) the sum of the
Letter of Credit Exposure plus the aggregate principal amount of all outstanding
Working Capital Loans and Loans made under this Section 2.04 plus the aggregate
amount of outstanding Existing Letters of Credit at any time exceeding the total
Working Capital Commitments.
(b) In order to request a Swingline Loan, the Borrower shall
notify the Agent and the Swingline Bank of such request not later than 11:00
A.M. (New York City time) on the day of such proposed Swingline Loan, specifying
the proposed date (which shall be a Domestic Business Day) and amount of the
requested Swingline Loan (which shall be $1,000,000 or a larger multiple of
$100,000). The Swingline Bank shall make each Swingline Loan available to the
Borrower by means of a credit to the general deposit account of the Borrower
with the Swingline Bank by 3:00 P.M. (New York City time) on the requested date
of such Swingline Loan.
(c) Each Swingline Loan shall mature and be due and payable,
together with accrued and unpaid interest thereon, on the earlier of (i) the
first day after such Swingline Loan is made on which a Borrowing of Working
Capital Loans is made and (ii) the Working Capital Maturity Date. Each Swingline
Loan shall be a Base Rate Loan and shall bear interest as provided in Section
2.07.
<PAGE>
31
(d) The Swingline Bank may by written notice given to the
Agent and the Working Capital Banks not later than 10:00 A.M. New York City
time, on any Domestic Business Day require the Working Capital Banks to acquire
participations on such Domestic Business Day in all or a portion of the
Swingline Loans outstanding. Such notice shall specify the aggregate amount of
Swingline Loans in which the Working Capital Banks will acquire participations.
In furtherance of the foregoing, each Working Capital Bank hereby absolutely and
unconditionally agrees, upon receipt of notice as provided above, to pay to the
Agent, for the account of the Swingline Bank, such Working Capital Bank's
Applicable Percentage of such Swingline Loan or Loans. Each Working Capital Bank
acknowledges and agrees that its obligation to acquire participations in
Swingline Loans pursuant to this paragraph is absolute and unconditional and
shall not be affected by any circumstance whatsoever, including the occurrence
and continuance of a Default or reduction or termination of the Working Capital
Commitments, and that each such payment shall be made without any offset,
abatement, withholding or reduction whatsoever. Each Working Capital Bank shall
comply with its obligation under this paragraph by wire transfer of immediately
available funds, in the same manner as provided in Section 2.05 with respect to
Loans made by such Working Capital Bank (and Section 2.05 shall apply, mutatis
mutandis, to the payment obligations of the Working Capital Banks). The Agent
shall notify the Borrower of any participations in any Swingline Loan acquired
pursuant to this paragraph. Any amounts received by the Swingline Bank from the
Borrower (or other party on behalf of the Borrower) in respect of a Swingline
Loan after receipt by the Swingline Bank of the proceeds of a sale of
participations therein shall be promptly remitted to the Agent; any such amounts
received by the Agent shall be promptly remitted by the Agent to the Working
Capital Banks that shall have made their payments pursuant to this paragraph and
to the Swingline Bank, as their interests may appear. The purchase of
participations in a Swingline Loan pursuant to this paragraph shall not relieve
the Borrower of any default in the payment thereof.
SECTION 2.05. Notes. (a) Each Bank's Loans of each Class shall
be evidenced by a single Note (in the form applicable to such Class) payable to
the order of such Bank for the account of its Applicable Lending Office.
(b) Each Bank may, by notice to the Borrower and the Agent,
request that its Loans of a particular Type and
<PAGE>
32
Class be evidenced by a separate Note. Each such Note shall be in substantially
the form of Exhibit A-1 or A-2 hereto applicable to the relevant Class with
appropriate modifications to reflect the fact that it evidences solely Loans of
the relevant Type. Each reference in this Agreement to the "Note" of such Bank
shall be deemed to refer to and include any or all of such Notes, as the context
may require.
(c) Upon receipt of each Bank's Notes pursuant to clause (b)
of Section 3.01(b), the Agent shall forward such Notes to such Bank. Each Bank
shall record the date and amount of each Loan made by it to the Borrower and the
date and amount of each payment of principal made by the Borrower with respect
thereto and may, if such Bank so elects, in connection with any transfer or
enforcement of any of its Notes, endorse on the schedule forming a part thereof
appropriate notations to evidence the foregoing information with respect to each
such Loan then outstanding; provided that the failure of any Bank to make any
such recordation or endorsement shall not affect the obligations of the Borrower
hereunder or under the Notes. Each Bank is hereby irrevocably authorized by the
Borrower so to endorse its Notes and to attach to and make a part of any of its
Notes a continuation of any such schedule as and when required.
SECTION 2.06. Interest Rate Elections. (a) The initial Type of
Loans comprising each Borrowing, and the duration of the initial Interest Period
applicable thereto if they are initially Euro-Dollar Loans, shall be as
specified in the applicable Notice of Borrowing. Thereafter, the Borrower may
from time to time elect to change or continue the Type of, or the duration of
the Interest Period applicable to, the Loans included in any Borrowing
(excluding overdue Loans and subject in each case to the provisions of the
definition of Interest Period and Article VIII), as follows:
(i) if such Loans are Base Rate Loans, the Borrower may elect
to convert such Loans to Euro-Dollar Loans as of any Euro-Dollar
Business Day; and
(ii) if such Loans are Euro-Dollar Loans, the Borrower may elect
to convert such Loans to Base Rate Loans or elect to continue such
Loans as Euro-Dollar Loans for an additional Interest Period, subject
to Section 2.13 in the case of any such conversion or continuation
effective on any day other than the last
<PAGE>
33
day of the then current Interest Period applicable to
such Loans.
Each such election shall be made by delivering a notice (a
"Notice of Interest Rate Election") to the Agent not later than 10:30 A.M. (New
York City time) on the third Euro-Dollar Business Day before the conversion or
continuation selected in such notice is to be effective (unless the relevant
Loans are to be converted to Base Rate Loans in which case such notice shall be
delivered to the Agent not later than 10:30 A.M. (New York City time) on the
second Domestic Business Day before such conversion or continuation is to be
effective). A Notice of Interest Rate Election may, if it so specifies, apply to
only a portion of the aggregate principal amount of the relevant Group of Loans;
provided that (i) such portion is allocated ratably among the Loans comprising
such Group and (ii) the portion to which such Notice applies, and the remaining
portion to which it does not apply, are each $10,000,000 or any larger multiple
of $1,000,000. Notwithstanding the foregoing, the Borrower may not elect to
convert any Loan to, or continue any Loan as, a Euro-Dollar Loan pursuant to any
Notice of Interest Rate Election if at the time such notice is delivered an
Event of Default shall have occurred and be continuing.
(b) Each Notice of Interest Rate Election shall specify:
(i) the Group of Loans (or portion thereof) to
which such notice applies;
(ii) the date on which the conversion or continuation selected
in such notice is to be effective, which shall comply with the
applicable clause of subsection (a) above;
(iii) if the Loans comprising such Group are to be converted,
the new Type of Loans and, if the Loans being converted are to be
Euro-Dollar Loans, the duration of the next succeeding Interest Period
applicable thereto; and
(iv) if such Loans are to be continued as Euro-Dollar Loans
for an additional Interest Period, the duration of such additional
Interest Period.
<PAGE>
34
Each Interest Period specified in a Notice of Interest Rate
Election shall comply with the provisions of the definition of Interest Period.
(c) Upon receipt of a Notice of Interest Rate Election from
the Borrower pursuant to subsection (a) above, the Agent shall promptly notify
each Bank affected thereby of the contents thereof and such notice shall not
thereafter be revocable by the Borrower. If no Notice of Interest Rate Election
is timely received prior to the end of an Interest Period for any Group of
Loans, the Borrower shall be deemed to have elected that such Group of Loans be
converted to Base Rate Loans as of the last day of such Interest Period.
(d) An election by the Borrower to change or continue the rate
of interest applicable to any Group of Loans pursuant to this Section shall not
constitute a "Borrowing" subject to the provisions of Section 3.02. This Section
2.06 shall not apply to Swingline Loans, which may not be converted or
continued.
SECTION 2.07. Interest Rates. (a) Each Base Rate Loan shall
bear interest on the outstanding principal amount thereof, for each day from the
date such Loan is made until it becomes due, at a rate per annum equal to (i) in
the case of a Base Rate Working Capital Loan, a Base Rate Tranche A Term Loan or
a Swingline Loan, the sum of the Base Rate Margin for such day plus the Base
Rate for such day or (ii) in the case of a Base Rate Tranche B Term Loan, the
sum of the Base Rate for such day plus 1.25%. Such interest shall be payable
quarterly in arrears on each Quarterly Date and, with respect to the principal
amount of any Base Rate Loan converted to a Euro-Dollar Loan, on each date a
Base Rate Loan is so converted. Any overdue principal of or interest on any Base
Rate Loan of any Class shall bear interest, payable on demand, for each day
until paid at a rate per annum equal to the sum of 2% plus the rate otherwise
applicable to Base Rate Loans of such Class for such day.
"Base Rate Margin" applicable to any Working Capital Loan or
Tranche A Term Loan that is a Base Rate Loan outstanding on any day, or any
Swingline Loan outstanding on any day, means:
(i) if such day falls within a Level I Pricing Period, a Level
II Pricing Period or a Level III Pricing Period, then 0.0%;
<PAGE>
35
(ii) if such day falls within a Level IV Pricing
Period, then 0.25%;
(iii) if such day falls within a Level V Pricing
Period, then 0.50%;
(iv) if such day falls within a Level VI Pricing
Period, then 0.75%; or
(v) if such day falls within a Level VII Pricing
Period, then 1.00%.
(b) Each Euro-Dollar Loan shall bear interest on the
outstanding principal amount thereof, for each day during each Interest Period
applicable thereto, at a rate per annum equal to (i) in the case of a
Euro-Dollar Working Capital Loan or a Euro-Dollar Tranche A Term Loan, the sum
of the Euro-Dollar Margin for such day plus the Adjusted London Interbank
Offered Rate applicable to such Interest Period or (ii) in the case of a
Euro-Dollar Tranche B Term Loan, the sum of the Adjusted London Interbank
Offered Rate applicable to such Interest Period plus 2.25%. Such interest shall
be payable for each Interest Period on the last day thereof and, if such
Interest Period is longer than three months, at intervals of three months after
the first day thereof.
"Euro-Dollar Margin" applicable to any Working Capital Loan or
Tranche A Term Loan that is a Euro-Dollar Loan outstanding on any day means:
(i) if such day falls within a Level I Pricing
Period, then 0.50%;
(ii) if such day falls within a Level II Pricing
Period, then 0.75%;
(iii) if such day falls within a Level III Pricing
Period, then 1.00%;
(iv) if such day falls within a Level IV Pricing
Period, then 1.25%;
(v) if such day falls within a Level V Pricing
Period, then 1.50%;
(vi) if such day falls within a Level VI Pricing
Period, then 1.75%; or
<PAGE>
36
(vii) if such day falls within a Level VII Pricing
Period, then 2.00%;
The "Adjusted London Interbank Offered Rate" applicable to any
Interest Period means a rate per annum equal to the quotient obtained (rounded
upward, if necessary, to the next higher 1/100 of l%) by dividing (i) the
applicable London Interbank Offered Rate by (ii) 1.00 minus
the Euro-Dollar Reserve Percentage.
The "London Interbank Offered Rate" applicable to any Interest
Period means the average (rounded upward, if necessary, to the next higher 1/16
of 1%) of the respective rates per annum at which deposits in dollars are
offered to each of the Reference Banks in the London interbank market at
approximately 11:00 A.M. (London time) two Euro-Dollar Business Days before the
first day of such Interest Period in an amount approximately equal to the
principal amount of the Euro-Dollar Loan of such Euro-Dollar Reference Bank to
which such Interest Period is to apply and for a period of time comparable to
such Interest Period.
(c) Any overdue principal of or interest on any Euro-Dollar
Loan shall bear interest, payable on demand, for each day until paid, at a rate
per annum equal to the higher of (i) the sum of the Euro-Dollar Margin (or, in
the case of a Euro-Dollar Tranche B Term Loan, 2.25%) for such day plus 2% plus
the quotient obtained (rounded upward, if necessary, to the next higher 1/100 of
1%) by dividing (x) the average (rounded upward, if necessary, to the next
higher 1/16 of 1%) of the respective rates per annum at which one day (or, if
such amount due remains unpaid more than three Euro- Dollar Business Days, then
for such other period of time not longer than three months as the Agent may
select) deposits in dollars in an amount approximately equal to such overdue
payment due to each of the Euro-Dollar Reference Banks are offered to such
Euro-Dollar Reference Bank in the London interbank market for the applicable
period determined as provided above by (y) 1.00 minus the Euro-Dollar Reserve
Percentage (or, if the circumstances described in clause (a) or (b) of Section
8.01 shall exist, at a rate per annum equal to the sum of 2% plus the rate
applicable to Base Rate Loans for such day) and (ii) the sum of the Euro-Dollar
Margin (or, in the case of a Euro-Dollar Tranche B Term Loan, 2.25%) for such
day plus 2% plus the Adjusted London Interbank Offered Rate applicable to such
Loan at the date such payment was due.
<PAGE>
37
(d) The Agent shall determine each interest rate applicable to
the Loans hereunder. The Agent shall give prompt notice to the Borrower and the
participant Banks of each rate of interest so determined, and its determination
thereof shall be conclusive in the absence of manifest error.
(e) Each Reference Bank agrees to use its best efforts to
furnish quotations to the Agent as contemplated by this Section. If any
Reference Bank does not furnish a timely quotation, the Agent shall determine
the relevant interest rate on the basis of the quotation or quotations furnished
by the remaining Reference Bank or Banks or, if none of such quotations is
available on a timely basis, the provisions of Section 8.01 shall apply.
SECTION 2.08. Fees. (a) Commitment Fee. During the Working
Capital Availability Period the Borrower shall pay to the Agent for the account
of the Banks ratably in proportion to their Working Capital Commitments a
commitment fee at the applicable per annum Commitment Fee Rate on the daily
amount by which the aggregate amount of the Working Capital Commitments exceeds
the sum of outstanding principal amount of the Working Capital Loans plus the
Letter of Credit Exposure. Such commitment fee shall accrue from and including
the Effective Date to but excluding the date of termination of the Working
Capital Commitments in their entirety.
"Commitment Fee Rate" applicable on any day means:
(i) if such day falls within a Level I Pricing
Period, then 0.175%;
(ii) if such day falls within a Level II Pricing
Period, then 0.250%;
(iii) if such day falls within a Level III Pricing
Period or a Level IV Pricing Period, then 0.300%;
(iv) if such day falls within a Level V Pricing
Period or a Level VI Pricing Period, then 0.375%; or
(v) if such day falls within a Level VII Pricing
Period, then 0.500%.
(b) Payments. Accrued fees under this Section shall be payable
quarterly in arrears on each
<PAGE>
38
Quarterly Date and on the date of termination of the Working Capital Commitments
in their entirety.
SECTION 2.09. Termination or Reduction of Commitments. (a) The
Tranche A Commitments and Tranche B Commitments shall terminate at the close of
business on the Effective Date. All Commitments shall terminate on January 31,
1997, unless the Effective Date occurs on or before January 31, 1997.
(b) During the Working Capital Availability Period, the
Borrower may, upon at least three Domestic Business Days' notice to the Agent
(i) terminate the Working Capital Commitments at any time if there is no Letter
of Credit Exposure at such time and if no Working Capital Loans are outstanding
at such time or (ii) ratably reduce from time to time by an aggregate amount of
$10,000,000 or any larger multiple of $1,000,000, the aggregate amount of the
Working Capital Commitments in excess of the sum of the Letter of Credit
Exposure and the aggregate outstanding principal amount of the Working Capital
Loans.
(c) Unless previously terminated, the Working Capital
Commitments shall terminate on the Working Capital Maturity Date.
(d) Notwithstanding anything to the contrary in this
Agreement, all Commitments shall terminate and all outstanding Loans shall be
repaid (and any outstanding Letters of Credit shall be secured by cash
collateral as provided in Section 2.15(k)) on March 31, 1997, in the event that
Corning shall not have delivered to the Agent by such date a certificate,
executed on behalf of Corning by one of its executive officers, confirming that
the Spin-Off Transactions and the Spin-Off Distributions have been completed in
all material respects in accordance with the Spin-Off Information.
SECTION 2.10. Maturity of Loans. (a) The Working Capital Loans
of each Bank shall mature, and the principal amount thereof shall be due and
payable, together with accrued interest thereon, on the Working Capital Maturity
Date or such earlier date on which the Working Capital Commitments shall be
terminated. Each Swingline Loan shall mature, and the principal amount thereof
shall be due and payable, together with accrued interest thereon, as provided in
Section 2.04.
<PAGE>
39
(b) The aggregate principal amount of the Term Loans shall be
payable in quarterly installments on each Quarterly Date commencing March 31,
1998. Subject to adjustment as provided in subsection (c) of this Section, such
installments shall be payable in the respective amounts set forth below opposite
the respective payment dates:
Tranche A Term Loans:
---------------------
<TABLE>
<CAPTION>
Payment Date Amount Payment Date Amount
- ------------ ------ ------------ ------
<S> <C> <C> <C>
March 31, 1998 $7,500,000 September 30, 2000 $17,500,000
June 30, 1998 $7,500,000 December 31, 2000 $17,500,000
September 30, 1998 $7,500,000 March 31, 2001 $18,750,000
December 31, 1998 $7,500,000 June 30, 2001 $18,750,000
March 31, 1999 $12,500,000 September 30, 2001 $18,750,000
June 30, 1999 $12,500,000 December 31, 2001 $18,750,000
September 30, 1999 $12,500,000 March 31, 2002 $18,750,000
December 31, 1999 $12,500,000 June 30, 2002 $18,750,000
March 31, 2000 $17,500,000 September 30, 2002 $18,750,000
June 30, 2000 $17,500,000 Tranche A
Maturity Date $18,750,000
Tranche B Term Loans:
---------------------
Payment Date Amount Payment Date Amount
------------ ------ ------------ ------
March 31, 1998 $250,000 March 31, 2001 $ 250,000
June 30, 1998 $250,000 June 30, 2001 $ 250,000
September 30, 1998 $250,000 September 30, 2001 $ 250,000
December 31, 1998 $250,000 December 31, 2001 $ 250,000
March 31, 1999 $250,000 March 31, 2002 $ 250,000
June 30, 1999 $250,000 June 30, 2002 $ 250,000
September 30, 1999 $250,000 September 30, 2002 $ 250,000
December 31, 1999 $250,000 December 31, 2002 $ 250,000
March 31, 2000 $250,000 March 31, 2003 $11,250,000
June 30, 2000 $250,000 June 30, 2003 $11,250,000
September 30, 2000 $250,000 September 30, 2003 $11,250,000
December 31, 2000 $250,000 Tranche B
Maturity Date $11,250,000
</TABLE>
<PAGE>
40
All Tranche A Term Loans and all Tranche B Term Loans
outstanding on the Tranche A Maturity Date or the Tranche B Maturity Date,
respectively, shall mature and be due and payable on such date. All principal
payments in respect of the Term Loans shall be accompanied by accrued interest
on the principal amount being repaid to the date of payment.
(c) If the initial aggregate amount of the Banks' Tranche A
Commitments or Tranche B Commitments exceeds the aggregate principal amount of
Term Loans of such Class that are made on the Effective Date, then the scheduled
repayments of Term Borrowings of such Class to be made pursuant to this Section
shall be reduced ratably by an aggregate amount equal to such excess. Any
prepayment of a Tranche B Term Borrowing shall be applied to reduce the
subsequent scheduled repayments of the Tranche B Term Borrowings to be made
pursuant to this Section in reverse chronological order. Any prepayment of a
Tranche A Term Borrowing shall be applied, first, to reduce the scheduled
repayment of Tranche A Term Loans set forth in subsection (b) of this Section
opposite the Tranche A Maturity Date, second to reduce the scheduled repayment
of Tranche A Term Loans set forth in subsection (b) of this Section opposite
September 30, 2002, and third ratably to reduce the remaining scheduled
repayments of Tranche A Term Loans set forth in subsection (b) of this Section.
(d) Prior to any repayment of any Term Borrowings of either
Class hereunder, the Borrower shall select the Borrowing or Borrowings of the
applicable Class to be repaid and shall notify the Agent by telephone (confirmed
by telecopy) of such selection not later than 11:00 A.M., New York City time,
three Domestic Business Days before the scheduled date of such repayment;
provided that each repayment of Term Borrowings of either Class shall be applied
to repay any outstanding Base Rate Term Borrowings of such Class before any
other Borrowings of such Class. If the Borrower fails to make a timely selection
of the Borrowing or Borrowings to be repaid, such repayment shall be applied,
first, to repay any outstanding Base Rate Term Borrowings of the applicable
Class and, second, to other Borrowings of such Class in the order of the
remaining duration of their respective Interest Periods (the Borrowing with the
shortest remaining Interest Period to be repaid first). Each repayment of a
Borrowing shall be applied ratably to the Loans included in the repaid
Borrowing.
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SECTION 2.11. Optional Prepayments; Mandatory Prepayments. (a)
Subject to Section 2.13 and to subsection (f) of this Section, the Borrower may,
upon at least one Domestic Business Day's notice to the Agent, prepay any Group
of Base Rate Loans or upon at least three Euro-Dollar Business Days' notice to
the Agent, prepay any Group of Euro-Dollar Loans, in each case in whole at any
time, or from time to time in part in amounts aggregating (i) in the case of
Euro-Dollar Loans, $10,000,000 and (ii) in the case of Base Rate Loans,
$5,000,000, or in each such case any larger multiple of $1,000,000, by paying
the principal amount to be prepaid together with accrued interest thereon to the
date of prepayment. Each such optional prepayment shall be applied to prepay
ratably the Loans of the several Banks included in such Group (or Borrowing).
The Borrower may, upon notice to the Agent and the Swingline Bank prior to 11:00
A.M. (New York City time) on the date of prepayment, prepay any Swingline Loan
in whole at any time, or from time to time in part in amounts aggregating
$100,000 or any larger multiple thereof, by paying the principal amount to be
prepaid together with accrued interest thereon to the date of prepayment.
(b) Upon receipt of a notice of prepayment pursuant to this
Section, the Agent shall promptly notify each Bank that is entitled to a share
of such prepayment of the contents thereof and of such Bank's ratable share of
such prepayment and such notice shall not thereafter be revocable by the
Borrower.
(c) If the Borrower or any of its Subsidiaries shall incur
Debt for borrowed money (other than Debt otherwise permitted under Section
5.17), an amount equal to 100% of the Net Cash Proceeds therefrom shall be
applied on or within two Domestic Business Days after the date of receipt of the
Net Cash Proceeds therefrom toward the prepayment of one or more Groups of Term
Loans as set forth in paragraph (f) of this Section.
(d) If the Borrower shall issue in a primary offering any
shares of any class of equity securities of the Borrower (other than pursuant to
the issuance of equity securities in connection with any employee compensation
or benefit plan), an amount equal to 50% of the Net Cash Proceeds therefrom
shall be applied on or within two Domestic Business Days after the date of
receipt of the Net Cash Proceeds therefrom toward the prepayment of one or more
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42
Groups of Term Loans as set forth in paragraph (f) of this Section.
(e) If the Borrower or any of its Subsidiaries shall receive
Net Cash Proceeds from any Asset Sale, an amount equal to 75% of the Net Cash
Proceeds therefrom shall be applied on or within two Domestic Business Days
after the date of receipt of the Net Cash Proceeds toward the prepayment of one
or more Groups of Term Loans as set forth in paragraph (f) of this Section;
provided, that no such prepayment pursuant to this subsection needs to be made
until the aggregate Net Cash Proceeds required to be applied pursuant to this
subsection to prepay Term Loans and not yet so applied equals or exceeds
$5,000,000, at which time all such Net Cash Proceeds not yet so applied shall be
so applied to prepay Term Loans. Notwithstanding the foregoing, no prepayment
shall be required under this subsection (e) with respect to an Asset Sale that
constitutes part of an Asset Swap; provided that (i) if the aggregate Net Cash
Proceeds, if any, received by the Borrower and its Subsidiaries in connection
with any Asset Swap exceeds the aggregate amount of any cash consideration paid
by the Borrower and its Subsidiaries in connection therewith, then a prepayment
shall be required under this subsection (e) in an amount equal to 75% of such
excess Net Cash Proceeds, and (ii) if the Borrower or any Subsidiary consummates
an Asset Sale that is intended to constitute part of an Asset Swap and such
Asset Swap is not completed within the time required in order for such Asset
Sale to qualify as part of an Asset Swap (as provided in the definition of the
term "Asset Swap"), then a prepayment shall be required under this subsection
(e) with respect to the Net Cash Proceeds of such Asset Sale and the amount of
such prepayment shall be equal to 100% of such Net Cash Proceeds. Subject to the
proviso to the first sentence of this subsection (e), any prepayment required
pursuant to clause (i) above shall be made on or within two Domestic Business
Days after completion of the applicable Asset Swap and any prepayment required
pursuant to clause (ii) above shall be made on or within two Domestic Business
Days after expiration of the period of time allowed to complete the applicable
Asset Swap.
(f) The Borrower shall notify the Agent of each mandatory
prepayment of Term Loans pursuant to subsection (c), (d) or (e) of this Section
not less than three Domestic Business Days prior to the date of prepayment,
which notice shall specify the amount and
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43
allocation of the prepayment and the Group or Groups of Term Loans to be
prepaid. Each such mandatory prepayment shall be applied to prepay ratably the
Term Loans of the Banks included in such Group or Groups. In the event of any
optional or mandatory prepayment of Term Borrowings made at a time when Term
Borrowings of both Classes remain outstanding, the Borrower shall select Term
Borrowings to be prepaid so that the aggregate amount of such prepayment is
allocated between the Tranche A Term Borrowings and Tranche B Term Borrowings
pro rata based on the aggregate principal amount of outstanding Borrowings of
each such Class; provided that any Tranche B Bank may elect, by notice to the
Agent by telephone (confirmed by telecopy) at least one Business Day prior to
the prepayment date, to decline all or any portion of any prepayment of its
Tranche B Term Loans pursuant to this Section (other than an optional prepayment
pursuant to subsection (a) of this Section, which may not be declined), in which
case the aggregate amount of the prepayment that would have been applied to
prepay Tranche B Term Loans but was so declined shall be applied to prepay
Tranche A Term Borrowings. Each mandatory prepayment of the Loans under this
Section shall be accompanied by accrued interest to the date of such prepayment
on the amount prepaid.
