As filed with the Securities and Exchange Commission on December 11, 1996
Registration No. 333-15867
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
AMENDMENT NO. 3
TO
FORM S-1
REGISTRATION STATEMENT
Under
THE SECURITIES ACT OF 1933
CORNING CLINICAL LABORATORIES INC.
(to be renamed Quest Diagnostics Incorporated)
(Exact name of registrant as specified in its charter)
<TABLE>
<CAPTION>
<S> <C> <C>
Delaware 8071 16-1387862
(State of other jurisdiction (Primary Standard Industrial (I.R.S. Employer
of Incorporation or organization) Classification Code Number) Identification Number)
</TABLE>
One Malcolm Avenue
Teterboro, New Jersey 07608
(201) 393-5000
(Address, including zip code, and telephone number, including area code, of
each registrant's principal executive offices)
Raymond C. Marier
General Counsel
Corning Clinical Laboratories Inc.
One Malcolm Avenue
Teterboro, New Jersey 07608
(201) 393-5000
(Address, including zip code, and telephone number, including area code, of
agent for service)
See Table of Subsidiary Guarantor Registrants
<TABLE>
<CAPTION>
<S> <C>
Stephen T. Giove with copies to: Robert W. Reeder, III
Shearman & Sterling Sullivan & Cromwell
599 Lexington Avenue 125 Broad Street
New York, New York 10022 New York, New York 10004
(212) 848-4000 (212) 558-4000
</TABLE>
Approximate date of commencement of proposed sale to the public: As soon
as practicable after this Registration Statement becomes effective.
If any of the securities being registered on this Form are to be offered
on a delayed or continuous basis pursuant to Rule 415 under the Securities
Act of 1933, check the following box: [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box: [ ]
<PAGE>
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box: [ ]
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
Proposed maximum
Amount Proposed maximum aggregate
Title of to be offering price offering Amount of
securities to be registered registered per note(2) price(2) registration fee
--------------------------------------- --------------- ---------------- ---------------- -----------------
<S> <C> <C> <C> <C>
% Senior Subordinated Notes due 2006(1) $150,000,000 100% $150,000,000 $45,455(3)
</TABLE>
(1) The Guarantees of the payment of the principal and interest on the Notes
are also being registered hereby. Pursuant to Rule 457(n), no
registration fee is required with respect to the Guarantees.
(2) Estimated pursuant to Rule 457(a), solely for the purpose of computing
the registration fee.
(3) Fee of $45,455 previously paid on November 8, 1996.
The Registrants hereby amend this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrants
shall file a further amendment which specifically states that this
Registration Statement shall thereafter become effective in accordance with
Section 8(a) of the Securities Act of 1933, as amended, or until the
Registration Statement shall become effective on such date as the Commission,
acting pursuant to Section 8(a), may determine.
<PAGE>
TABLE OF ADDITIONAL REGISTRANTS
<TABLE>
<CAPTION>
Primary Standard
State or Other Industrial
Jurisdiction of Classification I.R.S. Employer
Incorporation Code Identification
Name or Organization Number Number
- ------------------------------------------------------------- ---------------- ---------------- --------------------
<S> <C> <C> <C>
Corning Clinical Laboratories Inc. (MI) Michigan 8071 38-1882750
Corning Nichols Institute Inc. California 8071 95-2701802
Damon Clinical Laboratories Inc. Massachusetts 8071 04-2449994
Corning Clinical Laboratories Inc. (CT) Connecticut 8071 06-1460613
Corning Clinical Laboratories Inc. (MA) Massachusetts 8071 04-3248020
Corning Clinical Laboratories of Pennsylvania Inc. Delaware 8071 22-3137283
Deyor CPF/Metpath, Inc. Ohio 8071 34-1464777
Southgate Medical Services, Inc. Ohio 8071 34-0944454
Corning MRL Inc. Delaware 8071 81-0496712
DPD Holdings Inc. Delaware 8071 93-0988106
Metwest Inc. Delaware 8071 33-0363316
Corning Clinical Laboratories Inc. (MD) Maryland 8071 52-0890739
Nichols Institute Diagnostics California 8071 95-2955451
Nomad-Massachusetts, Inc. Massachussets 8071 04-2704542
Quest Diagnostics Incorporated (MI) Michigan 8071 22-3471689
Quest Diagnostics Incorporated (MD) Maryland 8071 22-3471687
CLMP Inc. Delaware 8071 51-031423
Diagnostic Reference Services, Inc. Maryland 8071 Application pending
Pathology Building Partnership Maryland 8071 Application pending
</TABLE>
The principal executive office and telephone number of each of the above
registrants is One Malcolm Avenue, Teterboro, New Jersey 07608, (201)
393-5000.
<PAGE>
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold and
offers to buy may not be accepted prior to the time the registration
statement becomes effective. This prospectus shall not constitute an offer to
sell or the solicitation of an offer to buy and there shall not be any sale
of these securities in any State in which such offer, solicitation or sale
would be unlawful prior to registration or qualification under the securities
laws of any such State.
[end red herring]
Subject to Completion Dated December 11, 1996
Prospectus
[LOGO] Quest Diagnostics Incorporated
$150,000,000
% Senior Subordinated Notes due 2006
Interest payable June 15 and December 15
Issue Price: %
Interest on the Notes is payable on June 15 and December 15 of each year,
commencing June 15, 1997. The Notes are subject to redemption on or after
December 15, 2001, in whole or in part, at the option of the Company, at the
redemption prices set forth herein. As discussed below, the Notes are also
subject to redemption at a premium, at the option of the Company, in case the
Distributions do not occur prior to March 31, 1997. Upon a Change of Control
(as defined), holders of the Notes may require the Company to purchase all or
a portion of the Notes at a purchase price equal to 101% of the principal
amount thereof, plus accrued and unpaid interest (if any) to the date of
purchase. In addition, in the event of certain asset sales, the Company may
be required to make an offer to purchase Notes at a price equal to 100% of
the principal amount thereof, plus accrued and unpaid interest (if any) to
the date of purchase, with the net proceeds of such asset sales. See
"Description of the Notes--Optional Redemption" and "--Repurchase at the
Option of Holders."
The Notes will be unsecured senior subordinated obligations of the Company and
will be fully and unconditionally guaranteed (the "Senior Subordinated
Guarantees") on a senior subordinated basis by all of the Restricted
Subsidiaries of the Company (collectively, "the Guarantors"). The Notes and the
Senior Subordinated Guarantees will be subordinated in right of payment to all
existing and future Senior Debt and Senior Guarantees of the Company and the
Guarantors, respectively, will rank pari passu in right of payment with all
unsecured senior subordinated indebtedness and all unsecured senior subordinated
guarantees of the Company and the Guarantors, respectively, and will rank senior
in right of payment to any future indebtedness and guarantees of the Company and
the Guarantors, respectively, that may be subordinated thereto. On a pro forma
basis, as of September 30, 1996, after giving effect to the Distributions, the
sale of the Notes and the application of the proceeds thereof and $350.0 million
of borrowings under the Credit Facility, there was $367 million of Senior Debt
of Quest Diagnostics outstanding. The Notes are effectively subordinated to all
existing and future indebtedness and other liabilities of the Company's
Subsidiaries that are Unrestricted Subsidiaries, and thus not Guarantors, and
would be so subordinated to all existing and future indebtedness of the
Guarantors if the Senior Subordinated Guarantees were avoided or subordinated in
favor of the Guarantors' other creditors.
The Notes will be issued only in registered form in denominations of $1,000
and integral multiples thereof. See "Description of the Notes."
The Notes are being offered in connection with the Distributions of the
Company's Common Stock and the Covance Common Stock to holders of Corning Common
Stock. The net proceeds of the Notes offering will be used to repay, prior to
the Distributions, certain indebtedness owed by the Company to Corning. The
closing of the offering of the Notes is anticipated to occur prior to the
Distributions. If as a result of an event outside the control of Corning, the
Company and Covance, the Distributions do not occur prior to March 31 , 1997,
the Notes will be subject to redemption, as a whole and not in part, at the
option of the Company, prior to June 30, 1997, at a redemption price equal to
101% of the principal amount of the Notes plus accrued and unpaid interest, if
any, to the date fixed for redemption. See "The Distributions" and "Description
of the Notes--Optional Redemption."
The Notes have been approved for listing on the New York Stock Exchange, subject
to official notice of issuance.
See "Risk Factors" beginning on page 15 for certain considerations relevant
to an investment in the Notes.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Underwriting
Discount and Proceeds to
Price to Public (1) Commissions (2) Company (1)(3)
Per Note % % %
Total $ $ $
</TABLE>
(1) Plus accrued interest, if any, from , 1996.
(2) The Company and Corning have agreed to indemnify the Underwriters against
certain liabilities, including liabilities under the Securities Act of 1933.
Corning has agreed to pay the Underwriters certain fees in connection with
the Offering and the Distributions. See "Underwriting."
(3) Before deducting expenses payable by the Company estimated at $ .
The Notes are being offered by the Underwriters, subject to prior sale, when,
as and if delivered to and accepted by the Underwriters. The Underwriters
withhold the right to withdraw, cancel or modify such offer and to reject
orders in whole or in part. It is expected that delivery of the Notes will be
made in New York, New York, against payment therefor in immediately available
funds on or about December , 1996.
J.P. Morgan & Co.
Goldman, Sachs & Co.
Lazard Freres & Co. LLC
December , 1996.
<PAGE>
Map of the United States and Mexico indicating the locations of Quest
Diagnostics Regional Labs, Headquarters, Branch labs and Esoteric lab.
Map heading - Quest Diagnostics' Geographic Coverage.
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVERALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE NOTES AT A
LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH
STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
<PAGE>
No person has been authorized to give any information or to make any
representation other than those contained in this Prospectus, and if given or
made, such information or representation must not be relied upon as having
been authorized by the Company or by any of the Underwriters. This Prospectus
does not constitute an offer to sell, or a solicitation of an offer to buy,
the Notes in any jurisdiction to any person to whom it is unlawful to make
such offer or solicitation. Neither the delivery of this Prospectus nor any
sale made hereunder shall, under any circumstances, create any implication
that there has been no change in the affairs of the Company since the date
hereof.
Table of Contents
<TABLE>
<CAPTION>
<S> <C>
Page
---------
Available Information 4
Prospectus Summary 5
Risk Factors 15
The Distributions 21
Use of Proceeds 25
Capitalization 26
Selected Historical Financial Data 27
Pro Forma Financial Information 31
Management's Discussion and Analysis of Financial Condition and
Results of Operations 38
Business 46
Management 66
Security Ownership by Certain Beneficial Owners and Management 76
Description of the Credit Facility 77
Description of the Notes 79
Underwriting 99
Validity of the Notes and Guarantees 100
Experts 100
Index to Financial Statements F-1
</TABLE>
Until , 1997 (25 days after the date of this Prospectus), all dealers
effecting transactions in the Notes, whether or not participating in this
distribution, may be required to deliver a Prospectus. This is in addition to
the obligations of dealers to deliver a Prospectus when acting as
underwriters and with respect to their unsold allotments or subscriptions.
3
<PAGE>
Available Information
The Company has filed a Registration Statement on Form 10 under the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), registering its common
stock, and is subject to the informational requirements of the Exchange Act, and
in accordance therewith will file reports, proxy statements and other
information with the Securities and Exchange Commission (the "Commission").
Reports, proxy statements and other information filed by the Company with the
Commission can be inspected and copies made at the public reference facilities
of the Commission, 450 Fifth Street, N.W., Room 1024, Washington, D.C. 20549 and
at the Commission's Regional Offices: 7 World Trade Center, 13th Floor, New
York, New York 10048 and Citicorp Center, 500 West Madison Street, Suite 1400,
Chicago, Illinois 60611. Copies of such materials can be obtained from the
Public Reference Section of the Commission, 450 Fifth Street, N.W., Room 1024,
Washington, D.C. 20549 at the prescribed rates. In addition, the Commission
maintains a Web site that contains reports, proxy and information statements and
other information regarding registrants that file electronically, such as the
Company. The address of the Commission's Web site is http://www.sec.gov. The
Company's common stock has been accepted for listing on the New York Stock
Exchange ("NYSE") and, with such listing, such reports, proxy statements and
other information regarding the Company may also be inspected and copied at the
offices of the NYSE, 20 Broad Street, New York, New York 10005.
The Company and the Guarantors have filed with the Commission a joint
Registration Statement on Form S-1 (the "Registration Statement") under the
Securities Act of 1933, as amended (the "Securities Act"), with respect to
the Notes and the Guarantees offered hereby. This Prospectus omits
information contained in the Registration Statement in accordance with the
rules and regulations of the Commission. Reference is hereby made to the
Registration Statement and related exhibits for further information with
respect to the Company, the Guarantors, the Notes and the Guarantees offered
hereby. Statements contained herein concerning the provisions of any document
are not necessarily complete and, in each instance, reference is made to the
copy of such document filed as an exhibit to the Registration Statement or
otherwise filed with the Commission. Each such statement is qualified in its
entirety by such reference. Copies of the Registration Statement and the
exhibits thereto may be inspected, without charge, at the offices of the
Commission, or obtained at prescribed rates from the Public Reference Section
of the Commission, at the addresses set forth above.
The Company has agreed to furnish holders of Notes its annual reports
containing financial statements audited by independent auditors and quarterly
reports containing unaudited financial information for the first three
quarters of each year for as long as the Notes remain outstanding.
4
<PAGE>
Prospectus Summary
This Summary is qualified by the more detailed information (including the
financial statements and related notes) set forth elsewhere in this
Prospectus which should be read in its entirety. Unless the context
indicates, or it is specifically indicated otherwise, all references to (i)
"Corning" include Corning Incorporated, a New York corporation, and its
consolidated subsidiaries, (ii) "Quest Diagnostics" or the "Company" include
Corning Clinical Laboratories Inc. (to be renamed Quest Diagnostics
Incorporated prior to the Distributions), a Delaware corporation, and its
direct and indirect subsidiaries (other than Covance) and assume that the
Distributions have occurred, and (iii) "Covance" include Covance Inc.
(formerly Corning Pharmaceutical Services Inc.), a Delaware corporation, and
its direct and indirect subsidiaries and assume that the Distributions have
occurred. Capitalized terms used but not defined in this Summary are defined
elsewhere in this Prospectus.
