SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-----------
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of earliest event reported):
November 26, 1996
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CORNING INCORPORATED
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(Exact Name of Registrant as Specified in Charter)
NEW YORK
(State or Other Jurisdiction of Incorporation)
1-3247 16-0393470
- --------------------------------------------------------------------------------
(Commission File Number) (IRS Employer Identification No.)
One Riverfront Plaza, Corning, New York 14831
---------------------------------------------
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code:
(607) 974-9000
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Item 5. Other Events.
-------------
Attached for filing as an exhibit hereto is the item listed in "Item
7-Financial Statements and Exhibits" below. Such item is being filed
in connection with the distributions to Corning shareholders of record
on December 31, 1996 of all of the outstanding common stock of Corning
Clinical Laboratories Inc. (to be renamed Quest Diagnostics
Incorporated) and Covance Inc.
Item 7. Financial Statements and Exhibits.
----------------------------------
(c) Exhibits.
99.1 Selected pages of the Information Statement of Corning Incorporated,
dated November 26, 1996 (pages 18-32)
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
CORNING INCORPORATED
By: /s/ A. John Peck, Jr.
----------------------------
Name: A. John Peck, Jr.
Title: Secretary
Dated: December 2, 1996
INTRODUCTION
On May 13, 1996, the Board of Directors of Corning (the "Corning Board")
approved a plan to distribute to Corning shareholders (i) the clinical
laboratory testing business being conducted by its wholly owned subsidiary,
Quest Diagnostics, in the Quest Diagnostics Spin-Off Distribution and (ii)
the contract research business being conducted by Quest Diagnostics' wholly
owned subsidiary, Covance, in the Covance Spin-Off Distribution. The
Distributions will be effected by the distribution of a dividend to holders
of Corning Common Stock of all of the outstanding Quest Diagnostics Common
Stock, followed immediately by the distribution of a dividend to the holders
of Quest Diagnostics Common Stock of all of the Covance Common Stock. Since
the Covance Spin-Off Distribution will be immediately after (but on the same
day as) the Quest Diagnostics Spin-Off Distribution, each holder of Corning
Common Stock will, after the Distributions, not only hold shares of Corning
Common Stock but also shares of Quest Diagnostics Common Stock and Covance
Common Stock. As a result of the Distributions, Quest Diagnostics will own
and 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. On the Distribution Date, Corning
(in the case of the Quest Diagnostics Spin-Off Distribution) and Quest
Diagnostics (in the case of the Covance Spin-Off Distribution) will effect
the Distributions by delivering all of the outstanding shares of Quest
Diagnostics Common Stock and Covance Common Stock to Harris Trust and Savings
Bank, as the distribution agent (the "Distribution Agent") for transfer and
distribution to the holders of Corning Common Stock and Quest Diagnostics
Common Stock on the Record Date. The Corning Board formally approved the
Distributions and declared the dividend of Quest Diagnostics Common Stock on
November 20, 1996. The Board of Directors of Quest Diagnostics (the "Quest
Diagnostics Board") declared the dividend of Covance Common Stock on November
20, 1996. It is expected that the Distributions will be made on December 31,
1996.
Quest Diagnostics' principal executive offices are located at One Malcolm
Avenue, Teterboro, New Jersey 07608, and its telephone number is (201)
393-5000. Covance's principal executive offices are located at 210 Carnegie
Center, Princeton, New Jersey 08540, and its telephone number is (609)
452-4440.
Shareholders of Corning with inquiries relating to the Distributions
should contact Investor Relations, Corning Incorporated, One Riverfront
Plaza, Corning, New York 14831, telephone (607) 974-9000, or Corning's stock
transfer agent Harris Trust and Savings Bank, Shareholder Services Division,
P.O. Box 755, Chicago, Illinois 60690- 0755, telephone (800) 255-0461. After
the Distribution Date, stockholders of Quest Diagnostics with inquiries
relating to their investment in Quest Diagnostics should contact Investor
Relations at the address and telephone number for Quest Diagnostics'
principal executive offices indicated above and stockholders of Covance with
inquiries relating to their investment in Covance should contact Investor
Relations at the address and telephone number for Covance's principal
executive offices indicated above.
No action is required by Corning shareholders in order to receive the
Quest Diagnostics Common Stock or the Covance Common Stock to which they are
entitled in the Distributions.
18
<PAGE>
CORNING
Corning traces its origins to a glass business established in 1851. The
present corporation was incorporated in the State of New York in December
1936, and its name was changed from Corning Glass Works to Corning
Incorporated on April 28, 1989.