(g) Term Loans that are prepaid may not be reborrowed.
SECTION 2.12. General Provisions as to Payments. (a) The
Borrower shall make each payment of principal of, and interest on, the Loans and
of fees hereunder, not later than 12:00 Noon (New York City time) on the date
when due, in Federal or other funds immediately available in New York City, to
the Agent at its address referred to in Section 9.01, except that (i) fees
payable to an Issuing Bank may be paid directly to such Issuing Bank and (ii)
principal of and interest on Swingline Loans may be paid directly to the
Swingline Bank. The Agent will promptly distribute to each Bank its ratable
share of each such payment received by the Agent for the account of the Banks.
(b) Whenever any payment of principal of, or interest on, the
Base Rate Loans or of fees shall be due on a day which is not a Domestic
Business Day, the date for payment thereof shall be extended to the next
succeeding Domestic Business Day. Whenever any payment of principal of, or
interest on, the Euro-Dollar Loans shall be due on a
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44
day which is not a Euro-Dollar Business Day, the date for payment thereof shall
be extended to the next succeeding Euro-Dollar Business Day unless such
Euro-Dollar Business Day falls in another calendar month, in which case the date
for payment thereof shall be the next preceding Euro-Dollar Business Day. If the
date for any payment of principal is extended by operation of law or otherwise,
interest thereon shall be payable for such extended time.
(c) Unless the Agent shall have received notice from the
Borrower prior to the date on which any payment is due to an Issuing Bank or the
Banks hereunder that the Borrower will not make such payment in full, the Agent
may assume that the Borrower has made such payment in full to the Agent on such
date and the Agent may, in reliance upon such assumption, cause to be
distributed to such Issuing Bank or the relevant Banks, as the case may be, on
such due date an amount equal to the amount then due to such Issuing Bank or
Banks. If and to the extent that the Borrower shall not have so made such
payment, each Issuing Bank or Bank shall repay to the Agent forthwith on demand
such amount distributed to such Issuing Bank or Bank, together with interest
thereon, for each day from the date such amount is distributed to such Issuing
Bank or Bank until the date such Issuing Bank or Bank repays such amount to the
Agent, at the Federal Funds Rate.
SECTION 2.13. Funding Losses; Prepayment Premium. (a) If the
Borrower makes any payment of principal with respect to any Euro-Dollar Loans or
any Euro-Dollar Loan is converted (pursuant to Article II, VI or VIII or
otherwise) on any day other than the last day of an Interest Period applicable
thereto, or the last day of an applicable period fixed pursuant to Section
2.07(c), or if the Borrower fails to borrow, prepay, convert or continue any
Euro-Dollar Loans after notice has been given to any Bank in accordance with
Section 2.03, 2.06 or 2.11, the Borrower shall reimburse each Bank within 15
days after demand for any resulting loss or expense incurred by it (or by an
existing or prospective Participant in the related Loan), including (without
limitation) any loss incurred in obtaining, liquidating or employing deposits
from third parties, but excluding loss of margin for the period after any such
payment or conversion or failure to borrow; provided that such Bank shall have
delivered to the Borrower a certificate as to the amount of such loss or
expense, which certificate shall be conclusive in the absence of manifest error.
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(b) In the event of any optional prepayment of any Tranche B
Term Loan pursuant to Section 2.11(a) prior to the date that is 18 months after
the Effective Date, then the Borrower shall pay to each Tranche B Bank a
prepayment premium equal to 1% of the principal amount so prepaid. Each such
premium payment shall be paid at the time of the prepayment and shall be in
addition to any amounts payable under subsection (a) of this Section.
SECTION 2.14. Computation of Interest and Fees. Interest based
on the Prime Rate hereunder shall be computed on the basis of a year of 365 days
(or 366 days in a leap year) and paid for the actual number of days elapsed
(including the first day but excluding the last day). All other interest and
fees shall be computed on the basis of a year of 360 days and paid for the
actual number of days elapsed (including the first day but excluding the last
day).
SECTION 2.15. Letters of Credit. (a) The Borrower may request
the issuance of Letters of Credit by any Issuing Bank, in a form reasonably
acceptable to the Agent and such Issuing Bank, appropriately completed, for the
account of the Borrower, at any time and from time to time during the Working
Capital Availability Period; provided that any Letter of Credit shall be issued
only if, and each request by the Borrower for the issuance of any Letter of
Credit shall be deemed a representation and warranty of the Borrower that,
immediately following the issuance of any such Letter of Credit, (i) the Letter
of Credit Exposure shall not exceed the Letter of Credit Sublimit Amount and
(ii) the sum of the Letter of Credit Exposure plus the aggregate principal
amount of all outstanding Working Capital Loans and Swingline Loans plus the
aggregate amount of the outstanding Existing Letters of Credit shall not exceed
the aggregate amount of the Working Capital Commitments.
(b) Each Letter of Credit shall provide for payment of all
drawings thereunder in U.S. dollars.
(c) Each issuance of any Letter of Credit shall be made on
such prior notice from the Borrower to the applicable Issuing Bank as shall be
acceptable to such Issuing Bank specifying the date of issuance, the date on
which such Letter of Credit is to expire (which shall not be later than the
earlier of (i) the date that is five Domestic Business Days prior to the Working
Capital Maturity Date,
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46
and (ii) subject to renewal, the date one year after the date of such Letter of
Credit), the amount of such Letter of Credit, the name and address of the
beneficiary of such Letter of Credit, the purpose of such Letter of Credit, and
such other information as may be necessary or desirable to complete such Letter
of Credit. Each Issuing Bank will give the Agent prompt notice of the issuance
and amount of each Letter of Credit issued by it, any amendment, extension or
renewal of such Letter of Credit and the expiration of such Letter of Credit.
Each Issuing Bank will give the Agent and the Borrower (i) daily notice of the
aggregate amount available to be drawn under all outstanding Letters of Credit
issued by it and (ii) a quarterly summary indicating, on a daily basis during
such quarter, the issuance of any Letter of Credit issued by it and the amount
thereof, the expiration of any such Letter of Credit and any payment on drafts
presented under such Letters of Credit.
(d) Each Issuing Bank that issues a Letter of Credit, by the
issuance of such Letter of Credit and without any further action on the part of
such Issuing Bank or the Banks in respect thereof, hereby grants to each Working
Capital Bank, and each Working Capital Bank hereby acquires from such Issuing
Bank, a participation in such Letter of Credit equal to such Bank's Applicable
Percentage of the aggregate amount available to be drawn under such Letter of
Credit, effective upon the issuance of such Letter of Credit. In consideration
and in furtherance of the foregoing, each Working Capital Bank hereby absolutely
and unconditionally agrees to pay to the Agent, on behalf of such Issuing Bank,
in accordance with Section 2.03(c) such Bank's Applicable Percentage of each
Letter of Credit Disbursement made by such Issuing Bank and not reimbursed by
the Borrower when due in accordance with subsection (g) of this Section;
provided that the Working Capital Banks shall not be obligated to make any such
payment with respect to any wrongful Letter of Credit Disbursement made as a
result of the gross negligence or wilful misconduct of such Issuing Bank.
(e) Each Working Capital Bank acknowledges and agrees that its
obligation to acquire participations pursuant to subsection (d) above in respect
of Letters of Credit is absolute and unconditional and shall not be affected by
any circumstance whatsoever, including the occurrence and continuance of a
Default, and that each such payment shall be made without any offset, abatement,
withholding or
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47
reduction whatsoever (subject only to the proviso in subsection (d) above).
(f) During the Working Capital Availability Period (and
thereafter if and so long as there is any Letter of Credit Exposure), the
Borrower shall pay (i) to the Agent for the account of the Working Capital Banks
ratably in accordance with their Letter of Credit Exposure a fee at the per
annum Euro-Dollar Margin for such day on the aggregate undrawn amount at the end
of such day of all outstanding Letters of Credit and (ii) to each Issuing Bank
for its own account, a fee at the rate of 0.125% per annum on the amount
available to be drawn on each outstanding Letter of Credit issued by such
Issuing Bank. Accrued fees under this subsection shall be calculated by the
Agent (in the case of fees payable pursuant to clause (i) above) or the
applicable Issuing Bank (in the case of fees payable to it pursuant to clause
(ii) above) and shall be payable quarterly on each Quarterly Date (commencing on
March 31, 1997) and on the Termination Date (and on demand after the Termination
Date). The Agent (in the case of fees payable pursuant to clause (i) above) or
the applicable Issuing Bank (in the case of fees payable to it pursuant to
clause (ii) above) will notify the Borrower of the amount of accrued fees
payable hereunder on each payment date. In addition to the foregoing, the
Borrower shall pay directly to each Issuing Bank, for its account, such Issuing
Bank's customary processing and documentation fees in connection with the
issuance or amendment of or payment on any Letter of Credit, payable within 15
days after demand therefor by such Issuing Bank.
(g) If an Issuing Bank shall pay any draft presented under a
Letter of Credit, the Borrower shall pay directly to such Issuing Bank an amount
equal to the amount of such draft before 1:00 P.M. (New York City time), on the
day on which such Issuing Bank shall have notified the Borrower (as provided in
subsection (j) below) that payment of such draft will be made; provided that, if
the Borrower shall not have received notice of such draft before 11:00 A.M. (New
York City time) on the date that payment of such draft is made, then such
payment may be made by the Borrower to such Issuing Bank on the Domestic
Business Day immediately following the date of receipt by the Borrower of notice
of such draft, together with interest (at a rate per annum equal to the interest
rate then applicable to Base Rate Working Capital Loans) on the amount of such
draft from and including the date such draft was paid by such Issuing
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48
Bank to but excluding such next Domestic Business Day. If the Borrower shall
fail to pay any amount required to be paid by it under this subsection when due,
such unpaid amount shall bear interest, for each day from and including the due
date to but excluding the date of payment, at a rate per annum equal to the
interest rate then applicable to overdue Base Rate Working Capital Loans.
(h) The Borrower's obligation to reimburse Letter of Credit
Disbursements as provided in subsection (g) above shall be absolute,
unconditional and irrevocable and shall be performed strictly in accordance with
the terms of this Agreement under any and all circumstances whatsoever, and
irrespective of:
(i) any lack of validity or enforceability of any
Letter of Credit or any Loan Document;
(ii) the existence of any claim, setoff, defense or other right
which the Borrower, any Subsidiary or any other Person may at any time
have against the beneficiary under any Letter of Credit, any Issuing
Bank, the Agent or any Bank or any other Person in connection with this
Agreement, any other Loan Document or any other related or unrelated
agreement or transaction;
(iii) any draft or other document presented under a Letter of
Credit proving to be forged, fraudulent, invalid or insufficient in any
respect or any statement therein being untrue or inaccurate in any
respect;
(iv) payment by any Issuing Bank under a Letter of Credit
against presentation of a draft or other document which does not comply
with the terms of such Letter of Credit, subject to subsection (i)
below; and
(v) any other act or omission or delay of any kind or any
other circumstance or event whatsoever, whether or not similar to any
of the foregoing and whether or not foreseeable, that might, but for
the provisions of this subsection (h), constitute a legal or equitable
discharge of the Borrower's obligations hereunder.
(i) None of the Banks (including any Issuing Bank) nor the
Agent nor any of their officers or directors or employees or agents shall be
liable or responsible by reason of or in connection with (and the Borrower shall
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49
indemnify and hold harmless each of the Banks, the Issuing Banks, the Agent and
their officers, directors, employees and agents from and against any and all
liabilities, losses, damages, costs and expenses, including, without limitation,
reasonable fees and disbursements of counsel, arising by reason of or in
connection with) the execution and delivery or transfer of or payment or failure
to pay under any Letter of Credit, including without limitation any of the
circumstances enumerated in subsection (h) above, as well as (i) any error,
omission, interruption or delay in transmission or delivery of any messages, by
mail, cable, telegraph, telex or otherwise, (ii) any error in interpretation of
technical terms, (iii) any loss or delay in the transmission of any document
required in order to make a drawing under a Letter of Credit, or (iv) any
consequences arising from causes beyond the control of any Issuing Bank,
including without limitation any government acts, or any other circumstances
whatsoever in making or failing to make payment under any Letter of Credit;
provided that the Borrower shall not be required to indemnify any Issuing Bank
for any claims, damages, losses, liabilities, costs or expenses, and the
Borrower shall have a claim for direct (but not consequential) damage suffered
by it, to the extent found by a court of competent jurisdiction to have been
caused by (x) the wilful misconduct or gross negligence of an Issuing Bank in
determining whether a request presented under any Letter of Credit issued by it
complied with the terms of such Letter of Credit or (y) an Issuing Bank's
failure to pay under any Letter of Credit issued by it after the presentation to
it of a request strictly complying with the terms and conditions of such Letter
of Credit. Nothing in this subsection (i) is intended to limit the obligations
of the Borrower under any other provision of this Agreement. To the extent the
Borrower does not indemnify an Issuing Bank as required by this subsection, the
Banks agree to do so ratably in accordance with their Working Capital
Commitments. It is expressly understood and agreed that, for purposes of
determining whether a wrongful payment under a Letter of Credit resulted from an
Issuing Bank's gross negligence or wilful misconduct, such Issuing Bank may
accept documents that appear on their face to be in order, without
responsibility for further investigation, regardless of any notice or
information to the contrary and, in making any payment under any Letter of
Credit (A) an Issuing Bank's exclusive reliance on the documents presented to it
under such Letter of Credit as to any and all matters set forth therein,
including reliance on the amount of any draft presented under such Letter of
Credit, whether or not
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the amount due to the beneficiary thereunder equals the amount of such draft and
whether or not any document presented pursuant to such Letter of Credit proves
to be insufficient in any material respect, if such document on its face appears
to be in order, and whether or not any other statement or any other document
presented pursuant to such Letter of Credit proves to be forged or invalid or
any statement therein proves to be inaccurate or untrue in any respect
whatsoever and (B) any noncompliance in any immaterial respect of the documents
presented under such Letter of Credit with the terms thereof shall, in each
case, be deemed not to constitute wilful misconduct or gross negligence of such
Issuing Bank.
(j) Each Issuing Bank shall, promptly following its receipt
thereof, examine all documents purporting to represent a demand for payment
under a Letter of Credit issued by it. Such Issuing Bank shall as promptly as
possible give telephonic notification, confirmed by telex or telecopy, to the
Agent and the Borrower of such demand for payment and whether such Issuing Bank
has made or will make a Letter of Credit Disbursement thereunder, provided that
the failure to give such notice shall not relieve the Borrower of its obligation
to reimburse any such Letter of Credit Disbursement in accordance with this
Section. The Agent shall promptly give each Bank that holds a participation in
such Letter of Credit notice thereof.
(k) If at any time, (i) the Letter of Credit Exposure exceeds
the Letter of Credit Sublimit Amount or (ii) the sum of the Letter of Credit
Exposure plus the aggregate principal amount of all outstanding Working Capital
Loans and Swingline Loans plus the aggregate amount of the outstanding Existing
Letters of Credit exceeds the aggregate Working Capital Commitments, then the
Borrower shall provide cash collateral in respect of the Letter of Credit
Exposure as provided below in an amount equal to such excess; provided that,
solely for purposes of determining whether the Borrower is in compliance with
the foregoing requirements of this subsection (k), each of the Letter of Credit
Sublimit Amount and the aggregate Working Capital Commitments shall be deemed to
be increased by the amount of any cash collateral then held by the Agent
pursuant to this subsection (k). In the event that the Borrower is required
pursuant to the terms of this Agreement to provide cash collateral in respect of
the Letter of Credit Exposure, the Borrower shall deposit in an account with the
Agent, for the benefit of the Banks (including the Issuing Banks), an amount in
cash equal to (x) in the case of a deposit
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required pursuant to the first sentence of this subsection (k), the amount
specified therein, or (y) in the case of a deposit required as a result of an
Event of Default, the entire Letter of Credit Exposure. Such deposit shall be
held by the Agent as collateral for the payment and performance of the
Obligations. The Agent shall have exclusive dominion and control, including the
exclusive right of withdrawal, over such account. Other than any interest earned
on the investment of such deposits in Temporary Cash Investments, which
investments shall be made at the direction of the Borrower if at the time no
Event of Default shall have occurred and be continuing (in which case such
investments shall be made at the option and sole but reasonable discretion of
the Agent), such deposits shall not bear interest. Interest or profits, if any,
on such investments shall accumulate in such account. Moneys in such account
shall automatically be applied by the Agent to reimburse the Issuing Banks for
Letter of Credit Disbursements and, if the maturity of the Loans has been
accelerated, to satisfy the Obligations. If the Borrower is required to provide
an amount of cash collateral hereunder pursuant to the first sentence of this
subsection (k), the Agent shall return such amount (to the extent not applied as
aforesaid) to the Borrower, from time to time, to the extent that doing so would
not give rise to an obligation on the part of the Borrower to provide additional
cash collateral pursuant to such sentence. If the Borrower is required to
provide an amount of cash collateral hereunder as a result of an Event of
Default, such amount (to the extent not applied as aforesaid) shall be returned
to the Borrower within three Domestic Business days after all Events of Default
have been cured or waived, and if prior to such return the amount of the Letter
of Credit Exposure is reduced, any excess of the amount deposited (to the extent
not applied as aforesaid and disregarding interest or profits on investments)
over the reduced amount of the Letter of Credit Exposure shall be returned to
the Borrower promptly after such reduction gives rise to such excess.
Notwithstanding the foregoing, if any Obligation is due and payable but remains
unpaid at the time that the Agent would otherwise be required to return any
amount of cash collateral to the Borrower hereunder, the Agent may retain such
cash collateral and apply the amounts retained to the payment of such unpaid
Obligation.
(l) The Borrower, the Agent and any Bank that is willing to be
an Issuing Bank hereunder may agree that such Bank shall be an Issuing Bank by
the execution and delivery
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of an agreement substantially in the form of Exhibit I (an "Issuing Bank
Agreement"). The Agent shall notify the Banks of the identity of any Issuing
Bank appointed pursuant to this subsection (l). The Borrower also may terminate
the status of any Issuing Bank as an Issuing Bank hereunder at any time by at
least three Domestic Business Days' prior notice to such Issuing Bank and the
Agent, and the Agent shall thereupon notify the Banks of such termination;
provided that such termination shall operate only to relieve such Issuing Bank
of its obligation to issue Letters of Credit hereunder and shall not affect such
Issuing Bank's status as an Issuing Bank or its rights and obligations hereunder
with respect to any Letters of Credit previously issued by it.
ARTICLE III
Conditions
----------
SECTION 3.01. Effectiveness. The obligations of the Banks to
make Loans and of the Issuing Banks to issue Letters of Credit under this
Agreement shall become effective on the date that each of the following
conditions shall have been satisfied (or waived in accordance with Section
9.05):
(a) receipt by the Agent of counterparts hereof signed by each
of the parties hereto (or, in the case of any party as to which an
executed counterpart shall not have been received, receipt by the Agent
in form satisfactory to it of telecopy or other written confirmation
from such party of execution of a counterpart hereof by such party);
(b) receipt by the Agent for the account of each Bank of duly
executed Notes dated on or before the Effective Date complying with the
provisions of Section 2.05;
(c) receipt by the Agent of counterparts of the Guarantee
Agreement, duly executed by the Initial Guarantors;
(d) receipt by the Agent of counterparts of the Indemnity,
Subrogation and Contribution Agreement, duly executed by the Initial
Guarantors;
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(e) receipt by the Security Agent of (i) counterparts of the
Pledge Agreement, duly executed by the parties thereto and (ii)
certificates representing all outstanding shares of capital stock (or
other equity interest) of each Subsidiary of the Borrower to be pledged
under the Pledge Agreement (it being understood that (x) the Pledge
Agreement does not require the pledge of any shares of capital stock
(or other equity interest) owned by an Excluded Subsidiary, a Foreign
Subsidiary, a Qualified Joint Venture or a Joint Venture Holding
Company, or any shares of capital stock (or other equity interest)
issued by a Foreign Subsidiary or Excluded Subsidiary and (y) prior to
January 1, 1997, the Pledge Agreement does not require the pledge of
any shares of capital stock (or other equity interest) issued by a
Qualified Joint Venture), accompanied by stock powers endorsed in
blank;
(f) receipt by the Security Agent of counterparts of the
Security Agreement, duly executed by the parties thereto, and a duly
completed and executed Perfection Certificate (as defined in the
Security Agreement);
(g) receipt by the Security Agent of copies of each document
(including each Uniform Commercial Code financing statement) required
by law or reasonably requested by the Security Agent to be filed,
registered or recorded in order to create in favor of the Security
Agent for the benefit of the Banks a valid, legal and perfected
security interest in or lien on the collateral that is the subject of
the Security Agreement;
(h) receipt by the Security Agent of the results of a search
of the Uniform Commercial Code financing statements filed with respect
to the Borrower and its Subsidiaries in the States in which are located
the chief executive offices of such Persons and the other jurisdictions
in which Uniform Commercial Code financing statements are to be filed,
together with copies of all financing statements disclosed by such
search, and accompanied by evidence reasonably satisfactory to the
Required Banks that each Lien indicated in any such financing statement
is permitted hereunder or that the Lien indicated thereby has been
released;
(i) receipt by the Agent of a certificate signed
on behalf of the Borrower by the chief financial
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54
officer, treasurer or controller of the Borrower, dated the Effective
Date, to the effect that (i) no Default has occurred and is continuing
as of the Effective Date, (ii) the representations and warranties of
the Borrower set forth in Article IV hereof and in the Pledge Agreement
and the Security Agreement are true in all material respects on, and as
of, the Effective Date and (iii) all the Preliminary Spin-Off
Transactions have been consummated in all material respects;
(j) to the extent not received prior to the date of execution
and delivery of this Agreement, receipt by the Agent and its counsel of
true and complete copies of the Transaction Documents (excluding those
described in Schedule 1.01(b)) and reasonable satisfaction of the Agent
and its counsel with the form, terms and provisions of the Transaction
Documents, including, without limitation, the indemnities of Corning
for the benefit of the Borrower with respect to certain contingent
liabilities;
(k) receipt by the Banks of satisfactory evidence that the
Borrower shall have obtained all consents and approvals of, and shall
have made all filings and registrations with, any governmental
authority required in order to consummate the Transactions (other than
(i) filing of Uniform Commercial Code financing statements in order to
perfect Liens granted under the Security Agreement and (ii) notice
filings in connection with (x) changing the name of the Borrower and
certain Subsidiaries and (y) substituting the ultimate parent entity
with respect to substantially all licenses and accreditation, in each
case in connection with the Spin-Off Transactions), in each case
without the imposition of any condition which, in the reasonable
judgment of the Required Banks, could have a Material Adverse Effect;
(l) receipt by the Agent of all fees and other compensation
payable to the Agent, the Arranging Agents and the Banks on or prior to
the Effective Date pursuant to their agreements with the Borrower,
including reimbursement of all out-of-pocket expenses of the Agent and
the Arranging Agents payable by the Borrower in accordance with this
Agreement for which invoices have been presented to the Borrower at
least one Domestic Business Day prior to the Effective Date;
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55
(m) receipt by the Agent of (i) an opinion of Raymond C.
Marier, general counsel of the Borrower, substantially in the form of
Exhibit G-1 hereto, and (ii) an opinion of Shearman & Sterling, counsel
for the Borrower, substantially in the form of Exhibit G-2 hereto, and
in each case covering such additional matters relating to the
Transactions as the Required Banks may reasonably request;
(n) receipt by the Agent of an opinion of Cravath, Swaine &
Moore, special counsel for the Agent, substantially in the form of
Exhibit H hereto and covering such additional matters relating to the
transactions contemplated hereby as the Required Banks may reasonably
request;
(o) the Borrower shall have made arrangements satisfactory to
the Agent to repay, on the Effective Date, Debt of the Borrower and its
Subsidiaries owing to the Corning Companies with the proceeds of the
Term Loans, together with the proceeds of certain loan repayments and
dividends received from CPS as contemplated by the Spin-Off
Information, and the Agent shall have received counterparts of the
Corning Subordination Agreement duly executed by the parties thereto
with respect to the remaining Permitted Subordinated Debt and any
Excess Corning Debt;
(p) receipt by the Agent and each Bank of copies of a solvency
opinion from Murray, Devine & Co., Inc. in form and substance
satisfactory to the Agent and the Banks, with respect to the solvency
of the Borrower as of the Effective Date and giving effect to the
Spin-Off Transactions;
(q) the Banks shall be reasonably satisfied that there are no
environmental and employee health and safety exposures to which the
Borrower or the Subsidiaries may be subject (other than any such
exposures that individually or in the aggregate would not reasonably be
expected to have a Material Adverse Effect) and shall be reasonably
satisfied with the plans of the Borrower with respect thereto;
(r) the Banks shall be reasonably satisfied with the
Borrower's arrangements for insurance required by Section 5.03(b) and
the Security Documents, including premiums payable with respect
thereto; and
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56
(s) receipt by the Agent of all documents and certificates it
may reasonably request relating to the existence of the Borrower and
the Initial Guarantors, the corporate authority for and the validity of
this Agreement and the other Loan Documents, the accuracy of the
representations and warranties contained in this Agreement and the
other Loan Documents on the Effective Date, the Transactions and any
other matters relevant hereto or thereto, all in form and substance
satisfactory to the Agent;
provided that the obligations of the Banks to make Loans and of the Issuing
Banks to issue Letters of Credit under this Agreement shall not become effective
unless all of the foregoing conditions are satisfied not later than January 31,
1997. The Agent shall promptly notify the Borrower and the Banks of the
Effective Date, and such notice shall be conclusive and binding on all parties
hereto.
SECTION 3.02. Each Credit Event. The obligation of any Bank
(including the Swingline Bank) to make a Loan on the occasion of any Borrowing
and of any Issuing Bank to issue any Letter of Credit is subject to the
satisfaction of the following conditions:
(a) receipt by the Agent of a Notice of Borrowing as required
by Section 2.02, receipt by the Swingline Bank of a notice requesting a
Swingline Loan as required by Section 2.04 or receipt by the applicable
Issuing Bank of a notice requesting issuance of a Letter of Credit as
required by Section 2.15(c), as applicable;
(b) the fact that, immediately after such Borrowing or the
issuance of such Letter of Credit, (i) the sum of the aggregate
principal amount of all outstanding Working Capital Loans and Swingline
Loans plus the Letter of Credit Exposure and the aggregate amount of
the outstanding Existing Letters of Credit shall not exceed the
aggregate Working Capital Commitments and (ii) the Letter of Credit
Exposure shall not exceed the Letter of Credit Sublimit Amount;
(c) the fact that, immediately before and after such Borrowing
or the issuance of such Letter of Credit, no Default shall have
occurred and be continuing; and
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57
(d) the fact that the representations and warranties of the
Borrower contained in this Agreement and of the Borrower and its
Subsidiaries contained in the other Loan Documents shall be true on and
as of the date of such Borrowing or issuance of such Letter of Credit.