The Company
Quest Diagnostics is one of the largest independent clinical laboratory
testing companies in the United States. Quest Diagnostics offers a broad
range of routine and specialty ("esoteric") testing services used by the
medical profession in the diagnosis, monitoring and treatment of disease and
other medical conditions. Quest Diagnostics' network, which processes
approximately 60 million requisitions for diagnostic tests annually, consists
of 17 regional laboratories across the United States and the Corning Nichols
Institute ("Nichols") esoteric testing laboratory in San Juan Capistrano,
California. In addition, Quest Diagnostics has 14 branch laboratories in the
United States as well as one branch laboratory in Mexico City (branch
laboratories are smaller than regional laboratories), approximately 200
"STAT" laboratories and approximately 850 patient service centers located
throughout the United States. For the year ended December 31, 1995 and the
nine months ended September 30, 1996, Quest Diagnostics had net revenues of
$1,629 million and $1,231 million, respectively, and Adjusted EBITDA (income
(loss) before income taxes plus net interest expense, depreciation and
amortization and restructuring and other special charges) of $177 million and
$135 million, respectively.
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.
Quest Diagnostics provides daily pickup of specimens from most customers
principally through an in-house courier system. The specimens are sent to one
of the Company's laboratories where one or more tests are performed.
Each patient specimen is accompanied by a test requisition form, which is
completed by the customer, that indicates the tests to be performed and
provides the necessary billing information. Each specimen and related
requisition form is checked for completeness and then given a unique
bar-coded identification number. Once the appropriate information is entered
into the computer system, the tests are performed and the results are
delivered to the doctor, primarily through computer interface or manually.
Corning entered the clinical laboratory business in 1982 with the acquisition
of MetPath Inc. ("MetPath"), which was founded in 1967 and was one of the
first laboratories to expand beyond a regional market. Since January 1993,
Quest Diagnostics has acquired over thirty laboratories, including Damon
Corporation ("Damon"), Bioran Medical Laboratory ("Bioran") and Maryland
Medical Laboratory, Inc. ("MML"). In 1994, Quest Diagnostics enhanced its
presence in the esoteric testing market through the acquisition of Nichols, a
preeminent clinical laboratory with a leading reputation for esoteric testing
and test innovations.
While Corning's ownership provided the Company with the capital to grow
through acquisitions and to become one of the nation's largest independent
clinical laboratory testing companies, the management of both Corning and
Quest Diagnostics believe that Quest Diagnostics will be more competitive and
operate more successfully in the future as an independent company, with a
strong, focused and experienced management team to concentrate on customer
needs. Independence will also enable Quest Diagnostics to motivate its
employees by offering equity-based incentives tied directly to the
performance of the Company and individual performance. Quest Diagnostics'
management team has implemented a new business strategy, which focuses the
business around three key strategic areas: clinical operations, customer
focus and technological leadership and excellence.
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.
5
<PAGE>
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 Quest Diagnostics, and
physician-office laboratories. The Company 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.
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'
management team has focused the business around three key strategic areas:
clinical operations, customer focus and technological leadership and excellence.
(bullet) 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. Quest Diagnostics' average cost per requisition
varies significantly among its regional laboratories; there is 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. Management expects to achieve
significant cost savings within the next three years as these programs
are fully implemented. *
(bullet) Highest Quality Provider. Quest Diagnostics is dedicated to providing
accurate and timely test 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 the Company to be viewed by
its customers as the highest quality provider of clinical testing
services.
(bullet) 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) the Company 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 both select and pursue customers and allocate
resources to support these efforts.
*This is a forward looking statement and is based on current expectations.
Actual results may vary materially from those projected. See "Business-
Important Factors Regarding Forward Looking Statements." In particular, see
factors (a), (d) and (j).
6
<PAGE>
(bullet) Account Profitability. Quest Diagnostics intends to refocus its sales
efforts on pursuing and keeping profitable accounts. Quest Diagnostics
is actively reviewing the profitability of its current accounts,
including those with managed care organizations, and will either
increase pricing or eliminate accounts that cannot be serviced
profitably.
(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 the Company
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, the Company can
subcontract with other clinical laboratories to perform testing for
national accounts in any markets in which the Company chooses not to
compete.
(bullet) 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.
Recent Developments
By a plea agreement and civil agreement and release dated October 9, 1996,
between the Department of Justice ("DOJ") and Damon, all federal criminal
matters within the scope of the various federal investigations against Damon,
and all claims including the civil qui tam cases underlying the civil
investigations were settled for an aggregate of $119 million, which sum was
reimbursed to Quest Diagnostics by Corning. The Damon settlement does not
exclude Quest Diagnostics from future participation in any federal health care
programs on account of Damon's practices.
Quest Diagnostics' aggregate reserve with respect to all governmental and
private claims 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 may become
available which may cause the final resolution of these matters to be in excess
of established reserves by an amount which could be material to Quest
Diagnostics' results of operations and, for non-indemnified claims, Quest
Diagnostics' cash flows in the period in which such claims are settled. While
none of the governmental or nongovernmental investigations or claims is covered
by insurance, Quest Diagnostics does not believe that these matters will have a
material adverse effect on Quest Diagnostics' overall financial condition.
Corning Indemnity
In connection with the Distributions, Corning has agreed to indemnify Quest
Diagnostics against all monetary penalties, fines or settlements arising out of
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. Corning has also agreed 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 for nongovernmental claims 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. 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.
7
<PAGE>
The Distributions
On May 13, 1996, the board of directors of Corning approved a plan to
distribute to Corning shareholders the clinical laboratory testing business
being conducted by Quest Diagnostics and the contract research business being
conducted by Quest Diagnostics' wholly owned subsidiary, Covance (together,
the "Distributions").
The Distributions will be effected by distributing all of the outstanding shares
of Quest Diagnostics common stock (the "Quest Diagnostics Common Stock") to
holders of Corning common stock (the "Corning Common Stock"), followed
immediately by the distribution of all of the common stock of Covance (the
"Covance Common Stock") to those same holders, as holders of Quest Diagnostics
Common Stock. It is expected that the Distributions will be made on December 31,
1996 (the date on which the Distributions are to be made, the "Distribution
Date").
Prior to the consummation of the offering of the Notes contemplated hereby (the
"Offering"), the Company entered into a $450 million senior, secured credit
facility (the "Credit Facility"), among the Company, the lenders listed therein,
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.
The Credit Facility is comprised of a $300 million six-year amortizing term
loan ("Tranche A Loan"), a $50 million seven-year term loan ("Tranche B Loan"
and together with the Tranche A Loan, the "Term Loans") and a $100 million
six-year revolving working capital facility (the "Working Capital Facility").
Corning currently has approximately $1.2 billion of Quest Diagnostics
intercompany debt. Approximately $145 million of net proceeds from the
Offering, together with the $350 million of borrowings under the Term Loans,
will be paid to Corning in satisfaction of a portion of the outstanding
intercompany debt. Corning will contribute the remaining intercompany debt to
Quest Diagnostics' capital. Borrowings under the Working Capital Facility,
substantially all of which is expected to be available as of the Distribution
Date, will provide for future working capital needs and other general
corporate purposes.
8
<PAGE>
The Offering
<TABLE>
<CAPTION>
<S> <C>
Securities Offered $150,000,000 aggregate principal amount of % Senior Subordinated
Notes due December 15, 2006 (the "Notes").
Maturity Date December 15, 2006.
Interest Payment Date June 15 and December 15, commencing June 15, 1997.
Optional Redemption by the Company The Notes will be redeemable, in whole or in part, at the option of the
Company at any time on or after December 15, 2001, at the redemption
prices set forth herein, plus accrued and unpaid interest, if any, to
but excluding the date fixed for redemption. In addition, if as a
result of an event outside the control of Corning, Quest Diagnostics
and Covance, the Distributions do not occur prior to March 31, 1997,
the Notes will be subject to redemption, as a whole and not in part, at
the option of Quest Diagnostics, prior to June 30, 1997, at a
redemption price equal to 101% of the principal amount of the Notes,
plus accrued and unpaid interest, if any, to but excluding the date
fixed for redemption. See "Description of the Notes--Optional
Redemption."
Change of Control Offer Upon a Change of Control, the Company has the obligation to offer to
purchase all the outstanding Notes at a price equal to 101% of the
principal amount thereof, plus accrued and unpaid interest, if any, to
but excluding the date of purchase. See "Description of the Notes--
Repurchase at the Option of Holders--Change of Control" for a
discussion of the circumstances in which the Company may not be
required to make an offer to purchase upon a Change of Control.
Offers to Purchase In the event of certain asset sales, the Company will be required to
offer to repurchase the Notes at 100% of their principal amount, plus
accrued and unpaid interest, if any, to but excluding the date of
purchase with the net proceeds of such asset sales.
Subordination The Notes will be general unsecured obligations of the Company and will
be subordinated in right of payment to all existing and future Senior
Debt of the Company, including all indebtedness of the Company under
the Credit Facility. The Notes will rank Pari Passu in right of payment
with any other senior subordinated indebtedness of the Company.
9
<PAGE>
Subsidiary Guarantees The Notes will be guaranteed, jointly and severally, and fully and
unconditionally, on a senior subordinated basis by the Guarantors (the
"Senior Subordinated Guarantees"). The obligations of any Guarantor
with respect to its Senior Subordinated Guarantee will be subordinated
in right of payment, to the same extent as the obligations of the
Company in respect of the Notes, to all existing and future Senior
Guarantees, which will include the guarantees of the Credit Facility.
The Senior Subordinated Guarantees would also be subordinated to all
existing and future indebtedness of the Guarantors if the Senior
Subordinated Guarantees were avoided or subordinated in favor of the
Guarantors' other creditors. See "Risk Factors--Fraudulent Conveyance."
The obligations of a Guarantor under its Senior Subordinated Guarantee
will be released in certain circumstances, including if the Guarantor
ceases to guarantee the Credit Facility. See "Description of the
Notes--Senior Subordinated Guarantees."
Principal Covenants The indenture under which the Notes are issued (the "Indenture") will
impose certain limitations on the ability of the Company and its
subsidiaries to, among other things, incur additional indebtedness, pay
dividends or make certain other restricted payments, consummate certain
asset sales, enter into certain transactions with affiliates, incur
indebtedness that is subordinate in right of payment to any Senior Debt
and senior in right of payment to the Notes, enter into leases, incur
liens, 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.
Use of Proceeds The Company intends to use the proceeds from the sale of the Notes,
together with the proceeds of borrowings under the Credit Facility, to
repay certain intercompany indebtedness owed to Corning. See "Use of
Proceeds."
The Distributions The Notes are being offered in connection with the Distributions of the
Quest Diagnostics Common Stock and the Covance Common Stock to holders
of Corning Common Stock. The closing of the offering of the Notes is
anticipated to occur prior to the Distributions.
Listing The Notes have been approved for listing on the New York Stock Exchange,
subject to official notice of issuance.
Risk Factors See "Risk Factors" for a discussion of certain factors that should be
considered in connection with an investment in the Notes.
</TABLE>
10
<PAGE>
Summary Financial Data
The following table summarizes certain historical and pro forma 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 (the "Audited 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 have been derived
from the unaudited interim combined financial statements of Quest Diagnostics
(the "Interim Financial Statements" and, together with the Audited Financial
Statements, the "Financial Statements") and the notes thereto included
elsewhere herein. In the opinion of Quest Diagnostics management, the
unaudited interim combined 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 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 pro forma financial data have been derived from the unaudited
pro forma combined financial information of Quest Diagnostics for the year
ended December 31, 1995 and for the three and nine months ended September 30,
1996 (the "Pro Forma Financial Information") and the notes thereto included
elsewhere herein. The pro forma statement of operations data gives effect to
the Distributions and the Accounting Policy Change (as defined below) as if
they had occurred on January 1, 1995 and the pro forma balance sheet data
gives effect to the Distributions and the Accounting Policy Change as if they
had occurred on September 30, 1996. The pro forma financial data does not
purport to represent what Quest Diagnostics' results of operations would have
been if the Distributions and the Accounting Policy Change had in fact
occurred on such dates, nor does it purport to indicate the future financial
position or results of future operations of Quest Diagnostics. The pro forma
adjustments are based upon currently available information and certain
assumptions that Quest Diagnostics management believes to be reasonable. The
summary historical and pro forma financial data set forth below should be
read in conjunction with "Selected Historical Financial Data," "Management's
Discussion and Analysis of Financial Condition and Results of Operations,"
the Financial Statements and the notes thereto and the Pro Forma Financial
Information and the notes thereto.