Corning is an international corporation competing, prior to the
Distributions, in four broadly based business segments: Specialty Materials,
Communications, Health Care Services and Consumer Products. After the
Distributions, Corning will compete in the Specialty Materials,
Communications and Consumer Products business segments. Corning's total
revenues from continuing operations were $3.3 billion in 1995.
The Specialty Materials segment includes the environmental-products
business, which produces emission- control substrates and related
applications for both the North American and European markets, and the
science- products business, which produces various plastic and glass
laboratory products for the life-sciences market. The other businesses which
operate in this segment specialize in the production of optical, lighting and
other advanced material products.
The Communications segment includes the opto-electronics and
information-display businesses. The opto- electronics business produces
optical fiber, optical cable and optical hardware and components for the
worldwide telecommunications industry. The information-display business
manufactures glass panels and funnels, projection video lens assemblies and
liquid crystal display glass for flat panel displays.
The Consumer Products segment produces cookware, glassware and dinnerware
that is sold primarily in the North American retail market through
mass-market and other distribution channels. The Consumer Products segment
also includes Steuben crystal.
Corning and its subsidiaries produce approximately 60,000 different
products at 42 plants in ten countries.
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<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA OF CORNING
The following table summarizes certain historical consolidated financial
data of Corning at the dates and for each of the periods indicated. The
selected financial data as of and for the five years ended December 31, 1995
have been derived from audited financial statements and have been restated to
reflect Quest Diagnostics and Covance as discontinued operations. The
selected consolidated financial data as of and for the nine months ended
September 30, 1996 and forty weeks ended October 8, 1995 are derived from
Corning's unaudited financial statements. In the opinion of Corning
management, the unaudited consolidated financial statements include all
adjustments, consisting of only 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 nine months ended September 30, 1996 are not necessarily indicative of
the results for the entire year ending December 31, 1996.
20
<PAGE>
<TABLE>
<CAPTION>
Nine Months Forty Fiscal Year Ended
Ended Weeks Ended ----------------------------------------------------------------------
September 30, October 8, December 31, January 1, January 2, January 3, December 29,
1996(a) 1995 1995 1995 1994 1993 1991
-------------- ------------- ------------- ----------- ----------- ------------- --------------
(in millions, except per share amounts)
<S> <C> <C> <C> <C> <C> <C> <C>
Income Statement Data:
Revenues:
Net sales $ 2,661.5 $ 2,442.6 $ 3,257.1 $ 3,083.4 $ 2,685.3 $2,558.9 $ 2,374.9
Royalty, interest, and
dividend income 24.0 22.9 30.6 26.5 28.2 34.1 25.8
-------------- ------------- ------------- ---------- ---------- ------------- --------------
2,685.5 2,465.5 3,287.7 3,109.9 2,713.5 2,593.0 2,400.7
Deductions:
Cost of sales 1,636.9 1,512.2 2,032.6 1,950.0 1,784.8 1,676.8 1,555.1
Selling, general and
administrative
expenses 470.1 413.8 556.2 535.8 480.3 483.3 462.5
Research and
development expenses 137.5 130.4 175.7 176.6 172.7 150.9 130.2
Provision for
restructuring and
other special charges 26.5 26.5 112.0 63.3
Interest expense 53.8 52.8 69.3 65.6 57.5 46.8 46.9
Other, net 19.7 17.7 21.3 38.1 31.9 15.7 23.5
-------------- ------------- ------------- ---------- ---------- ------------- --------------
Income from continuing
operations before
taxes on income 367.5 312.1 406.1 343.8 74.3 156.2 182.5
Taxes on income from
continuing operations 123.1 92.9 118.2 112.6 (5.2) 20.8 52.2
-------------- ------------- ------------- ---------- ---------- ------------- --------------
Income from continuing
operations before
minority interest and
equity earnings 244.4 219.2 287.9 231.2 79.5 135.4 130.3
Minority interest in
earnings of
subsidiaries (41.0) (51.4) (64.4) (48.6) (15.1) (21.0) (16.9)
Dividends on
convertible preferred
securities of
subsidiary (10.3) (10.5) (13.7) (6.1)
Equity in earnings
(losses) of associated
companies:
Other than Dow Corning
Corporation 58.5 48.9 66.7 48.6 25.0 40.4 36.6
Dow Corning