Each Borrowing hereunder and the issuance of each Letter of Credit hereunder
shall be deemed to be a representation and warranty by the Borrower on the date
of such Borrowing or issuance as to the facts specified in clauses (b), (c) and
(d) of this Section.
ARTICLE IV
Representations and Warranties
------------------------------
The Borrower represents and warrants that:
SECTION 4.01. Corporate Existence and Power. The Borrower is a
corporation duly incorporated, validly existing and in good standing under the
laws of the State of Delaware, and has all corporate powers and all material
governmental licenses, authorizations, consents and approvals required to carry
on its business as now conducted.
SECTION 4.02. Corporate and Governmental Authorization; No
Contravention. The execution, delivery and performance by each of the Borrower
and the Subsidiaries of each Loan Document to which it is or is to be a party
and the Financing Transactions provided for thereunder and, to the extent
involving the Borrower or any Subsidiary, the Spin-Off Transactions, are within
its corporate powers, have been duly authorized by all necessary corporate
action, require no action by or in respect of, or filing with, any governmental
body, agency or official (other than (i) the filing of Uniform Commercial Code
financing statements in order to perfect Liens granted under the Security
Agreement, (ii) notice filings in connection with (x) changing the name of the
Borrower and certain Subsidiaries and (y) substituting the ultimate parent
entity with respect to substantially all licenses and accreditation, in each
case in connection with the Spin-Off Transactions and (iii) any other actions
and filings that have been obtained and are in full force and effect) and do not
contravene, or constitute a default under, any provision of applicable law or
<PAGE>
58
regulation or of the certificate of incorporation or by-laws of the Borrower or
any Subsidiary or of any judgment, injunction, order or decree, or any other
material agreement or instrument, in each case binding upon the Borrower or any
of its Subsidiaries, or result in the creation or imposition of any Lien (other
than Liens created under the Security Documents) on any asset of the Borrower or
any of its Subsidiaries.
SECTION 4.03. Binding Effect. This Agreement constitutes a
valid and binding agreement of the Borrower, and the other Loan Documents to
which the Borrower or any of the Subsidiaries is or is to be a party, when
executed and delivered in accordance with this Agreement, will constitute valid
and binding agreements and obligations of each of the Borrower and the
Subsidiaries that is a party thereto, in each case enforceable in accordance
with its terms.
SECTION 4.04. Financial Information. (a) The combined balance
sheets of the Borrower as of December 31, 1995 and the related combined
statements of operations, stockholder's equity and cash flows for the fiscal
year then ended, reported on by Price Waterhouse LLP and set forth in the
Spin-Off Information, a copy of which has been delivered to each of the Banks,
fairly present, in conformity with generally accepted accounting principles, the
financial position of the Borrower as of such date and its results of operations
and cash flows for such fiscal year.
(b) The unaudited combined balance sheet of the Borrower as of
September 30, 1996, and the related combined statements of operations and cash
flows for the fiscal period then ended, set forth in the Spin-Off Information, a
copy of which has been delivered to each of the Banks, fairly present, in
conformity with generally accepted accounting principles applied on a basis
consistent with the financial statements referred to in subsection (a) of this
Section, the financial position of the Borrower as of such date and its results
of operations and cash flows for such fiscal period (subject to normal year-end
adjustments).
(c) The unaudited pro-forma combined balance sheet of the
Borrower dated as of September 30, 1996, and the related unaudited pro forma
combined statements of income for the fiscal year ended December 31, 1995, and
the fiscal quarter ended September 30, 1996, set forth in the Spin-Off
Information, have been derived from the historical financial statements as of
such date and for such periods
<PAGE>
59
referred to in subsections (a) and (b) of this Section adjusted to give effect
to the Transactions on the basis described therein. Such pro-forma combined
financial statements present fairly, on a pro-forma basis, the consolidated
financial position of the Borrower as of the date thereof and its consolidated
income for such periods, assuming that the adjustments specified therein had
occurred as described therein, subject, in the case of such pro forma financial
statements as of and for the period ended September 30, 1996, to normal year-end
adjustments.
(d) Since December 31, 1995, there has been no material
adverse change in the business, assets, liabilities, operations or condition
(financial or otherwise) of the Borrower and its Consolidated Subsidiaries,
considered as a whole; provided that it is understood that the special charges
taken and reserves established as described in footnotes numbered [2, 3 and 6]
to the unaudited combined financial statements of the Borrower for the
nine-month period ended September 30, 1996, as set forth in the Spin-Off
Information, shall not, in and of themselves, be deemed to constitute such a
material adverse change.
SECTION 4.05. Litigation. There is no action, suit or
proceeding pending against, or to the knowledge of the Borrower threatened
against or affecting, the Borrower or any of its Subsidiaries before any court
or arbitrator or any governmental body, agency or official in which there is a
reasonable possibility of an adverse decision which would reasonably be expected
to have a Material Adverse Effect or which in any manner draws into question the
validity or enforceability of this Agreement or any other Loan Document.
SECTION 4.06. Compliance with ERISA. Except to the extent that
all such failures to fulfill any such obligations or comply with any such
provisions would not reasonably be expected to have a Material Adverse Effect,
each member of the ERISA Group has fulfilled its obligations under the minimum
funding standards of ERISA and the Internal Revenue Code with respect to each
Plan and is in compliance in all material respects with the presently applicable
provisions of ERISA and the Internal Revenue Code with respect to each Plan.
Except to the extent that all such waivers, failures and liabilities would not
reasonably be expected to have a Material Adverse Effect, no member of the ERISA
Group has (i) sought a waiver of the minimum funding standard under Section 412
of the Internal Revenue
<PAGE>
60
Code in respect of any Plan, (ii) failed to make any contribution or payment to
any Plan or Multiemployer Plan or in respect of any Benefit Arrangement, or made
any amendment to any Plan or Benefit Arrangement, which failure or amendment has
resulted or could result in the imposition of a Lien or the posting of a bond or
other security under ERISA or the Internal Revenue Code or (iii) incurred any
liability under Title IV of ERISA other than a liability to the PBGC for
premiums under Section 4007 of ERISA.
SECTION 4.07. Environmental Matters. Except with respect to
matters that, individually or in the aggregate, would not reasonably be likely
to result in a Material Adverse Effect, neither the Borrower nor any of its
Subsidiaries (i) has failed to comply with any Environmental Law or to obtain,
maintain or comply with any permit, license or other approval required under any
Environmental Law, (ii) has become subject to any Environmental Liability, (iii)
has received notice of any claim with respect to any Environmental Liability or
(iv) knows of any basis for any Environmental Liability.
SECTION 4.08. Taxes. The Borrower and each Subsidiary has
filed, or caused to be filed, all tax returns (Federal, state, local and
foreign) required to be filed and paid (a) all amounts of taxes shown thereon to
be due (including interest and penalties) and (b) all other taxes, fees,
assessments and other governmental charges (including mortgage recording taxes,
documentary stamp taxes and intangible taxes) owed by it, except for such taxes
(i) which are not delinquent or (ii) that are being contested in good faith and
by proper proceedings, and against which adequate reserves are being maintained
in accordance with generally accepted accounting principles. Neither the
Borrower nor any of its Subsidiaries is aware of any proposed tax assessments
issued against it by a taxing authority to either the Borrower or any of its
Subsidiaries which would be reasonably likely to have a Material Adverse Effect.
SECTION 4.09. Subsidiaries. (a) Each of the Borrower's
corporate Subsidiaries is a corporation duly incorporated, validly existing and
in good standing under the laws of its jurisdiction of incorporation, and has
all corporate powers and all material governmental licenses, authorizations,
consents and approvals required to carry on its business as now conducted.
<PAGE>
61
(b) Schedule 4.09(b) lists as of the Effective Date, each
Subsidiary indicating the Initial Guarantors, Foreign Subsidiaries, Qualified
Joint Ventures, Joint Venture Holding Companies and Excluded Subsidiaries.
SECTION 4.10. Regulatory Restrictions on Borrowing. The
Borrower is not an "investment company" within the meaning of the Investment
Company Act of 1940, as amended, a "holding company" within the meaning of the
Public Utility Holding Company Act of 1935, as amended, or otherwise subject to
any regulatory scheme which restricts its ability to incur debt.
SECTION 4.11. Full Disclosure. All written information
heretofore furnished by the Borrower to the Agent or any Bank for purposes of or
in connection with this Agreement or any other Loan Document or any Transaction
is, and all such information hereafter furnished by the Borrower to the Agent or
any Bank will be, true and accurate in all material respects on the date as of
which such information is stated or certified. The Borrower has disclosed to the
Banks in the Spin-Off Information any and all facts which materially and
adversely affect or may affect (to the extent the Borrower can now reasonably
foresee) the business, operations or financial condition of the Borrower and its
Consolidated Subsidiaries, taken as a whole, or the ability of the Borrower to
perform its obligations under this Agreement and the other Loan Documents.
SECTION 4.12. Compliance with Laws and Agreements. Neither the
Borrower nor any Subsidiary is in violation of any law, rule or regulation, or
in default with respect to any judgment, writ, injunction or decree applicable
to it of any governmental body, agency or official, where such violation or
default (individually or in the aggregate) could reasonably be expected to
result in a Material Adverse Effect. Neither the Borrower nor any Subsidiary is
in default in any manner under any provision of any indenture or other agreement
or instrument evidencing Debt, or any other agreement or instrument to which it
is a party or by which it or any of its properties or assets are or may be
bound, where such default (individually or in the aggregate) could reasonably be
expected to result in a Material Adverse Effect.
SECTION 4.13. Governmental Approvals. As of the Effective
Date, all material consents and approvals of, and material filings and
registrations with, and all other
<PAGE>
62
material actions in respect of, all governmental bodies, agencies or officials
or any other Person required in order to consummate the Transactions shall have
been obtained, given, filed or taken and shall be in full force and effect,
other than the filings and notices referred to in clauses (i) and (ii) of
Section 4.02.
SECTION 4.14. Solvency. (a) On the Effective Date and
immediately after the consummation of the Spin-Off Distributions, (i) the fair
value of the assets of the Borrower, at a fair valuation, will exceed its debts
and liabilities, subordinated, contingent or otherwise; (ii) the present fair
saleable value of the property of the Borrower will be greater than the amount
that will be required to pay the probable liability of its debts and other
liabilities, subordinated, contingent or otherwise, as such debts and other
liabilities become absolute and matured; (iii) the Borrower does not intend to
incur and does not believe it will incur debts and liabilities, subordinated,
contingent or otherwise, beyond its ability to pay such debts and liabilities as
they become absolute and matured; and (iv) the Borrower will not have
unreasonably small capital with which to conduct the business in which it is
engaged as such business is now conducted and is proposed to be conducted
following the Effective Date and the consummation of the Spin-Off Distributions.
ARTICLE V
Covenants
---------
The Borrower agrees that, so long as any Bank has any
Commitment or any Loan or Letter of Credit Disbursement or accrued interest
thereon remains unpaid or any Letter of Credit remains outstanding:
SECTION 5.01. Information. The Borrower will
deliver to each of the Banks:
(a) as soon as available and in any event within 90 days after
the end of each fiscal year of the Borrower, a consolidated balance
sheet of the Borrower and its Consolidated Subsidiaries as of the end
of such fiscal year and the related consolidated statements of
operations, stockholders' equity and cash flows for such fiscal year,
setting forth in each case in comparative form the figures for the
previous fiscal
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63
year, all reported on in a manner acceptable to the Securities and
Exchange Commission by Price Waterhouse LLP or other independent public
accountants of nationally recognized standing;
(b) as soon as available and in any event within 45 days after
the end of each of the first three quarters of each fiscal year of the
Borrower, a consolidated balance sheet of the Borrower and its
Consolidated Subsidiaries as of the end of such quarter and the related
consolidated statements of operations, stockholders' equity and cash
flows for such quarter and for the portion of the Borrower's fiscal
year ended at the end of such quarter, setting forth in each case in
comparative form the figures for the corresponding quarter and the
corresponding portion of the Borrower's previous fiscal year, all
certified (subject to normal year-end adjustments) as to fairness of
presentation, generally accepted accounting principles and consistency
by the chief financial officer or chief accounting officer of the
Borrower;
(c) simultaneously with the delivery of each set of financial
statements referred to in clauses (a) and (b) above, a certificate of
the chief financial officer or the chief accounting officer of the
Borrower (i) setting forth in reasonable detail the calculations
required to establish whether the Borrower was in compliance with the
requirements of Sections 5.18, 5.19, 5.20 and 5.21 of this Agreement on
the date of such financial statements, (ii) setting forth in reasonable
detail the calculations required to establish the Borrower's Debt
Coverage Ratio as of the end of the Calculation Period ended on the
date of the most recent balance sheet included in such financial
statements, (iii) stating whether to such officer's actual knowledge
any Default exists hereunder on the date of such certificate and, if
any such Default then exists, setting forth the details thereof and the
action which the Borrower is taking or proposes to take with respect
thereto, (iv) stating whether, since the date of the most recent
financial statements previously delivered pursuant to this Section,
there has been any material change in the generally accepted accounting
principles applied in the preparation of such statements, and, if so,
describing such change and (v) stating whether there is any Subsidiary
that has not
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64
taken all actions required to be taken pursuant to Section 5.07;
(d) simultaneously with the delivery of each set of financial
statements referred to in clause (a) above, a statement of the firm of
independent public accountants which reported on such statements
indicating whether anything has come to their attention to cause them
to believe that any Default existed on the date of such statements
(which certificate may be limited to the extent required by accounting
rules or guidelines);
(e) within five days after any officer of the Borrower obtains
actual knowledge of any Default, if such Default is then continuing, a
certificate of the chief financial officer or the chief accounting
officer of the Borrower setting forth the details thereof and the
action which the Borrower is taking or proposes to take with respect
thereto;
(f) promptly upon the mailing thereof to the shareholders of
the Borrower generally after the Spin- Off Distributions, copies of all
financial statements, reports and proxy statements so mailed;
(g) promptly upon the filing thereof, copies of all
registration statements (other than the exhibits thereto and any
registration statements on Form S-8 or its equivalent) and reports on
Forms 10-K, 10-Q and 8-K (or their equivalents), including, without
limitation, any and all amendments thereto and to the Spin-Off
Information, which the Borrower shall have filed with the Securities
and Exchange Commission;
(h) within 10 days after any member of the ERISA Group (i)
gives or is required to give notice to the PBGC of any "reportable
event" (as defined in Section 4043 of ERISA), other than any reportable
event resulting from the Spin-Off Transactions, with respect to any
Plan with an unfunded liability in excess of $5,000,000 which might
constitute grounds for a termination of such Plan under Title IV of
ERISA, or knows that the plan administrator of any Plan has given or is
required to give notice of any such reportable event, a copy of the
notice of such reportable event given or required to be given to the
PBGC; (ii) receives notice of complete or partial withdrawal
<PAGE>
65
liability under Title IV of ERISA or notice that any Multiemployer Plan
is in reorganization, is insolvent or has been terminated, a copy of
such notice; (iii) receives notice from the PBGC under Title IV of
ERISA of an intent to terminate, impose liability (other than for
premiums under Section 4007 of ERISA) in respect of, or appoint a
trustee to administer any Plan with an unfunded liability in excess of
$5,000,000, a copy of such notice; (iv) applies for a waiver of the
minimum funding standard under Section 412 of the Internal Revenue
Code, a copy of such application; (v) gives notice of intent to
terminate any Plan with an unfunded liability in excess of $5,000,000
under Section 4041(c) of ERISA, a copy of such notice and other
information filed with the PBGC; (vi) gives notice of withdrawal from
any Plan with an unfunded liability in excess of $5,000,000 pursuant to
Section 4063 of ERISA, a copy of such notice, if such withdrawal,
reorganization, insolvency or termination has resulted or could
reasonably be expected to result in a current payment obligation of any
member of the ERISA Group in excess of $5,000,000; or (vii) fails to
make any payment or contribution to any Plan or Multiemployer Plan or
makes any amendment to any Plan which failure or amendment has resulted
or could result in the imposition of a Lien or the posting of a bond or
other security, a certificate of the chief financial officer or the
chief accounting officer of the Borrower setting forth details as to
such occurrence and action, if any, which the Borrower or applicable
member of the ERISA Group is required or proposes to take; provided,
however, that prior to the Spin-Off Transactions, the Borrower's
covenant under this subparagraph (h) shall not apply with respect to
(i) any notice given or required to be given by, (ii) any notice
received by, (iii) any waiver application by, or (iv) any failure or
amendment by (collectively, "Section 5.01(h) Notice"), any member of
the ERISA Group other than the Borrower or any Subsidiary, unless the
event or condition that is the subject of the Section 5.01(h) Notice
has resulted or is reasonably expected to result in a liability in
excess of $5,000,000.
(i) not later than 45 days after the end of each fiscal year
of the Borrower, commencing with the fiscal year beginning in January
1997, a copy of the annual business plan and projections of the
Borrower and its Consolidated Subsidiaries (including, without
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66
limitation, operating budget and cash flow budget of the Borrower and
its Consolidated Subsidiaries) for such fiscal year, such plans and
projections to be accompanied by a certificate of the chief financial
officer or chief accounting officer of the Borrower stating that such
plans and projections have been prepared using assumptions believed in
good faith by management of the Borrower to be reasonable at the time
made; and
(j) from time to time such additional information regarding
the financial position or business of the Borrower and its Subsidiaries
as the Agent, at the request of any Bank, may reasonably request.
SECTION 5.02. Payment of Obligations. The Borrower will pay
and discharge, and will cause each of its Subsidiaries to pay and discharge, at
or before maturity, all their respective material obligations and liabilities,
(including, without limitation, tax liabilities and claims of materialmen,
warehousemen and the like which if not paid might by law give rise to a Lien),
except where the same may be contested in good faith by appropriate proceedings,
and will maintain, and will cause each Subsidiary to maintain, in accordance
with generally accepted accounting principles, appropriate reserves for the
accrual of any of the same.
SECTION 5.03. Maintenance of Property; Insurance. (a) The
Borrower will keep, and will cause each of its Subsidiaries to keep, all
property useful and necessary in its business in good working order and
condition, ordinary wear and tear excepted.
(b) The Borrower will, and will cause each of its Subsidiaries
to, maintain (either in the name of the Borrower or in such Subsidiary's own
name) with financially sound and responsible insurance companies, insurance on
all their respective properties in at least such amounts, against at least such
risks and with such risk retention as are usually maintained, insured against or
retained, as the case may be, in the same general area by companies of
established repute engaged in the same or a similar business; and will furnish
to the Banks, upon request from the Agent, information presented in reasonable
detail as to the insurance so carried. Prior to the Spin-Off Distributions, the
Borrower will be deemed to be in compliance with the foregoing provisions of
this subparagraph (b) of this Section if and to the extent
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67
Corning maintains such insurance coverage under common policies for the Borrower
and its Subsidiaries.
SECTION 5.04. Conduct of Business and Maintenance of
Existence. The Borrower will continue, and will cause each of its Subsidiaries
to continue, to engage in business of the same general type as now conducted by
the Borrower and its Subsidiaries, and will preserve, renew and keep in full
force and effect, and will cause each of its Subsidiaries to preserve, renew and
keep in full force and effect, their respective corporate existence and their
respective rights, privileges and franchises necessary or desirable in the
normal conduct of business; provided that nothing in this Section 5.04 shall
prohibit (i) any merger of any Subsidiary of the Borrower permitted by Section
5.11(a) or (ii) the termination of the corporate existence of any Subsidiary if
the Borrower in good faith determines that such termination is in the best
interest of the Borrower and is not materially disadvantageous to the Banks (it
being understood that the mere existence of Security Documents or a Guarantee
Agreement applicable to such Subsidiary does not preclude the Borrower from
making such determination).
SECTION 5.05. Compliance with Laws. The Borrower will comply,
and cause each of its Subsidiaries to comply, with all applicable laws,
ordinances, rules, regulations and requirements of any governmental authorities
(including, without limitation, Environmental Laws and ERISA and the rules and
regulations thereunder) except where (i) noncompliance therewith would not have
a Material Adverse Effect or (ii) the necessity of compliance therewith is
contested in good faith by appropriate proceedings.
SECTION 5.06. Inspection of Property, Books and Records. The
Borrower will keep, and will cause each of its Subsidiaries to keep, proper
books of record and account in which full, true and correct entries shall be
made of all dealings and transactions in relation to its business and
activities. The Borrower, upon reasonable advance notice from any Bank, will
permit, and will cause each of its Subsidiaries to permit, representatives of
such Bank at such Bank's expense to visit and inspect any of their respective
properties, to examine and make abstracts from any of their respective books and
records and to discuss their respective affairs, finances and accounts with
their respective officers, employees and independent public accountants, all
<PAGE>
68
at such reasonable times and as often as may reasonably be desired.
SECTION 5.07. Additional Subsidiaries. If at any time after
the Effective Date any Person is or becomes a Subsidiary (or any Subsidiary that
initially is an Excluded Subsidiary ceases to be an Excluded Subsidiary) the
Borrower, within 30 days of such Person becoming a Subsidiary (or ceasing to be
an Excluded Subsidiary), will (a) cause such Subsidiary (unless such Subsidiary
is a Qualified Joint Venture, Joint Venture Holding Company, Foreign Subsidiary
or Excluded Subsidiary) to become a Guarantor pursuant to the Guarantee
Agreement; (b) pledge, or cause to be pledged, all the outstanding shares of
capital stock of and other Investments in such Subsidiary (unless such
Subsidiary is a Foreign Subsidiary or Excluded Subsidiary or, prior to January
1, 1997, a Qualified Joint Venture) that are owned directly or indirectly by or
on behalf of the Borrower or any other Subsidiary (unless such Subsidiary is a
Qualified Joint Venture, Joint Venture Holding Company, Foreign Subsidiary or
Excluded Subsidiary), to be pledged pursuant to the Pledge Agreement; (c) cause
such Subsidiary (unless such Subsidiary is a Qualified Joint Venture, Joint
Venture Holding Company, Foreign Subsidiary or Excluded Subsidiary) to become a
party to the Pledge Agreement and the Security Agreement and grant Liens on its
assets to the same extent as the Borrower and its other Subsidiaries thereunder;
and (d) take all actions as shall be necessary, or that the Agent or the
Security Agent shall reasonably request, to perfect such Liens, including,
without limitation, the execution and filing of Uniform Commercial Code
financing statements in all relevant jurisdictions, and deliver evidence thereof
to the Security Agent, all at the Borrower's expense.
SECTION 5.08. Amendment of Certain Documents; Post-Closing
Transaction Documents. (a) The Borrower will not permit any amendment or
modification to be made to, or any waiver of its rights or the rights of any
Subsidiary under, any Transaction Document or Subordinated Debt Document. The
Borrower will not permit any amendment or modification to be made to the terms
of the Permitted Preferred Stock.
(b) Neither the Borrower nor any Subsidiary will enter into
any Transaction Document after the Effective Date unless either (i) such
Transaction Document is substantially in the form delivered to the Agent and its
counsel on or
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69
prior to the Effective Date, (ii) such Transaction Document is entered into in
order to effectuate a transaction expressly contemplated by another Transaction
Document and, to the extent the terms and conditions of such Transaction
Document are not disclosed in the Spin-Off Information, is on terms and
conditions no less favorable to the Borrower and its Subsidiaries than they
would obtain in a comparable arm's-length transaction or (iii) such Transaction
Document is approved by the Required Banks.
SECTION 5.09. Investments. Neither the Borrower nor any of its
Subsidiaries will make, hold or acquire any Investment in any Person other than:
(a) Investments of the Borrower and its Subsidiaries existing
on the date of this Agreement and set forth in Schedule 5.09;
(b) Investments by the Borrower and its Subsidiaries in the
Borrower and its Subsidiaries other than Excluded Subsidiaries, Foreign
Subsidiaries, Joint Venture Holding Companies and Qualified Joint
Ventures;
(c) Temporary Cash Investments;
(d) Investments by the Borrower and its Subsidiaries in
Excluded Subsidiaries, Foreign Subsidiaries, Joint Venture Holding
Companies and Qualified Joint Ventures consisting of (i) Investments
made prior to the date of this Agreement and set forth in Schedule
5.09, (ii) Investments in additional Qualified Joint Ventures
consisting of the contribution to such Qualified Joint Ventures of
assets (other than cash and cash equivalents) described in Schedule
1.01(c) and assets (other than cash and cash equivalents) comprising
one additional Quadrant Four Property and (iii) additional Investments,
provided that the sum of all such additional Investments plus any
commitments to make any such Investments (including the amount of any
Indebtedness or other monetary obligations of any Excluded
Subsidiaries, Foreign Subsidiaries, Joint Venture Holding Companies and
Qualified Joint Ventures Guaranteed by the Borrower or any other
Subsidiary) shall not exceed $25,000,000 in the aggregate at any time;
(e) Investments by a Qualified Joint Venture;
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(f) Investments that constitute acquisitions permitted by
subparagraph (c) of Section 5.11;
(g) loans and advances by the Borrower and its Subsidiaries to
their respective employees not exceeding $3,000,000 in the aggregate at
any time outstanding; and
(h) any Investment by the Borrower not otherwise permitted by
the foregoing clauses of this Section if, immediately after such
Investment is made or acquired, the aggregate net book value of all
Investments permitted by this subparagraph (h) does not exceed
$5,000,000.