11
<PAGE>
<TABLE>
<CAPTION>
Three Months Ended September 30, Nine Months Ended September 30,
------------------------------------------------------------------------------------------------
Pro Forma Historical Pro Forma Historical
------------------------------- -------------------------------
1996(a) 1996 1995 1996(a) 1996 1995
--------------- --------------- --------------- ---------------- ---------------- --------------
(in thousands, except share, per share and percentage data)
<S> <C> <C> <C> <C> <C> <C>
Statement of Operations
Data:
Net revenues $ 405,352 $ 405,352 $ 399,959 $ 1,231,290 $1,231,290 $1,239,474
Costs and expenses:
Cost of services 255,390 255,390 240,868 768,809 768,809 735,984
Selling, general and
administrative 125,190 125,190 181,346(c) 371,439 371,439 399,635(c)
Provision for
restructuring and other
special charges(d) 155,730 155,730 201,730 201,730 45,885
Interest expense, net 12,189 19,866 20,927 36,938 59,887 61,529
Amortization of
intangible assets 7,672 10,328 11,293 23,803 31,772 33,678
Other, net 1,837 1,837 1,930 (198) (198) 4,429
--------------- --------------- --------------- ---------------- ---------------- --------------
Total 558,008 568,341 456,364 1,402,521 1,433,439 1,281,140
--------------- --------------- --------------- ---------------- ---------------- --------------
Income (loss) before taxes (152,656) (162,989) (56,405) (171,231) (202,149) (41,666)
Income tax expense
(benefit) (40,521) (43,553) (17,810) (34,215) (43,280) (3,642)
--------------- --------------- --------------- ---------------- ---------------- --------------
Income (loss) before
cumulative effect of
change in accounting
principle (112,135) (119,436) (38,595) (137,016) (158,869) (38,024)
Cumulative effect of
change in accounting
principle
--------------- --------------- --------------- ---------------- ---------------- --------------
Net income (loss) $ (112,135) $ (119,436) $ (38,595) $ (137,016) $ (158,869) $ (38,024)
=============== =============== =============== ================ ================ ==============
Pro forma shares
outstanding(e) 28,901,735 28,901,735
Pro forma net loss per
share $ (3.88) $ (4.74)
Balance Sheet Data (at end
of period):
Cash $ 40,000 $ 48,319 $ 46,908 $ 40,000 $ 48,319 $ 46,908
Working capital 306,741 114,718 129,319 306,741 114,718 129,319
Total assets 1,612,459 1,886,378 1,896,058 1,612,459 1,886,378 1,896,058
Long-term debt 515,494 1,219,900 1,114,367 515,494 1,219,900 1,114,367
Total debt 517,379 1,231,785 1,226,211 517,379 1,231,785 1,226,211
Stockholder's equity 604,099 132,670 320,576 604,099 132,670 320,576
Ratio of earnings to fixed
charges -- (f) -- (f) -- (f) -- (f) -- (f) -- (f)
Supplemental Data:
Net cash provided by
operating activities $ 25,236 $ 25,236 $ 38,202 $ 41,937 $ 41,937 $ 53,789
Net cash used in investing
activities (7,904) (7,904) (17,044) (53,097) (53,097) (77,911)
Net cash provided by (used
in) financing activities (6,618) (6,618) (18,006) 23,033 23,033 32,311
Bad debt expense $ 30,539 $ 30,539 $ 85,831(c) $ 81,891 $ 81,891 $ 127,297(c)
Bad debt expense as a % of
net revenues 7.5% 7.5% 21.5% 6.7% 6.7% 10.3%
Rent expense $ 12,515 $ 12,515 $ 11,860 $ 37,315 $ 37,315 $ 35,060
Capital expenditures 11,912 11,912 16,441 58,802 58,802 56,062
Depreciation expense $ 14,672 $ 14,672 $ 14,275 $ 43,460 $ 43,460 $ 42,358
EBITDA(g) $ (118,123)(h) $ (118,123)(h) $ (9,910)(c) $ (67,030)(h) $ (67,030)(h) $ 95,899(c)
EBITDA as a % of net
revenues (29.1%) (29.1%) (2.5%) (5.4%) (5.4%) 7.7%
Adjusted EBITDA(i) $ 37,607 $ 37,607 $ (9,910)(c) $ 134,700 $ 134,700 $ 141,784(c)
Adjusted EBITDA as a % of
net revenues 9.3% 9.3% (2.5%) 10.9% 10.9% 11.4%
Supplemental Ratio Data:
Adjusted EBITDA/interest
expense, net 3.1x 3.6x
(Adjusted EBITDA-capital
expenditures)/interest
expense, net 2.1x 2.1x
(Total debt--cash)/annualized
adjusted EBITDA 3.2x 2.7x
</TABLE>
(Footnotes on page 14)
12
<PAGE>
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------------------------------
Pro Forma Historical
-------------------------------------------
1995(a) 1995 1994(b) 1993
--------------- --------------- ------------- -------------
(in thousands, except share, per share and percentage data)
<S> <C> <C> <C> <C>
Statement of Operations Data:
Net revenues $ 1,629,388 $1,629,388 $1,633,699 $1,416,338
Costs and expenses:
Cost of services 980,232 980,232 969,844 805,729
Selling, general and administrative 523,271(c) 523,271(c) 411,939 363,579
Provision for restructuring and other
special charges(d) 50,560 50,560 79,814 99,600
Interest expense, net 50,748 82,016 63,295 41,898
Amortization of intangible assets 34,031 44,656 42,588 28,421
Other, net 6,221 6,221 3,464 6,423
--------------- --------------- ------------- -------------
Total 1,645,063 1,686,956 1,570,944 1,345,650
--------------- --------------- ------------- -------------
Income (loss) before taxes (15,675) (57,568) 62,755 70,688
Income tax expense (benefit) 6,835 (5,516) 34,410 25,929
--------------- --------------- ------------- -------------
Income (loss) before cumulative effect of
change in accounting principle (22,510) (52,052) 28,345 44,759
Cumulative effect of change in accounting
principle (10,562)
--------------- --------------- ------------- -------------
Net income (loss) $ (22,510) $ (52,052) $ 28,345 $ 34,197
=============== =============== ============= =============
Pro forma shares outstanding(e) 28,901,735
Pro forma net loss per share $ (0.78)
Balance Sheet Data (at end of period):
Cash $ 36,446 $ 38,719 $ 39,410
Working capital 200,740 214,358 139,771
Total assets 1,853,385 1,882,663 1,861,162
Long-term debt 1,195,566 1,153,054 1,025,787
Total debt 1,207,714 1,165,626 1,123,307
Stockholder's equity 295,801 386,812 395,509
Ratio of earnings to fixed charges -- (f) -- (f) 1.77(f) 2.20(f)
Supplemental Data:
Net cash provided by operating activities $ 85,828 $ 85,828 $ 37,963 $ 99,614
Net cash used in investing activities (93,087) (93,087) (46,186) (473,687)
Net cash provided by (used in) financing
activities 4,986 4,986 7,532 392,956
Bad debt expense $ 152,590(c) $ 152,590(c) $ 59,480 $ 47,240
Bad debt expense as a % of net revenues 9.4% 9.4% 3.6% 3.3%
Rent expense $ 46,900 $ 46,900 $ 49,400 $ 46,900
Capital expenditures 74,045 74,045 93,354 65,317
Depreciation expense $ 56,857 $ 56,857 $ 46,929 $ 38,058
EBITDA(g) $ 125,961(c) $ 125,961(c) $ 215,567 $ 179,065
EBITDA as a % of net revenues 7.7% 7.7% 13.2% 12.6%
Adjusted EBITDA(i) $ 176,521(c) $ 176,521(c) $ 295,381 $ 278,665
Adjusted EBITDA as a % of net revenues 10.8% 10.8% 18.1% 19.7%
Supplemental Ratio Data:
Adjusted EBITDA/interest expense, net 3.5x
(Adjusted EBITDA-capital expenditures)/
interest expense, net 2.0x
</TABLE>
(Footnotes on page 14)
13
<PAGE>
(Footnotes for preceding pages)
(a) Adjusted to reflect the pro forma effects of the Distributions and the
Accounting Policy Change. See "Selected Historical Financial Data" and "Pro
Forma Financial Information."
(b) In August 1993, Quest Diagnostics acquired Damon, a national clinical
testing laboratory with approximately $280 million in annualized revenue,
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 revenue. The Damon and Unilab acquisitions were
accounted for as purchases. Quest Diagnostics acquired MML, Nichols
Institute and 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 Institute 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.
(c) 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.
(d) Provision for restructuring and other special charges includes charges for
restructurings primarily for workforce 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 Financial Statements
and Notes 2 and 3 to the Interim Financial Statements.
(e) Includes the issuance of approximately 28.0 million shares of Quest
Diagnostics Common Stock in the Quest Diagnostics Spin-Off Distribution and
the issuance of an estimated 900,000 shares into the Quest Diagnostics
employee stock ownership plan.
(f) For purposes of this calculation, earnings consist of pretax income from
continuing operations plus fixed charges. Fixed charges consist of interest
expense and one-third of rental expense, representing that portion of rental
expense deemed representative of the interest factor. Earnings were
insufficient to cover fixed charges by the following amounts (in thousands):
<TABLE>
<CAPTION>
Three Months Ended September 30, Nine Months Ended September 30, Year Ended December 31,
----------------------------------- --------------------------------- --------------------------
Pro Forma Historical Pro Forma Historical Pro Forma Historical
------------ -------------------- ---------- --------------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
1996 1996 1995 1996 1996 1995 1995 1995
$152,656 $162,989 $56,405 $171,231 $202,149 $41,666 $15,675 $57,568
</TABLE>
(g) EBITDA represents income (loss) before income taxes plus net interest
expense and depreciation and amortization. EBITDA is presented and discussed
because management believes that EBITDA is a useful adjunct to net income
and other measurements under generally accepted accounting principles since
it is a meaningful measure of a leveraged company's performance and ability
to meet its future debt service requirements, fund capital expenditures and
meet working capital requirements. EBITDA is not a measure of financial
performance under generally accepted accounting principles and should not be
considered as an alternative to (i) net income (or any other measure of
performance under generally accepted accounting principles) as a measure of
performance or (ii) cash flows from operating, investing or financing
activities as an indicator of cash flows or as a measure of liquidity.
(h) 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 the Damon and other related
claims. 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.
(i) 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 and discussed because management believes that
Adjusted EBITDA is a useful adjunct to net income and other measurements
under generally accepted accounting principles since it is a meaningful
measure of a leveraged company's performance and ability to meet its future
debt service requirements, fund capital expenditures and meet working
capital requirements. Adjusted EBITDA is not a measure of financial
performance under generally accepted accounting principles and should not be
considered as an alternative to (i) net income (or any other measure of
performance under generally accepted accounting principles) as a measure of
performance or (ii) cash flows from operating, investing or financing
activities as an indicator of cash flows or as a measure of liquidity.
14
<PAGE>
Risk Factors
Prospective purchasers of the Notes should consider carefully the following
factors, as well as the other information set forth or incorporated in this
Prospectus, in deciding whether to purchase the Notes.
Subordination; Ranking of the Notes as Unsecured Obligations.The Notes will
be unsecured senior subordinated obligations of Quest Diagnostics and will be
unconditionally guaranteed on a senior subordinated basis by all of the
Restricted Subsidiaries of Quest Diagnostics. The Notes and the Senior
Subordinated Guarantees will be subordinated in right of payment to all
existing and future Senior Debt (as defined under "Description of the
Notes--Certain Definitions") and Senior Guarantees (as defined under
"Description of the Notes--Certain Definitions"), respectively, of the
Company and the Guarantors, will rank Pari Passu (as defined under
"Description of the Notes--Certain Definitions") in right of payment with all
unsecured senior subordinated indebtedness and all unsecured senior
subordinated guarantees of Quest Diagnostics and the Guarantors,
respectively, and will rank senior in right of payment to any future
indebtedness or guarantees of Quest Diagnostics and the Guarantors,
respectively, that may be subordinated thereto. Upon any payment or
distribution of assets of Quest Diagnostics to creditors upon any
liquidation, dissolution, winding up, reorganization, assignment for the
benefit of creditors, marshalling of assets and liabilities or any
bankruptcy, insolvency or similar proceedings of Quest Diagnostics, the
holders of Senior Debt will be entitled to receive payment in full of the
principal of (and premium, if any) and interest on such Senior Debt,
including all amounts due or to become due on all Senior Debt, or provision
will be made for payment in cash or cash equivalents or otherwise, before the
Holders of Notes are entitled to receive any payments, subject to certain
exceptions. See "Description of the Notes--Subordination."
The Notes and the Senior Subordinated Guarantees will be effectively
subordinated in right of payment to all existing and future secured
indebtedness of Quest Diagnostics and the Guarantors, respectively, to the
extent of the collateral securing such indebtedness.
On a pro forma basis, as of September 30, 1996, after giving effect to the
Distributions, the sale of the Notes and the application of the proceeds
thereof and $350.0 million of borrowings under the Term Loans, there was $367
million of Senior Debt of Quest Diagnostics outstanding. All of the
borrowings under the Credit Facility have been guaranteed by the Guarantors
on a senior basis. While the Indenture will limit, subject to the certain
financial tests, the amount of additional Debt that Quest Diagnostics and its
Restricted Subsidiaries can incur, there is no other limitation on the amount
of Senior Debt that may be incurred. In addition, Quest Diagnostics may from
time to time hereafter incur additional Debt constituting Senior Debt,
including $100.0 million under the Working Capital Facility, substantially
all of which is anticipated to be available at the Distribution Date.
Substantial Operations at Subsidiary Level; Structural Subordination.Quest
Diagnostics holds substantial assets and conducts substantial operations
through its Subsidiaries. Quest Diagnostics thus derives a substantial
portion of its operating income and cash flow from its Subsidiaries and must
rely substantially upon distributions from its Subsidiaries to generate the
funds necessary to meet its obligations, including the payment of principal
of and interest on the Notes. Although the Indenture generally prohibits
Quest Diagnostics from permitting its Restricted Subsidiaries to allow
restrictions on their ability to pay dividends and other amounts to Quest
Diagnostics, any such restrictions could materially and adversely affect
Quest Diagnostics' ability to service and repay its debts, including the
Notes.
The Notes are effectively subordinated to all existing and future indebtedness
and other liabilities of Quest Diagnostics' Subsidiaries (if any) that are
Unrestricted Subsidiaries, and thus not Guarantors, and would be so subordinated
to all existing and future indebtedness of the Guarantors if the Senior
Subordinated Guarantees were avoided or subordinated in favor of the Guarantors'
other creditors. See "--Fraudulent Conveyance." The aggregate net revenues and
net loss from the Unrestricted Subsidiaries for the year ended December 31, 1995
were $21.7 million and $0.5 million, respectively. The Unrestricted Subsidiaries
had an aggregate net book value of $0.1 million at December 31, 1995. The
aggregate net revenues and net income for the Unrestricted Subsidiaries was less
than 3% of the Company's net revenues and net income for the nine months ended
September 30, 1996. The Unrestricted Subsidiaries had an aggregate net book
value of less than 3% of the Company's net book value at September 30, 1996.
The obligation of a Guarantor under its Senior Subordinated Guarantee will be
released if (i) such Guarantor ceases to be a Restricted Subsidiary, (ii)
such Guarantor ceases to guarantee the Credit Facility, (iii) the Notes are
defeased and discharged or (iv) all or substantially all of the assets of
such Guarantor or all of the Capital Stock of such Guarantor is sold
(including by issuance, merger, consolidation or otherwise) by the Company or
any of its Subsidiaries in a transaction complying with the provisions
described under "Certain Covenants--Repurchase at the Option of
Holders--Asset Dispositions."