Corporation (348.0) (348.0) (2.8) (144.5) 11.9 74.4
-------------- ------------- ------------- ---------- ---------- ------------- --------------
Income (Loss) from
Continuing Operations
Before Extraordinary
Credit and
Cumulative Effect of
Changes in
Accounting Methods 251.6 (141.8)(c) (71.5)(c) 222.3(e) (55.1)(g) 166.7(i) 224.4(l)
Tax benefit of loss
carryforwards 0.7 5.6
Cumulative effect of
changes in accounting
methods (284.7)(j)
-------------- ------------- ------------- ---------- ---------- ------------- --------------
Income (loss) from
continuing operations 251.6 (141.8) (71.5) 222.3 (55.1) (117.3) 230.0
Income (loss) from
discontinued
operations, net of
income taxes (162.6)(b) 7.5(d) 20.7(d) 59.0(f) 39.9(h) 104.7(k) 86.8(m)
-------------- ------------- ------------- ---------- ---------- ------------- --------------
Net Income (Loss) $ 89.0 $ (134.3) $ (50.8) $ 281.3 $ (15.2) $ (12.6) $ 316.8
============== ============= ============= ========== ========== ============= ==============
Per Common Share Data:
Income (Loss) from
Continuing Operations
Before Extraordinary
Credit and
Cumulative Effect of
Changes in
Accounting Methods $ 1.10 $ (0.63) $ (0.32) $ 1.04 $ (0.30) $ 0.87 $ 1.19
Tax benefit of loss
carryforwards 0.03
Cumulative effect of
changes in accounting
methods (1.51)
-------------- ------------- ------------- ---------- ---------- ------------- --------------
Income (loss) from
continuing operations 1.10 (0.63) (0.32) 1.04 (0.30) (0.64) 1.22
Income (loss) from
discontinued
operations, net of
income taxes (0.72) 0.03 0.09 0.28 0.21 0.56 0.47
-------------- ------------- ------------- ---------- ---------- ------------- --------------
Net Income (Loss) $ 0.38 $ (0.60) $ (0.23) $ 1.32 $ (0.09) $ (0.08) $ 1.69
============== ============= ============= ========== ========== ============= ==============
Weighted Average Shares
Outstanding 227.4 226.5 226.6 211.8 192.0 188.6 186.5
============== ============= ============= ========== ========== ============= ==============
Common Dividends
Declared $ 0.54 $ 0.54 $ 0.72 $ 0.69 $ 0.68 $ 0.62 $ 0.68(n)
============== ============= ============= ========== ========== ============= ==============
Balance Sheet Data (at
end of period):
Total assets $ 5,728.7 $ 5,411.6 $ 5,461.7 $ 5,516.2 $ 4,797.9 $ 4,013.3 $ 3,630.6
Working capital 260.5 533.7 454.4 448.2 278.2 328.1 395.9
Loans payable beyond
one year 1,278.3 1,419.2 1,340.0 1,345.0 1,550.1 781.8 669.9
Common stockholders'
equity 2,074.3 2,081.3 2,103.0 2,263.0 1,685.8 1,803.8 2,018.8
</TABLE>
See notes to selected consolidated financial data on following page.
21
<PAGE>
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(Footnotes for preceding page)
(a) Effective January 1, 1996, Corning made several changes to its accounting
calendar which, although not affecting the comparability of Corning's
annual results, caused a shift in results between the quarters, primarily
increasing the first quarter and decreasing the third quarter reported
results.
(b) The loss from discontinued operations includes a $115 million third
quarter after-tax charge and a $56.8 million second quarter after-tax
charge, offset by $9.2 million of income recognized in the first quarter.
The third quarter charge related primarily to a charge taken by Quest
Diagnostics to increase reserves related to certain government
investigations of billing practices of certain clinical laboratories
acquired by Quest Diagnostics in 1993 and 1994. The second quarter charge
includes the estimated costs related to the Distributions and a charge to
increase reserves for government claims offset by the estimated results
of operations of the businesses to be distributed from April 1, 1996
through December 31, 1996, the anticipated date of the Distributions.
(c) In 1995, Corning recognized a restructuring charge for continuing
operations totalling $26.5 million ($16.1 million after tax), as a result
of severance for workforce reductions in certain corporate staff groups
and the write-off of production equipment caused by the decision to exit
the manufacturing facility for glass-ceramic memory-disks.
Corning also recorded an after-tax charge of $365.5 million to fully
reserve its investment in Dow Corning Corporation (a 50%-owned equity
company) ("Dow Corning") as a result of Dow Corning filing for protection
under Chapter 11 of the United States Bankruptcy Code in May 1995. Corning
discontinued recognition of equity earnings from Dow Corning in the second
quarter of 1995.
(d) In 1995, discontinued operations included a restructuring charge
totalling $40.5 million ($24.4 million after tax, or $0.11 per share).