SECTION 5.10 Negative Pledge. Neither the Borrower nor any of
its Subsidiaries (other than Qualified Joint Ventures) will create, assume or
suffer to exist any Lien on any asset now owned or hereafter acquired by it,
except Liens created under the Security Documents and the following:
(a) Liens existing on the date of this Agreement, or that the
Borrower or any of its Subsidiaries has an existing commitment to
create after the date of this Agreement, in each case identified on
Schedule 5.10 securing obligations identified on such Schedule;
(b) any Lien existing on any asset of any Person that becomes
a Subsidiary after the Effective Date at the time such Person becomes a
Subsidiary and not created in contemplation of such event;
(c) any Lien on any asset securing Debt incurred or assumed
for the purpose of financing all or any part of the cost of acquiring
such asset; provided that (i) such Lien attaches to such asset
concurrently with or within 90 days after the acquisition thereof and
(ii) such Debt is permitted hereunder;
(d) any Lien on any asset of any Person (other than the
Borrower or a Subsidiary) existing at the time such Person is merged or
consolidated with or into the Borrower or a Subsidiary and not created
in contemplation of such event; provided that such Lien shall not
attach to any other assets;
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71
(e) any Lien existing on any asset prior to the acquisition
thereof by the Borrower or a Subsidiary and not created in
contemplation of such acquisition; provided that such Lien shall not
attach to any other assets;
(f) any Lien arising out of the refinancing, extension,
renewal or refunding of any Debt secured by any Lien permitted by any
of the foregoing clauses of this Section; provided that such Debt is
permitted hereunder, is not increased and is not secured by any
additional assets;
(g) Liens for taxes not delinquent or being contested in good
faith and by appropriate proceedings;
(h) deposits or pledges to secure obligations under workers'
compensation, social security or similar laws, or under unemployment
insurance;
(i) mechanics', workers', materialmen's, warehousemen's,
lessor's or other like Liens arising in the ordinary course of business
with respect to obligations which are not due or which are being
contested in good faith;
(j) Liens arising in the ordinary course of its business which
(i) do not secure Debt or Derivatives Obligations, (ii) do not secure
any monetary obligation in an amount exceeding $3,000,000 and (iii) do
not in the aggregate materially detract from the value of its assets or
materially impair the use thereof in the operation of its business; and
(k) Liens on cash and cash equivalents securing Derivatives
Obligations; provided that the aggregate amount of cash and cash
equivalents subject to such Liens may at no time exceed $5,000,000.
SECTION 5.11. Consolidations, Mergers, Acquisitions and Sales
of Assets. (a) Neither the Borrower nor any of its Subsidiaries will consolidate
or merge with or into any other Person, except that if, after giving effect
thereto, no Default shall have occurred and be continuing, (i) any Subsidiary of
the Borrower may be merged into the Borrower if the Borrower is the surviving
corporation and (ii) any Subsidiary of the Borrower may merge with any other
corporation (other than the Borrower)
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72
if the surviving corporation is a Subsidiary; provided that if any such merger
involves a party that was not a wholly-owned Subsidiary immediately prior to
such merger, then such merger must also comply with subsection (c) of this
Section.
(b) Neither the Borrower nor any of its Subsidiaries will sell
or otherwise transfer any asset, except (i) those assets owned on the date of
this Agreement by the Borrower or any of its Subsidiaries identified on Schedule
5.11, (ii) sales and transfers between and among the Borrower and the
Guarantors, (iii) the Spin-Off Transactions identified in Schedule 1.01(b) and
the Spin-Off Distributions may be made in accordance with the Spin-Off
Information, (iv) in the ordinary course of business, (v) transfers made to
acquire Investments permitted by Section 5.09 or transfers made as Restricted
Payments permitted by Section 5.16, (vi) transfer of assets comprising Quadrant
Four Properties and (vii) other transfers (including assets other than Quadrant
Four Properties transferred pursuant to Asset Swaps) provided that the aggregate
fair market value of all assets transferred in reliance upon this clause (vii)
shall not exceed $5,000,000 (or $10,000,000, in the case of transfers of assets
comprising a Quadrant Two Property or Quadrant Three Property as part of an
Asset Swap) per transfer or $25,000,000 in the aggregate during the period from
the Effective Date through the Tranche B Maturity Date. Notwithstanding the
foregoing, neither the Borrower nor any of its Subsidiaries will sell or
otherwise transfer any assets prior to the date of the Spin-Off Distributions,
except as permitted by clauses (ii), (iv) or (v) above and except for those
assets identified in Part II of Schedule 5.11.
(c) Neither the Borrower nor any of its Subsidiaries will,
directly or indirectly (including, without limitation, by merger or
consolidation), acquire any assets constituting a going concern business, or any
capital stock or other ownership interests in any Person that prior to such
acquisition was not a wholly-owned Subsidiary, except that, if at the time
thereof and after giving effect thereto no Default shall have occurred and be
continuing, the Borrower or any of its Subsidiaries may make any such
acquisition; provided that (i) the business conducted with such acquired assets
or conducted by such acquired Person shall be the same as or substantially
similar to the principal business conducted by the Borrower and its Subsidiaries
on the Effective Date, (ii) the aggregate
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73
consideration paid or delivered by the Borrower and its Subsidiaries (including
the fair market value of any non-cash consideration, including any capital stock
of the Borrower issued as part of such consideration, and any Debt outstanding
at the time of any such acquisition that becomes Debt of the Borrower or a
Subsidiary as a result of any such acquisition) shall not exceed (A) $5,000,000,
in the case of any such acquisition or series of related acquisitions (or
$25,000,000, in the case of any such acquisition or series of acquisition of any
Quadrant One Property) or (B) $50,000,000, on a cumulative basis, for all such
acquisitions subsequent to the Effective Date, (iii) the Borrower would be in
compliance with Sections 5.18, 5.19, 5.20 and 5.21 for the most recent
Calculation Period and as of the last day thereof if such acquisition had been
consummated at the beginning of such Calculation Period, (iv) the Borrower shall
deliver to the Agent a certificate of the chief financial officer or the chief
accounting officer of the Borrower setting forth calculations in reasonable
detail demonstrating compliance with the conditions set forth in clauses (ii)
and (iii) above and (v) in the case of any such acquisition of any capital stock
of or other ownership interests in any Person, such acquisition will result in
such Person becoming a wholly-owned Subsidiary of the Borrower; provided
further, that the limitations set forth in clause (ii) above shall not apply to
any consideration paid or delivered in connection with an acquisition
constituting part of an Asset Swap to the extent that the aggregate
consideration paid or delivered by the Borrower and its Subsidiaries in
connection with such acquisition includes assets comprising one or more Quadrant
Two Properties, Quadrant Three Properties or Quadrant Four Properties
transferred as part of such Asset Swap (or if one or more of such Quadrant Two
Properties, Quadrant Three Properties or Quadrant Four Properties are sold as
part of such Asset Swap, an amount equal to the Net Cash Proceeds of such sale),
but shall apply to any excess consideration so paid or delivered.
SECTION 5.12. Use of Proceeds and Letters of Credit. The
proceeds of the Term Loans will be used to partially finance the repayment of
the Borrower's or Subsidiaries' intercompany Debt to the Corning Companies. The
proceeds of the Working Capital Loans and Swingline Loans will be used for
general corporate purposes of the Borrower and its Subsidiaries, including
acquisitions permitted by subclause (c) of Section 5.11 and working capital.
Letters of Credit will be issued only to support
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74
obligations of the Borrower and its Subsidiaries incurred in the ordinary course
of business. None of such proceeds of the Loans will be used, directly or
indirectly, for the purpose, whether immediate, incidental or ultimate, of
buying or carrying any Margin Stock.
SECTION 5.13. Further Assurances. The Borrower will, and will
cause each of its Subsidiaries to, execute any and all further documents,
financing statements, agreements and instruments, and take all further action
(including filing Uniform Commercial Code and other financing statements), that
may be required under applicable law, or that the Required Banks, the Agent or
the Security Agent may request, in order to effectuate the transactions
contemplated by the Loan Documents and in order to grant, preserve, protect and
perfect the validity and priority of the security interests created or intended
to be created by the Security Documents. The Borrower agrees to provide such
evidence as the Security Agent shall reasonably request as to the perfection and
priority status of each such security interest.
SECTION 5.14. Transactions with Affiliates. The Borrower will
not, nor will it permit any of its Subsidiaries to, directly or indirectly,
enter into any transaction, including any purchase, sale, lease or exchange of
property or rendering of services, with or for the benefit of any Affiliate,
other than (a) transactions expressly contemplated by the Transaction Documents
or (b) any transaction entered into by the Borrower or any Subsidiary which is
(i) otherwise permitted under this Agreement, (ii) in the ordinary course of
business of such entity's business and (iii) upon fair and reasonable terms no
less favorable to such entity than it would obtain in a comparable arm's-length
transaction with a Person not an Affiliate.
SECTION 5.15. Restrictions Affecting Subsidiaries. The
Borrower will not create, incur, permit or suffer to exist any agreement or
other arrangement that prohibits, restricts or imposes any condition upon the
ability or right of any Subsidiary to pay dividends or other distributions with
respect to any shares of its capital stock or to make or repay loans or advances
to the Borrower or any other Subsidiary; provided that the foregoing shall not
apply to restrictions or conditions (i) imposed by law, (ii) existing on the
Effective Date that are identified in Schedule 5.15 or (iii) included in any
partnership agreement
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or other governing document relating to a Qualified Joint Venture.
SECTION 5.16. Restricted Payments. Neither the Borrower nor
any of its Subsidiaries will declare or make, or agree to declare or make, any
Restricted Payment, except that, if at the time thereof and after giving effect
thereto no Default shall have occurred and be continuing, (a) the Borrower may
repay Permitted Subordinated Debt consisting of Debt owing to Corning, but only
to the extent of the gross proceeds received by the Borrower (before deducting
underwriting discounts and commissions or other expenses) from the issuance of
the Senior Subordinated Notes or the borrowing of Senior Subordinated Bridge
Loans, (b) the Borrower may repay Permitted Subordinated Debt consisting of
Senior Subordinated Bridge Loans, but only to the extent of the gross proceeds
received by the Borrower (before deducting underwriting discounts and
commissions or other expenses) from the issuance of the Senior Subordinated
Notes, (c) the Borrower may pay interest and fees as and when due in respect of
the Senior Subordinated Bridge Loans and the Senior Subordinated Notes, (d) the
Borrower may make the Spin-Off Distributions, (e) the Borrower may pay dividends
on the Permitted Preferred Stock in an amount not exceeding $150,000 per year,
(f) after consummation of the Spin-Off Distributions, the Borrower may
repurchase shares of its common stock to be contributed to employee benefit
plans, or to the extent of any cash consideration received by the Borrower in
respect of the issuance of shares of its common stock to employees, provided
that aggregate Restricted Payments pursuant to this clause (f) shall not exceed
during any fiscal year of the Borrower the sum of $10,000,000 plus the amount of
cash consideration received by the Borrower during such fiscal year in respect
of the issuance of shares of common stock to its employees, and (g) following
the date of consummation of the Spin-Off Distributions, the Borrower may make a
payment to Corning (as a Restricted Payment or otherwise) in an amount equal to
the excess, if any, of (i) the aggregate amount of cash and cash equivalents
held by the Borrower and its Subsidiaries on the date of the Spin-Off
Distributions over (ii) the sum of the aggregate principal amount of Working
Capital Loans and Swingline Loans outstanding on the date of the Spin-Off
Distributions plus $40,000,000 plus the Net Cash Proceeds from any sales of
assets identified in Part II of Schedule 5.11 received on or prior to such date.
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76
SECTION 5.17. Debt.
(a) The Borrower will not create, assume or otherwise be or
become liable with respect to any Debt, except:
(i) Debt existing on the date of this Agreement identified on
Schedule 5.17 and extensions, renewals and replacements of any such
Debt (other than Existing Letters of Credit) that do not increase the
outstanding principal amount thereof;
(ii) Debt in respect of the Loans and Letters of Credit
hereunder;
(iii) Permitted Subordinated Debt on terms and conditions, and
incurred pursuant to documentation, satisfactory to the Agent and the
Required Banks;
(iv) secured Debt of the Borrower permitted by clause (c) of
Section 5.10 and unsecured Debt of the Borrower not otherwise permitted
by the foregoing clauses of this Section; provided that the aggregate
outstanding principal amount of Debt permitted by this clause (iv) plus
Debt permitted by clause (vii) of subsection (b) of this Section shall
not at any time exceed $10,000,000;
(v) Debt of the Borrower to the Corning Companies that is
repaid on the Effective Date as provided in clause (o) of Section 3.01
and Excess Corning Debt; provided that no payment, whether of
principal, interest or otherwise, shall be made in respect of any
Excess Corning Debt (except to the extent of Restricted Payments made
pursuant to clause (g) of Section 5.16) and all Excess Corning Debt
outstanding on the date of consummation of the Spin-Off Distribution
(after giving effect to any such permitted payments) shall be
contributed by the Corning Companies to the capital of the Borrower and
shall cease to be outstanding; and
(vi) Debt owed by the Borrower to any Subsidiary.
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(b) The Borrower will not permit any Subsidiary to create,
assume or otherwise be or become liable with respect to any Debt, except:
(i) Debt existing on the date of this Agreement identified on
Schedule 5.17 and extensions, renewals and replacements of any such
Debt (other than Existing Letters of Credit) that do not increase the
outstanding principal amount thereof;
(ii) Debt in respect of the Guarantees under the
Guarantee Agreement;
(iii) Debt owed by any Subsidiary to the Borrower or to another
Subsidiary; provided that such Debt is incurred in compliance with
Section 5.09;
(iv) unsecured Debt of any Subsidiary that has become a
Guarantor under the Guarantee Agreement in respect of a Guarantee of
Permitted Subordinated Debt provided that any such Guarantee by a
Subsidiary of any Permitted Subordinated Debt shall by its terms
expressly provide that (A) the obligations of such Subsidiary under
such Guarantee are subordinated to the obligations of such Subsidiary
under the Loan Documents to which it is a party on the same terms as
the obligations of the Borrower are subordinated pursuant to the
related Permitted Subordinated Debt and (B) will terminate and be
released if such Subsidiary is released from the Guarantee Agreement or
if the Borrower's ownership interest in such Subsidiary is sold or
otherwise disposed of either in a transaction permitted by the terms of
the Permitted Subordinated Debt or pursuant to the exercise of remedies
under the Pledge Agreement;
(v) Debt outstanding at the time of any acquisition permitted
by subsection (c) of Section 5.11 that becomes Debt of the Borrower or
a Subsidiary as a result of such acquisition and is treated as
consideration paid in connection with such acquisition for purposes of
subsection (c) of Section 5.11;
(vi) Debt of Qualified Joint Ventures that by its terms
provides that neither the Borrower nor any of its other Subsidiaries
(other than a Joint Venture Holding Company that owns an equity
interest in such Qualified Joint Venture) is liable therefor; provided
that the
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aggregate principal amount of Debt permitted by this clause (vi) shall
not at any time exceed $5,000,000 for any Qualified Joint Venture or
$15,000,000 in the aggregate for all Qualified Joint Ventures;
(vii) secured Debt of Subsidiaries permitted by clause (c) of
Section 5.10 and unsecured Debt of Subsidiaries not otherwise permitted
by the foregoing clauses of this Section; provided that the aggregate
outstanding principal amount of Debt permitted by this clause (vii)
plus Debt permitted by clause (iv) of subsection (a) of this Section
shall not at any time exceed $10,000,000; and
(viii) Debt of any Subsidiary to the Corning Companies that is
repaid on the Effective Date as provided in clause (o) of Section 3.01
and Excess Corning Debt; provided that no payment, whether of
principal, interest or otherwise, shall be made in respect of any
Excess Corning Debt (except to the extent of Restricted Payments made
pursuant to clause (g) of Section 5.16) and all Excess Corning Debt
outstanding on the date of consummation of the Spin-Off Distribution
(after giving effect to any such permitted payments) shall be
contributed by the Corning Companies to the capital of the Borrower and
shall cease to be outstanding.
SECTION 5.18. Leverage Ratio. The Leverage Ratio will not at any time
during any period set forth below exceed the ratio set forth opposite such
period:
Period Ratio
------ -----
Effective Date through December 31, 1997 0.55 to 1.00
January 1, 1998 through December 31, 1998 0.50 to 1.00
January 1, 1999 and thereafter 0.45 to 1.00
SECTION 5.19. Debt Coverage Ratio. The Debt Coverage Ratio will not at
any time during any period set forth below exceed the ratio set forth opposite
such period:
Period Ratio
------ -----
Effective Date through June 30, 1997 3.80 to 1.00
July 1, 1997 through December 31, 1997 3.50 to 1.00
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January 1, 1998 through June 30, 1998 2.80 to 1.00
July 1, 1998 through December 31, 1998 2.50 to 1.00
January 1, 1999 and thereafter 2.00 to 1.00
SECTION 5.20. Coverage Ratio. The Coverage Ratio for any Calculation
Period ending during any period set forth below will not be less than the ratio
set forth opposite such period:
Calculation Period Ending During the Period Ratio
- ------------------------------------------- -----
January 1, 1997 through June 30, 1997 1.80 to 1.00
July 1, 1997 through December 31, 1997 2.00 to 1.00
January 1, 1998 through June 30, 1998 2.25 to 1.00
July 1, 1998 through December 31, 1998 2.50 to 1.00
January 1, 1999 through December 31, 1999 2.75 to 1.00
January 1, 2000 and thereafter 3.00 to 1.00
provided that for purposes of determining the Coverage Ratio (i) for the
Calculation Period ended March 31, 1997, the Consolidated Interest Expense shall
be based on the Consolidated Interest Expense for the fiscal quarter then ended
multiplied by four and shall be determined on a pro forma basis adjusted to give
effect to the Spin-Off Transactions as if the Spin-Off Transactions and the
borrowing of the Term Loans and Permitted Subordinated Debt had occurred on
December 31, 1996; (ii) for the Calculation Period ended June 30, 1997, the
Consolidated Interest Expense shall be based on the Consolidated Interest
Expense for the two fiscal quarters then ended multiplied by two and shall be
determined on a pro forma basis adjusted to give effect to the Spin-Off
Transactions as if the Spin-Off Transactions and the borrowing of the Term Loans
and Permitted Subordinated Debt had occurred on December 31, 1996; (iii) for the
Calculation Period ended September 30, 1997, the Consolidated Interest Expense
shall be based on the Consolidated Interest Expense for the three fiscal
quarters then ended multiplied by four-thirds and shall be determined on a pro
forma basis adjusted to give effect to the Spin-Off Transactions as if the
Spin-Off Transactions and the borrowing of the Term Loans and Permitted
Subordinated Debt had occurred on December 31, 1996; and (iv) for the
Calculation Period ended December 31, 1997, the
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Consolidated Interest Expense shall be based on the Consolidated Interest
Expense for the four fiscal quarters then ended and shall be determined on a pro
forma basis adjusted to give effect to the Spin-Off Transactions as if the
Spin-Off Transactions and the borrowing of the Term Loans and Permitted
Subordinated Debt had occurred on December 31, 1996.
SECTION 5.21. Consolidated Capital Expenditures. Consolidated
Capital Expenditures during any fiscal year will not exceed the excess of (i)
$95,000,000 over (ii) one-half of the aggregate consideration paid or delivered
by the Borrower or any of its Subsidiaries during such fiscal year in connection
with any acquisitions permitted by subsection (c) of Section 5.11 (including the
fair market value of any non-cash consideration, including any capital stock of
the Borrower issued as part of such consideration, and any Debt outstanding at
the time of any such acquisition that becomes Debt of the Borrower or a
Subsidiary as a result of such acquisition) excluding any such consideration
that is not subject to the limitations of clause (ii) thereof by reason of the
final proviso to such subsection; provided that, if the aggregate Capital
Expenditures made in any fiscal year commencing on or after January 1, 1997, are
less than the maximum allowed amount for such fiscal year (excluding amounts
allowed by reason of this proviso), then an amount equal to the lesser of (x)
such shortfall and (y) $9,500,000 shall be carried forward and added to the
amount of Capital Expenditures permitted in the immediately succeeding fiscal
year.
SECTION 5.22. Relationships with Corning Companies and CPS
Companies. If the Spin-Off Distributions are not made on or prior to the
Effective Date, then, unless and until the Spin-Off Distributions are made, and
without limitation of the other covenants and agreements of the Borrower herein:
(a) the Borrower shall be permitted to own the shares of
common stock of CPS to be distributed by it in connection with the
Spin-Off Distributions, but neither the Borrower nor any of its
Subsidiaries shall make, hold or acquire any other Investment in any
CPS Company, or Guarantee any Debt or other obligation of any CPS
Company, or incur any Debt to any CPS Company; and
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(b) neither the Borrower nor any of its Subsidiaries shall
enter into any agreement or other transaction with any CPS Company or
Corning Company, other than the Transaction Documents entered into on
or prior to the Effective Date and transactions expressly contemplated
thereby and except as otherwise permitted by clause (b) of Section
5.14.
ARTICLE VI
Defaults
--------
SECTION 6.01. Events of Default. If one or more
of the following events ("Events of Default") shall have
occurred and be continuing:
(a) (i) the Borrower shall fail to pay when due any principal
of any Loan or any reimbursement obligation in respect of a Letter of
Credit Disbursement or (ii) the Borrower shall fail to pay interest on
any Loan, any fees or any other amount payable hereunder or under any
other Loan Document within three days of the time such amount is due;
(b) the Borrower shall fail to observe or perform any covenant
contained in Section 5.01(e), any of Sections 5.08 to 5.12, inclusive,
any of Sections 5.14 to 5.22, inclusive, or the Borrower or any
Subsidiary shall fail to observe or perform any covenant contained in
any of Sections [ ] of the Pledge Agreement or Sections [ ] of the
Security Agreement;
(c) the Borrower or any Subsidiary shall fail to observe or
perform any covenant or agreement contained in any Loan Document (other
than those covered by clause (a) or (b) above) for 10 days after notice
thereof has been given to the Borrower by the Agent at the request of
any Bank;
(d) any representation, warranty, certification or statement
made by the Borrower, any Subsidiary or Corning in this Agreement or
any other Loan Document or in any certificate, financial statement or
other document delivered pursuant to this Agreement or any other Loan
Document shall prove to have been incorrect in any material respect
when made (or deemed made);
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(e) the Borrower or any Subsidiary shall fail to make any
payment in respect of any Material Financial Obligations when due or
within any applicable grace period;
(f) any event or condition shall occur which results in the
acceleration of the maturity of any Material Debt or enables (or, with
the giving of notice or lapse of time or both, would enable) the holder
of such Debt or any Person acting on such holder's behalf to accelerate
the maturity thereof or, under circumstances in the nature of a
default, to require the prepayment, repurchase or redemption thereof;
(g) the Borrower or any Subsidiary shall commence a voluntary
case or other proceeding seeking liquidation, reorganization or other
relief with respect to itself or its debts under any bankruptcy,
insolvency or other similar law now or hereafter in effect or seeking
the appointment of a trustee, receiver, liquidator, custodian or other
similar official of it or any substantial part of its property, or
shall consent to any such relief or to the appointment of or taking
possession by any such official in an involuntary case or other
proceeding commenced against it, or shall make a general assignment for
the benefit of creditors, or shall fail generally to pay its debts as
they become due, or shall take any corporate action to authorize any of
the foregoing;
(h) an involuntary case or other proceeding shall be commenced
against the Borrower or any Subsidiary seeking liquidation,
reorganization or other relief with respect to it or its debts under
any bankruptcy, insolvency or other similar law now or hereafter in
effect or seeking the appointment of a trustee, receiver, liquidator,
custodian or other similar official of it or any substantial part of
its property, and such involuntary case or other proceeding shall
remain undismissed and unstayed for a period of 60 days; or an order
for relief shall be entered against the Borrower or any Subsidiary
under the federal bankruptcy laws as now or hereafter in effect;
(i) any member of the ERISA Group shall fail to pay when due
an amount or amounts aggregating in excess of $10,000,000 which it
shall have become liable to pay
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83
under Title IV of ERISA; or notice of intent to terminate a Material
Plan pursuant to Section 4041(c) of ERISA shall be filed under Title IV
of ERISA by any member of the ERISA Group, any plan administrator or
any combination of the foregoing; or the PBGC shall institute
proceedings under Title IV of ERISA to terminate, to impose liability
(other than for premiums under Section 4007 of ERISA) in respect of, or
to cause a trustee to be appointed to administer any Material Plan; or
the Borrower or any Subsidiary has knowledge that a condition set forth
in Sections 4042(a)(1), (2) or (3) of ERISA exists, or the PBGC shall
have given notice to any member of the ERISA Group that it has
determined that a condition exists by reason of which the PBGC would be
entitled to obtain a decree adjudicating that any Material Plan must be
terminated and that it has commenced proceedings to obtain such a
decree; or there shall occur a complete or partial withdrawal from, or
a default, within the meaning of Section 4219(c)(5) of ERISA, with
respect to, one or more Multiemployer Plans which could reasonably be
expected to cause one or more members of the ERISA Group to incur a
current payment obligation in excess of $10,000,000; provided, however,
that prior to the Spin-Off Transactions any such event or condition
with respect to any member of the ERISA Group other than the Borrower
or any Subsidiary shall constitute an Event of Default only if it has
resulted or is reasonably expected to result a liability in excess of
$10,000,000.
(j) one or more judgments or orders for the payment of money
in an aggregate amount in excess of $10,000,000 shall be rendered
against the Borrower or any Subsidiary or a combination thereof and
shall continue unsatisfied and unstayed for a period of 30 days, or any
action shall be legally taken by a judgment creditor to levy upon
assets or properties of the Borrower or any Subsidiary to enforce any
such judgment;
(k) at any time after the Spin-Off Distributions are made, any
person or group of persons (within the meaning of Section 13 or 14 of
the Securities Exchange Act of 1934, as amended) shall have acquired
beneficial ownership (within the meaning of Rule 13d-3 promulgated by
the Securities and Exchange Commission under said Act) of 20% or more
of the outstanding shares of common
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stock of the Borrower; or, during any period of 12 consecutive calendar
months, individuals who were directors of the Borrower on the first day
of such period shall cease to constitute a majority of the board of
directors of the Borrower; or
(l) any security interest purported to be created by any
Security Document shall cease to be, or shall be asserted by the
Borrower or any Subsidiary not to be, a valid and perfected security
interest in respect of the collateral;
then, and in every such event, the Agent shall (i) if requested by Banks having
more than 50% in aggregate amount of the Commitments, by notice to the Borrower
terminate the Commitments and they shall thereupon terminate, (ii) if requested
by Banks holding Notes evidencing more than 50% of the aggregate principal
amount of the Loans, by notice to the Borrower declare the Loans (together with
accrued interest thereon) to be, and the Loans (together with accrued interest
thereon) shall thereupon become, immediately due and payable without
presentment, demand, protest or other notice of any kind, all of which are
hereby waived by the Borrower, (iii) if requested by Banks having more than 50%
of the Letter of Credit Exposure, require cash collateral as contemplated by
Section 2.15(k) in an amount not exceeding the Letter of Credit Exposure or (iv)
any combination of the foregoing; provided that in the case of any of the Events
of Default specified in clause (g) or (h) above with respect to the Borrower,
without any notice to the Borrower or any other act by the Agent or the Banks,
the Commitments shall thereupon terminate and the Loans (together with accrued
interest thereon) shall become immediately due and payable without presentment,
demand, protest or other notice of any kind, all of which are hereby waived by
the Borrower and the Borrower shall be required to provide, immediately, cash
collateral as contemplated by Section 2.15(k) in an amount equal to the Letter
of Credit Exposure.