Fraudulent Conveyance.The Senior Subordinated Guarantees may be subject to
review under federal or state fraudulent transfer law. To the extent that a
court were to find that (x) the Senior Subordinated Guarantees were incurred
by any Guarantor
15
<PAGE>
with intent to hinder, delay or defraud any present or future creditor, or a
Guarantor contemplated insolvency with a design to prefer one or more creditors
to the exclusion in whole or in part of others, or (y) any Guarantor did not
receive fair consideration or reasonably equivalent value for issuing its Senior
Subordinated Guarantees and any Guarantor (i) was insolvent, (ii) was rendered
insolvent by reason of the issuance of the Senior Subordinated Guarantees, (iii)
was engaged or about to engage in a business or transaction for which the
remaining assets of a Guarantor constituted unreasonably small capital to carry
on its business or (iv) intended to incur, or believed that it would incur,
debts beyond its ability to pay such debts as they matured, a court could avoid
or subordinate the Senior Subordinated Guarantees in favor of a Guarantor's
creditors. If the Senior Subordinated Guarantees are subordinated, payments of
principal and interest on the Notes generally would be subject to the prior
payment in full of all indebtedness of the Guarantors. Among other things, a
legal challenge of the Senior Subordinated Guarantees on fraudulent conveyance
grounds may focus on the benefits, if any, realized by a Guarantor as a result
of the issuance by Quest Diagnostics of the Notes. The extent (if any) to which
a particular Guarantor may be deemed to have received such benefits may depend
on Quest Diagnostics' use of the Offering proceeds, including the extent (if
any) to which such proceeds or benefits therefrom benefit the Guarantor. None of
the proceeds from the Offering will be contributed to the Restricted
Subsidiaries. See "Use of Proceeds." The measure of insolvency for purposes of
the foregoing will vary depending on the law of the applicable jurisdiction.
Generally, however, an entity would be considered insolvent if the sum of its
debts (including contingent or unliquidated debts) is greater than all of its
property at a fair valuation or if the present fair saleable value of its assets
is less than the amount that will be required to pay its probable liability
under its existing debts as such debts become absolute and matured. Based upon
financial and other information currently available to it, Quest Diagnostics
presently believes that the Senior Subordinated Guarantees are being incurred
for proper purposes and in good faith, and that the Guarantors (i) are solvent
and will continue to be solvent after issuing the Senior Subordinated
Guarantees, (ii) will have sufficient capital for carrying on their business
after such issuance and (iii) will be able to pay their debts as they mature.
There can be no assurance, however, that a court would necessarily agree with
these conclusions, or determine that any particular Guarantor received fair
consideration or reasonably equivalent value for issuing its Senior Subordinated
Guarantee.
Financial Impact of the Distributions. 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 Credit Facility and the
issuance of Notes, Quest Diagnostics will have substantial debt. At September
30, 1996, after giving effect to the transactions and adjustments described
in "Pro Forma Financial Information," 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
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. See "Description of the Credit Facility."
The degree to which Quest Diagnostics is leveraged could have important
consequences to holders of the Notes, 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 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. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations--Liquidity and Capital Resources" and "Description
of the Credit Facility."
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
16
<PAGE>
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 and Nichols 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." There can be no assurance that Quest Diagnostics' operations will
be profitable in the future.
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 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--The Clinical Laboratory
Testing Industry" and "Business--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--Customers and Payors" and "Business--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 authorized when more
17
<PAGE>
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--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--Billing" and "Management's
Discussion and Analysis of Financial Condition and Results of
Operations--Results of Operations."
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 the Company's net
revenues. Quest Diagnostics is beginning to convert the remaining
non-standard billing systems to the standard SYS system. See
"Business--Information Systems" and "--Billing." Standardizing its billing
systems presents conversion risk to Quest Diagnostics as key databases and
masterfiles are transferred to the SYS system and because the billing
workflow is interrupted during the conversion, which may cause backlogs.
Government Investigations and Related Claims. As discussed under
"Business--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 $192 million relating
primarily to industry-wide billing and marketing practices that had been
substantially discontinued by early 1993. Specifically, Quest Diagnostics has
entered into, (i) for an aggregate of approximately $180 million, five
settlements with the Office of the Inspector General ("OIG") of the Department
of Health and Human Services ("HHS") and the DOJ and two settlements and one
tentative settlement 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)
twelve completed settlements and one tentative settlement relating to private
claims totalling approximately $12 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 other private claims presently pending other than
routine claims that are not material in aggregate. 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
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 has agreed 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. Corning has also agreed 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, (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 over-
18
<PAGE>
billings, Quest Diagnostics will control the defense. All disputes under the
Transaction Agreement are subject to binding arbitration. See "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 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 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 the Company's
overall financial condition.
Government Regulation. The clinical laboratory industry is subject to
extensive governmental regulations at the federal, state and local levels.
See "Business--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 OIG 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--Regulation and
Reimbursement."
Potential Liability under the Spin-Off Tax Indemnification Agreements. Quest
Diagnostics will enter into the Corning/Quest Diagnostics Spin-Off Tax
Indemnification Agreement (as defined under "The Distributions--Spin-Off Tax
Indemnification Agreements") 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 section 355 of the Internal Revenue Code,
as amended (the "Code"), and will provide Corning with certain rights of
indemnification against Quest Diagnostics. Quest Diagnostics may also have
indemnification obligations under the Corning/Quest Diagnostics Spin-Off Tax
Indemnification Agreement 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 Internal Revenue Service
("IRS") in respect of the Distributions. Quest Diagnostics and Covance will
enter into the Covance/Quest Diagnostics Spin-Off Tax Indemnification Agreement
(as defined under "The Distributions--Spin-Off Tax Indemnification Agreements")
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
Distributions--Spin-Off Tax Indemnification Agreements."
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
19
<PAGE>
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--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 a Prior Public Market. The Notes are a new issue of securities with
no established trading market. The Notes have been approved for listing on the
New York Stock Exchange, subject to official notice of issuance. While the
Underwriters have informed Quest Diagnostics that they intend to make a market
in the Notes, they are not obligated to do so and may discontinue such market
making at any time without notice. Accordingly, there can be no assurance as to
the liquidity of any markets that may develop for the Notes.
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--Recent Organizational Changes" and "Management."
Certain Antitakeover Effects. Quest Diagnostics' amended and restated
certificate of incorporation (the "Certificate") and by-laws (the "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 "Board"), or, in certain circumstances,
by the disinterested members of the 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."
20
<PAGE>
The Distributions
Overview of and Reasons for the Distributions
The Notes are being offered prior to but in connection with the distributions to
holders of common stock with attached preferred share purchase rights (the
"Corning Common Stock") of Corning of all of the outstanding common stock with
attached preferred stock purchase rights, of (i) Quest Diagnostics, which is
and, at the time of such distributions, will be a direct wholly owned subsidiary
of Corning, and (ii) Covance, which currently is and, at the time of such
distributions, will be a direct wholly owned subsidiary of Quest Diagnostics.
The distribution (the "Quest Diagnostics Spin-Off Distribution") of all the
outstanding common stock with attached preferred stock purchase rights of Quest
Diagnostics (the "Quest Diagnostics Common Stock") to the holders of Corning
Common Stock will be immediately followed by the distribution (the "Covance
Spin-Off Distribution" and, together with the Quest Diagnostics Spin-Off
Distribution, the "Distributions") of all of the outstanding common stock with
attached preferred stock purchase rights of Covance (the "Covance Common Stock")
to the holders of Quest Diagnostics 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,
immediately after the Distributions, not only hold shares of Corning Common
Stock but also shares of Quest Diagnostics Common Stock and Covance Common
Stock. The Distributions will occur at 11:59 p.m. on December 31, 1996 (the
"Distribution Date"). The shares of Quest Diagnostics Common Stock and Covance
Common Stock have been accepted for listing on the New York Stock Exchange
("NYSE") under the symbols "DGX" and "CVD," respectively, subject to official
notice of the Distributions.
The Distributions are subject to the satisfaction of several conditions
including the receipt of a favorable IRS ruling (as defined below). Prior to
the closing of the Offering, Quest Diagnostics transferred to Corning
approximately $350 million of initial borrowings under the Credit Facility in
partial repayment of certain intercompany indebtedness owed by Quest
Diagnostics to Corning (the "Intercompany Debt"). On the closing date of the
Offering, Quest Diagnostics will transfer the approximately $145 million net
proceeds from the Offering to Corning in repayment of additional Intercompany
Debt. Corning will cancel the Intercompany Debt as a contribution to the
capital of Quest Diagnostics. See "Use of Proceeds."
Closing Document Escrow Arrangements
It is currently anticipated that the Offering will close prior to the
Distributions. At the time of the closing of the Offering, all of the conditions
to the consummation of the Distributions under the Transaction Agreement (as
described below under "--Transaction Agreement") will have been satisfied or
waived, and all of the operative agreements necessary to effect the
Distributions will have been executed and placed in escrow with The Bank of New
York, as Escrow Agent (the "Escrow Agent"), pursuant to the terms of an Escrow
Agreement, dated the closing date of the Offering (the "Escrow Agreement"),
among Quest Diagnostics, Corning, Covance and the Escrow Agent.
The Escrow Agreement will require the Escrow Agent to release the documents
placed in escrow on the Distribution Date. If as a result of an event outside
the control of Corning, Quest Diagnostics and Covance, the Distributions do not
occur prior to March 31, 1997, the Notes will be subject to redemption, as a
whole and not in part, at the option of Quest Diagnostics, prior to June 30,
1997, at a redemption price equal to 101% of the principal amount of the Notes
plus accrued and unpaid interest at the date fixed for redemption.
Transaction Agreement
Corning, Quest Diagnostics and Covance have entered 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.
The Transaction Agreement provides 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 provides that Corning, Quest Diagnostics and Covance
will use their respective commercially reasonable efforts to achieve an
allocation of consolidated indebtedness of Corning and an agreed upon capital
structure after the Distributions of Corning, Quest Diagnostics and 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
21
<PAGE>
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--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 has agreed 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 has also
agreed 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 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 and as a result of the payment of settled claims,
primarily the Damon settlement of $119 million.
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 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 also provides 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 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
22
<PAGE>
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, 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 Quest
Diagnostics 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 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. 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.
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.
23
<PAGE>
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 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.
24
<PAGE>
Use of Proceeds
The net proceeds to Quest Diagnostics from the Offering are estimated to be
approximately $145 million. The net proceeds from the Offering, together with
approximately $350 million of borrowings under the Term Loans of the Credit
Facility, will be used to repay approximately $495 million of Intercompany
Debt owed to Corning. Corning will contribute to the equity capital of Quest
Diagnostics any Intercompany Debt owed in excess of the approximately $495
million of Intercompany Debt being repaid. After completion of the foregoing
transactions, Quest Diagnostics will not owe any Intercompany Debt to
Corning. The Intercompany Debt currently bears interest at a weighted average
interest rate of approximately 7% per annum and matures at various dates
through 2024.
25
<PAGE>
Capitalization
The following table sets forth Quest Diagnostics' capitalization as of
September 30, 1996 giving effect to (i) the consummation of the Offering and
the estimated initial borrowings under the Credit Facility, (ii) the
Distributions and (iii) the Accounting Policy Change (as defined below), as
if such transactions occurred on such date. This table should be read in
conjunction with the Financial Statements and notes thereto and the 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" and "Business."
<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 Credit Facility and the Notes, respectively.
(c) The 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 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 "Accounting Policy Change"). The pro forma adjustment to
accumulated deficit represents the estimated impact of the 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.
26
<PAGE>
Selected Historical Financial Data
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 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
"Interim Financial Statements" and, together with the Audited Financial
Statements, the "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 Financial
Statements and notes thereto, and the 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 Financial Statements and notes thereto and Pro
Forma Financial Information. See also "Management's Discussion and Analysis
of Financial Condition and Results of Operations" and "Business."
27
<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 30)
28
<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 30)
29
<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, with approximately $90 million
in annualized revenues. The Damon and Unilab acquisitions were accounted
for as purchases. Quest Diagnostics acquired 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 Financial Statements and Notes 2 and 3 to the 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>
Three months Ended September 30, Nine months Ended 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, depreciation and amortization. EBITDA is presented and discussed
because management believes that EBITDA is a useful adjunct to net income
and other measurements under generally accepted accounting principles since
it is a meaningful measure of a leveraged company's performance and ability
to meet its future debt service requirements, fund capital expenditures and
meet working capital requirements. EBITDA is not a measure of financial
performance under generally accepted accounting principles and should not be
considered as an alternative to (i) net income (or any other measure of
performance under generally accepted accounting principles) as a measure of
performance or (ii) cash flows from operating, investing or financing
activities as an indicator of cash flows or as a measure of liquidity.
(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 and discussed because management believes that
Adjusted EBITDA is a useful adjunct to net income and other measurements
under generally accepted accounting principles since it is a meaningful
measure of a leveraged company's performance and ability to meet its future
debt service requirements, fund capital expenditures and meet working
capital requirements. Adjusted EBITDA is not a measure of financial
performance under generally accepted accounting principles and should not be
considered as an alternative to (i) net income (or any other measure of
performance under generally accepted accounting principles) as a measure of
performance or (ii) cash flows from operating, investing or financing
activities as an indicator of cash flows or as a measure of liquidity.
(h) 1991 cash flow data, on a basis restated for poolings, is not available.
30
<PAGE>
Pro Forma Financial Information
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 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 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 "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 Pro Forma Financial Information and are set forth in the "Pro Forma
Adjustments" column.
The Pro Forma Financial Information should be read in conjunction with the
Financial Statements and notes thereto included elsewhere herein. The 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 Accounting Policy Change occurred as
assumed herein, or had Quest Diagnostics been operated as an independent
company during the periods shown.
31
<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.
32
<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.
33
<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.
34
<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.
35
<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 Credit
Facility and $150 million of Notes. The assumed interest rates on these new
borrowings are 7.50% and 11.50% for the Credit Facility and the Notes,
respectively. If the interest rate on the Credit Facility fluctuates by
1/8%, interest expense fluctuates by approximately $440,000 annually.
Depending on market conditions at the time of the Offering, the total
combined debt amount, the interest rates, and the amounts of 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 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 arm's-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.
(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 Credit Facility and $150 million of Notes.
(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 fund-
36
<PAGE>
ing 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 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.
37
<PAGE>
Management's Discussion and Analysis of
Financial Condition and Results of Operations
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--Role of Managed Care" and
"Business--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 Financial Statements and
Notes 2 and 3 to the Interim 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 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 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
38
<PAGE>
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' 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--Government Investigations and Related Claims" and "Business--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--Billing,"
"Business--Information Systems" and "Business--Billing" and Note 3 to the
Interim Financial Statements.
Net interest expense declined from the prior year's level due to lower average
borrowings during 1996. Amortization of intangible assets decreased below the
prior year's level due to certain intangible assets having been fully amortized.
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.
* This is a forward looking statement and is based on current expectations.
Actual results may vary materially from those projected. See
"Business--Important Factors Regarding Forward Looking Statements." In
particular see factors (c), (d), (j) and (k).