(e) In 1994, Corning recorded a $75.9 million reduction in equity earnings as
a result of a charge taken by Dow Corning related to breast-implant
litigation.
(f) In 1994, discontinued operations included a restructuring charge
totalling $82.3 million ($55.4 million after tax, or $0.26 per share).
(g) In 1993, Corning recognized a restructuring charge from continuing
operations totalling $112.0 million ($63.2 million after tax and minority
interest) as a result of costs to integrate the Costar acquisition and a
planned company-wide restructuring program. Corning also recognized a
non-operating gain totalling $4.2 million ($2.6 million after tax).
Corning also recorded a $203.1 million reduction in equity earnings as a
result of a charge taken by Dow Corning related to breast-implant
litigation and a $9.5 million reduction in equity earnings as a result of a
restructuring charge taken by Vitro Corning, SA, then a 50%-owned equity
company.
(h) In 1993, discontinued operations included restructuring and other special
charges totalling $95 million ($57.3 million after tax, or $0.30 per
share).
(i) In 1992, Corning recorded a provision of $63.3 million ($32.1 million
after-tax and minority interest) as a result of Corning Vitro
Corporation's decision to restructure its Brazilian operations. Corning
also recognized net non-operating gains from consolidated operations
totalling $7.0 million ($21.7 million after tax), including a gain of
$10.1 million (before and after tax) from the sale of an additional
equity interest in Corning Japan and a pre-tax loss of $7.3 million ($9.0
million after-tax gain) from the formation of the consumer housewares
venture with Vitro S.A. of Mexico.
Corning also recognized a $37.7 million reduction in equity earnings which
included $24.5 million of costs associated with Dow Corning's terminated
breast implant business and $13.2 million of restructuring charges
associated with Dow Corning's exit from its Brazilian operations and other
cost-reduction programs.
(j) Effective December 30, 1991, Corning and its subsidiaries adopted
Financial Accounting Standard No. 106, "Employers' Accounting for
Postretirement Benefits Other than Pensions" ("FAS 106"). The cumulative
effect of adopting FAS 106 resulted in a charge to continuing operations
of $292.9 million (after-tax and minority interest), or $1.55 per share,
in 1992. In addition, an $8.2 million gain, or $0.04 per share, from an
equity company's adoption of Financial Accounting Standard No. 109,
"Accounting for Income Taxes" ("FAS 109") was recognized in 1992.
(k) In 1992, discontinued operations included a charge for the cumulative
effect of adopting FAS 106 totalling $1.9 million after tax, or $0.01 per
share and a tax benefit of loss carryforwards totalling $7.0 million, or
$0.04 per share.
22
<PAGE>
(l) In 1991, Corning recognized net non-operating gains from consolidated
operations totalling $4.6 million ($12.5 million after tax) which
included a gain of $5.3 million (before and after tax) on the sale of a
less than 10% equity interest in Corning Japan. Corning also recognized
an $8.2 million reduction in equity earnings to reflect a charge recorded
by Dow Corning for costs associated with its breast implant business.
(m) In 1991, discontinued operations included non-operating gains of $3.5
million ($2.1 million after tax, or $0.01 per share).
(n) Includes a special dividend of $0.15 per common share in 1991.
(o) The following analysis summarizes the impact of the items included in
notes (b) through (m) on Corning's net income and earnings per share:
<TABLE>
<CAPTION>
Nine Months Forty Fiscal Year Ended
Ended Weeks Ended -------------------------------------------------------------------
September 30, October 8, December 31, January 1, January 2, January 3, December 29,
1996 1995 1995 1995 1994 1993 1991
-------------- ------------- ------------- ----------- ----------- ----------- --------------
<S> <C> <C> <C> <C> <C> <C> <C>
Net Income
Before Unusual Items
and Dow Corning
Corporation $ 251.6 $ 222.3 $ 292.6 $225.1 $ 159.5 $ 165.2 $137.5
Unusual Items and Dow
Corning Corporation:
Tax benefit of loss
carryforwards 0.7 5.6
Cumulative effect of
changes in
accounting methods (284.7)
Dow Corning
Corporation (348.0) (348.0) (2.8) (144.5) 11.9 74.4
Restructuring and
other special
charges, net of
non-operating gains (16.1) (16.1) (70.1) (10.4) 12.5
-------------- ------------- ------------- ---------- ---------- ---------- --------------
Continuing operations 251.6 (141.8) (71.5) 222.3 (55.1) (117.3) 230.0