SECTION 6.02. Notice of Default. The Agent shall give notice
to the Borrower under Section 6.01(c) promptly upon being requested to do so by
any Bank and shall thereupon notify all the Banks thereof.
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ARTICLE VII
The Agent and Arranging Agents
------------------------------
SECTION 7.01. Appointment and Authorization. Each Bank
irrevocably appoints and authorizes each of the Agent and the Security Agent,
each being referred to as an "Agent" for purposes of this Article, to take such
action as agent on its behalf and to exercise such powers under this Agreement
and the other Loan Documents as are delegated to such Agent by the terms hereof
or thereof, together with all such powers as are reasonably incidental thereto.
SECTION 7.02. Agent and Affiliates. Each Bank that is an Agent
shall have the same rights and powers under this Agreement as any other Bank and
may exercise or refrain from exercising the same as though it were not an Agent,
and each such Bank and its affiliates may accept deposits from, lend money to,
and generally engage in any kind of business with the Borrower or any Subsidiary
or Affiliate of the Borrower as if it were not an Agent.
SECTION 7.03. Action by Agent. The obligations of any Agent
under this Agreement or any other Loan Documents are only those expressly set
forth herein and therein. Without limiting the generality of the foregoing, no
Agent shall be required to take any action with respect to any Default, except
as expressly provided in Article VI or, in the case of the Security Agent, as
may be expressly provided in the Security Documents.
SECTION 7.04. Consultation with Experts. Each Agent may
consult with legal counsel (who may be counsel for the Borrower), independent
public accountants and other experts selected by it and shall not be liable for
any action taken or omitted to be taken by it in good faith in accordance with
the advice of such counsel, accountants or experts.
SECTION 7.05. Liability of Agent. Neither any Agent nor any of
its Affiliates nor any of their respective directors, officers, agents, or
employees shall be liable for any action taken or not taken by it in connection
herewith (i) with the consent or at the request of the Required Banks (or, when
expressly required hereby, such different number of Banks required to consent to
or request such action or inaction) or (ii) in the absence of its own gross
negligence or willful misconduct. Neither any Agent
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nor any of its Affiliates nor any of their respective directors, officers,
agents or employees shall be responsible for or have any duty to ascertain,
inquire into or verify (i) any statement, warranty or representation made in
connection with this Agreement or any other Loan Document or any borrowing
hereunder; (ii) the performance or observance of any of the covenants or
agreements of the Borrower or its Subsidiaries; (iii) the satisfaction of any
condition specified in Article III, except receipt of items required to be
delivered to it; or (iv) the validity, effectiveness or genuineness of this
Agreement, the other Loan Documents or any other instrument or writing furnished
in connection herewith or therewith. No Agent shall incur any liability by
acting in reliance upon any notice, consent, certificate, statement, or other
writing (which may be a bank wire, telex, facsimile transmission or similar
writing) believed by it to be genuine or to be signed by the proper party or
parties. Without limiting the generality of the foregoing, the use of the term
"agent" in this Agreement with reference to any Agent is not intended to connote
any fiduciary or other implied (or express) obligations arising under agency
doctrine of any applicable law. Instead, such term is used merely as a matter of
market custom and is intended to create or reflect only an administrative
relationship between independent contracting parties.
SECTION 7.06. Indemnification. Each Bank shall, ratably in
accordance with its Loans, Letter of Credit Exposure and unused Commitment,
indemnify each Agent, its Affiliates and their respective directors, officers,
agents and employees (to the extent not reimbursed by the Borrower) against any
cost, expense (including counsel fees and disbursements), claim, demand, action,
loss or liability (except such as result from such indemnitee's gross negligence
or willful misconduct) that such Agent may suffer or incur in connection with
this Agreement or any other Loan Document or any action taken or omitted by such
indemnities hereunder or thereunder.
SECTION 7.07. Credit Decision. Each Bank acknowledges that it
has, independently and without reliance upon any Agent or any other Bank, and
based on such documents and information as it has deemed appropriate, made its
own credit analysis and decision to enter into this Agreement. Each Bank also
acknowledges that it will, independently and without reliance upon any Agent or
any other Bank, and based on such documents and information as it shall deem
appropriate at the time, continue to make its
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own credit decisions in taking or not taking any action under this Agreement.
SECTION 7.08. Successor Agent. Any Agent may resign at any
time by giving notice thereof to the Banks and the Borrower. Upon any such
resignation, the Required Banks shall have the right to appoint a successor
Agent. If no successor Agent shall have been so appointed by the Required Banks
and shall have accepted such appointment within 30 days after the retiring Agent
gives notice of resignation, then the retiring Agent may, on behalf of the
Banks, appoint a successor Agent, which shall be a commercial bank organized or
licensed under the laws of the United States of America or of any State thereof
and having a combined capital and surplus of at least $500,000,000. Upon the
acceptance of its appointment as an Agent by a successor Agent, such successor
Agent shall thereupon succeed to and become vested with all the rights and
duties of the retiring Agent, and the retiring Agent shall be discharged from
its duties and obligations hereunder. After any retiring Agent's resignation,
the provisions of this Article shall inure to its benefit as to any actions
taken or omitted to be taken by it while it was Agent.
SECTION 7.09. Agent's Fees. The Borrower shall pay to each
Agent for its own account fees in the amounts and at the times previously agreed
upon between the Borrower and such Agent.
SECTION 7.10. Arranging Agents. Each of the parties to this
Agreement hereby acknowledges that the Arranging Agents do not have any
obligations in their capacities as such under this Agreement or any other Loan
Document and that neither any Arranging Agent nor any of its directors,
officers, agents or employees shall have any liability hereunder or thereunder.
ARTICLE VIII
Change in Circumstances
-----------------------
SECTION 8.01. Basis for Determining Interest Rate Inadequate
or Unfair. If on or prior to the first day of any Interest Period for any
Euro-Dollar Borrowing:
(a) the Agent is advised by the Reference Banks that deposits
in dollars (in the applicable amounts)
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are not being offered to the Reference Banks in the relevant market for
such Interest Period; or
(b) Banks having 50% or more of the aggregate principal amount
of the affected Loans advise the Agent that the London Interbank
Offered Rate as determined by the Agent will not adequately and fairly
reflect the cost to such Banks of funding their Euro-Dollar Loans for
such Interest Period,
the Agent shall forthwith give notice thereof to the Borrower and the Banks,
whereupon until the Agent notifies the Borrower that the circumstances giving
rise to such suspension no longer exist, (i) the obligations of the Banks to
make Euro-Dollar Loans or to continue or convert outstanding Loans into
Euro-Dollar Loans shall be suspended, and (ii) each outstanding Euro-Dollar Loan
shall be converted into a Base Rate Loan on the last day of the then current
Interest Period applicable thereto. Unless the Borrower notifies the Agent at
least two Domestic Business Days before the date of any Euro-Dollar Borrowing
for which a Notice of Borrowing has previously been given that it elects not to
borrow on such date, if such Borrowing is a Euro-Dollar Borrowing such Borrowing
shall instead be made as a Base Rate Borrowing.
SECTION 8.02. Illegality. If, on or after the date of this
Agreement, the adoption of any applicable law, rule or regulation, or any change
in any applicable law, rule or regulation, or any change in the interpretation
or administration thereof by any governmental authority, central bank or
comparable agency charged with the interpretation or administration thereof, or
compliance by any Bank (or its Euro-Dollar Lending Office) with any request or
directive (whether or not having the force of law) of any such authority,
central bank or comparable agency shall make it unlawful or impossible for any
Bank (or its Euro-Dollar Lending Office) to make, maintain or fund its
Euro-Dollar Loans and such Bank shall so notify the Agent, the Agent shall
forthwith give notice thereof to the other Banks and the Borrower, whereupon
until such Bank notifies the Borrower and the Agent that the circumstances
giving rise to such suspension no longer exist, the obligation of such Bank to
make Euro-Dollar Loans, or to convert outstanding Loans into Euro-Dollar Loans,
shall be suspended. Before giving any notice to the Agent pursuant to this
Section, such Bank shall designate a different Euro- Dollar Lending Office if
such designation will avoid the
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need for giving such notice and will not, in the judgment of such Bank, be
otherwise disadvantageous to such Bank. If such notice is given, each
Euro-Dollar Loan of such Bank then outstanding shall be converted either (a) on
the last day of the then current Interest Period applicable to such Euro-Dollar
Loan if such Bank may not lawfully continue to maintain and fund such Loan to
such day or (b) immediately if such Bank shall determine that it may not
lawfully continue to maintain and fund such Loan to such day.
SECTION 8.03. Increased Cost and Reduced Return. (a) If on or
after the date hereof the adoption of any applicable law, rule or regulation, or
any change in any applicable law, rule or regulation, or any change in the
interpretation or administration thereof by any authority, central bank or
comparable agency charged with the interpretation or administration thereof, or
compliance by any Bank (or its Applicable Lending Office) with any request or
directive (whether or not having the force of law) of any such governmental
authority, central bank or comparable agency shall impose, modify or deem
applicable any reserve (including, without limitation, any such requirement
imposed by the Board of Governors of the Federal Reserve System, but excluding
with respect to any Euro-Dollar Loan any such requirement reflected in the
Euro-Dollar Reserve Percentage), special deposit, insurance assessment or
similar requirement against assets of, deposits with or for the account of, or
credit extended by, any Bank (or its Applicable Lending Office) or shall impose
on any Bank (or its Applicable Lending Office) or on the London interbank market
any other condition affecting its Euro-Dollar Loans or Letters of Credit or its
participations therein or its obligation to make such Euro-Dollar Loans or to
issue or participate in Letters of Credit and the result of any of the foregoing
is to increase the cost to such Bank (or its Applicable Lending Office) of
making or maintaining any Euro-Dollar Loan to the Borrower or to issue or
participate in Letters of Credit, or to reduce the amount of any sum received or
receivable by such Bank (or its Applicable Lending Office) under this Agreement
or under its Notes with respect thereto, by an amount deemed by such Bank to be
material, then, within 15 days after demand by such Bank (with a copy to the
Agent), the Borrower shall pay to such Bank such additional amount or amounts as
will compensate such Bank for such increased cost or reduction.
(b) If any Bank shall have determined that, after the date
hereof, the adoption of any applicable law, rule or
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regulation regarding capital adequacy, or any change in any such law, rule or
regulation, or any change in the interpretation or administration thereof by any
governmental authority, central bank or comparable agency charged with the
interpretation or administration thereof, or any request or directive regarding
capital adequacy (whether or not having the force of law) of any such authority,
central bank or comparable agency, has or would have the effect of reducing the
rate of return on capital of such Bank (or its Parent) as a consequence of such
Bank's obligations hereunder to a level below that which such Bank (or its
Parent) could have achieved but for such adoption, change, request or directive
(taking into consideration its policies with respect to capital adequacy) by an
amount deemed by such Bank to be material, then from time to time, within 15
days after demand by such Bank (with a copy to the Agent), the Borrower shall
pay to such Bank such additional amount or amounts as will compensate such Bank
(or its Parent) for such reduction.
(c) Each Bank will promptly notify the Borrower and the Agent
of any event of which it has knowledge, occurring after the date hereof, which
will entitle such Bank to compensation pursuant to this Section and will
designate a different Applicable Lending Office if such designation will avoid
the need for, or reduce the amount of, such compensation and will not, in the
judgment of such Bank, be otherwise disadvantageous to such Bank. A certificate
of any Bank claiming compensation under this Section and setting forth the
additional amount or amounts to be paid to it hereunder shall be conclusive in
the absence of manifest error. In determining such amount, such Bank may use any
reasonable averaging and attribution methods.
(d) The provisions of this Section also shall inure to the
benefit of each Issuing Bank in its capacity as such.
SECTION 8.04. Taxes. (a) For purposes of this
Section 8.04(a), the following terms have the following
meanings:
"Taxes" means any and all present or future taxes, duties,
levies, imposts, deductions, charges or withholdings with respect to
any payment by the Borrower pursuant to this Agreement or under any
other Loan Document, and all liabilities with respect
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thereto, excluding (i) in the case of each Bank, each Issuing Bank and
the Agent, taxes imposed on or measured by its income, and franchise,
branch profits or similar taxes imposed on it, and taxes on the overall
capital or net worth of the Bank or its applicable lending office or
any branch or Affiliate thereto by a jurisdiction under the laws of
which such Bank, such Issuing Bank or the Agent (as the case may be),
is organized or in which its principal executive office is located or,
in the case of each Bank, in which its Applicable Lending Office is
located, and (ii) in the case of each Bank organized outside the United
States of America, any United States withholding tax imposed on such
payments but only to the extent that such Bank is subject to United
States withholding tax at the time such Bank first becomes a party to
this Agreement.
"Other Taxes" means any present or future stamp or documentary
taxes and any other excise or property taxes, or similar charges or
levies, which arise from any payment made pursuant to this Agreement or
under any other Loan Document or from the execution or delivery of, or
otherwise with respect to, this Agreement or any other Loan Document,
excluding any current or future stamp, intangible or documentary taxes
or any other excise or property taxes, charges or similar levies
(including, without limitation, mortgage recording taxes and similar
fees) that arise as a result of sales, assignments or other transfers
of rights hereunder by any Bank.
(b) Any and all payments by the Borrower to or for the account
of any Bank, any Issuing Bank or the Agent hereunder or under any Note shall be
made without deduction for any Taxes or Other Taxes; provided that, if the
Borrower shall be required by law to deduct any Taxes or Other Taxes from any
such payments, (i) the sum payable shall be increased as necessary so that after
making all required deductions (including deductions applicable to additional
sums payable under this Section) such Bank, such Issuing Bank or the Agent (as
the case may be) receives an amount equal to the sum it would have received had
no such deductions been made, (ii) the Borrower shall make such deductions,
(iii) the Borrower shall pay the full amount deducted to the relevant taxation
authority or other authority in accordance with applicable law and (iv) the
Borrower shall furnish to the Agent, at its address referred
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to in Section 9.01, the original or a certified copy of a receipt evidencing
payment thereof or, if none is available, other documentary evidence showing
such payment.
(c) The Borrower agrees to indemnify each Bank, each Issuing
Bank and the Agent for the full amount of Taxes or Other Taxes (including,
without limitation, any Taxes or Other Taxes imposed or asserted by any
jurisdiction on amounts payable under this Section) paid by such Bank, such
Issuing Bank or the Agent (as the case may be) and any liability (including
penalties, interest and expenses) arising therefrom or with respect thereto.
This indemnification shall be paid within 30 days after such Bank, such Issuing
Bank or the Agent (as the case may be) makes written demand therefor.
(d) Each Bank organized under the laws of a jurisdiction
outside the United States, on or prior to the date of its execution and delivery
of this Agreement in the case of each Bank listed on the signature pages hereof
and on or prior to the date on which it becomes a Bank in the case of each other
Bank, and from time to time thereafter (but only so long as such Bank remains
lawfully able to do so), shall provide the Borrower and the Agent with the
appropriate form or forms (including IRS Forms No. 1001 and 4224 and any forms
required to replace forms previously provided because of a change in a Bank's
place of organization, principal office or Applicable Lending Office, or in the
event that any forms are no longer valid because of their expiration or a change
in law or regulations, other appropriate evidence of exemption or reduction as
reasonably requested by the Borrower), certifying that such Bank is entitled to
benefits under an income tax treaty to which the United States is a party which
exempts the Bank from withholding tax imposed by the United States or reduces
the rate of withholding tax (if any) on payments of interest for the account of
such Bank or certifying that the income receivable pursuant to this Agreement is
otherwise not subject to such withholding tax.
(e) For any period with respect to which a Bank has failed to
provide the Borrower or the Agent with the appropriate form as required by
Section 8.04(d) (unless such failure is due to a change in treaty, law or
regulation occurring subsequent to the date on which such form originally was
required to be provided), such Bank shall not be entitled to indemnification
under Section 8.04(b) or (c) with respect to Taxes imposed by the United States;
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provided that if a Bank, which is otherwise exempt from or subject to a reduced
rate of withholding tax, becomes subject to Taxes because of its failure to
deliver a form required hereunder, the Borrower shall take such steps as such
Bank shall reasonably request to assist such Bank to recover such Taxes.
(f) If the Borrower is required to pay additional amounts to
or for the account of any Bank pursuant to this Section, then such Bank will
change the jurisdiction of its Applicable Lending Office if, in the reasonable
judgment of such Bank, such change (i) will eliminate or reduce any such
additional payment which may thereafter accrue and (ii) is not otherwise
disadvantageous to such Bank.
(g) Each Bank that is organized under the laws of the United
States of America or any State thereof shall, on or before the date such Bank
becomes a party to this Agreement, deliver to the Borrower and the Agent an IRS
Form W-9, or successor applicable form, certifying that it is entitled to an
exemption from United States backup withholding tax.
(h) If the Borrower and a Bank (or, in the case of a payment
to the Agent, the Agent) agree that any Taxes paid by the Borrower under this
Section 8.04 with respect to payments to such Bank (or the Agent) should, more
likely than not, be refunded under applicable law, such Bank (or the Agent)
shall, at the request of the Borrower and at the Borrower's expense, take such
steps as may be appropriate to obtain a refund of such Taxes and shall permit
the Borrower to participate in the preparation of any such refund claim. If any
Bank (or the Agent) receives a refund in respect of any Taxes for which the Bank
has received payment from the Borrower hereunder, such Bank (or the Agent),
within 30 days of such receipt, shall deliver to the Borrower the amount of such
refund. In addition, within 30 days of a written request by the Borrower, the
relevant Bank (or Agent) shall execute and deliver to the Borrower such
certificates, forms or other documents which can be reasonably furnished
consistent with the facts and which are reasonably necessary to assist the
Borrower in applying for refunds of Taxes remitted hereunder.
SECTION 8.05. Base Rate Loans Substituted for Affected
Euro-Dollar Loans. If (i) the obligation of any Bank to make, or convert
outstanding Loans to, Euro-Dollar Loans to the Borrower has been suspended
pursuant to Section
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8.02 or (ii) any Bank has demanded compensation under Section 8.03 or 8.04 with
respect to its Euro-Dollar Loans and the Borrower shall, by at least five
Euro-Dollar Business Days' prior notice to such Bank through the Agent, have
elected that the provisions of this Section shall apply to such Bank, then,
unless and until such Bank notifies the Borrower that the circumstances giving
rise to such suspension or demand for compensation no longer exist:
(a) all Loans which would otherwise be made by such Bank as
(or continued or converted into) Euro- Dollar Loans shall instead be
Base Rate Loans (on which interest and principal shall be payable
contemporaneously with the related Euro-Dollar Loans of the other
Banks); and
(b) after each of its Euro-Dollar Loans has been repaid (or
converted to a Base Rate Loan), all payments of principal which would
otherwise be applied to repay such Euro-Dollar Loans shall be applied
to repay its Base Rate Loans instead.
If such Bank notifies the Borrower that the circumstances giving rise to such
notice no longer apply, the principal amount of each such Base Rate Loan shall
be converted into a Euro-Dollar Loan on the first day of the next succeeding
Interest Period applicable to the related Euro-Dollar Loans of the other Banks.
ARTICLE IX
Miscellaneous
-------------
SECTION 9.01. Notices. All notices, requests and other
communications to any party hereunder shall be in writing (including bank wire,
telex, facsimile transmission or similar writing) and shall be given to such
party: (a) in the case of the Borrower, any Issuing Bank, the Swingline Bank or
the Agent, at its address or its facsimile number or telex number set forth on
the signature pages hereof (or, in the case of any Issuing Bank, in its Issuing
Bank Agreement), (b) in the case of any Bank, at its address or its facsimile
number or telex number set forth in its Administrative Questionnaire, or (c) in
the case of any party, such other address or other facsimile number or telex
number as such party may hereafter specify for the purpose by notice to the
Agent and the Borrower. Each such notice,
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request or other communication shall be effective (i) if given by telex, when
such telex is transmitted to the telex number specified in this Section and the
appropriate answer back is received, (ii) if given by facsimile transmission,
when transmitted to the facsimile number specified in this Section and
confirmation of receipt is received, (iii) if given by mail, 72 hours after such
communication is deposited in the mails with first class postage prepaid,
addressed as aforesaid or (iv) if given by any other means, when delivered at
the address specified in this Section; provided that notices to the Agent under
Article II or Article VIII shall not be effective until received.
SECTION 9.02. No Waivers. No failure or delay by the Agent,
the Security Agent, any Issuing Bank or any Bank in exercising any right, power
or privilege hereunder or under any other Loan Document shall operate as a
waiver thereof nor shall any single or partial exercise thereof preclude any
other or further exercise thereof or the exercise of any other right, power or
privilege. The rights and remedies herein and in the other Loan Documents
provided shall be cumulative and not exclusive of any rights or remedies
provided by law.
SECTION 9.03. Expenses; Indemnification. (a) The Borrower
shall pay (i) all reasonable out-of-pocket expenses of the Agent, the Security
Agent, each Arranging Agent and (in the case of expenses relating to any Letter
of Credit) each Issuing Bank, including reasonable fees and disbursements of
special counsel for the Agent and the Arranging Agents, in connection with the
syndication of the credit facilities contemplated by this Agreement, the
preparation and administration of this Agreement and the other Loan Documents,
any waiver or consent hereunder or thereunder or any amendment hereof or
thereof, the issuance, amendment, renewal or extension of or drawing under any
Letter of Credit, or any Default or alleged Default hereunder and (ii) if an
Event of Default occurs, all reasonable out-of-pocket expenses incurred by the
Agent, the Security Agent, each Arranging Agent, each Issuing Bank and each
Bank, including reasonable fees and disbursements of outside counsel and
allocated cost of inside counsel, in connection with such Event of Default and
collection, bankruptcy, insolvency and other enforcement proceedings resulting
therefrom.
(b) The Borrower agrees to indemnify the Agent, the Security
Agent, each Arranging Agent, each Issuing Bank
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and each Bank, their respective affiliates and the respective directors,
officers, agents and employees of the foregoing (each an "Indemnitee") and hold
each such Indemnitee harmless from and against any and all liabilities, losses,
damages, costs and expenses of any kind (including any of the foregoing with
respect to Environmental Laws applicable to the Borrower or any Subsidiary),
including, without limitation, the reasonable fees and disbursements of counsel,
which may be incurred by such Indemnitee in connection with any investigative,
administrative or judicial proceeding (whether or not such Indemnitee shall be
designated a party thereto) brought or threatened relating to or arising out of
any of the Loan Documents or Letters of Credit or any actual or proposed use of
proceeds of Loans or Letters of Credit hereunder; provided that no Indemnitee
shall have the right to be indemnified hereunder for such Indemnitee's own gross
negligence or willful misconduct as determined by a court of competent
jurisdiction.
SECTION 9.04. Sharing of Setoffs. Each Bank agrees that if it
shall, by exercising any right of setoff or counterclaim or otherwise, receive
payment of a proportion of the aggregate amount of its claims in respect of
Letter of Credit Disbursements and principal and interest due with respect to
any Note held by it which is greater than the proportion received by any other
Bank in respect of the aggregate amount of claims in respect of Letter of Credit
Disbursements and principal and interest due with respect to any Note held by
such other Bank, the Bank receiving such proportionately greater payment shall
purchase such participations in the claims in respect of Letter of Credit
Disbursements and Notes held by the other Banks, and such other adjustments
shall be made, as may be required so that all such payments of claims in respect
of Letter of Credit Disbursements and of principal and interest with respect to
the Notes held by the Banks shall be shared by the Banks pro rata; provided that
nothing in this Section shall impair the right of any Bank to exercise any right
of setoff or counterclaim it may have and to apply the amount subject to such
exercise to the payment of indebtedness of the Borrower other than its
indebtedness under the Loan Documents. The Borrower agrees, to the fullest
extent it may effectively do so under applicable law, that any holder of a
participation in a claim in respect of a Letter of Credit Disbursement or in a
Note, whether or not acquired pursuant to the foregoing arrangements, may
exercise rights of setoff or counterclaim and other rights with respect to
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such participation as fully as if such holder of a participation were a direct
creditor of the Borrower in the amount of such participation.
SECTION 9.05. Amendments and Waivers. Any provision of this
Agreement or any other Loan Document may be amended or waived if, but only if,
such amendment or waiver is in writing and is signed by, or approved in writing
by, the Borrower and the Required Banks (and if the rights or duties of the
Agent, the Security Agent, any Issuing Bank or the Swingline Bank are affected
thereby, by the Agent, the Security Agent, such Issuing Bank or the Swingline
Bank, as the case may be); provided that no such amendment or waiver shall (i)
unless signed by all the Banks, increase or decrease the Commitment of any Bank
(except for a ratable decrease in the Commitments of the same Class of all
Banks) or subject any Bank to any additional obligation, (ii) unless signed by
all the Banks, reduce the principal of or rate of interest on any Loan or any
claim for reimbursement of a Letter of Credit Disbursement or any fees
hereunder, (iii) unless signed by all the Banks, postpone the date fixed for any
scheduled payment (but excluding any optional or mandatory prepayment) of
principal of or interest on any Loan or for any reimbursement of a Letter of
Credit Disbursement or for payment of any fees hereunder or for termination of
any Commitment, (iv) unless signed by all the Banks, change the percentage of
the Commitments or of the aggregate unpaid principal amount of the Notes, or the
number of Banks, which shall be required for the Banks or any of them to take
any action under this Section or any other provision of this Agreement, (v)
unless signed by all the Banks, release any material amount of collateral from
the security interest granted under any Security Document, except as expressly
contemplated by such Security Document, (vi) unless signed by all the Banks,
release any Guarantor from its Guarantee under the Guarantee Agreement, except
as expressly contemplated by the Guarantee Agreement, (vii) unless signed by the
Banks holding a majority in interest of the outstanding Loans and unused
Commitments of each affected Class, change any provisions of any Loan Document
in a manner that by its terms adversely affects the rights in respect of
payments due to Banks holding Loans of any Class differently than those holding
Loans of any other Class or (viii) unless signed by the Tranche B Banks holding
a majority of the outstanding Tranche B Loans, change the rights of the Tranche
B Banks to decline mandatory prepayments as provided in Section 2.11; provided
further
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98
that any amendment or waiver of this Agreement that by its terms affects the
rights or duties under this Agreement of the Working Capital Banks (but not the
Tranche A Banks and Tranche B Banks), the Tranche A Banks (but not the Working
Capital Banks and Tranche B Banks) or the Tranche B Banks (but not the Working
Capital Banks and Tranche A Banks) may be effected by an agreement or agreements
in writing entered into by the Borrower and requisite percentage in interest of
the affected class of Banks.