39
<PAGE>
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 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 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--Government Investigations and Related Claims" and "Business--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--Billing,"
"Business--Information Systems" and "Business--Billing" and Notes 3 to the
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.
* This is a forward looking statement and is based on current expectations.
Actual results may vary materially from those projected. See
"Business--Important Factors Regarding Forward Looking Statements." In
particular see factors (c), (d), (j) and (k).
40
<PAGE>
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 duplicate
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 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 $31.1 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 6.5% 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--Billing" and "Business--Information Systems" and "Business--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 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.
41
<PAGE>
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 Financial Statements.
Year Ended December 31, 1994 Compared with Year Ended December 31,
1993. Earnings for 1994 were below those for the prior year due principally
to price declines, which outpaced the cost efficiencies realized from the
integration of acquisitions and other activities to reduce costs.
Net Revenues
Net revenues increased by $217.4 million, or 15.3%, over the prior year, due
principally to the net impact of acquisitions and dispositions which
increased net revenues by approximately $240 million. The net effect of
average price declines, estimated at 4%, offset by an increase in requisition
volume, estimated at 3%, accounted for the remaining change in net revenues.
The majority of the price declines resulted from a shift in volume to
lower-priced managed care business, changes in reimbursement policies of
various third-party payors, and intense price competition. Also contributing
to the price declines was a reduction in Medicare fee schedules effective
January 1, 1994 which accounted for approximately a 1% decrease in net
revenues.
Costs and Expenses
Cost of services increased $164.1 million over 1993 and as a percentage of
net revenues increased to 59.4% in 1994 from 56.9% in 1993. These increases
were due principally to the impact of price declines and the added cost of
doing business in an increasingly complex environment. Partially offsetting
these factors were synergies realized from integration of acquisitions.
Selling, general and administrative expense increased $48.4 million over 1993
and as a percentage of net revenues decreased slightly from 25.7% in the
prior year to 25.2%. Synergies associated with the elimination of duplicate
facilities, personnel and administrative functions of acquired entities,
primarily Damon, MML and Nichols, with those of 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--Government Investigations and Related Claims," "Business--Government
Investigations and Related Claims" and Note 5 to the Audited 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 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 Offering and incur approximately $350
million of borrowings under the Credit Facility. The proceeds from these
borrowings will be used to repay amounts owed to Corning. 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
42
<PAGE>
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 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--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.
Quest Diagnostics does not anticipate paying dividends on the Quest Diagnostics
Common Stock in the foreseeable future. In addition, the 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--Potential Liability
under the Spin-Off Tax Indemnification Agreements" and "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.
* This is a forward looking statement and is based on current expectations.
Actual results may vary materially from those projected. See
"Business--Important Factors Regarding Forward Looking Statements." In
particular see factors (a), (b), (c), (d), (e) and (j).
43
<PAGE>
Net cash provided by operating activities during 1995 increased above the prior
year despite reduced earnings, due primarily to changes in accounts payable and
accrued expenses and reduced spending for restructuring integration and other
special charges. Net cash provided by operating activities in 1994 declined from
the 1993 level principally due to larger increases in accounts receivables and
higher levels of spending for restructuring, integration and other special
charges during 1994.
Cash used for investing activities for the nine months ended September 30, 1996
was below the prior year level due to reduced acquisition activity and the sale
of several small investments during 1996. Investing activities during 1995, 1994
and 1993 were funded principally by cash flow from operations and borrowings
from Corning, and were principally for capital expenditures and acquisitions.
Cash used in investing activities in 1995 exceeded the prior year level due
principally to cash proceeds generated from the sale of certain California
operations in 1994. See Note 3 to the Audited 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 is
presented and discussed because management believes that Adjusted EBITDA is a
useful adjunct to net income and other measurements under generally accepted
accounting principles since it is a meaningful measure of a leveraged company's
performance and ability to meet its future debt service requirements, fund
capital expenditures and meet working capital requirements. Adjusted EBITDA is
not a measure of financial performance under generally accepted accounting
principles and should not be considered as an alternative to (i) net income (or
any other measure of performance under generally accepted accounting principles)
as a measure of performance or (ii) cash flows from operating, investing or
financing activities as an indicator of cash flows or as a measure of liquidity.
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
arm's-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 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.
44
<PAGE>
Upon adopting the new policy, management anticipates that the aggregate market
capitalization for Quest Diagnostics will be significantly less that its net
book value. While the market capitalization ascribes a value to Quest
Diagnostics as a whole, Quest Diagnostics' policy values individual laboratories
on a case by case basis, based on the estimated amount for which each regional
laboratory could be sold in an arm's-length transaction. Management believes
that the overall valuation of Quest Diagnostics represented by its market
capitalization ascribes a value to certain underperforming laboratories which is
lower than Quest Diagnostics used in assessing intangible asset recovery. The
higher value ascribed by Quest Diagnostics is principally associated with
management's assumption that a buyer within the industry will value these
businesses based on a multiple of revenues, versus a multiple of current cash
flows, due to the synergy opportunities which exist. While management believes
these 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. Additional factors
which management believes give rise to the difference between Quest Diagnostics'
anticipated market capitalization and net book value are market uncertainty
around the impact of increased government regulation and enforcement and growth
in managed care. These factors, as well as recent highly-publicized government
settlements, have created a negative sentiment in the market which management
believes is temporarily depressing the market value for publicly-traded clinical
laboratory companies. See Note 15 to the Audited Financial Statements.
In October 1995, the Financial Accounting Standards Board issued Statement
No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123"). This statement
defines a fair value-based method of accounting for employee stock options and
similar equity investments and encourages adoption of that method of accounting
for employee stock compensation plans. However, it also allows entities to
continue to measure compensation cost for employee stock compensation plans
using the intrinsic value-based method of accounting prescribed by APB Opinion
No. 25, "Accounting for Stock Issued to Employees" ("APB 25"). Entities which
elect to continue accounting for stock compensation plans utilizing APB 25 are
required to disclose pro forma net income and earnings per share, as if the fair
value-based method of accounting under SFAS 123 had been applied. 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.
45
<PAGE>
Business
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, 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."
The principal executive offices of Quest Diagnostics are located at One Malcolm
Avenue, Teterboro, New Jersey 07608, telephone number: (201) 393-5000.
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--Executive Officers." 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 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.
46
<PAGE>
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 27% 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.
(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
* This is a forward looking statement and is based on current expectations.
Actual results may vary materially from those projected. See "--Important
Factors Regarding Forward Looking Statements." In particular see factors
(c), (d), (g) and (j).
** This is a forward looking statement and is based on current expectations.
Actual results may vary materially from those projected. See "--Important
Factors Regarding Forward Looking Statements." In particular see factors
(b), (c), (d), (f) and (j).
*** 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).
47
<PAGE>
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 66% 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-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
48
<PAGE>
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.
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' 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.
49
<PAGE>
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.
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 eso-
50
<PAGE>
teric 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.
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:
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."
51
<PAGE>
[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
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 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
52
<PAGE>
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.
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 infor-
53
<PAGE>
mation 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.
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 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 pro-
* 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).
54
<PAGE>
cess are pricing differences between the fee schedules of Quest Diagnostics and
the payor, disputes between payors as to the party responsible for payment of
the bill and auditing for specific compliance issues. Ultimately, if all issues
are not resolved in a timely manner, the related receivables are written off to
bad debt expense.
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." 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 $35 million was attributable to the Teterboro
location. At the time of charge, the backlog of unbilled requisitions was
estimated at over 2 million requisitions and DSOs for the clinical testing
business were 90 days. In addition, significant backlogs existed in (1)
reconciling cash received to payment of specific bills, (2) rejected claims
that needed to be researched and (3) correspondence from customers attempting
to resolve billing problems.
Integration of a standardized billing system is a priority of Quest
Diagnostics and Quest Diagnostics is in the process of integrating a billing
system with proven reliability throughout its network. The SYS system is in
use at seven of Quest Diagnostics' laboratories. Its reliability is evidenced
by both the improvement in the laboratories' bad debt experience after SYS
was implemented and the improved capability to handle new billing
requirements as compared with non-SYS laboratories, such as Teterboro. For
example, bad debt expense for the nine months ended September 30, 1996 for
the combined SYS laboratories is 6.4% of sales, versus 7.1% for all other
laboratories combined. The use of a standard system will also provide for
operational efficiencies as redundant programming efforts are eliminated and
the ability to consolidate billing sites will become more feasible. See
"--Information Systems." Standardizing billing systems presents conversion
risk to Quest Diagnostics as key databases and masterfiles are transferred to
the SYS system and because the billing workflow is interrupted during the
conversion, which may cause backlogs. Quest Diagnostics, however, has already
completed seven conversions to this system and has retained key people who
have been involved in those conversions.
Quest Diagnostics has focused on improving its billing operations in the last
year. Over the last twelve months, the backlog of unbilled requisitions has
been reduced by approximately 30%, DSOs for the clinical testing business
have been reduced to 74 days, bad debt expense as a percentage of net
revenues has decreased, the percentage of requisitions received with missing
billing information has been reduced by approximately 30% and backlogs in
rejected claims, unapplied cash and customer correspondence have been
significantly reduced. These improvements were achieved in spite of a higher
level of information requirements necessary for correct billing, especially
those bills relating to Medicare. However, additional requirements to provide
documentation of the "medical necessity" of testing have added to the backlog
of unbilled receivables and caused third quarter 1996 bad debt expense as a
percentage of revenues to increase above the rate Quest Diagnostics had
experienced during the first two quarters of 1996. See "--Regulation and
Reimbursement--Regulation of Reimbursement for Clinical Laboratory Services."
Acquisitions and Dispositions
MetPath, Quest Diagnostics' predecessor, originally commenced operations in
1967 with laboratories only in the New York metropolitan area. Most of Quest
Diagnostics' other regional laboratories have been added through
acquisitions. Principally as the result of the acquisitions discussed below
that were completed in 1993 and 1994, Quest Diagnostics' revenues have almost
tripled since 1991. However, this increase in revenues is not reflected in
the Financial Statements because several of the major acquisitions are
accounted for as a pooling of interests. Acquisition activity has diminished
significantly since May 1995, in part so that Quest Diagnostics could
concentrate on the integration of the laboratory networks that had been
acquired in 1993 and 1994. Quest Diagnostics may resume making acquisitions
in the future, most likely focusing on acquisitions of smaller laboratories
that can be folded into existing laboratories where Quest Diagnostics can
expect to achieve significant cost savings and other benefits resulting from
the elimination of redundant facilities and equipment and reductions in
staffing or personnel.
55
<PAGE>
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 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 effect to the April 1995 merger of Roche into NHL; and SmithKline, which
had approximately $1.29 billion in revenues from clinical laboratory testing in
1995. Both LabCorp and SmithKline are affiliated with large corporations that
have greater financial resources than Quest Diagnostics. SmithKline is wholly
owned by SmithKline Beecham Ltd. and F. Hoffman La Roche Ltd. 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 66% 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.
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
56
<PAGE>
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 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).
57
<PAGE>
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.
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.
58
<PAGE>
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 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,
59
<PAGE>
according to recent workplans, targeted certain laboratory practices for study,
investigation and prosecution. The federal government's involvement in
curtailing fraud and abuse is likely to increase as a result of the enactment in
August 1996 of the Health Insurance Act which will require, by January 1, 1997,
the U.S. Attorney General and the OIG to jointly establish a program to (a)
coordinate federal, state and local enforcement programs to control fraud and
abuse with respect to health care, (b) conduct investigations, audits,
evaluations and inspections relating to the delivery and payment for health
care, (c) facilitate the enforcement of the health care fraud and abuse laws,
(d) provide for the modification and establishment of safe harbors and to issue
advisory opinions and Special Fraud Alerts and (e) provide for a data collection
system for the reporting and disclosure of adverse actions taken against health
care providers. The Health Insurance Act also authorizes the establishment of an
anti-fraud and abuse trust fund funded through the collection of penalties and
fines for violations of the health care anti-fraud laws as well as amounts
authorized therefor by Congress. The Health Insurance Act also requires HHS to
establish a program to encourage Medicare beneficiaries and others to report
violations of the health care anti-fraud laws, including by paying to the
reporting person a portion of any fines and penalties collected.
In October 1994, the OIG issued a Special Fraud Alert, which set forth a number
of practices allegedly engaged in by clinical laboratories and health care
providers that the OIG believes violate the anti-kickback laws. These practices
include providing employees to collect patient samples at physician offices if
the employees perform additional services for physicians that are typically the
responsibility of the physicians' staff; selling laboratory services to renal
dialysis centers at prices that are below fair market value in return for
referrals of Medicare tests which are billed to Medicare at higher rates;
providing free testing to a physician's HMO patients in situations where the
referring physicians benefit from lower utilization; providing free pickup and
disposal of bio-hazardous waste for physicians for items unrelated to a
laboratory's testing services; providing facsimile machines or computers to
physicians that are not exclusively used in connection with the laboratory
services performed; and providing free testing for health care providers, their
families and their employees (professional courtesy testing). The OIG stressed
in the Special Fraud Alert that when one purpose of the arrangements is to
induce referral of program-reimbursed laboratory testing, both the clinical
laboratory and the health care provider or physician may be liable under the
anti-kickback laws and may be subject to criminal prosecution and exclusion from
participation in the Medicare and Medicaid programs. The Special Fraud Alert was
issued in part at the request of the American Clinical Laboratory Association,
which requested clarification of certain of these rules. 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 pay-
60
<PAGE>
ments, 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 $192 million relating primarily to industry-wide billing and
marketing practices that had been substantially discontinued by early 1993.
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) twelve
completed settlements and one tentative settlement relating to private claims
totalling approximately $12 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 other private claims presently pending.
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 late 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. For further information regarding the Damon
Settlement, see Note 13 to the Audited Quest Diagnostics Financial Statements
and Note 2 to the Quest Diagnostics Interim Financial Statements.
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.
61
<PAGE>
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.
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 (or intends to self-report
prior to the Distribution Date) 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
$12 million. There are no other private claims presently pending other than
routine claims that are not material in the aggregate.
Corning Indemnity
In connection with the Distributions, Corning has agreed 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 has also agreed 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 ben-
62
<PAGE>
efits 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.
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
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 Board and requires periodic reporting of
compliance operations by management to the Compliance Committee. Such
sharpened focus on regulatory standards and procedures will continue to be a
priority for Quest Diagnostics in the future.