Discontinued operations (162.6) 7.5 20.7 59.0 39.9 104.7 86.8
-------------- ------------- ------------- ---------- ---------- ---------- --------------
Net Income (Loss) $ 89.0 $(134.3) $ (50.8) $281.3 $ (15.2) $ (12.6) $316.8
============== ============= ============= ========== ========== ========== ==============
Earnings Per Share
Before Unusual Items
and Dow Corning
Corporation $ 1.10 $ 0.98 $ 1.29 $ 1.05 $ 0.82 $ 0.87 $ 0.72
Unusual items and Dow
Corning Corporation:
Tax benefit of loss
carryforwards
Cumulative effect of
changes in
accounting methods (1.51) 0.03
Dow Corning
Corporation (1.54) (1.54) (0.01) (0.76) 0.06 0.40
Restructuring and
other special
charges, net of
non-operating gains (0.07) (0.07) (0.36) (0.06) 0.07
-------------- ------------- ------------- ---------- ---------- ---------- --------------
Continuing operations 1.10 (0.63) (0.32) 1.04 (0.30) (0.64) 1.22
Discontinued operations (0.72) 0.03 0.09 0.28 0.21 0.56 0.47
-------------- ------------- ------------- ---------- ---------- ---------- --------------
Net Income (Loss) $ 0.38 $ (0.60) $ (0.23) $ 1.32 $ (0.09) $ (0.08) $ 1.69
============== ============= ============= ========== ========== ========== ==============
</TABLE>
23
<PAGE>
CAPITALIZATION OF CORNING
The following table sets forth the actual capitalization of Corning at
September 30, 1996, without giving effect to the Distributions.
<TABLE>
<CAPTION>
September
(dollars in millions, except per share data) 30, 1996
------------
(unaudited)
<S> <C>
Short-Term Debt $ 427.8
============
Long-Term Debt $1,278.3
------------
Convertible Preferred Securities of Subsidiary 365.0
------------
Convertible Preferred Stock:
Par value $100 per share: 10,000,000 shares
authorized; 227,000 shares of 8% Series B
Preferred Stock outstanding 22.7
------------
Common Stockholders' Equity:
Common Stock, including excess over par value
and other capital, par value $0.50 per share;
shares authorized 500,000,000; shares issued
259,600,000 1,174.4
Retained earnings 1,452.3
Less cost of 29,900,000 shares of common stock in treasury (603.1)
Cumulative translation adjustment 50.7
------------
Total common stockholders' equity 2,074.3
------------
Total capitalization $3,740.3
============
</TABLE>
Corning's investment in equity and intercompany debt of Quest Diagnostics
and Covance totalled $1.6 billion at September 30, 1996 and is expected to
increase to $1.8 billion at the date of the Distributions. Prior to the
Distributions, Quest Diagnostics and Covance will borrow approximately $600
million from third-party lenders and repay intercompany debt to Corning,
reducing Corning's investment to approximately $1.2 billion. Corning's
stockholders' equity will be reduced by Corning's investment in Quest
Diagnostics and Covance at the Distribution Date. Corning intends to use the
proceeds from the repayment of intercompany debt to repay third-party debt
and invest for future strategic uses.
Corning's long-term debt as a percentage of total capital is expected to
increase from the current 32 percent to between 40 percent and 44 percent at
the end of 1996 when the Distributions are completed.
24
<PAGE>
THE DISTRIBUTIONS
Reasons for the Distributions
Management of Corning, Quest Diagnostics and Covance each believe that
their respective companies will be more competitive and operate more
successfully as stand-alone entities. In particular, the separation will (i)
permit the management of each company to concentrate on its core business,
each business having different priorities, business strategies, operations,
risks, services, regulatory constraints and customer demands. Corning, Quest
Diagnostics and Covance are in substantially different businesses, each of
which requires separate management expertise, demands distinct operational
skills and presents different risk profiles and opportunities, and (ii)
enable each of Quest Diagnostics and Covance to use several different
employee stock ownership plans, available only to publicly traded companies,
to compensate and motivate their employees through a direct link between
equity-based awards and the performance of the particular employer. These
different businesses compete for the attention of management, compete for
capital with one another and have distinct levels of research and development
requirements. The management of each has concluded that separation would
enable each company to pursue its own business and growth strategies, as well
as manage its own risks, without competing against each other with different
priorities within the Corning group of companies.