SECTION 9.06. Successors and Assigns. (a) The provisions of
this Agreement shall be binding upon and inure to the benefit of the parties
hereto and their respective successors and assigns, except that the Borrower may
not assign or otherwise transfer any of its rights under this Agreement without
the prior written consent of all Banks.
(b) Any Bank may at any time grant to one or more banks or
other institutions (each a "Participant") participating interests in its
Commitment or any or all of its Loans or its participations in Letters of
Credit. In the event of any such grant by a Bank of a participating interest to
a Participant, whether or not upon notice to the Borrower and the Agent, such
Bank shall remain responsible for the performance of its obligations hereunder,
and the Borrower and the Agent shall continue to deal solely and directly with
such Bank in connection with such Bank's rights and obligations under this
Agreement. Any agreement pursuant to which any Bank may grant such a
participating interest shall provide that such Bank shall retain the sole right
and responsibility to enforce the obligations of the Borrower hereunder
including, without limitation, the right to approve any amendment, modification
or waiver of any provision of this Agreement or any other Loan Document;
provided that such participation agreement may provide that such Bank will not
agree to any modification, amendment or waiver described in clause (i), (ii),
(iii) or (iv) of Section 9.05 without the consent of the Participant. The
Borrower agrees that each Participant shall, to the extent provided in its
participation agreement, be entitled to the benefits of Article VIII with
respect to its participating interest. An assignment or other transfer which is
not permitted by subsection (c) or (d) below shall be given effect for purposes
of this Agreement only to the extent of a participating interest granted in
accordance with this subsection (b).
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99
(c) Any Bank may at any time assign to one or more banks or
other institutions (each an "Assignee") all, or a proportionate part (equivalent
to an initial Commitment of not less than $10,000,000) of all, of its rights and
obligations under this Agreement and the Notes, and such Assignee shall assume
such rights and obligations, pursuant to an instrument executed by such Assignee
and such transferor Bank, with (and subject to) the subscribed consent of the
Borrower, the Agent and (in the case of any assignment of a Working Capital
Commitment) and each Issuing Bank and the Swingline Bank (which consents shall
not be unreasonably withheld or delayed); provided that (i) if an Assignee is
another Bank or an affiliate of any Bank, no such consent shall be required and
(ii) a Bank may assign all, or a proportionate part of all, of its rights and
obligations of one Class separately from the other Classes. Upon execution and
delivery of such instrument (including by the Borrower, the Agent, each Issuing
Bank and the Swingline Bank, if their consent is required as provided above) and
payment by such Assignee to such transferor Bank of an amount equal to the
purchase price agreed between such transferor Bank and such Assignee, such
Assignee shall be a Bank party to this Agreement and shall have all the rights
and obligations of a Bank with a Commitment as set forth in such instrument of
assumption, and the transferor Bank shall be released from its obligations
hereunder to a corresponding extent, and no further consent or action by any
party shall be required. Upon the consummation of any assignment pursuant to
this subsection (c), the transferor Bank, the Agent and the Borrower shall make
appropriate arrangements so that, if required, a new Note is issued to the
Assignee. In connection with any such assignment, the transferor Bank shall pay
to the Agent an administrative fee for processing such assignment in the amount
of $2,500. If the Assignee is not incorporated under the laws of the United
States of America or a state thereof, it shall, prior to the first date on which
interest or fees are payable hereunder for its account, deliver to the Borrower
and the Agent certification as to exemption from deduction or withholding of any
United States federal income taxes in accordance with Section 8.04.
(d) If any Bank requests compensation under Section 8.03, or
if the Borrower is required to pay any additional amount to any Bank or any
governmental body, agency or official for the account of any Bank pursuant to
Section 8.04, then the Borrower may, at its sole expense and effort, upon notice
to such Bank and the Agent, require such
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100
Bank to assign and delegate, without recourse (in accordance with and subject to
the restrictions contained in Section 9.06), all its interests, rights and
obligations under this Agreement to an assignee that shall assume such
obligations (which assignee may be another Bank, if a Bank accepts such
assignment); provided that (i) the Borrower shall have received the prior
written consent of the Agent (and, if a Working Capital Commitment is being
assigned, the Issuing Banks and the Swingline Bank), which consents shall not
unreasonably be withheld, (ii) such Bank shall have received payment of an
amount equal to the outstanding principal of its Loans and participations in
Letter of Credit Disbursements, accrued interest thereon, accrued fees and all
other amounts payable to it hereunder, from the assignee (to the extent of such
outstanding principal and accrued interest and fees) or the Borrower (in the
case of all other amounts) and (iii) in the case of any such assignment
resulting from a claim for compensation under Section 8.03 or payments required
to be made pursuant to Section 8.04, such assignment will result in a reduction
in such compensation or payments. A Bank shall not be required to make any such
assignment and delegation if, prior thereto, as a result of a waiver by such
Bank or otherwise, the circumstances entitling the Borrower to require such
assignment and delegation cease to apply.
(e) Any Bank may at any time assign all or any portion of its
rights under this Agreement and its Notes to a Federal Reserve Bank. No such
assignment shall release the transferor Bank from its obligations hereunder.
(f) No Assignee, Participant or other transferee of any Bank's
rights shall be entitled to receive any greater payment under Section 8.03 or
8.04 than such Bank would have been entitled to receive with respect to the
rights transferred, unless such transfer is made with the Borrower's prior
written consent or by reason of the provisions of Section 8.02, 8.03 or 8.04
requiring such Bank to designate a different Applicable Lending Office under
certain circumstances or at a time when the circumstances giving rise to such
greater payment did not exist.
SECTION 9.07. Collateral. Each of the Banks represents to the
Agent and each of the other Banks that it in good faith is not relying upon any
margin stock (as defined in Regulation U) as collateral in the extension or
maintenance of the credit provided for in this Agreement.
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101
SECTION 9.08. Governing Law; Submission to Jurisdiction. This
Agreement and each Note shall be governed by and construed in accordance with
the laws of the State of New York. The Borrower hereby submits to the
nonexclusive jurisdiction of the United States District Court for the Southern
District of New York and of any New York State court sitting in New York City
for purposes of all legal proceedings arising out of or relating to this
Agreement or the transactions contemplated hereby. The Borrower irrevocably
waives, to the fullest extent permitted by law, any objection which it may now
or hereafter have to the laying of the venue of any such proceeding brought in
such a court and any claim that any such proceeding brought in such a court has
been brought in an inconvenient forum.
SECTION 9.09. Counterparts; Integration. This Agreement may be
signed in any number of counterparts, each of which shall be an original, with
the same effect as if the signatures thereto and hereto were upon the same
instrument. This Agreement, together with the other Loan Documents and separate
letter agreements regarding fees relating hereto, constitutes the entire
agreement and understanding among the parties hereto and supersedes any and all
prior agreements and understandings, oral or written, relating to the subject
matter hereof. This Agreement shall become effective upon receipt by the Agent
of counterparts hereof signed by each of the parties hereto (or, in the case of
any party as to which an executed counterpart shall not have been received,
receipt by the Agent in form satisfactory to it of telegraphic, telex, facsimile
or other written confirmation from such party of execution of a counterpart
hereof by such party).
SECTION 9.10. WAIVER OF JURY TRIAL. EACH OF THE BORROWER, THE
AGENT, THE ISSUING BANKS, THE SWINGLINE BANK AND THE BANKS HEREBY IRREVOCABLY
WAIVES ANY AND ALL RIGHT TO TRIAL BY JURY IN ANY LEGAL PROCEEDING ARISING OUT OF
OR
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102
RELATING TO THIS AGREEMENT, THE OTHER LOAN DOCUMENTS OR THE TRANSACTIONS
CONTEMPLATED HEREBY.
IN WITNESS WHEREOF, the parties hereto have caused this
Agreement to be duly executed by their respective authorized officers as of the
day and year first above written.
CORNING CLINICAL LABORATORIES INC.,
by ______________________________
Title:
One Malcolm Avenue
Teterboro, NJ 07608
Attention of:
Telecopy Number:
MORGAN GUARANTY TRUST COMPANY OF
NEW YORK,
by ______________________________
Title:
NATIONSBANK, N.A.,
by ______________________________
Title:
WACHOVIA BANK OF GEORGIA, N.A.,
by ______________________________
Title:
[OTHER BANKS]
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103
NATIONSBANK, N.A., as Issuing Bank,
by ______________________________
Title:
[Address]
Attention of:
Telecopy Number:
WACHOVIA BANK OF GEORGIA, N.A., as
Swingline Bank,
by ______________________________
Title:
[Address]
Attention of:
Telecopy Number:
MORGAN GUARANTY TRUST COMPANY OF
NEW YORK, as Administrative Agent
by ______________________________
Title:
60 Wall Street
New York, NY 10260
Attention of:
Telecopy number:
QUEST DIAGNOSTICS
TRANSFEREE PENSION PLAN
Effective as of the effective date of the divestiture by Corning
Incorporated of its interest in QUEST DIAGNOSTICS INC., formerly Corning
Clinical Laboratories, Inc. (the "Company"), the Company hereby establishes this
QUEST DIAGNOSTICS 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 30% 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.
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1.5 "Company" means Quest Diagnostics Inc. (formerly 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 Quest Diagnostics Transferee Pension Plan.
1.13 "Qualified Plan" means The Corning Incorporated Pension Plan for
Salaried Employees, a copy of which is appended hereto.
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.
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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 by providing to 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:
[bullet] 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;
[bullet] terminates employment for any reason prior to
completing five full Years of Credited Service measured
from the eligible Employee's date of hire; or
[bullet] 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:
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(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:
1.0% 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 up to 35
Plus
1.5% times the Employee's Final Average
Compensation in excess of such Social Security
Covered Compensation, times the Employee's Years of
Credited Service up to 35
Plus
1.5% times the Employee's Final Average
Compensation times the Employee's Years of Credited
Service in excess of 35
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;
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(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;
(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, but applying the reduction factors
applicable to deferred vested benefits prescribed
by the Qualified Plan, and where
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(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.
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 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
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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 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.
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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.
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.
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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 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
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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 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
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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 a 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.
IN WITNESS WHEREOF, the Company has caused this Plan document to
be executed by its duly authorized officer this ____ day of ______________,
1996.
QUEST DIAGNOSTICS INC.
By ____________________________
Title__________________________
Employment Agreement
between
Kenneth W. Freeman
&
Corning Clinical Laboratories, Incorporated
This EMPLOYMENT AGREEMENT (the "Agreement") is entered into between
CORNING CLINICAL LABORATORIES, INC. (the "Company"), a Delaware corporation
having its principal place of business at One Malcolm Avenue, Teterboro, NJ
07608, and KENNETH W. FREEMAN (the "Executive").
WHEREAS, Executive has been employed by the Company as President and
Chief Executive Officer; and WHEREAS, the Company considers the services of the
Executive to be unique and essential to the success
of the Company's business; and
WHEREAS, it is anticipated that the Company will be subject to a
tax-free spin-off by Corning Incorporated ("Corning") (the "Spin-off") and the
parties desire that the Executive continue as President and Chief Executive
Officer of the Company following the Spin-off; and
WHEREAS, the Company and the Executive now wish to enter into an
agreement of employment that will constitute the sole and exclusive agreement
relating to the employment of Executive by the Company on the terms and
conditions set forth herein.
<PAGE>
2
NOW, THEREFORE, in consideration of the foregoing premises, the mutual
covenants, terms and conditions set forth herein, and other valuable
consideration, the receipt and sufficiency of which are hereby acknowledged, it
is hereby agreed between the Corporation and the Executive as follows:
1. Employment: The Company shall continue to employ the Executive in a
full-time capacity in the position set forth in this paragraph, and the
Executive shall continue to accept such employment upon the terms and
conditions set forth herein. Such employment shall be in the capacity
of President and Chief Executive Officer of the Company, and as a
Director and Chairman of the Board of Directors of the Company,
reporting directly to the Board. The Company shall nominate the
Executive as a Director of the Company and shall use its best efforts
to have the Executive elected and re-elected to the Board for the
duration of the "Employment Term" (as hereinafter defined).
2. Term: Unless earlier terminated pursuant to Section (9) hereof, the
term of employment under this agreement shall commence on the
later of January 1, 1997 or the date upon which the Spin-off is
consummated (the "Effective Date"), and shall continue through December
31, 1999 (the "Employment Term"). On or before June 1, 1999, the
Company and the Executive agree to use their good faith efforts to
negotiate a renewal of this Agreement (the "Renewal Agreement"), on
mutually satisfactory terms and conditions. In the event that the
Company and Executive are unable to agree to a Renewal Agreement, and
subject to continued service by the Executive through December 31, 1999
(absent any termination by the Company
<PAGE>
3
without Cause, or termination by the Executive for Good Reason, or as a
result of the death or disability of the Executive, in each case giving
rise to payments pursuant to Section 12 hereof) (each individually a
"Section 12 Event"), then upon the expiration of this Agreement on
December 31, 1999, and in lieu of any other amounts otherwise payable
to the Executive pursuant to Section 12 hereof, the Executive shall
receive the "Non-Renewal Payment" (as hereinafter defined).
"Non-Renewal Payment" shall mean (i) a lump-sum cash payment equal to
two times the highest annual cash compensation paid to the Executive
during the Employment Term, and (ii) reimbursed health benefits under
COBRA for eighteen months for the Executive and his family following
the expiration of this Agreement. Notwithstanding the foregoing, the
Executive shall not be entitled to receive the Non-Renewal Payment if
upon the expiration of the Employment Term (and absent any Section 12
Event) the Executive accepts an executive position at Corning on terms
and conditions satisfactory to the Executive.
3. Duties: During the Employment Term, the Executive shall, subject to the
supervising powers of the Board, have those powers and duties
consistent with his position as Chief Executive Officer and Chairman,
which powers shall in all cases include, without limitation, the power
of supervision and control over, and responsibility for, the general
management and operations of the Company. Executive agrees to devote
substantially all his working time and attention to the business of the
Company. The Executive shall not, without the prior written consent of
the Company's Board of Directors, be directly or indirectly engaged in
any other trade, business or occupation
<PAGE>
4
for compensation requiring his personal services during the Employment
Term. Nothing in this agreement shall preclude the Executive from: (i)
engaging in charitable and community activities or from managing his
personal investments, or (ii) serving as a member of the board of
directors of an unaffiliated company not in competition with the
Company, subject however, in each such case of board membership, to
approval by the Company's Board of Directors (not to be unreasonably
withheld).
4. Place of Performance: The principal place of employment of the
Executive shall be at the Company's principal executive offices in
Teterboro, New Jersey, or such other location as may be agreed to by
the Board and Executive.
5. Cash Compensation: Executive shall be compensated for services rendered
during the Employment Term as follows:
(a) Base Salary: Executive shall be compensated at an annual base
salary of no less than $500,000 (the base salary, at the rate in effect
from time to time, is hereinafter referred to as the "Base Salary").
The Company's Board of Directors shall review and may, if appropriate,
at its discretion, increase this annual base salary effective the first
day of any future new year during the Employment Term; provided that
the Base Salary shall be increased annually to reflect ordinary salary
actions generally granted to other Company executives. The Base Salary
shall be payable in equal semi-monthly installments.
(b) Variable (bonus) Pay: In addition to the Base Salary provided for
in Section 5(a) above, the Company will provide annual bonus awards to
Executive under its
<PAGE>
5
Variable Compensation (VC) program in accordance with the plan and
financial performance targets as established by the Company's
shareholders and/or Board of Directors. During the Employment Term,
Executive's target incentive opportunity under the Company's VC program
will be no less than 65% of Base Salary as in effect at the time such
target incentive opportunity is established.
6. Equity/Awards: Executive may be awarded additional compensation (such
as stock options or restricted stock) (collectively the "Annual
Incentive Awards") pursuant to the present or any future incentive
compensation or long-term compensation program established for the
senior officers of the Company (collectively the "Incentive
Compensation Programs"), which, in the sole judgment of the Company's
Board of Directors, is appropriate for the position occupied by
Executive and his performance therein; provided that no executive,
consultant or individual shall receive any annual award under the
Incentive Compensation Programs in excess of the annual award (if any)
made to the Executive, without Executive's express written consent.
Compensation granted under such plans will be subject to the actual
provisions and conditions applicable to such plans.
7. Initial Incentive Awards:
(a) The Executive is hereby granted (i) options on 180,000 shares of
common stock of the Company ("Common Stock") at an exercise price equal
to the lesser of $12.50 or the fair market value of the Common Stock as
of the effective date of the Spin-Off (the "Exercise Price"); and (ii)
90,000 shares of the Company's common stock (collectively the "Initial
Incentive Awards"). The Initial Incentive Awards shall
<PAGE>
6
be subject to the general terms and conditions of the incentive plans
under which they were granted subject in each case to any provisions of
this Agreement providing for accelerated vesting.
(b) The Executive's rights with respect to certain previously granted
incentive awards in Corning shall be converted into (i) options on
185,600 shares of Common Stock (representing first and second year CPP
6 stock options under Corning's long-term plan), and (ii) 55,085 shares
of Common Stock (the "CCL Career Shares") (such CCL Career Shares to be
subject to the vesting provisions set forth in Annex A hereto, absent
accelerated vesting under the terms of this Agreement) (collectively
"Converted Incentive Awards").
(c) The final number of Initial Incentive Awards and Converted
Incentive Awards granted to the Executive shall be adjusted pro rata
upward or downward, as the case may be, depending on the appropriate
pricing formula finally adopted with the approval of the Executive, and
the extent to which the price of the Common Stock on the effective date
of the Spin-Off is less than or greater than $12.50 per share.
8. Employee Benefits:
(a) General Provisions: Except as expressly provided in this Agreement,
Executive shall be eligible to participate in all employee benefit and
welfare plans offered by the Company (e.g. Life Insurance, Medical &
Dental Insurance, Travel, Accident, STD<D, Flexible Spending
Accounts, Regular and Supplemental AD&D, Optional/Supplemental Life
Insurance, Investment Plan - 401k, Employee Stock Purchase Plan and
other personal benefit plans of the Company) on a basis
<PAGE>
7
which is no less favorable to the Executive than that made available to
other senior officers of the Company.
(b) Transferred Executive Supplemental Retirement Plan: (i) Executive
will be eligible to participate in the "Transferred Executive
Supplemental Retirement Plan" (the "SRP") established by the Company
for certain executives of the Company, effective upon the Effective
Date. Under the terms of such plan, Executive will be entitled to
receive a nonqualified retirement benefit in accordance with the terms
and provisions of the plan, as administered by the Company's Board of
Directors, subject to the terms of this Agreement.
(ii) Notwithstanding any terms of the SRP to the contrary,
Executive shall be entitled to receive a retirement pension benefit
under this Agreement (the "Company Non-Qualified Benefit") as provided
for below. The Company Non-Qualified Benefit shall be an annuity
commencing on the later of (i) his date of termination or (ii) the
Executive's 57th birthday (the "SRP Commencement Date"), and (iii)
shall be (1) fully equivalent in value to the pension benefits
Executive would have received under the Corning non-qualified and
qualified pension plans as in effect on the date of this Agreement
(including all across-the-board plan improvements or benefit decreases
and/or successor plans, in each case adopted after the date of this
Agreement and applicable to the class of executives of which the
Executive was a part while employed by Corning), (2) based on
Executive's combined years of service with the Company and Corning (but
in any case not less than 34 years of service), (3) computed on an
unreduced basis as if Executive were a retiree, rather than on a
<PAGE>
8
deferred vested basis, and (4) based on all compensation earned by
Executive from Corning and Company through to the SRP Commencement Date
(provided that for purposes of such computation, Executive's benefit
eligible compensation shall be his 1997 Base Salary and Bonus and such
amount increased at 5% per annum for subsequent years); provided that
if the Executive terminates his employment under this Agreement without
Good Reason or the Company terminates the Executive's employment under
this Agreement with Cause, then the pension benefits payable to the
Executive under the SRP shall be determined based only on actual years
of service and compensation through to the Termination Date.
(iii) On or before the Effective Date, the Company shall
deliver to Executive a standby letter of credit in the amount of $5.4
million, in form acceptable to Executive and his counsel and with an
evergreen term of no less than eighteen (18) months, to ensure that the
Company's obligation under the SRP and the Company Non-Qualified
Benefit are fully funded and secured on an after-tax basis to the
Executive (the "SRP LC"). As of the first day of any calendar year
thereafter (the "Adjustment Date") as of which the Company's pension
liability (on an after-tax basis) to Executive as computed hereunder,
as determined by an actuary acceptable to Executive on or before
November 1 of the preceding calendar year, has a present value that
exceeds by more than $250,000 the SRP LC (on an after-tax basis), the
Company shall, within 60 days of the Adjustment Date, increase the
amount of the SRP LC or secure and deliver to the Executive an
additional letter of credit in form acceptable to the Executive and his
counsel so that, in the aggregate, the letter(s) of
<PAGE>
9
credit then in place are not less than the present value of such
liability (on an after-tax basis).
(iv) Immediately upon (x) the termination of Executive's
employment with the Company for any reason, including, without
limitation, failure to negotiate a Renewal Agreement (and other than a
termination of Executive's employment by the Company for Cause or by
the Executive without Good Reason), (y) failure of the Company to renew
the SRP LC or increase the amount of the SRP LC or secure an additional
letter of credit, as provided herein (in each case, without the consent
of the Executive not to do so), or (z) upon the Executive's retirement,
the Executive may draw on the SRP LC; it being understood that the
Executive may elect to draw on the SRP LC (and any supplemental letter
of credit) pursuant to subclause (y) above and continue his employment
hereunder.
(v) Amounts payable to the Executive in satisfaction of the
Company Non-Qualified Benefit shall be reduced by (i) any qualified
plan benefits actually received by Executive under Corning's qualified
plan ("Qualified Corning Benefits") and (ii) any non-qualified benefits
to the extent funded pursuant to Section III (c) of the Transition
Agreement, dated as of December __, 1996 between Corning and the
Executive, and actually received by the Executive ("Section III (c)
Benefits"), and any amounts realized by the Executive upon drawing upon
the SRP LC (or any supplemental letter of credit) shall be adjusted to
take into account such Qualified Corning Benefits and Section III (c)
Benefits.
<PAGE>
10
(c) Relocation: The Company shall reimburse the Executive up to $10,000
per month (grossed-up for tax purposes at a rate of 45%) until the
earlier of: (i) suitable housing in the New York Metropolitan area
being obtained by the Executive, or (ii) June 30, 1998. If the
Executive has not utilized Corning's relocation benefits prior to the
Effective Date, the Company shall extend equal benefits (to the extent
the Company's relocation policies are of lesser value to the Executive)
for relocating the Executive and his family from the Corning, New York
area to the New York City Metropolitan area. In addition, the Company
will provide for an interest-free housing loan to the Executive in the
amount of $400,000, all of which shall be forgiven in five (5) annual
installments at each annual anniversary of this Agreement's Effective
Date. Any compensation income to Executive resulting from the loan
forgiveness or interest-free features of this loan will be grossed-up
for tax purposes at the Executive's effective tax rate.
(d) Vacation and Sick-Leave: Executive shall be entitled to vacation
and sick leave in accordance with the vacation and sick leave policies
adopted by the Company from time to time, provided that the Executive
shall be entitled to no less than five (5) weeks of paid vacation each
calendar year. Any vacation shall be at such times and for such periods
as shall be mutually agreed upon between the Executive and the Company.
The Executive shall be entitled to all public holidays observed by the
Company.
<PAGE>
11
9. Applicable Taxes: There shall be deducted from any compensation
payments made under this Agreement any federal, state and local taxes
or other amounts required to be withheld by any entity having
jurisdiction over the matter.
10. Miscellaneous Benefits:
During the Employment Term, the Company shall provide the Executive
with the following additional benefits:
(a) Business Travel and Expenses: Executive shall be reimbursed by the
Company for reasonable travel and other business expenses, as approved
by the Company, which are incurred and accounted for in accordance with
the Company's normal practices and procedures for reimbursement of
expenses.
(b) Legal Fees: The Company shall reimburse Executive for reasonable
legal fees and disbursements incurred in connection with the
negotiation, preparation and implementation of this Agreement (grossed
up for tax purposes at a rate of 45%).
(c) Clubs and Memberships: The Company will reimburse Executive, for
annual and one-time costs associated with memberships for the Executive
and his family in a country club and city club (grossed-up for tax
purposes at a rate of 45%).
(d) Executive Driver: In order to ensure the accessibility and safety
of the Executive during the Employment Term, the Company will reimburse
Executive for the costs of an executive driver comparable to the costs
presently incurred on behalf of the Executive, subject to annual COLA
adjustments (grossed up for tax purposes at a rate of 45%).
<PAGE>
12
(e) Use of Aircraft: In order to ensure the accessibility and safety of
the Executive during the Employment Term, the Company shall reimburse
Executive for all costs associated with the Executive's use of aircraft
in accordance with the Company's policies, whether for business
purposes or for personal reasons, whether the aircraft is being
chartered or is Company-owned. Any payments under this provision which
are to be treated as taxable compensation to the Executive (in
accordance with IRS rules and regulations) will be grossed-up tax
purposes at a rate of 45%.
(f) Automobile Expenses: The Company will provide Executive with a
gross automobile allowance of $1,070 per month (or other greater
monthly amount as is provided to other senior executives of the
Company) in accordance with the provisions of the Company's auto
allowance program.
(g) Financial Counseling and Legal Services: The Company shall
reimburse the Executive for financial counseling, tax preparation and
legal services (grossed-up for tax purposes at a rate of 45%) in an
annual amount comparable to that paid on behalf of similarly situated
senior executives, but in no event less than $25,000/year.
(h) Non-Exclusivity: Nothing in this Agreement shall prevent the
Executive from being entitled to receive any additional compensation or
benefits as approved by the Company's Board of Directors.