Quest Diagnostics has established a comprehensive program designed to ensure
that it is in compliance in all material respects with all statutes, regulations
and other requirements applicable to its clinical laboratory operations. This
program was publicly cited with approval by government officials at the time the
Damon settlement was announced and characterized as a "model" for the industry.
In addition, the government advised Quest Diagnostics representatives that Quest
Diagnostics' compliance program, coupled with corrective action taken by Quest
Diagnostics after its acquisition of Damon, greatly reduced the amounts of fines
and penalties, and was influential in causing the OIG not to seek exclusion of
Quest Diagnostics from future participation in governmental health care
programs. Pursuant to the Damon settlement, Quest Diagnostics signed a five year
Corporate Integrity Agreement with the OIG pursuant to which Quest Diagnostics
will, among other things, maintain its corporate compliance program, make
certain changes to its test order forms, provide certain additional notices to
ordering physicians, provide to the OIG data on certain test ordering patterns,
adopt certain pricing guidelines, audit laboratory operations, deliver annual
reports on compliance activities, and investigate and report instances of
noncompliance, including any corrective actions and disciplinary steps.
Importantly, the agreement gives Quest 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
63
<PAGE>
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--Overview."
Properties
Quest Diagnostics' principal laboratories (listed alphabetically by state)
are located in the following metropolitan areas:
<TABLE>
<CAPTION>
Location Type of Laboratory Leased or Owned
- -------- ------------------ ---------------
<S> <C> <C>
Phoenix, Arizona Regional Leased
San Diego, California Regional Leased
San Juan Capistrano, California Esoteric Owned
Denver, Colorado Regional Leased
New Haven, Connecticut Regional Owned
Miami, Florida Branch Leased
Tampa, Florida Regional Leased
Atlanta, Georgia Regional Leased
Chicago, Illinois Regional Leased
Indianapolis, Indiana Branch Leased
Baltimore, Maryland Regional Owned
Boston, Massachusetts Regional Owned subject to put/call
with option to lease
Detroit, Michigan Regional Leased
Grand Rapids, Michigan Branch Leased
Kansas City, Missouri Branch Leased
St. Louis, Missouri Regional Leased
Billings, Montana Branch Leased
Lincoln, Nebraska Regional Managed (hospital)
Teterboro, New Jersey/New York, New York Regional Owned
Albuquerque, New Mexico Branch Leased
Buffalo, New York Branch Owned
Long Island, New York Branch Leased
Cleveland, Ohio Branch Owned
Columbus, Ohio Branch Leased
Portland, Oregon Regional Leased
Erie, Pennsylvania Branch Leased by joint venture
Philadelphia, Pennsylvania Regional Leased
64
<PAGE>
Location Type of Laboratory Leased or Owned
- -------- ------------------ ---------------
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 investors 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--Intense Competition."
(b) Impact of changes in payor mix, including the shift from traditional,
fee-for-service medicine to managed-cost health care. See "Risk
Factors--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--Reliance on Medicare/Medicaid Reimbursements" and
"Risk Factors--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--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' clinical laboratories under CLIA, by HCFA for Medicare
and Medicaid programs or other federal, state and local agencies. See
"Risk Factors--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--Billing."
(k) Development of technologies that substantially alter the practice of
laboratory medicine.
65
<PAGE>
Management
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 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
certificate of incorporation (the "Certificate"), the board of directors (the
"Board") will be divided into three classes effective upon the Distributions
and one class of the 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.
Name Age
Kenneth W. Freeman 46
Van C. Campbell 58
David A. Duke 61
Gail R. Wilensky 53
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 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 $1,500.
Quest Diagnostics has adopted, effective the Distribution Date, a deferred
compensation plan for directors pursuant to which each director may elect to
defer until a date specified by him receipt of all or a portion of his
compensation. Such plan provides that amounts deferred may be allocated to
(i) a cash account upon which amounts deferred may earn interest, compounded
quarterly, at the base rate of Citibank, N.A. in effect on certain specified
dates, (ii) a market value account, the value of which will be based upon the
market value of Quest Diagnostics Common Stock from time to time, or (iii) a
combination of such accounts. All non-employee directors will be eligible to
participate in the plan.
66
<PAGE>
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 Board
is expected to establish and designate specific functions and areas of
oversight to an Audit and Finance Committee, a Compensation Committee
("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' internal financial and accounting controls. The
Compensation Committee will make recommendations to the Board with respect to
programs for human resource development and management organization and
succession, determine senior executive compensation, make recommendations to
the 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--Compliance Program."
Executive Officers. 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 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.
67
<PAGE>
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 Quest Diagnostics 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.
Summary Compensation Table
<TABLE>
<CAPTION>
Annual Compensation
--------------------------------------
Name and Other Annual
Principal Position Year Salary(1) Bonus(2) Compensation(3)
- ------------------------- --------- ---------- --------- ----------------
<S> <C> <C> <C> <C>
Kenneth W. Freeman, 1996 385,000 211,750 10,440
President and Chief 1995 316,667 249,918 7,200
Executive Officer 1994 240,000 244,634 6,900
Robert A. Carothers, 1996 250,000 136,714 1,800
Vice President and 1995 173,000 68,337 --
Chief Financial Officer 1994 165,250 84,180 --
Gregory C. Critchfield, 1996 310,000 182,900 40,909
Senior Vice President 1995(6) 70,000 122,920 --
and Chief Medical and
Science Officer
Don M. Hardison, Jr., 1996 260,000 159,467 2,880
Senior Vice President-
Sales and Manufacturing
Douglas M. VanOort, 1996 325,000 178,750 2,880
Senior Vice President- 1995 251,912 56,754 7,200
Operations 1994 228,333 165,969 6,900
</TABLE>
<TABLE>
<CAPTION>
Long-Term Compensation
------------------------------------
Awards Payouts
------------------------- -----------
Restricted Securities Incentive
Name and Stock Underlying Plan All Other
Principal Position Awards(4) Options Payouts Compensation(5)
- ------------------------- ------------ ------------ ----------- ---------------
<S> <C> <C> <C> <C>
Kenneth W. Freeman, -- -- -- 16,690
President and Chief 326,926 87,000 -- 14,057
Executive Officer 406,766 20,000 162,679 13,376
Robert A. Carothers, -- -- -- 8,254
Vice President and -- 16,500 -- 8,561
Chief Financial Officer -- 6,092 -- 7,557
Gregory C. Critchfield, -- 2,000 -- 65,690
Senior Vice President -- 3,000 -- 2,370
and Chief Medical and
Science Officer
Don M. Hardison, Jr., -- 24,000 -- 17,123
Senior Vice President-
Sales and Marketing
Douglas M. VanOort, -- -- -- 4,750
Senior Vice President- 98,626 60,000 -- 4,620
Operations 109,652 20,000 -- 4,178
</TABLE>
(1) Reflects for 1996 current salaries on an annualized basis, including
amounts deferred.
(2) Reflects for 1996 projected performance-based annual cash compensation
awards at target levels.
(3) Includes dividends on shares of restricted stock granted but not earned
within one year from date of grant and tax gross-up payments.
(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
68
<PAGE>
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 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>
Individual Grants
----------------------------------------------------
Number of % of Total
Securities Options
Underlying Granted
Options to Employees Exercise Expiration
Name Granted(2) in Fiscal Year Price Date
------------------------------ --------------------------- --------- ------------
<S> <C> <C> <C> <C>
Kenneth W. Freeman 87,000 2.6% 31.25 12/5/2005
Robert A. Carothers 1,500 0.0% 31.75 6/7/2005
15,000 0.4% 31.25 12/5/2005
Gregory C. Critchfield 3,000 0.1% 27.50 10/3/2005
Don M. Hardison, Jr. 24,000 0.7% 33.69 2/6/2006
Douglas M. VanOort 60,000 1.8% 31.25 12/5/2005
All Optionees as a Group (4) 3,389,100 100.0% 31.34 2005
</TABLE>
<TABLE>
<CAPTION>
Potential Realizable Value at
Assumed Annual Rates of Stock
Price Appreciation for
Option Term (3)
-------------------------------------
Gain at Gain at Gain at
Name 0% (4) 5% 10%
------------------------------ --------------------- -------------
<S> <C> <C> <C>
Kenneth W. Freeman 0 1,709,807 4,332,987
Robert A. Carothers 0 29,951 75,902
0 294,794 747,067
Gregory C. Critchfield 0 51,884 131,484
Don M. Hardison, Jr. 0 508,499 1,288,636
Douglas M. VanOort 0 1,179,177 2,988,267
All Optionees as a Group (4) 0 66,797,662 169,278,390
</TABLE>
(1) No SARs were granted.
(2) The stock option agreements with Messrs. Freeman, Carothers (with respect
to the 15,000 share grant), Hardison and VanOort provide that one-half of
the options will become exercisable on February 1, 1999 and all options
will become exercisable on February 1, 2000. The stock option agreement
with Dr. Critchfield provides that one-half of the options will become
exercisable on October 4, 1996 and all of the options will become
exercisable on October 4, 1997. The stock option agreement with Mr.
Carothers with respect to the 1,500 share grant provides that one-half of
the options became exercisable on June 6, 1996 and all of the options
will become exercisable on June 6, 1997. All such agreements also provide
that an additional option may be granted when the optionee uses shares of
Corning Common Stock to pay the purchase price of an option. The
additional option will be exercisable for the number of shares tendered
in payment of the
69
<PAGE>
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.
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' 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 Number
Grant of Shares Performance of Shares of Shares Vesting Date of
Name Year Date Granted Period Forfeited Earned Earned Shares
- ------------------------ ------ ------------------ ------------- ------------ ----------- ---------------
<S> <C> <C> <C> <C> <C> <C> <C>
Kenneth W. Freeman 1996 12/95 14,500 1996 2/99
1995 12/94 10,000 1995 10,740 2/98
1994 12/93 10,000 1994 14,690 2/97
Robert A. Carothers 1996 12/95 2,500 1996 2/99
1995 0
1994 0
Gregory C. Critchfield 1996 0
1995 0
Don M. Hardison, Jr. 1996 2/96 4,000 1996 2/99
70
<PAGE>
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 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 Compensation Committee sets
the target for the performance year. The 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 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 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 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 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 Compensation Committee). The 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 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 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 issued but not earned, or which are forfeited under
71
<PAGE>
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 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 or more 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 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%
72
<PAGE>
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 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").
73
<PAGE>
Shares of Quest Diagnostics Common Stock will be credited under the Quest
Diagnostics ESOP for the account of all active regular employees of Quest
Diagnostics and its domestic wholly owned subsidiaries as of the Distribution
Date, with 50 shares being credited for all full time employees (employees who
are regularly scheduled to work 30 hours or more a week) and 25 shares being
credited for all part time employees. Approximately 900,000 shares of Quest
Diagnostics Common Stock are expected to be issued under the ESOP.
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
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 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.
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.
74
<PAGE>
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 Board changes as a result of a
contested election such that a majority of the Board members at any particular
time were initially placed on the 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.
75
<PAGE>
Security Ownership by Certain Beneficial
Owners and Management
All of the outstanding shares of Quest Diagnostics Common Stock are currently
held 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 Number of
Name Owned(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 66,280 398,562
</TABLE>
(1) Does not include 3,954 shares owned by the spouses and minor children of
certain executive officers and directors as to which such officers and
directors (or trusts of which families of such executive officers are
beneficiaries) 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--Management--Directors' Compensation."
76
<PAGE>
Description of the 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 entered into
a credit agreement (the "Credit Agreement") with several banks providing for a
$450 million credit facility (the "Credit Facility"). Morgan Guaranty Trust
Company of New York ("Morgan"), NationsBank, N.A. ("NationsBank") and Wachovia
Bank of Georgia, N.A. ("Wachovia") arranged the Credit Facility. A copy of the
proposed form of the Credit Agreement has been filed as an exhibit to the
Registration Statement of which this Prospectus forms a part. This summary of
the material terms and conditions of the 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 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 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 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 the 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 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 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 cover-
77
<PAGE>
age 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 and certain other
Permitted Subordinated Debt, (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 between 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, increasing 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, increasing 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 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.
78
<PAGE>
Description of the Notes
The Notes will be issued by the Company pursuant to an Indenture, to be dated
as of the Closing Date, 1996 (the "Indenture"), between the Company and The
Bank of New York, as trustee (the "Trustee").
The Indenture is subject to and governed by the Trust Indenture Act of 1939,
as amended. The statements under this caption relating to the Notes and the
Indenture are summaries and do not purport to be complete, and are subject
to, and are qualified in their entirety by reference to, all the provisions
of the Indenture, including the definitions therein of certain terms.
Wherever defined terms or particular sections of the Indenture are referred
to, such defined terms and sections are incorporated herein by reference. A
copy of the Indenture has been filed as an exhibit to the Registration
Statement of which this Prospectus constitutes a part. All references in this
section to the "Company" refer solely to Quest Diagnostics Incorporated, a
Delaware corporation, and not to its subsidiaries.
General
The Notes will to the extent described herein be fully and unconditionally
guaranteed by the existing Restricted Subsidiaries of the Company, and the
Company will covenant to cause any future Restricted Subsidiaries to fully
and unconditionally guarantee the Notes, in each case jointly and severally
on a senior subordinated basis (such guarantees, the "Senior Subordinated
Guarantees" and such guarantors, the "Guarantors"). The Senior Subordinated
Guarantees will be unsecured senior subordinated obligations of the
Guarantors, will be subordinate in right of payment to the prior payment in
full of all Senior Guarantees (as defined under "Senior Subordinated
Guarantees") to substantially the same extent as the Notes are subordinated
to Senior Debt and will automatically terminate if and to the extent the
related guarantees of the Credit Facility are terminated.
The Notes are effectively subordinated to all existing and future
indebtedness and other liabilities (including trade payables and capital
lease obligations) of the Company's Subsidiaries that are Unrestricted
Subsidiaries, and thus not Guarantors, and would be so subordinated to all
existing and future indebtedness of the Guarantors if the Senior Subordinated
Guarantees were avoided or subordinated in favor of the Guarantors' other
creditors. See "Risk Factors--Subordination; Ranking of the Notes as
Unsecured Obligations" and "--Fraudulent Conveyance."
The Notes will be issued only in fully registered form, without coupons, in
denominations of $1,000 and any integral multiple thereof. No service charge
will be made for any registration of transfer or exchange of Notes, but the
Company may require payment of a sum sufficient to cover any tax or other
governmental charge payable in connection therewith. (Sections 203 and 305).