Manner of Effecting the Distributions
The Distributions were formally declared by the Corning Board on November
20, 1996 and will be effective on the Distribution Date. At the time of the
Distributions, share certificates for Quest Diagnostics Common Stock and
Covance Common Stock will be delivered to the Distribution Agent. As soon as
possible after the Distribution Date, the Distribution Agent will mail share
certificates representing shares of Quest Diagnostics Common Stock and
Covance Common Stock to holders of Corning Common Stock as of 11:59 p.m. on
December 31, 1996, the date selected by the Corning Board and by Quest
Diagnostics as the Record Date on the basis of one share of Quest Diagnostics
Common Stock for every eight shares of Corning Common Stock and one share of
Covance Common Stock for every four shares of Corning Common Stock (or two
shares of Covance Common Stock for every share of Quest Diagnostics Common
Stock) held on the Record Date. Based on 229,723,000 shares of Corning Common
Stock outstanding on October 11, 1996, and subject to adjustment for
repurchases of Corning Common Stock and for cancellations, waivers or other
adjustments under certain Corning employee benefit programs of shares of
Corning Common Stock, approximately (i) 28.0 million shares of Quest
Diagnostics Common Stock, and (ii) 56.0 million shares of Covance Common
Stock will be distributed. All such shares of Quest Diagnostics Common Stock
and Covance Common Stock will be fully paid and nonassessable. See
"Description of Quest Diagnostics Capital Stock" and "Description of Covance
Capital Stock."
No certificates or scrip representing fractional shares of Quest
Diagnostics Common Stock or Covance Common Stock will be issued to Corning
shareholders as part of the Distributions. The Distribution Agent will
aggregate fractional shares into whole shares and sell them in the open
market at then prevailing prices on behalf of holders who otherwise would be
entitled to receive fractional share interests, and such persons will receive
instead a check in payment for the amount of their allocable share of the
sale proceeds net of all brokerage charges, commissions and transfer taxes
attributed to such sales. See "--Certain Federal Income Tax Consequences of
the Distributions." Such sales and the distribution of the proceeds therefrom
are expected to be made as soon as practicable after the mailing of
certificates representing shares of Quest Diagnostics Common Stock and
Covance Common Stock to Corning shareholders.
Holders of shares of Corning Common Stock issued under certain employee
benefit programs will not receive shares of Quest Diagnostics Common Stock or
Covance Common Stock in the Distributions. The trustee of one program has
agreed to waive the right to receive shares of Quest Diagnostics Common Stock
and Covance Common Stock in the Distributions and has elected instead to
receive shares of Corning Common Stock. Pursuant to another program, holders
will not participate in the Distributions and will receive shares of Corning
Common Stock equivalent in value to the shares of Quest Diagnostics Common
Stock and Covance Common Stock to be distributed. No vote of Corning
shareholders is required in connection with the Distributions, and Corning
shareholders have no appraisal rights in connection with the Distributions.
No consideration will be paid by Corning shareholders for shares received in
the Distributions nor will such shareholders be required to surrender or
exchange shares of Corning Common Stock. Holders of Corning Common Stock will
continue to own their shares of Corning Common
25
<PAGE>
Stock and, except as described above, if such shareholders were shareholders
of record on the Record Date, they will also receive shares of Quest
Diagnostics Common Stock and Covance Common Stock. Except for the change in
number of shares of Corning Common Stock described above, the Distributions
will not otherwise change the number of, or affect the rights associated
with, outstanding shares of Corning Common Stock.
Listing and Trading of Quest Diagnostics Common Stock and Covance Common
Stock
Prior to the Distributions, there have been no public trading markets for
the Quest Diagnostics Common Stock or the Covance Common Stock, although
"when issued" markets are expected to develop prior to the Distribution Date.
Application has been made to list the Quest Diagnostics Common Stock and the
Covance Common Stock on the NYSE, subject to official notice of the
Distributions. Prices at which Quest Diagnostics Common Stock or Covance
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 and Covance Common Stock are fully distributed and
orderly markets develop, the prices at which trading in such stock occurs may
fluctuate significantly. The prices at which Quest Diagnostics Common Stock
and Covance 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 markets for Quest Diagnostics Common Stock and Covance
Common Stock, investor perceptions of each of Quest Diagnostics and Covance
and the clinical laboratory testing and contract research businesses, as the
case may be, and general economic and market conditions.
Upon the consummation of the Distributions, Corning Clinical Laboratories
Inc. will adopt the name Quest Diagnostics Incorporated. 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." 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."
Application has been made to list the Covance Common Stock on the NYSE,
subject to official notice of the Distributions, under the trading symbol
"CVD." Covance initially will have approximately 18,000 stockholders of
record, based on the expected number of holders of Quest Diagnostics Common
Stock immediately following the Quest Diagnostics Spin-Off Distribution. The
Transfer Agent and Registrar for the Covance Common Stock will be Harris
Trust and Savings Bank. For certain information regarding options to purchase
Covance Common Stock that may become outstanding after the Distributions, see
"Management of Covance."