11. Termination of Employment: Notwithstanding any other provisions of this
Agreement to the contrary, the employment of the Executive pursuant to
this Agreement may be terminated as follows:
<PAGE>
13
(a) Termination by the Company For Cause: Executive may be terminated
for "Cause" by the Company as provided below. As used herein, the term
"Cause" shall mean (i) conviction of the Executive of a felony; (ii) if
Executive is not disabled (as defined below), a willful failure or
refusal to substantially perform the duties and services specified
herein for a period of not less than thirty (30) days, and after having
been afforded (x) written notice of any alleged failure to
substantially perform such duties and services and (y) a reasonable
opportunity to cure any alleged failure; (iii) the commission by the
Executive of fraud or theft against, or embezzlement from, the Company;
or (iv) gross misconduct intentionally undertaken by the Executive that
is demonstrably and materially injurious to the operations of the
Company. For purposes of this section, no act or failure to act on
Executive's part shall be considered to be reason for termination for
Cause if done, or omitted to be done, by Executive in good faith and
with the reasonable belief that the action or omission was in the best
interests of the Company. Cause shall not exist unless and until there
shall have been delivered to the Executive a copy of a resolution, duly
adopted by the affirmative vote of not less than two thirds of the
entire membership of the Board at a meeting of the Board held for the
purpose (after ten (10) days' prior written notice to the Executive of
such meeting and the purpose thereof and an opportunity for him,
together with his counsel, to be heard before the Board at such
meeting), finding that in the good faith opinion of the Board, the
Executive was guilty of the conduct set forth above in this Section
11(a) and specifying the particulars thereof in detail. As set forth
more fully in Section 11(f) hereof, the "Date of
<PAGE>
14
Termination" shall be the date specified in the "Notice of
Termination"; provided, however, that in the case of a termination for
Cause under clause (ii) above, the Date of Termination shall not be
earlier than 30 days after delivery of the Notice of Termination.
Anything herein to the contrary notwithstanding, if, following a
termination of the Executive's employment by the Company for Cause
based upon the conviction of the Executive for a felony, such
conviction is overturned in a final determination on appeal, the
Executive shall be entitled to the payments and the economic equivalent
of the benefits the Executive would have received if his employment had
been terminated by the Company without Cause.
(b) Termination By the Company For Disability: At the sole discretion
of the Company's Board of Directors, Executive may be terminated if the
Executive is disabled (as defined below) and shall have been absent
from his duties with the Company on a full-time basis for one hundred
and twenty (120) consecutive days, and if within thirty (30) days after
written Notice of Termination is given by the Company to the Executive,
the Executive shall not have resumed the performance of his duties
hereunder on a full-time basis. In this event, the date of termination
shall be thirty (30) days after Notice of Termination is given by the
Company (provided that the Executive shall not have returned to the
full-time performance of his duties). As used herein, the term
"disabled" shall mean that the Executive is unable, as a result of a
medically determinable physical or mental impairment, to perform the
duties and services of his position.
<PAGE>
15
(c) Death: The Executive's employment shall terminate upon his death,
and the date of his death shall be the Date of Termination for purposes
of this Agreement.
(d) Termination by the Executive for Good Reason: The Executive may
terminate his employment hereunder for "Good Reason," provided that the
Executive shall have delivered a Notice of Termination within ninety
(90) days after the occurrence of the event of Good Reason giving rise
to such termination. For purposes of this Agreement, "Good Reason"
shall mean the occurrence of one or more of the following
circumstances, without the Executive's express written consent, which
are not remedied by the Company with thirty (30) days of receipt of the
Executive's Notice of Termination:
(i) an assignment to the Executive of any duties
materially inconsistent with his positions, duties,
responsibilities and status with the Company, or any material
limitation of the powers of the Executive not consistent with
the powers of the Executive contemplated by Section (3)
hereof,
(ii) any removal of the Executive from, or any
failure to re-elect the Executive to, the positions specified
in Section (1) of this Agreement;
(iii) the change of the Executive's title as
specified by Section (1) of this Agreement;
(iv) the Company's requiring the Executive without
his written consent to be based at any office or location more
than 75 miles commuting distance from the location as
described in Section (4) of this Agreement;
<PAGE>
16
(v) a reduction in the Executive's Base Salary or
Variable Compensation bonus opportunity as in effect from time
to time, without his written consent;
(vi) the failure of the Company to continue in effect
any Benefit Plan that was in effect on the date hereof or
provide the Executive with equivalent benefits, without his
written consent;
(vii) the failure of the Company, within not more
than thirty (30) days after the Effective Date, to have the
Executive duly elected as a member of its Board of Directors
and to maintain the Executive in such position at all times
thereafter, for so long as he shall serve as Chief Executive
Officer of the Company;
(viii) any other material breach by the Company of
this Agreement;
(ix) a Change in Control;
(x) a failure of the Company to secure a written
assumption by any successor company as provided for in Section
15(g) hereof; or
(xi) the failure of the Company to secure, maintain,
renew or supplement the SRP LC (and any supplemental letter of
credit) as provided for in Section 8(b)(iii) hereof.
In the event of a termination for Good Reason, the Date of Termination
shall be the date specified in the Notice of Termination, and shall be
more than thirty (30) days after the Notice of Termination. In the
event of a termination for Good Reason pursuant to Section 11(d)(xi)
hereof, the Executive shall retain the night to draw on
<PAGE>
17
the SRP LC (and any supplemental letter of credit) as provided for in
Section 8(b) hereof.
(e) Other Terminations: Notwithstanding the foregoing, the Executive
may terminate his employment at any time, subject to the provisions of
Section (11)(f) hereof. If the Executive's employment is terminated
hereunder for any reasons other than as set forth in Sections
(11)(a)-(11)(d) hereof, the date on which a Notice of Termination is
given or any later date (within 30 days) set forth in such Notice of
Termination shall be the Date of Termination.
(f) Notice of Termination: Any termination of the Executive's
employment hereunder by the Company or by the Executive shall be
communicated by written Notice of Termination to the other party
hereto. For purposes of this Agreement, a "Notice of Termination" shall
mean a notice which shall indicate the specific termination provision
in this Agreement relied upon and shall set forth in reasonable detail
the facts and circumstances claimed to provide a basis for termination
of the Executive's employment under the provisions so indicted.
12. Compensation upon Termination or during Disability:
(a) Disability Period. During any period during the Employment Term
that the Executive fails to perform his duties hereunder as a result of
incapacity due to physical or mental illness ("Disability Period"), the
Executive shall continue to (i) receive his full Base Salary and bonus
otherwise payable for that period of the Employment Term including the
Disability Period and (ii) participate in the Benefit Plans. Such
payments made to the Executive during the Disability Period shall be
<PAGE>
18
reduced by the sum of the amounts, if any, payable to the Executive at
or prior to the time of any such payment under disability benefit plans
of the Company or under the Social Security disability insurance
program, where such amounts were not previously applied to reduce any
such payment.
(b) Death. If the Executive's employment hereunder is terminated as a
result of his death, then: (i) the Company shall pay the Executive's
estate or designated beneficiary, as soon as practicable after the Date
of Termination, a lump sum payment equal to (1) any Base Salary
installments due in the month of death and any reimbursable expenses
accrued or owing the Executive hereunder as of the Date of Termination,
(2) a pro rata portion of any bonus owed to the Executive for that
portion of the Employment Term through to the Date of Termination, and
(3) the greater of (x) Base Salary payments otherwise payable for the
remainder of the Employment Term or (y) two (2) times the average
annual Base Salary paid to the Executive prior to his death (the
payments provided for in subclauses (x) and (y) are the "Reduced
Severance Benefits"), and (ii) the Initial Incentive Awards, Converted
Incentive Awards, and all other Annual Incentive Awards granted to the
Executive shall immediately become fully vested as of the Date of
Termination, subject to such exercise periods as shall be provided for
under the terms of the initial grant.
(c) Disability. If the Executive's employment hereunder is terminated
as a result of Disability, then (i) the Company shall pay the
Executive, as soon as practicable after the Date of Termination (1) any
Base Salary and any reimbursable expenses accrued or owing the
Executive hereunder as of the Date of Termination, (2) a pro
<PAGE>
19
rata portion of any bonus owed to the Executive for that portion of the
Employment Term through to the Date of Termination, and (3) the
"Reduced Severance Benefits"; and (ii) the Initial Incentive Awards,
Converted Incentive Awards, and all other Annual Incentive Awards
granted to the Executive shall immediately become fully vested as of
the Date of Termination, subject to such exercise periods as shall be
provided for under the terms of the initial grant.
(d) Termination for Cause or by the Executive other than for Good
Reason. If the Executive's employment hereunder is terminated by the
Company for Cause or by the Executive (other than for Good Reason),
then (i) the Company shall pay the Executive, as soon as practicable
after the Date of Termination, any Base Salary and any reimbursable
expenses accrued or owing the Executive hereunder for services as of
the Date of Termination; and (ii) the Executive shall immediately
forfeit any untested CCL Career Shares. In the event of termination by
the Company for Cause, the Executive shall have the right to exercise
the vested unexercised portion of any Initial Incentive Awards,
Converted Incentive Awards or any other Annual Incentive Awards prior
to the Date of Termination, and the unexercised portion of any such
awards shall be forfeited thereafter. In the event of termination by
the Executive other than for Good Reason, the Executive shall have the
right to exercise the vested unexercised portion of any Initial
Incentive Awards, Converted Incentive Awards or any other Annual
Incentive Awards then held by the Executive for such period following
the Date of Termination as shall be provided for under the terms of the
<PAGE>
20
initial grant, and the unexercised portion of any such awards shall be
forfeited thereafter.
(e) Termination by Company Without Cause or by Executive with Good
Reason:
Executive's employment may be terminated without Cause by the
Company's Board of Directors (other than as a result of Disability) or
by the Executive for Good Reason, provided that in such event:
(i) Executive shall be entitled to receive three (3)
years base salary (at the Executive's effective annual rate on
the date of termination) to be paid in a lump-sum (net of
appropriate withholdings) within sixty (60) days of the date
of termination;
(ii) Executive shall be entitled to receive three (3)
years of his annual bonus award (defined to be three (3) times
his most recent target incentive opportunity under the
Variable Compensation plan times his annual base salary on the
date of termination) to be paid in a lump sum (net of
appropriate withholdings) within sixty (60) days of the date
of termination;
(iii) Executive shall be entitled to continue
participation in the Company's health and benefit plans (to
the extent allowable in accordance with the administrative
provisions of those plans and applicable federal and state
law) for a period of up to three (3) years or until Executive
is covered by a successor employer's benefit plans, whichever
is sooner;
<PAGE>
21
(iv) The Initial Incentive Awards, Converted
Incentive Awards and any other Annual Incentive Awards granted
to the Executive shall become vested and fully exercisable as
of the Date of Termination; and
(v) In the event that the Executive receives any
payment or benefit (including but not limited to the payments
or benefits pursuant to Section 12 of this Agreement (a
"Payment") that is subject to the excise tax (the "Excise
Tax") under Section 4999 of the Internal Revenue Code of 1986,
as amended (the "Code"), the Company shall pay to the
Executive, as soon thereafter as practicable, an additional
amount (a "Gross-Up Payment") such that the net amount
retained by the Executive, after deduction of any Excise Tax
imposed upon the Payment and any federal, state and local
income tax and Excise Tax imposed upon the Gross-Up Payment,
shall be equal to the Payment. The determination of whether an
Excise Tax is due in respect to any payment or benefit, the
amount of the Excise Tax and the amount of the Gross-Up
Payment shall be made by an independent auditor (the
"Auditor") jointly selected by the Company and the Executive
and paid by the Company. If the Executive and the Company
cannot agree on the firm to serve as the Auditor, then the
Executive and the Company shall each select one nationally
recognized accounting firm and those two firms shall jointly
select the nationally recognized accounting firm to serve as
the Auditor. Notwithstanding the Payment, (i) any other
payments or benefits received or to be received by the
Executive in connection with a Change in Control or the
<PAGE>
22
Executive's termination of employment (whether pursuant to the
terms of this Agreement or any other plan, arrangement or
agreement with the Company, any person whose actions result in
a Change in Control or any person affiliated with the Company
or such person) shall be treated as "parachute payments"
within the meaning of Section 280G(b)(2) of the Code, and all
"excess parachute payments" within the meaning of Section 280G
of the Code shall be treated as subject to the Excise Tax,
unless in the opinion of the tax counsel selected by the
Auditor, such other payments or benefits (in whole or in part)
do not constitute parachute payments, or are otherwise not
subject to the Excise Tax, and (ii) the Executive shall be
deemed to pay federal income tax at the highest marginal rate
applicable in the calendar year in which the Gross-up Payment
is made, and state and local income taxes at the highest
marginal rate of Taxation in the state and locality of the
Executive's residence on the Date of Termination, net of the
maximum reduction in federal income taxes which could be
obtained from deduction of such state and local taxes. In the
event the actual Excise Tax or such income tax is more or less
than the amount used to calculate the Gross-Up Payment, the
Executive or the Company, as the case may be, shall pay to the
other an amount reflecting the actual Excise Tax or such
income tax.
(f) Change in Control. For purposes of this Agreement, a "Change-
in-Control" is defined to be:
<PAGE>
23
(i) any person (as such term is used in Sections 13(d) and
14(d)(2) of the Securities Exchange Act of 1934) becoming the
beneficial owner, directly or indirectly, of Company
securities representing 20% or more of the combined voting
power of the Company's then outstanding securities; or
(ii) the majority of the Board consists of individuals other
than Incumbent Directors, which term means the members of the
Board as of the date of the Spin-Off and any other Director
elected to the Board with the consent of the Executive,
provided that any person becoming a director subsequent to
such date whose election or nomination for election was
supported by two-thirds of the directors who then comprised
the Incumbent Directors shall be considered to be an Incumbent
Director; or
(iii) the Company's shareholders approve a merger (pursuant to
which the Company is not the surviving entity), consolidation,
sale or disposition of all or substantially all of the
Company's assets or a plan of partial or complete liquidation;
provided that in each case such action was not undertaken by
the Board at the direction of the Executive as part of a
unilateral, strategic restructuring unrelated to any third
party efforts to effect a change in control of the Company.
13. Arbitration: In the event of any difference of opinion or dispute
between the Executive and the Company with respect to the construction
or interpretation of this Agreement or the alleged breach thereof,
which cannot be settled amicably by agreement of the parties, then such
dispute shall be submitted to and determined by
<PAGE>
24
arbitration by a single arbiter in the city of New York, New York in
accordance with the rules then in effect of the Commercial Arbitration
Panel of the AMERICAN ARBITRATION ASSOCIATION, and judgment upon the
award rendered shall be final, binding and conclusive upon the parties
and may be entered in the highest court, state or federal, having
jurisdiction. The costs of the arbitration shall be borne as determined
by the arbitrator; provided, however, that if the Company's position is
not substantially upheld, as determined by the arbitrator, the expenses
of the Executive (including, without limitation, fees and expenses
payable to the AAA and the arbitrator, fees and expenses payable to
witnesses, including expert witnesses, fees and expenses payable to
attorneys and other professionals, expenses of the Executive in
attending the hearings, costs in connection with obtaining and
presenting evidence and costs of the transcription of the proceedings),
as determined by the arbitrator, shall be reimbursed to him by the
Company.
14. Confidentiality: During the Employment Term, and except as otherwise
required by law, the Executive shall not disclose or make accessible to
any business, person or entity, or make use of (other than in the
course of the business of the Company) any trade secrets, proprietary
knowledge or confidential information, which he shall have obtained
during his employment by the Company and which shall not be generally
known to or recognized by the general public. All information regarding
or relating to any aspect of either the Company's business, including
but not limited to that relating to existing or contemplated business
plans, activities or procedures, current or prospective clients,
current or prospective contracts or other business arrangements,
<PAGE>
25
or any other information acquired because of the Executive's employment
by the Company, shall be conclusively presumed to be confidential;
provided however, that Confidential Information shall not include any
information known generally to the public (other than as a result of
unauthorized disclosure by the Executive) or any specific information
or type of information generally not considered information disclosed
by the Company or any officer thereof to a third party without
restrictions on the disclosure of such information. The Executive's
obligations under this Section 14 shall be in addition to any other
confidentiality or nondisclosure obligations of the Executive to the
Company at law or under any other agreements.
15. Other Matters:
(a) Entire Agreement: This Agreement constitutes the entire agreement
between the Company and the Executive relating to the subject matter
hereof, and supersedes any previous agreements, commitments and
understandings, written or oral, with respect to the matters provided
herein. As used in this Agreement, terms such as "herein," "hereof,"
"hereto" and similar language shall be construed to refer to this
entire instrument and not merely the paragraph or sentence in which
they appear, unless so limited by express language.
(b) Assignment: Except as set forth below, this Agreement and the
rights and obligations contained herein shall not be assignable or
otherwise transferable by either party to this Agreement without the
prior written consent of the other party to this Agreement.
Notwithstanding the foregoing, any amounts owing to the Executive
<PAGE>
26
upon his death shall inure to the benefit of his heirs, legatees,
personal representatives, executor or administrator.
(c) Notices: Any and all notices provided for under this Agreement
shall be in writing and hand delivered or sent by first class
registered or certified mail, postage prepaid, return receipt
requested, addressed to the Executive at his residence or to the
Company at its usual place of business, and all such notices shall be
deemed effective at the time of delivery or at the time delivery is
refused by the addressee upon presentation.
(d) Amendment/Waiver: No provision of this Agreement may be amended,
waived, modified, extended or discharged unless such amendment, waiver,
extension or discharge is agreed to in writing signed by both the
Company and the Executive.
(e) Applicable Law: This Agreement and the rights and obligations of
the parties hereunder shall be construed, interpreted, and enforced in
accordance with the laws of the State of New York (applicable to
contracts to be performed wholly within such State).
(f) Severability: The Executive hereby expressly agrees that all of the
covenants in this Agreement are reasonable and necessary in order to
protect the Company and its business. If any provision or any part of
any provision of this Agreement shall be invalid or unenforceable under
applicable law, such part shall be ineffective only to the extent of
such invalidity or unenforceability and shall not affect in any way the
validity or enforceability of the remaining provisions of this
Agreement, or the remaining parts of such provision.
<PAGE>
27
(g) Successor of Interests: In the event the Company merges or
consolidates with or into any other corporation or corporations, or
sells or otherwise transfers substantially all of its assets to another
corporation, the provisions of this Agreement shall be binding upon and
inure to the benefit of the corporation surviving or resulting from the
merger or consolidation or to which the assets are sold or transferred
and, prior to the consummation of any such event, the Company shall
obtain the express written assumption of this Agreement by the other
corporation (other than in the case of a merger after which the Company
is the surviving entity). All references herein to the Company refer
with equal force and effect to any corporate or other successor of the
corporation that acquires directly or indirectly by merger,
consolidation, purchase or otherwise, all or substantially all of the
assets of the Company.
(h) No Mitigation: The Executive shall not be required to mitigate
amounts payable pursuant to Section (12) hereof by seeking other
employment or otherwise.
16. Condition Subsequent: This Agreement shall be null and void and of no
effect if the Spin-off is not consummated on or before March 1, 1997.
17. Indemnification: The Company shall indemnify the Executive to the full
extent permitted by law and the By-laws of the Company for all
expenses, costs, liabilities and legal fees which the Executive may
incur in the discharge of all his duties hereunder, including, without
limitation, the right to be paid in advance by the Company for his
expenses in defending a civil or criminal action, proceeding or
investigation prior to the final disposition thereof. The Executive
shall be insured under the Company's Directors' and Officers' Liability
Insurance Policy as in effect
<PAGE>
28
from time to time. Notwithstanding any other provision of this
Agreement to the contrary, any termination of the Executive's
employment or of this Agreement shall have no effect on the continuing
operation of this Section (17).
18. Authority: The execution, delivery and performance of this Agreement
has been duly authorized by the Company and this Agreement represents
the valid, legal and binding obligation of the Company, enforceable
against the Company according to its terms.
IN WITNESS WHEREOF, the Company has caused this Agreement to be
executed on its own behalf and has caused its corporate seal to be affixed, and
the Executive has executed this Agreement on his own behalf intending to be
legally bound, as of the date first written above.
CORNING CLINICAL LABORATORIES
By:
------------------------------
Van C. Campbell
Chairman CLSI
ATTEST:
- ---------------------
Secretary
EXECUTIVE:
----------------------------------
Kenneth W. Freeman
<PAGE>
ANNEX A
CCL Career Shares
Vesting Schedule
1997 11,997
1998 22,766
1999 33,538
2000 44,310
2001 55,085
CORNING CLINICAL LABORATORIES INC. (DE)
LIST OF SUBSIDIARIES
CLMP Inc. (DE)
Corning Clinical Laboratories Inc. (MI)1
Corning Clinical Laboratories of Pennsylvania Inc. (DE)2
Southgate Medical Services, Inc. (OH)1
DeYor CPF/MetPath Inc. (OH)
Medical Management Systems Inc. (PA)
Associated Clinical 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 Holdings, 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)
Laboratorios de Analisis Biomedicos, S.A. (Mexico)
Quest Diagnostics Incorporated (CT)5
Quest Diagnostics Incorporated (DE)5
Quest Diagnostics Incorporated (MA)5
Quest Diagnostics Incorporated (MD)6
Corning Clinical Laboratories Inc. (MD)1
Diagnostic Reference Services Inc. (MD)
Pathology Building Partnership (MD)7
Quest Diagnostics Incorporated (MI)6
Corning Nichols Institute Inc. (CA)8
Trans United Casualty and Indemnity Insurance Company
- -------------
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 Laboratorics 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 independent corporation in connection with the 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.
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.
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 fraud and health care statutes identified in the Transaction
Agreement 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."
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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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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
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<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 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 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 arising out of alleged violations of certain federal
fraud and health care statutes and 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 as a result of the payment of settled
claims, primarily the Damon settlement of $119 million. Based on information
available to management and Quest Diagnostics' experience with past
settlements (including the fact that the aggregate amount of the Damon
settlement was significantly in excess of established reserves) management
has reassessed its reserve levels and believes that its current level of
reserves is adequate. However, it is possible that additional information
(such as the indication by the government of criminal activity, additional
tests being questioned or other changes in the government's theories of
wrongdoing) 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
Diagnostic's 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 Diagnostic's 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
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and masterfiles are transferred to the SYS system and because the billing
workflow is interrupted during the conversion, which may cause backlogs.
Professional Liability Litigation. As a general matter, providers of
clinical laboratory testing services may be subject to lawsuits alleging
negligence or other similar legal claims, which suits could involve claims
for substantial damages. Damages assessed in connection with, and the costs
of defending any such actions could be substantial. Litigation could also
have an adverse impact on 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
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<PAGE>
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 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."
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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.
38
<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>
<S> <C> <C> <C> <C> <C>
Three months Ended Nine months Ended
September 30, September 30, Year Ended December 31,
----------------- ----------------- ----------------------
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. EBITDA and Adjusted EBITDA include 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, subsequent to
September 30, 1996 and before the Distribution Date. 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
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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 operations
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 "Business of Quest Diagnostics--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).
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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).
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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 "Business of Quest Diagnostics--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, substantially 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.*
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.
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
*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 (a), (b), (c), (d), (e) and (j).
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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. EBITDA and Adjusted EBITDA include bad debt expense.
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, Don 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 customers,
employees and competitors 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.
sults 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 (i).
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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 Medical Informatics
("Medical Informatics") 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 Medical Informatics 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
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* 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 the third
quarter of 1995. Of this amount approximately $34 million was attributable to
its Teterboro location. At the time of the 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
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smaller laboratories that can be folded into existing laboratories where
Quest Diagnostics can expect to achieve significant cost savings and other
benefits resulting from the elimination of redundant facilities and equipment
and reductions in staffing or personnel. 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 approximately $36 million in settlement
of civil claims by the United States that the company 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 a civil subpoena 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
included in 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. The settlement included base recoupments of
approximately $40 million (which did not differ materially from management's
estimate at June 30, 1996) and total criminal and civil payments in excess of
base recoupments of approximately $80 million. 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 in September
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 a civil subpoena 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 with 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
amounts greatly in excess of mere recoupment of overcharges from laboratories
and other providers will be more prevalent. In addition, the newly adopted
Health Insurance Act includes provisions 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 arising out of alleged violations of applicable
federal fraud and health care statutes and 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
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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.
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 approximately $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
$6 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 and the fact that the
aggregate amount of such settlement was significantly in excess of
established reserves, management has reassessed its reserve levels and
believes that its current level of reserves is adequate. However, it is
possible that the additional information may become available (such as the
indication by the government of criminal activity, additional tests being
questioned or other changes in the government's theories of wrongdoing) 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
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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 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
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Location Type of Laboratory Leased or Owned
Chicago, Illinois Regional Leased
Indianapolis, Indiana Branch Leased
Baltimore, Maryland Regional Owned
Boston, Massachusetts Owned subject to
Regional put/call
with option to
lease
Detroit, Michigan Regional Leased
Grand Rapids, Michigan Branch Leased
Kansas City, Missouri Branch Leased
St. Louis, Missouri Regional Leased
Billings, Montana Branch Leased
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 Leased by joint
Branch venture
Philadelphia, Pennsylvania Regional Leased
Pittsburgh, Pennsylvania Regional Leased
Nashville, Tennessee Branch Owned
Dallas, Texas Regional Leased
El Paso, Texas Branch Leased
Salt Lake City, Utah Branch Leased
</TABLE>
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."
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<PAGE>
(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 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 "Risk Factors--Risks Relating to
Quest Diagnostics--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. The term for which each
director will initially be elected has not yet been determined. Quest
Diagnostics is contemplating the selection of additional independent
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
----------------- ----
<S> <C>
Kenneth W.
Freeman 46
Van C. Campbell 58
David A. Duke 61
Gail R. Wilensky 53
</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. Dr. 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.
Gail R. Wilensky is the John M. Olin Senior Fellow at Project HOPE, an
international non-profit health foundation, which she joined in 1993. She is
currently the chair of the Physician Payment Review Commission which advises
Congress on physician payment and other Medicare issues. In 1992 and 1993,
Dr. Wilensky served as a deputy assistant to the President for policy
development relating to health and welfare issues. From 1990 to 1992, she was
the administrator of the Health Care Financing Administration where she
directed the Medicare and Medicaid programs. Dr. Wilensky is a director of
Advance Tissue Sciences Inc., Capstone Pharmacy Inc., Coram Healthcare Corp.,
Neopath Inc., St. Jude Medical Corp., SMS Corporation, Syncor Corporation and
United Healthcare Corporation.
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 or she attends. In addition, directors serving as
committee chairs would receive an additional annual retainer of $1500.
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
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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. All non-employee directors will be 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.
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 (40) 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 1994 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
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<PAGE>
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 23 years.
Raymond Gambino, M.D. (70) 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,
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 Corning's Life
Sciences division 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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<PAGE>
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Long-Term Compensation
----------------------------------
Annual Compensation Awards Payouts
----------------------------------- ---------------------- --------
Restricted
Other Annual Stock Securities Incentive All Other
Name and Salary Bonus Compensation Awards Underlying Plan Compensation
Principal Position Year (1) (2) (3) (4) Options Payouts (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
Don 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
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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
Don 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
Don 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
Don 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
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<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 is payable upon exercise. 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 no later than 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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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 is
currently an active participant 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
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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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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.