Principal, Stated Maturity and Interest
The Notes will be unsecured senior subordinated obligations of the Company,
will be limited to $150.0 million aggregate principal amount and will mature
on December 15, 2006. The Notes will bear interest at the rate per annum
shown on the front cover of this Prospectus from the Closing Date or from the
most recent Interest Payment Date to which interest has been paid or provided
for, payable semi-annually on June 15 and December 15 of each year,
commencing June 15, 1997, until the principal thereof is paid or made
available for payment, to the Person in whose name the Note (or any
Predecessor Note) is registered at the close of business on the preceding
June 1 or December 1, as the case may be. Interest on the Notes will be
computed on the basis of a 360-day year of twelve 30-day months. The
principal of (and premium, if any,) and interest on the Notes will be
payable, and the transfer of Notes will be registrable, at the office or
agency of the Company in The Borough of Manhattan, The City of New York. In
addition, payment of interest may, at the option of the Company, be made by
check mailed to the address of the Person entitled thereto as it appears in
the Security Register; provided, however, that all payments of the principal
(and premium, if any) and interest on Notes the Holders of which have given
wire transfer instructions to the Company or its agent at least 10 Business
Days prior to the applicable payment date will be required to be made by wire
transfer of immediately available funds to the accounts specified by such
Holders in such instructions. (Section 301).
Optional Redemption
Except as set forth below, the Notes are not redeemable at the option of the
Company prior to December 15, 2001. On or after such date, the Notes will be
subject to redemption, in whole or in part, at the option of the Company at
any time prior to maturity, upon not less than 30 nor more than 60 days'
notice mailed to each Holder of Notes to be redeemed at his address appearing
in the Security Register, in amounts of $1,000 or an integral multiple of
$1,000, at the following Redemption Prices (expressed as percentages of
principal amount) plus accrued interest to but excluding the Redemption Date
(subject to the right of Holders of record on the relevant Regular Record
Date to receive interest due on an Interest Payment Date that is on or prior
to the Redemption Date), if redeemed during the twelve-month period beginning
on December 15 of each of the years indicated below:
79
<PAGE>
Redemption
Year Price
- ---- ----------
2001 %
2002
2003
2004 and thereafter 100.000%
If less than all the Notes are to be redeemed, the particular Notes to be
redeemed will be selected not more than 60 days prior to the Redemption Date
by the Trustee, from the Outstanding Notes not previously called for
redemption, by such method as the Trustee shall deem fair and appropriate and
which may provide for the selection for redemption of portions (equal to
$1,000 or any integral multiple thereof) of the principal amount of Notes of
a denomination larger than $1,000. (Sections 1101, 1103, 1104 and 1105).
If as a result of an event outside the control of Corning, Quest Diagnostics
and Covance, the Distributions do not occur on or prior to March 31, 1997,
the Notes will be subject to redemption, as a whole and not in part, at the
option of Quest Diagnostics, on or prior to June 30, 1997, at a redemption
price equal to 101% of the principal amount of the Notes plus accrued and
unpaid interest to but excluding the Redemption Date. Notice of such
redemption will be given by notice, mailed and published, not more than 30
and not less than 15 days prior to the Redemption Date. (Section 1101).
Mandatory Redemption
Except as described below under "Repurchase at the Option of Holders--Asset
Dispositions" and "--Change of Control," the Notes will not have the benefit
of any mandatory redemption or sinking fund obligations of the Company.
Repurchase at the Option of Holders
Asset Dispositions
The Company may not make, and may not permit any Restricted Subsidiary to make,
any Asset Disposition in one or more transactions in any fiscal year unless: (i)
the Company (or such Restricted Subsidiary, as the case may be) receives
consideration at the time of such disposition at least equal to the fair market
value of the shares or the assets disposed of, as determined in good faith by
the Board of Directors; and (ii) 100% of the Net Available Proceeds from such
disposition (including from the sale of any Cash Equivalents received therein)
are applied by the Company (or such Restricted Subsidiary, as the case may be)
(A) first, either (I) within 270 days of such disposition, to repayment of
Senior Debt then outstanding under any agreements or instruments which would
require such application or which would prohibit payments pursuant to Clause (B)
following or (II) within 60 days before or 270 days after such disposition, to
reinvest in assets that will be used in a Permitted Business (provided, however,
that such application will not be required to be made pursuant to this Clause
(A) until the cumulative Net Available Proceeds (less any Net Available Proceeds
applied pursuant to this covenant) (such difference being the "Excess Proceeds")
exceed $5.0 million); (B) second, to the extent the Excess Proceeds exceeds $5.0
million, to purchases of Outstanding Notes pursuant to an Offer to Purchase (to
the extent such an offer is not prohibited by the terms of any Senior Debt then
outstanding) at a purchase price equal to 100% of their principal amount plus
accrued interest to the date of purchase (provided, however, that installments
of interest whose Stated Maturity is on or prior to the Purchase Date will be
payable to the Holders of such Notes, or one or more Predecessor Notes,
registered as such at the close of business on the relevant Record Dates
according to their terms and the provisions in the Indenture); and (C) third, if
and only if an Offer to Purchase has been made as described in Clause (B) above,
and to the extent of any remaining Excess Proceeds following completion of such
Offer to Purchase and after giving effect to Clauses (A) and (B) above, to
general corporate purposes. (Section 1014).
Any Offer to Purchase required by the provisions described above will be
effected by the sending of the written terms and conditions thereof (the
"Offer Document"), by first class mail, to Holders of the Notes within 270
days after the relevant disposition is completed. The contents of the Offer
to Purchase and the requirements that a Holder must satisfy to tender any
Note pursuant to such Offer to Purchase are substantially the same as those
described below under "--Change of Control."
Change of Control
Within 30 days following the date of the consummation of a transaction that
results in a Change of Control (as defined below), the Company will commence
an Offer to Purchase all Outstanding Notes, at a purchase price equal to 101%
of their aggregate principal amount plus accrued interest to the date of
purchase. Such obligation will not continue after a defeasance or covenant
defeasance of the Notes as described under "Defeasance."
A "Change of Control" means the occurrence of any of the following events
after the date of the Indenture: (i) any Person, or any Persons acting
together that would constitute a "group" (a "Group" ) for purposes of Section
13(d) of the Securities
80
<PAGE>
Exchange Act of 1934, as amended (the "Exchange Act"), beneficially owns 35% or
more of the total voting power of all classes of Voting Stock of the Company,
(ii) any Person or Group succeeds in having sufficient of its nominees elected
to the Board of Directors such that such nominees, when added to any existing
director remaining on the Board of Directors after such election who is an
Affiliate or Related Person of such Person or Group, will constitute a majority
of the Board of Directors or (iii) the occurrence of any transaction or series
of related transactions (excluding the Spin-Off Distributions), in which the
beneficial owners of the Voting Stock of the Company immediately prior to such
transaction (or series) do not, immediately after such transaction (or series),
beneficially own Voting Stock representing more than 35% of the voting power of
all classes of Voting Stock of the Company (or in the case of a transaction (or
series) in which another entity becomes a successor to the Company, of the
successor entity). (Section 1017).
The Company will comply with the requirements of Rule 14e-1 under the
Exchange Act and any other securities laws and regulations thereunder to the
extent such laws and regulations are applicable in connection with the
repurchase of the Notes resulting from a Change of Control.
Within 30 days of a Change of Control, an Offer Document will be sent, by
first class mail, to Holders of the Notes, accompanied by such information
regarding the Company and its Subsidiaries as the Company in good faith
believes will enable such Holders to make an informed decision with respect
to the Offer to Purchase, which at a minimum will include (a) the most recent
annual and quarterly financial statements and "Management's Discussion and
Analysis of Financial Condition and Results of Operations" contained in the
documents required to be filed with the Trustee pursuant to the provisions
described under "Certain Covenants--Provision of Financial Information" below
(which requirements may be satisfied by delivery of such documents together
with the Offer to Purchase), (b) a description of the events requiring the
Company to make the Offer to Purchase), (c) if applicable, appropriate pro
forma financial information concerning the Offer to Purchase and the events
requiring the Company to make the Offer to Purchase and (d) any other
information required by applicable law to be included therein. The Offer
Document will contain all instructions and materials necessary to enable
Holders of the Notes to tender Notes pursuant to the Offer to Purchase. The
Offer Document will also state (i) that a Change of Control has occurred (or,
if the offer to purchase is delivered in connection with an Asset
Disposition, that an Asset Disposition has occurred) and that the Company
will Offer to purchase the Holder's Notes, (ii) the Expiration Date of the
Offer Document, which will be, subject to any contrary requirements of
applicable law, not less than 30 days or more than 60 days after the date of
such Offer Document, (iii) the Purchase Date for the purchase of Notes which
will be within three Business Days after the Expiration Date, (iv) the
aggregate principal amount of Notes to be purchased (including, if less than
100%, the manner by which such purchase has been determined pursuant to the
Indenture) and the purchase price, and (v) a description of the procedure
which a Holder must follow to tender all or any portion of the Notes.
(Sections 101 and 1017).
Prior to the mailing of an Offer Document, but in any event within 30 days
following any Change of Control, the Company will to the extent required
either (i) repay all outstanding Senior Debt or (ii) obtain the requisite
consents, if any, under all agreements governing outstanding Senior Debt to
permit the making of the Offer to Purchase and the purchase of Notes required
by this covenant. The failure to repay any such Senior Debt or to obtain any
such consents will not relieve the Company of its obligation to make the
Offer to Purchase or to purchase Notes pursuant to the Offer to Purchase
required by this covenant and the failure of the Company to make an Offer to
Purchase, or to purchase the Notes pursuant to an Offer to Purchase, will
constitute an Event of Default under the Indenture. See "--Events of
Default." The terms of the Credit Facility prohibit any repurchase of Notes
by the Company in the event of a Change of Control, unless all indebtedness
then outstanding under the Credit Facility is first repaid. In order to repay
such indebtedness (and any other outstanding Senior Debt with a similar
restriction) and repurchase the Notes, it may be necessary for the Company to
recapitalize and/or refinance some or all of its outstanding indebtedness.
There can be no assurance that such recapitalization or refinancing, if
required, would be accomplished on favorable terms, in a timely manner, or at
all. Were any obligation of the Company to repurchase Notes upon a Change of
Control to result in a default under the Credit Facility or any other Senior
Debt, payments owing on the Notes could be blocked pursuant to the
subordination provisions of the Notes. See "Subordination."
To tender any Note, a Holder must surrender such Note at the place or places
specified in the Offer Document prior to the close of business on the
Expiration Date (such Note being, if the Company or the Trustee so requires,
duly endorsed by, or accompanied by a written instrument of transfer in form
satisfactory to the Company and the Trustee duly executed by, the Holder
thereof or his attorney duly authorized in writing). Holders will be entitled
to withdraw all or any portion of Notes tendered if the Company (or its
Paying Agent) receives, not later than the close of business on the
Expiration Date, a telegram, telex, facsimile transmission or letter setting
forth the name of the Holder, the principal amount of the Note the Holder
tendered, the certificate number of the Note the Holder tendered and a
statement that such Holder is withdrawing all or a portion of his tender. Any
portion of a Note tendered must be tendered in an integral multiple of $1,000
principal amount. (Section 101).
The Indenture does not contain any other change of control provisions.
81
<PAGE>
Subordination
The payment of the principal of (and premium, if any) and interest on the
Notes will, in certain circumstances as set forth in the Indenture, be
subordinated in right of payment to the prior payment in full of all Senior
Debt. Upon any payment or distribution of assets of the Company to creditors
upon any liquidation, dissolution, winding up, reorganization, assignment for
the benefit of creditors, marshalling of assets and liabilities or any
bankruptcy, insolvency or similar proceedings of the Company, the holders of
Senior Debt will be entitled to receive payment in full of the principal of
(and premium, if any) and interest on such Senior Debt, including all amounts
due or to become due on all Senior Debt, or provision will be made for
payment in cash or cash equivalents or otherwise in a manner satisfactory to
the holders of such Senior Debt, before the Holders of Notes are entitled to
receive any Securities Payments. "Securities Payment" means any payment or
distribution of any kind, whether in cash, property or securities (including
any payment or distribution deliverable by reason of the payment of any other
Debt subordinated to the Notes but excluding any payment or distribution made
with shares of stock or securities of the Company that are subordinate in
right of payment to all Senior Debt to substantially the same extent as the
Notes are so subordinated) on account of the principal of (and premium, if
any) or interest on the Notes or on account of the purchase or redemption or
other acquisition of Notes by the Company or any Subsidiary of the Company.
In the event that, notwithstanding the foregoing, upon any payment or
distribution of assets of the Company to creditors upon any liquidation,
dissolution, winding up, reorganization, assignment for the benefit of
creditors, marshalling of assets and liabilities or any bankruptcy,
insolvency or similar proceedings of the Company, the Trustee or the Holder
of any Note receives any Securities Payment before all Senior Debt is paid in
full or payment thereof is provided for in cash or cash equivalents or
otherwise in a manner satisfactory to the holders of such Senior Debt, then
and in such event such Securities Payment will be required to be paid over or
delivered forthwith for application to the payment of all Senior Debt
remaining unpaid, to the extent necessary to pay the Senior Debt in full.
(Sections 1201 and 1202).
The Company may not make any Securities Payments if there has occurred and is
continuing a default in the payment of the principal of (or premium, if any)
or interest on Senior Debt (a "Senior Payment Default"). In addition, if any
default (other than a Senior Payment Default), with respect to any Senior
Debt permitting after notice or lapse of time (or both) the holders thereof
(or a trustee on behalf thereof) to accelerate the maturity thereof (a
"Senior Nonmonetary Default") has occurred and is continuing and the Company
and the Trustee have received written notice thereof from the Administrative
Agent under the Credit Facility (or if the Credit Facility has been
terminated, from any holder of Senior Debt with a principal amount in excess
of $15.0 million), then the Company may not make any Securities Payments for
a period (a "blockage period") commencing on the date the Company and the
Trustee receive such written notice and ending on the earlier of (x) 179 days
after such date and (y) the date, if any, on which the Senior Debt to which
such default relates is discharged or such default is waived or otherwise
cured. (Section 1203).