Shares of Quest Diagnostics Common Stock and Covance Common Stock
distributed to Corning shareholders in the Distributions will be freely
transferable, except for shares of Quest Diagnostics Common Stock and Covance
Common Stock received by persons who may be deemed to be "affiliates" of
Quest Diagnostics or Covance, respectively, under the Securities Act of 1933,
as amended (the "Securities Act"). Persons who may be deemed to be affiliates
of Quest Diagnostics or Covance after the Distributions generally include
individuals or entities that control, are controlled by, or are under common
control with, Quest Diagnostics or Covance, respectively, and may include
certain officers and directors of Quest Diagnostics or Covance as well as
principal stockholders of Quest Diagnostics or Covance, if any. Persons who
are affiliates of Quest Diagnostics or Covance will be permitted to sell
their shares of Quest Diagnostics Common Stock or Covance Common Stock, as
the case may be, 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 afforded by Section 4(1) of the
Securities Act or by Rule 144 under the Securities Act. See "Description of
Quest Diagnostics Capital Stock--Restrictions on Transfer" and "Description
of Covance Capital Stock--Restrictions on Transfer."
Certain Federal Income Tax Consequences of the Distributions
THE FOLLOWING IS A SUMMARY OF CERTAIN FEDERAL INCOME TAX CONSEQUENCES
RESULTING FROM THE DISTRIBUTIONS UNDER CURRENT LAW. HOLDERS OF CORNING COMMON
STOCK ARE URGED TO CONSULT THEIR OWN TAX ADVISORS AS TO THE PARTICULAR
CONSEQUENCES TO THEM OF THE DISTRIBUTIONS, INCLUDING THE APPLICATION OF
STATE, LOCAL AND FOREIGN TAX LAWS. THIS SUMMARY MAY NOT BE APPLICABLE TO
HOLDERS WHO
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RECEIVED THEIR STOCK THROUGH THE EXERCISE OF OPTIONS OR OTHERWISE AS
COMPENSATION OR WHO ARE NOT CITIZENS OR RESIDENTS OF THE UNITED STATES.
Corning has received a ruling from the Internal Revenue Service (the
"IRS") to the effect that the Distributions will, for federal income tax
purposes, qualify as tax-free distributions under section 355 of the Internal
Revenue Code, as amended (the "Code"). Among other conclusions, the ruling
from the IRS (the "IRS Ruling") holds that, for federal income tax purposes:
(1) no gain or loss will be recognized by Corning upon the Quest
Diagnostics Spin-Off Distribution under Code section 355(c),
(2) no gain or loss will be recognized by (and no amount will be
included in the income of) the Corning shareholders upon receipt of shares
of Quest Diagnostics Common Stock, except to the extent of gain
attributable to cash received in exchange for fractional shares, under
Code section 355(a),
(3) no gain or loss will be recognized by Quest Diagnostics upon the
Covance Spin-Off Distribution under Code section 355(c),
(4) no gain or loss will be recognized by (and no amount will be
included in the income of) the Quest Diagnostics stockholders upon the
receipt of shares of Covance Common Stock, except to the extent of gain
attributable to cash received in exchange for fractional shares, under
Code section 355(a),
(5) the tax basis of the Corning Common Stock and Quest Diagnostics
Common Stock in the hands of the Corning shareholders immediately after
the Quest Diagnostics Spin-Off Distribution will be the same as their
basis in the Corning Common Stock immediately before the Quest Diagnostics
Spin-Off Distribution, allocated to each in proportion to the relative
fair market values in accordance with Treasury Regulation section
1.358-2(a)(2) (Code section 358(b)(1)),
(6) the holding period of the shares of Quest Diagnostics Common Stock
received in the Quest Diagnostics Spin-Off Distribution will include the
holding period of the Corning Common Stock with respect to which the
distribution is made, provided that the Corning Common Stock is held as a
capital asset on the date of the Quest Diagnostics Spin-Off Distribution
(Code section 1223(l)),
(7) the tax basis of the Quest Diagnostics Common Stock and Covance
Common Stock in the hands of the Quest Diagnostics stockholders
immediately after the Covance Spin-Off Distribution will be the same as
their basis in the Quest Diagnostics Common Stock immediately before the
Covance Spin-Off Distribution (but after taking into account the Quest
Diagnostics Spin-Off Distribution), allocated to each in proportion to the
relative fair market values in accordance with Treasury Regulation section
1.358-2(a)(2) (Code section 358(b)(1)), and
(8) the holding period of the shares of Covance Common Stock received in
the Covance Spin-Off Distribution will include the holding period of the
Quest Diagnostics Common Stock with respect to which the distribution is
made, provided that the Quest Diagnostics Common Stock is held as a
capital asset on the date of the Covance Spin-Off Distribution (Code
section 1223(l)).