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 change the designation of subsidiaries eligible to participate in the 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.
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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 without his consent 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 without his consent 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;
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. Mr. Freeman will also be entitled under
the agreement to 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. Mr. Freeman's pension benefits will be initially secured by a
$5.4 million letter of credit (such amount based on initial assumptions for
pricing pension benefits) issued under the Credit Facility.
On or before the Distribution Date, Quest Diagnostics will adopt a severance
policy pursuant to which it will provide to each executive officer other than
Mr. Freeman and Drs. Fisher and Gambino 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
such executive officer upon the termination of employment by Quest Diagnostics
other than for cause during the twelve months following a change in control,
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 or until such officer is covered by a
successor employer's benefits plans, whichever first occurs (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 (including certain
restricted shares that may be forfeited prior to the Distribution Date but
excluding Career Shares that will not receive the Distributions 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 Owned Number of
Name (1) Exercisable Options
- ---------------------------- ------------------ -------------------
<S> <C> <C>
Van C. Campbell 17,850 (2) 127,457
Robert A. Carothers 316 12,483
Gregory C. Critchfield 0 1,500
David A. Duke 10,878 (2) 82,000
Kenneth W. Freeman 14,461 103,500
Don M. Hardison, Jr. 500 0
Douglas M. VanOort 5,965 11,500
Gail R. Wilensky 5,000 (2) 0
All Directors and Executive
Officers as a Group 66,280 393,562
</TABLE>
- -------------
(1) Does not include 3,954 shares owned by the spouses and minor children of
certain executive officers and directors (or trusts of which families of
such executive officers are beneficiaries) as to which such officers and
directors disclaim beneficial ownership.
(2) Includes 5,000 shares of Quest Diagnostics Common Stock which each
non-employee director will receive in connection with their election but
does not include 750 shares of Quest Diagnostics Common Stock for each
year specified in the term of service as a director. See "Management of
Quest Diagnostics--Management-- Directors' Compensation."
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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 "DGX." 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 600,000 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:
<TABLE>
<CAPTION>
<S> <C>
Year Percentage
- ------------------------- ------------
2003 106.000%
2004 104.000%
2005 102.000%
2006 and thereafter 100.000%
</TABLE>
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
("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 Permitted Subordinated Debt,
including the Senior Subordinated Notes and any of Quest Diagnostics'
remaining debt to Corning. At the time of the Distributions, Quest
Diagnostics' debt to Corning must be extinguished except to the extent it is
included in the $150 million of Permitted Subordinated Debt.
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 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 Tranche A and Working Capital Base Rate 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
104
<PAGE>
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 Morgan a negotiated fee for its services
as Administrative 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 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 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)
certain payments to Corning required to be made pursuant to the Spin-Off
Transactions. Restricted Payments include: (i) any other dividends or
distributions on any of the shares of capital stock of Quest Diagnostics except
dividends or distributions 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) a ratio (the "Leverage
Ratio") of (A) Consolidated Total Debt to (B) Consolidated Total
Capitalization equal to or below 0.55 to 1.0 at the outset, decreasing over
time to 0.45 to 1.0; (ii) a ratio (the "Debt Coverage Ratio") of (A)
Consolidated Total Debt to (B) Consolidated EBITDA equal to or below between
3.8 to 1.0 at the outset, decreasing over time to 2.0 to 1.0; and (iii) a
ratio (the "Coverage 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 1.8 to 1.0 at
the outset, decreasing over time to 3.0 to 1.0. Quest Diagnostics is required
to have a Leverage Ratio no greater than 0.55 to 1.0 through December 31,
1997, a Debt Coverage Ratio of less than 3.8 to 1.0 through June 30, 1997 and
a Coverage Ratio of at least 1.8 to 1.0 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 to the Permitted Subordinated Debt,
Quest Diagnostics would have had a Leverage Ratio of 0.47 to 1.0 at September
30, 1996, a Debt Coverage Ratio of 3.2 to 1.0 for the quarter ended September
30, 1996 and a Coverage Ratio of 2.2 to 1.0 for the quarter ended September
30, 1996.
Events of Default. Events of Default include: (i) the failure to make
payment under the Credit Agreement of any principal when due or any interest,
fees or other amounts within three business days after becoming due; (ii) any
representation, warranty, certification or statement made by Quest
Diagnostics proving to have been incorrect
105
<PAGE>
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-23
Quarterly Operating Results (unaudited) F-24
Interim Combined Financial Statements (unaudited):
Combined Balance Sheets--September 30, 1996 and December 31, 1995 F-25
Combined Statements of Operations--Three and Nine Months ended September 30, 1996
and 1995 F-26
Combined Statements of Cash Flows--Nine Months ended September 30, 1996 and 1995 F-27
Notes to Interim Combined Financial Statements F-28
</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-23 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:
<TABLE>
<CAPTION>
1995 1994
---------- -----------
<S> <C> <C>
Land $ 18,568 $ 18,969
Buildings and improvements 186,192 173,546
Laboratory equipment, furniture and fixtures 286,326 247,200
Leasehold improvements 39,078 30,050
Construction-in-progress 19,490 33,508
-------- ----------
Property and equipment, at cost 549,654 503,273
Less: accumulated depreciation and amortization (253,538) (215,711)
-------- ----------
Property and equipment, net $ 296,116 $ 287,562
======== ==========
</TABLE>
Depreciation and amortization expense aggregated $56.8 million, $46.9 million
and $38.1 million for 1995, 1994 and 1993, respectively.
7. INTANGIBLE ASSETS
Intangible assets at December 31, 1995 and 1994 consist of the following:
<TABLE>
<CAPTION>
1995 1994
----------- ------------
<S> <C> <C>
Goodwill $1,056,073 $1,043,089
Customer lists 84,558 100,428
Other (principally non-compete covenants) 50,626 61,401
---------- -----------
Intangible assets, at cost 1,191,257 1,204,918
Less: accumulated amortization (160,624) (151,724)
---------- -----------
Intangible assets, net $1,030,633 $1,053,194
========== ===========
</TABLE>
Amortization expense aggregated $44.7 million, $42.6 million and $28.4
million for 1995, 1994 and 1993, respectively.
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)
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:
<TABLE>
<CAPTION>
<S> <C>
Fiscal year ending December 31,
1997 $ 261,131
1998 10,493
1999 10,530
2000 10,576
2001 and thereafter 902,836
----------
Total long-term debt $1,195,566
==========
</TABLE>
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:
<TABLE>
<CAPTION>
<S> <C>
Fiscal year ending December 31,
1997 $ 4,061
1998 3,846
1999 3,840
2000 3,948
2001 and thereafter 116,102
--------
Total future minimum payments under capital leases 131,797
Less amount representing interest (99,279)
--------
Present value of minimum payments under capital leases $ 32,518
========
</TABLE>
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.
As discussed in Note 14, the Company is currently pursuing the issuance of
$150 million of Senior Subordinated Notes due in 2006 which will be used to
repay certain intercompany indebtedness owed to Corning. The Senior
Subordinated Notes will be guaranteed, fully, jointly and severally, and
unconditionally, on a senior subordinated basis by the Company and each of
the Company's wholly-owned, domestic subsidiaries (Subsidiary Guarantors).
Non-guarantor subsidiaries are immaterial to the Company. Full financial
statements of the Subsidiary Guarantors are not presented because they are
not deemed material to investors. The following is summarized financial
information of the Subsidiary Guarantors as of December 31, 1995 and 1994 and
for each of the three years in the period ended December 31, 1995.
<TABLE>
<CAPTION>
December 31,
---------------------
1995 1994
-------- ----------
<S> <C> <C>
Current assets $244,547 $248,793
Noncurrent assets 864,351 916,499
Current liabilities 71,828 84,223
Noncurrent
liabilities 682,805 692,742
Stockholder's equity 354,265 388,227
</TABLE>
<TABLE>
<CAPTION>
For the Year Ended December 31,
---------------------------------
1995 1994 1993
-------- -------- ----------
<S> <C> <C> <C>
Net revenues $930,472 $923,205 $749,090
Cost of services 587,100 581,397 447,246
Net income (loss) (33,961) (44,056) 258
</TABLE>
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)
10. EMPLOYEE RETIREMENT PLANS
Defined Benefit Plans
An acquired entity had a defined benefit pension plan which in 1990 was
frozen as to the further accrual of benefits. At December 31, 1995 the
present value of the projected benefit obligation using a discount rate of
7.5% was $22.6 million and the fair value of the plan assets (publicly traded
corporate debt and equity securities, government obligations and money market
funds) was $17.4 million. The difference between the projected benefit
obligation and the fair value of plan assets is included in other long-term
liabilities in the accompanying combined balance sheet.
Defined Contribution Plans
The Company has several defined contribution plans covering substantially
all of its full-time employees. Company contributions to these plans
aggregated $18.5 million, $15.9 million and $7.3 million for 1995, 1994 and
1993, respectively.
11. RELATED PARTY TRANSACTIONS
The Company, in the ordinary course of business, conducts a number of
transactions with Corning and its affiliates. The significant transactions
occurring during the years ended December 31, 1995, 1994 and 1993 are as
follows:
<TABLE>
<CAPTION>
1995 1994 1993
-------- -------- ---------
<S> <C> <C> <C>
Interest expense on borrowings $78,930 $55,835 $28,400
Purchase of laboratory supplies 11,261 11,607 7,338
Corporate fees 2,800 2,800 2,450
</TABLE>
Certain executives of the Company are included in various stock
compensation programs of Corning. Expenses related to these programs have
been included in the Company's combined financial statements.
In 1994, Corning contributed capital of $25.2 million through the
reduction of revolving credit notes and former S-Corporation shareholders
contributed capital of a building approximating $4.4 million.
12. COMMITMENTS AND CONTINGENCIES
Minimum rental commitments under noncancellable operating leases,
primarily real estate, in effect at December 31, 1995 are as follows:
<TABLE>
<CAPTION>
<S> <C>
Year ending December 31,
1996 $ 40,459
1997 30,481
1998 20,527
1999 14,877
2000 12,532
2001 and thereafter 65,920
-------
Net minimum lease payments $184,796
=======
</TABLE>
F-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)
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. Specifically, in
late April 1996, the DOJ for the first time disclosed to CCL the total amount
of the claims that it proposed to assert against Damon. The government
presented its claim for the base recoupment (by lab, by test, by year) and
discussed various theories on which criminal and civil payments of up to
three times the various base recoupment amounts could be assessed. During May
and June, CCL management analyzed the government's claim in detail. CCL
management and outside counsel then believed that there were meritorious
defenses to a number of the claims for recoupments and potential payments in
excess of the base recoupment and these were presented to the government in
early July 1996.
At the end of the second quarter, CCL recorded a $46 million charge to
increase its reserves to equal management's estimate of the low end of the
range of amounts necessary to satisfy claims related to Damon and other
related and similar investigations. With respect to the Damon investigation,
the low end of the range was estimated to be equal to the base recoupment
sought by the government reflecting the basis on which CCL had settled an
earlier claim with the government in 1993. The low end of the range for the
Nichols and other government investigations was based on the base recoupment
estimated by management from internal investigations. Reserves for pending
private claims were estimated based on CCL's experience in settling private
claims following its 1993 government settlement.
CCL management considered the potential for some payments to be assessed
in excess of the base recoupment in estimating its liability at June 30,
1996. However, management believed that, although it was reasonably possible
that some level of payment in excess of the base recoupment could ultimately
be assessed, the government had not provided sufficient information to
reasonably estimate the amount of any such payments. In addition, management
and counsel believed that it was unlikely that treble payments would be
assessed. This position was based on CCL's experience with the government in
1993, in which the recovery in excess of base recoupments was not
significant, the government's representatives' invitation to present
information and arguments to them and their stated intention not to consider
the issue of payment multiples until the base recoupment amount had been
established, and management's and counsel's belief that it had meritorious
factual, legal and equitable defenses and mitigations of the government
claims.
CCL management was aware that similar investigations of other clinical
laboratories in the industry were ongoing. Other than CCL's 1993 settlement,
the only other similar settlement known to management was the 1992 civil
Medicare settlement by a major competitor for $100 million. CCL had reviewed
the publicly-available
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)
information about that settlement, including press releases and the
settlement agreement. The competitor's settlement agreement did not specify
whether the civil settlement included substantial payments to be assessed in
excess of the base recoupment. It was believed by CCL that it did not.
Although the competitor and its chief executive officer each pleaded guilty
to criminal charges, the fine was only $1 million for conduct that was
contemporaneous with, and considered by CCL management and its counsel to be
more egregious than, that of Damon.
During the third quarter 1996, CCL management met with the government
several times to evaluate the substance of the government's allegations.
During a meeting with the government in mid-August, further information and
legal arguments were exchanged. Importantly, at this time, the government for
the first time began to disclose to CCL and its outside counsel grand jury
testimony and other evidence that was inconsistent with certain of CCL's
defenses.
The final settlement discussions began in late September. The government
responded to and rejected many of CCL's defenses and made its tentative final
settlement offer, which included significant payments in excess of base
recoupments, to CCL. Negotiations on the final settlement amount and terms
(including releases from various federal and state payors, compliance program
requirements, etc.) continued into early October and ended with the
settlement agreement dated October 9, 1996. The settlement included base
recoupments of approximately $40 million (which did not differ materially
from management's estimate at June 30, 1996) and total criminal and civil
payments in excess of base recoupments of approximately $80 million. 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 be paid during the fourth quarter of
1996.
As a result of these settlement agreements, CCL management has reassessed
the level of reserves recorded for other asserted and unasserted claims
related to the Damon and other similar government investigations, including
the investigation of billing practices by Nichols prior to its acquisition by
the Company in 1994. The Company recorded a charge totaling $142 million in
the third quarter 1996 to establish additional reserves to provide for the
above settlement agreements and management's best estimate of potential
amounts which could be required to satisfy the remaining claims. At September
30, 1996, recorded reserves approximated $215 million (including the $119
million Damon settlement paid in October 1996). Based on information
currently available to CCL, management does not believe that the exposure to
claims in excess of recorded claims is material. Although the Damon
settlement was substantially in excess of amounts anticipated by management,
it was primarily due to the civil and criminal payments in excess of the base
recoupment assessed by the government and CCL has now increased its reserves
for asserted and unasserted claims to approximate the amount that may be
required to settle the Nichols and other government civil claims taking into
account the basis for the Damon civil settlement. In addition, although there
is the possibility that CCL could be excluded from participation in Medicare
and Medicaid programs, management believes that the possibility is remote as
a result of the Damon settlement, which included CCL's signing a Corporate
Integrity Agreement, and due to the fact that the government has publicly
commended CCL for its cooperation in the investigation and cited CCL as
having one of the "model" compliance programs in the industry.
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 CCL
against all settlements for any governmental claims relating to billing
practices of CCL and its predecessors that have been settled or are pending
on the Distribution Date. Corning will also agree to indemnify CCL for 50% of
the aggregate of all settlement payments made by CCL that are in excess of
$42 million to private parties that relate to indemnified or previously
settled governmental claims (such as the Damon settlement) for services
provided prior to the Distribution Date; however, the indemnification of
private party claims will not exceed $25 million and will be paid on an
after-tax basis. Such indemnification will not cover any nongovernmental
claims not settled prior to five years after the Distribution Date.
Coincident with the CCL Spin-Off Distribution, the
F-20
<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)
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 of being received from Corning to
satisfy the remaining indemnified governmental 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 (such as the indication by the government of criminal
activity, additional tests being questioned or other changes in the
government's theories of wrongdoing) 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-registered high-yield notes.
Corning will contribute the remaining debt to the Company's equity prior to
the CCL Spin-Off Distribution. The credit facility governing the bank
borrowings and the indenture governing the notes will contain various
customary affirmative and negative covenants, including the maintenance of
certain financial ratios and tests. The credit facility prohibits the Company
from paying cash dividends on the CCL common stock. Further, the indenture
will restrict the Company's ability to pay cash dividends based on a
percentage of the Company's cash flow.
In conjunction with the CCL Spin-Off Distribution, Corning and the Company
will enter into an indemnification agreement whereby Corning agrees to
indemnify CCL, on an after-tax basis, for any losses arising out of any
federal, criminal, civil or administrative investigations or claims that are
pending as of the Distribution Date to the extent that such investigations or
claims arise out of or are related to alleged violations of federal laws by
reason of CCL, its affiliates, officers or directors billing any federal
program or agency for services rendered to beneficiaries of such program or
agency.
Corning, CCL and Covance will enter into tax indemnification agreements
that will prohibit CCL and Covance for a period of two years after the
Spin-Off Distributions from taking certain actions that might jeopardize the
favorable tax treatment of the Distributions under section 355 of the
Internal Revenue Code of 1986, as amended and will provide Corning and CCL
with certain rights of indemnification against CCL and Covance. The tax
indemnification agreements will also require CCL and Covance to take such
actions as Corning may request to preserve the favorable tax treatment
provided for in any rulings obtained from the Internal Revenue Service in
respect of the Distributions.
Corning, CCL and Covance will also enter into a tax sharing agreement
which will allocate among Corning, CCL and Covance responsibility for
federal, state and local taxes relating to taxable periods before and after
the
F-21
<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)
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. Multiples of
revenues will be used to estimate fair value in cases where the Company
believes that the likely acquirer of a regional laboratory would be a
strategic buyer within the industry which would realize synergies from such
an acquisition. In regions where management does not believe there is a
potential strategic buyer within the industry, and, accordingly, believes the
likely buyer would not have synergy opportunities, multiples of EBITDA will
be used for estimating fair value. Regional laboratories with lower levels of
profitability valued using revenue multiples would generally be ascribed a
higher value than if multiples of EBITDA were used, due to assumed synergy
opportunities. While management believes the estimation methods are
reasonable and reflective of common valuation practices, there can be no
assurance that a sale to a buyer for the estimated value ascribed to a
regional laboratory could be completed.
For purposes of estimating the fair value of each of the regional
laboratories, management assumed that a potential buyer would seek to be
indemnified for litigation or other contingencies resulting from
preacquisition activities. Therefore, the reserves recorded for potential,
and settled, billing and marketing claims were not allocated to the regional
laboratories for purposes of estimating their fair value.
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. If such events or
changes in circumstances were deemed to have occurred, management would
consult with one or more of its investment bankers in estimating the impact
on fair value of the regional laboratory.
F-22
<PAGE>
CORNING CLINICAL LABORATORIES INC.
(to be renamed Quest Diagnostics Incorporated)
Schedule II--Valuation Accounts and Reserves
(amounts in thousands)
<TABLE>
<CAPTION>
Balance at Net Deductions Balance at
Year ended December 31, 1995 1-1-95 Additions and Other 12-31-95
---------- ---------- -------------- -----------
<S> <C> <C> <C> <C>
Doubtful accounts and allowances $ 74,829 $152,590 $ 79,472 $147,947
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-23
<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-24
<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-25
<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-26
<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-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
(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.
Specifically, in late April 1996, the DOJ for the first time disclosed to CCL
the total amount of the claims that it proposed to assert against Damon. The
government presented its claim for the base recoupment (by lab, by test, by
year) and discussed various theories on which criminal and civil payments of
up to three times the various base recoupment amounts could be assessed.
During May and June, CCL management analyzed the government's claim in
detail. CCL management and outside counsel then believed that there were
meritorious defenses to a number of the claims for recoupments and potential
payments in excess of the base recoupment and these were presented to the
government in early July 1996.
At the end of the second quarter, CCL recorded a $46 million charge to
increase its reserves to equal management's estimate of the low end of the
range of amounts necessary to satisfy claims related to Damon and other
related and similar investigations. With respect to the Damon investigation,
the low end of the range was estimated to be equal to the base recoupment
sought by the government reflecting the basis on which CCL had settled an
earlier claim with the government in 1993. The low end of the range for the
Nichols and other government investigations was based on the base recoupment
estimated by management from internal investigations. Reserves for pending
private claims were estimated based on CCL's experience in settling private
claims following its 1993 government settlement.
CCL management considered the potential for some payments to be assessed
in excess of the base recoupment in estimating its liability at June 30,
1996. However, management believed that, although it was reasonably possible
that some level of payment in excess of the base recoupment could ultimately
be assessed, the government had
F-28
<PAGE>
CORNING CLINICAL LABORATORIES INC.
(a wholly-owned business of Corning Incorporated)
NOTES TO INTERIM COMBINED FINANCIAL STATEMENTS (Continued)
(unaudited)
not provided sufficient information to reasonably estimate the amount of any
such payments. In addition, management and counsel believed that it was
unlikely that treble payments would be assessed. This position was based on
CCL's experience with the government in 1993, in which the recovery in excess
of base recoupments was not significant, the government's representatives'
invitation to present information and arguments to them and their stated
intention not to consider the issue of payment multiples until the base
recoupment amount had been established, and management's and counsel's belief
that it had meritorious factual, legal and equitable defenses and mitigations
of the government claims.
CCL management was aware that similar investigations of other clinical
laboratories in the industry were ongoing. Other than CCL's 1993 settlement,
the only other similar settlement known to management was the 1992 civil
Medicare settlement by a major competitor for $100 million. CCL had reviewed
the publicly-available information about that settlement, including press
releases and the settlement agreement. The competitor's settlement agreement
did not specify whether the civil settlement included substantial payments to
be assessed in excess of the base recoupment. It was believed by CCL that it
did not. Although the competitor and its chief executive officer each pleaded
guilty to criminal charges, the fine was only $1 million for conduct that was
contemporaneous with, and considered by CCL management and its counsel to be
more egregious than, that of Damon.
During the third quarter 1996, CCL management met with the government
several times to evaluate the substance of the government's allegations.
During a meeting with the government in mid-August, further information and
legal arguments were exchanged. Importantly, at this time, the government for
the first time began to disclose to CCL and its outside counsel grand jury
testimony and other evidence that was inconsistent with certain of CCL's
defenses.
The final settlement discussions began in late September. The government
responded to and rejected many of CCL's defenses and made its tentative final
settlement offer, which included significant payments in excess of base
recoupments, to CCL. Negotiations on the final settlement amount and terms
(including releases from various federal and state payors, compliance program
requirements, etc.) continued into early October and ended with the
settlement agreement dated October 9, 1996. The settlement included base
recoupments of approximately $40 million (which did not differ materially
from management's estimate at June 30, 1996) and total criminal and civil
payments in excess of base recoupments of approximately $80 million. 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 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. At September 30, 1996, recorded reserves approximated $215
million (including the $119 million Damon settlement paid in October 1996).
Based on information currently available to CCL, management does not believe
that the exposure to claims in excess of recorded claims is material.
Although the Damon settlement was substantially in excess of amounts
anticipated by management, it was primarily due to the civil and criminal
payments in excess of the base recoupment assessed by the government and CCL
has now increased its reserves for asserted and unasserted claims to
approximate the amount that may be required to settle the Nichols and other
government civil claims taking into account the basis for the Damon civil
settlement. In addition, although there is the possibility that CCL could be
excluded from participation in Medicare and Medicaid programs, management
believes that the possibility is remote as a result of the Damon settlement,
which included CCL's signing a Corporate Integrity Agreement, and due to the
fact that the government has publicly commended CCL for its cooperation in
the investigation and cited CCL as having one of the "model" compliance
programs in the industry.
F-29
<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 CCL
against all settlements for any governmental claims relating to billing
practices of CCL and its predecessors that have been settled or are pending
on the Distribution Date. Corning will also agree to indemnify CCL for 50% of
the aggregate of all settlement payments made by CCL that are in excess of
$42 million to private parties that relate to indemnified or previously
settled governmental claims (such as the Damon settlement) for services
provided prior to the Distribution Date; however, the indemnification of
private party claims will not exceed $25 million and will be paid on an
after-tax basis. Such indemnification will not cover any nongovernmental
claims not settled prior to five years after the Distribution Date.
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 of being received from Corning to satisfy the remaining indemnified
governmental 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 (such as the indication by the government of criminal
activity, additional tests being questioned or other changes in the
government's theories of wrongdoing) 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-registered 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-registered 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-30
<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. Multiples of
revenues will be used to estimate fair value in cases where the Company
believes that the likely acquirer of a regional laboratory would be a
strategic buyer within the industry which would realize synergies from such
an acquisition. In regions where management does not believe there is a
potential strategic buyer within the industry, and, accordingly, believes the
likely buyer would not have synergy opportunities, multiples of EBITDA will
be used for estimating fair value. Regional laboratories with lower levels of
profitability valued using revenue multiples would generally be ascribed a
higher value than if multiples of EBITDA were used, due to assumed synergy
opportunities. While management believes the estimation methods are
reasonable and reflective of common valuation practices, there can be no
assurance that a sale to a buyer for the estimated value ascribed to a
regional laboratory could be completed.
F-31
<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)
For purposes of estimating the fair value of each of the regional
laboratories, management assumed that a potential buyer would seek to be
indemnified for litigation or other contingencies resulting from
preacquisition activities. Therefore, the reserves recorded for potential,
and settled, billing and marketing claims were not allocated to the regional
laboratories for purposes of estimating their fair value.
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. If such events or
changes in circumstances were deemed to have occurred, management would
consult with one or more of its investment bankers in estimating the impact
on fair value of the regional laboratory.
7. SUMMARIZED FINANCIAL INFORMATION
As discussed in Note 5, the Company is currently pursuing the issuance of
$150 million of Senior Subordinated Notes due in 2006 which will be used to
repay certain intercompany indebtedness owed to Corning. The Senior
Subordinated Notes will be guaranteed, fully, jointly and severally, and
unconditionally, on a senior subordinated basis by the Company and each of
the Company's wholly-owned, domestic subsidiaries (Subsidiary Guarantors).
Non-guarantor subsidiaries are immaterial to the Company. Full financial
statements of the Subsidiary Guarantors are not presented because they are
not deemed material to investors. The following is summarized financial
information of the Subsidiary Guarantors as of September 30, 1996 and
December 31, 1995 and for the nine months ended September 30, 1996 and
September 30, 1995.
<TABLE>
<CAPTION>
September 30, December 31,
1996 1995
------------- --------------
<S> <C> <C>
Current assets $234,183 $244,547
Noncurrent assets 865,265 864,351
Current liabilities 71,416 71,828
Noncurrent liabilities 694,331 682,805
Stockholder's equity 333,701 354,265
For the nine months ended
September 30,
-----------------------------
1996 1995
------------ -------------
Net revenues $677,489 $709,317
Cost of services 427,583 444,705
Net loss (20,564) (26,435)
</TABLE>
F-32