The continuing validity of the IRS Ruling is subject to certain factual
representations and assumptions and future events. Moreover, there can be no
assurance that events occurring subsequent to the Distributions will not
cause the Distributions to be deemed taxable distributions. If the
Distributions were taxable (because of noncompliance with the factual
representations and assumptions contained in the IRS Ruling or future
events), then corporate level income taxes would be imposed on Corning and
Quest Diagnostics and the holders of Corning Common Stock would be treated as
if such shareholders received a taxable distribution. The Spin-Off Tax
Indemnification Agreements will provide (i) Corning with certain rights of
indemnification against Quest Diagnostics and Covance and (ii) Quest
Diagnostics and Covance with certain rights of indemnification against each
other in respect of future events that could result in the Distributions
being deemed taxable distributions. For a description of the Tax Sharing
Agreement and the Spin-Off Tax Indemnification Agreements pursuant to which
Corning, Quest Diagnostics and Covance have provided for various other tax
matters, 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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Treasury regulations require that each shareholder of Corning who receives
shares of Quest Diagnostics Common Stock in the Quest Diagnostics Spin-Off
Distribution and each shareholder of Quest Diagnostics who receives shares of
Covance Common Stock in the Covance Spin-Off Distribution attach, to the
federal income tax return of such shareholder for the tax year in which such
stock is received, a detailed statement setting forth such data as may be
appropriate in order to show the applicability of Code section 355 to the
Distributions. Within a reasonable time after the Distributions, Corning will
provide each Corning shareholder on the Record Date additional information
concerning the allocation of tax basis referred to in (5) and (7) above and
other appropriate information.
Conditions; Termination
The Corning Board has reserved the right to postpone or terminate and
abandon the Distributions at any time prior to the Distribution Date. This
reservation has primarily been made to enable appropriate action to be taken
if the following conditions to the Distributions contained in the Transaction
Agreement are not fulfilled or are not expected to be fulfilled at a time
that will allow the Distributions to be effected by December 31, 1996: (i)
Corning shall have received a favorable IRS Ruling, (ii) the registration
statements on Form 10 filed by each of Quest Diagnostics and Covance shall
have been declared effective by the Securities and Exchange Commission (the
"Commission"), (iii) the Quest Diagnostics Common Stock and the Covance
Common Stock shall have been approved for listing on the NYSE, subject to
official notice of the Distributions, (iv) Corning shall have received a
favorable response from the Commission to its "no-action request" letter
concerning, among other things, whether the Distributions may be effected
without registration of the Quest Diagnostics Common Stock or Covance Common
Stock under the Securities Act, (v) the Covance Credit Facility will have
closed, (vi) the Quest Diagnostics Credit Facility will have closed and (vii)
the Quest Diagnostics Notes Offering (as defined below) shall have been
consummated.
Repayment of Intercompany Indebtedness
Prior to the Distributions, each of Quest Diagnostics and Covance will
repay certain intercompany indebtedness to Corning. Quest Diagnostics will
repay intercompany indebtedness in an amount equal to $500 million which will
be financed by the borrowings under the Quest Diagnostics Credit Facility and
the proceeds realized from the Quest Diagnostics Notes Offering. Corning will
cancel any remaining intercompany indebtedness owed to it by Quest
Diagnostics as a contribution to the capital of Quest Diagnostics. Covance
will repay intercompany indebtedness between $150 million and $160 million
which will be financed by the borrowings under the Covance Credit Facility.
At the time of the Distributions, there will be no intercompany indebtedness
outstanding between any of Quest Diagnostics or Covance and Corning.
Reasons for Furnishing this Information Statement
This Information Statement is being furnished by Corning solely to provide
information to Corning shareholders who will receive the Quest Diagnostics
Common Stock and the Covance Common Stock in the Distributions. It is not
intended to be, and should not be construed as, an inducement or
encouragement to buy or sell any securities of Corning, Quest Diagnostics or
Covance. The information contained in this Information Statement is believed
by Corning, Quest Diagnostics and Covance to be accurate as of the date set
forth on its cover. Changes may occur after that date, and none of Quest
Diagnostics, Covance or Corning will update the information except in the
normal course of their respective public disclosure practices.
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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.
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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,
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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
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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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