In any event, not more than one blockage period may be commenced during any
period of 360 consecutive days, and there must be a period of at least 181
consecutive days in each period of 360 consecutive days when no blockage
period is in effect. No Senior Nonmonetary Default that existed or was
continuing on the date of commencement of any blockage period with respect to
the Senior Debt will be, or can be, made the basis for the commencement of a
subsequent blockage period, unless such default has been cured or waived for
a period of not less than 90 consecutive days. In the event that,
notwithstanding the foregoing, the Company makes any Securities Payment to
the Trustee or any Holder of a Note prohibited by the subordination
provisions, then and in such event such Securities Payment will be required
to be paid over and delivered forthwith. (Section 1203).
By reason of such subordination, in the event of insolvency, creditors of the
Company who are not holders of Senior Debt or of the Notes may recover less,
ratably, than holders of Senior Debt and may recover more, ratably, than the
Holders of the Notes.
The subordination provisions described above will cease to be applicable to
the Notes upon any defeasance or covenant defeasance of the Notes as
described under "Defeasance."
On a pro forma basis, as of September 30, 1996, after giving effect to the
Spin-Off Distributions, the sale of the Notes and the application of the
proceeds thereof and $350.0 million of borrowings under the Term Loans, there
was $367 million of Senior Debt of the Company outstanding, of which $350
million would have been guaranteed by the Guarantors on a senior basis. While
the Indenture will limit, subject to certain financial tests, the amount of
additional Debt that the Company and its Restricted Subsidiaries can Incur,
the Company may from time to time hereafter Incur additional Debt
constituting Senior Debt, including up to $100.0 million under the Working
Capital Facility, substantially all of which is anticipated to be available
at the Closing Date. See "--Certain Covenants--Limitation on Incurrence of
Debt."
Senior Subordinated Guarantees
The Guarantors will, jointly and severally, on a senior subordinated basis,
fully and unconditionally guarantee the due and punctual payment of principal
of (and premium, if any) and interest on the Notes, when and as the same
shall become due and
82
<PAGE>
payable, whether at the maturity date, by declaration of acceleration, call
for redemption or otherwise. As described below, the Senior Subordinated
Guarantees will automatically terminate if the related guarantees of the
Credit Facility are terminated.
The Senior Subordinated Guarantees will be subordinate in right of payment to
the prior payment in full of all Senior Guarantees to substantially the same
extent as the Notes are subordinated to Senior Debt. The term "Senior
Guarantees" means all obligations of the Guarantors under guarantees of
Senior Debt of the Company. No payment will be made by the Guarantors under
the Senior Subordinated Guarantees in respect of the Notes during any period
that payments by the Company on the Notes are suspended by the subordination
provisions of the Indenture as described above under "Subordination." By
reason of these provisions, in the event of insolvency, Holders of the Notes
and the related Senior Subordinated Guarantees may recover less, ratably,
than other creditors of the Company, including holders of Senior Guarantees.
(Sections 1401 and 1402).
The Senior Subordinated Guarantees will remain in effect with respect to each
Guarantor until the entire principal of, premium, if any, and interest on the
Notes shall have been paid in full or otherwise discharged in accordance with
the provisions of the Indenture; provided, however, that if (i) such Guarantor
ceases to be a Restricted Subsidiary, (ii) such Guarantor ceases to guarantee
the Credit Facility, (iii) the Notes are defeased and discharged as described
under Clause (A) under "Defeasance" or (iv) all or substantially all of the
assets of such Guarantor or all of the Capital Stock of such Guarantor is sold
(including by issuance, merger, consolidation or otherwise) by the Company or
any of its Subsidiaries in a transaction constituting an Asset Disposition and
the Net Available Proceeds from such Asset Disposition are applied in accordance
with the provisions described under "Repurchase at the Option of Holders--Asset
Dispositions," then in each case of (i), (ii), (iii) and (iv) above, such
Guarantor or the corporation acquiring such assets (in the event of a sale or
other disposition of all or substantially all of the assets or Capital Stock of
such Guarantor) shall be released and discharged of its Senior Subordinated
Guarantee obligations.
Subject to payment in full of all Senior Guarantees, the rights of the
Holders of the Notes under the related Senior Subordinated Guarantees will be
subrogated to the rights of the holders of Senior Guarantees to receive
payments or distributions of cash, property or securities of the Guarantors
applicable to Senior Guarantees.
Certain Covenants
The Indenture contains, among others, the following covenants:
Limitation on Incurrence of Debt
The Company may not, and may not permit any Restricted Subsidiary to, Incur any
Debt unless, immediately after giving effect to the Incurrence of such Debt and
the receipt and application of the proceeds thereof, the Consolidated EBITDA
Coverage Ratio of the Company for the four full fiscal quarters for which
internal financial statements are available immediately preceding the Incurrence
of such Debt, calculated on a pro forma basis as if such Debt had been Incurred
and the proceeds thereof had been received and so applied at the beginning of
the four full fiscal quarters, would be greater than 2.50 to 1.0 if such date is
on or prior to December 31, 1998, 2.75 to 1.0 if such date is after December 31,
1998 and on or prior to December 31, 1999 and 3.0 to 1.0 if thereafter. (Section
1008).
Without regard to the foregoing limitations, the Company or any Restricted
Subsidiary of the Company may Incur the following Debt:
(i) Debt under the Credit Facility in an aggregate principal amount at
any one time outstanding not to exceed $450.0 million less (A) principal
payments on any term loan facility under the Credit Facility required to
be made by the terms of the Credit Facility as in effect on the date of the
Indenture and actually made and (B) any amounts by which the Working
Capital Facility commitments are permanently reduced by the terms of the
Credit Facility as in effect on the date of the Indenture; provided, that
Clause (B) shall not apply to a refinancing or refunding of the Working
Capital Facility so long as such refinancing or refunding complies with
Clause (vii) below
(ii) Debt evidenced by the Notes;
(iii) Debt of the Company or any Restricted Subsidiary (other than Debt
referred to in Clauses (i) and (ii) above) outstanding on the date of the
Indenture;
(iv) Debt owed by the Company to any Wholly Owned Restricted Subsidiary or
Debt owed by a Wholly Owned Restricted Subsidiary to the Company; provided,
however, that (a) any such Debt owing by the Company to a Wholly Owned
Restricted Subsidiary shall be Subordinated Debt and (b) upon either (1) the
transfer or other disposition by such Wholly Owned Restricted Subsidiary or
the Company of any Debt so permitted to a Person other than the Company or
another Wholly Owned Restricted Subsidiary or (2) the issuance (other than
directors' qualifying shares), sale, lease, transfer or other disposition of
shares of Capital Stock (including by consolidation or merger) of such Wholly
Owned Restricted Subsidiary to a Person other than the Company or another such
Wholly Owned Restricted Subsidiary, the provisions of this
83
<PAGE>
Clause (iv) shall no longer be applicable to such Debt and such Debt shall
be deemed to have been Incurred at the time of such transfer or other
disposition or such issuance, sale, lease, transfer, or other disposition;
(v) Obligations under Interest Rate Agreements in respect of Debt permitted
to be incurred by the Company pursuant to the Indenture to the extent the
notional principal amount of such Interest Rate Agreements does not exceed the
aggregate principal amount of the Debt to which such Interest Rate Agreements
relate; provided, however, that (A) such Interest Rate Agreements are used
solely to hedge the related Debt and (B) the profits and losses with respect
to the Interest Rate Agreements are included as interest expense under
generally accepted accounting principles;
(vi) Debt Incurred by the Company or any Restricted Subsidiary in respect of
(x) bid or performance bonds entered into in favor of governmental entities or
(y) surety or appeal bonds, which, in each case are entered into in the
ordinary course of business;
(vii) Debt Incurred to renew, extend, refinance or refund any outstanding
Debt permitted by Clauses (i), (ii) and (iii) above or this Clause (vii);
provided, however, that such Debt does not exceed the principal amount of Debt
(or, in the case of Debt issued at a discount from its principal amount, the
amount then payable upon an acceleration thereof) so renewed, extended,
refinanced or refunded (plus accrued interest, fees, expenses, premiums and
other amounts payable in connection therewith in an amount not in excess of 1%
of the principal amount (or, in the case of Debt issued at a discount, the
amount payable upon acceleration) of the Debt being renewed, extended,
refinanced or refunded); and provided further, that (A) Debt the proceeds of
which are used to refinance or refund Debt which is Pari Passu to the Notes or
Debt which is subordinate in right of payment to the Notes shall only be
permitted if in the case of any refinancing or refunding of Debt which is Pari
Passu to the Notes, the refinancing or refunding Debt is made Pari Passu to
the Notes or subordinated to the Notes, and, in the case of any refinancing or
refunding of Debt which is subordinated to the Notes, the refinancing or
refunding Debt is made subordinate to the Notes on terms at least as favorable
to the Holders of Notes as those contained in the documentation governing the
Debt being refinanced or refunded and (B) such refinancing or refunding Debt
(x) does not have a final scheduled maturity earlier than the final scheduled
maturity of the refinanced or refunded Debt or permit redemption or other
retirement of such Debt (including pursuant to an offer to purchase by the
Company) at the option of the holder thereof prior to the final stated
maturity of the Debt being refinanced or refunded, other than a redemption or
other retirement at the option of the holder of such Debt on terms at least as
favorable to the Holders of the Notes as those contained in the Debt being
refinanced or refunded and (y) does not have a Weighted Average Life less than
the Weighted Average Life of the Debt being refinanced or refunded; and
(viii) Debt in addition to that otherwise permitted to be Incurred pursuant
to Clauses (i) through (vii) above, which, together with any other outstanding
Debt Incurred pursuant to this Clause (viii), has an aggregate principal
amount not in excess of $20.0 million at any one time outstanding. (Section
1008).
Limitation on Layered and Junior Debt
The Company may not (i) Incur or suffer to exist any Debt that is by its terms
subordinate in right of payment to any other Debt of the Company unless such
Debt is also Pari Passu with or subordinate by its terms in right of payment to
the Notes or (ii) permit any Guarantor to Incur or suffer to exist any Debt that
is by its terms subordinate in right of payment to any other Debt of the
Guarantor unless such Debt is also Pari Passu with or subordinate by its terms
in right of payment to the Senior Subordinated Guarantees. (Section 1009).
Limitation on Restricted Payments
The Company may not directly or indirectly, (i) declare or pay any dividend, or
make any distribution, of any kind or character (whether in cash, property or
securities) in respect of its Capital Stock or to the holders thereof in their
capacity as such (excluding the Spin-Off Payments and any dividends or
distributions payable solely in shares of its Capital Stock (other than
Redeemable Interests) or in options, warrants or other rights to acquire its
Capital Stock (other than Redeemable Interests)), (ii) purchase, redeem or
otherwise acquire or retire for value, or permit any Restricted Subsidiary to
purchase, redeem or otherwise acquire or retire for value (a) any Capital Stock
of the Company or any Capital Stock of or other ownership interests in any
Subsidiary or any Affiliate or Related Person of the Company (other than any
such acquisition which results in such Subsidiary, Affiliate or Related Person
becoming a Restricted Subsidiary) or (b) any options, warrants or rights to
purchase or acquire shares of Capital Stock of the Company or any Capital Stock
of or other ownership interests in any Subsidiary or any Affiliate or Related
Person of the Company (excluding the redemption or repurchase by any Restricted
Subsidiary of any of its Capital Stock, other ownership interests or options,
warrants or rights to purchase such Capital Stock or other ownership interests,
in each case, owned by the Company or a Wholly Owned Restricted Subsidiary and
any such acquisition that results in such Subsidiary, Affiliate or Related
Person becoming a Restricted Subsidiary), (iii) permit any Restricted Subsidiary
to declare or pay
84
<PAGE>
any dividend, or make any distribution, of any kind or character (whether in
cash, property or securities) in respect of the Capital Stock of or other
ownership interests in such Restricted Subsidiary or to the holders of such
Restricted Subsidiary's Capital Stock or other ownership interests (excluding
any dividends or distributions payable solely in shares of Capital Stock of or
other ownership interests in such Restricted Subsidiary (other than Redeemable
Interests) or in options, warrants or other rights to acquire Capital Stock of
or other ownership interests in such Restricted Subsidiary (other than
Redeemable Interests)) other than (A) the payment by any Restricted Subsidiary
of dividends or other distributions to the Company or a Wholly Owned Restricted
Subsidiary, or (B) the payment of pro rata dividends to holders of both minority
and majority interests in the Capital Stock or other ownership interests of any
such Restricted Subsidiary, (iv) make, or permit any Restricted Subsidiary to
make, any Investment in any Person that is not a Permitted Investment or (v)
redeem, defease, repurchase, retire or otherwise acquire or retire for value
prior to any scheduled maturity, repayment or sinking fund payment, Debt of the
Company (other than the Notes) that is Pari Passu with or subordinate in right
of payment to the Notes (each of the transactions described in Clauses (i)
through (v) being a "Restricted Payment"), if:
(1) an Event of Default, or an event that with the lapse of time or the
giving of notice, or both, would constitute an Event of Default, shall have
occurred and be continuing;
(2) the Company would, at the time of such Restricted Payment and after
giving pro forma effect thereto as if such Restricted Payment had been made
at the beginning of the most recently ended four full fiscal quarter period
for which internal financial statements are available immediately preceding
the date of such Restricted Payment, not have been permitted to Incur at
least $1.00 of additional Debt pursuant to the Consolidated EBITDA Coverage
Ratio test set forth in the first paragraph under "Limitation on Incurrence
of Debt" above; or
(3) upon giving effect to such Restricted Payment, the aggregate of all
Restricted Payments (excluding Restricted Payments permitted by Clauses (i)
through (vii) of the next succeeding paragraph) from the date of the
Indenture (the amount so expended, if other than in cash, determined in
good faith by the Board of Directors) exceeds the sum, without duplication,
of: (a) 50% of the cumulative Consolidated Net Income of the Company (or,
in the case such Consolidated Net Income shall be negative, less 100% of
such deficit) for the period (taken as one accounting period) from the
beginning of the first fiscal quarter commencing after the date of the
Indenture to the end of the Company's most recently ended fiscal quarter
for which internal financial statements are available at the time of such
Restricted Payment; provided that for purposes of this clause (a),
Consolidated Net Income of the Company will be calculated excluding
extraordinary losses resulting from the Spin-Off Distributions; plus (b)
100% of the aggregate net cash proceeds from the issuance and sale (other
than to a Restricted Subsidiary of the Company) of Capital Stock (other
than Redeemable Interests) of the Company and options, warrants or other
rights on Capital Stock (other than Redeemable Interests and Debt
convertible into Capital Stock) of the Company and the principal amount of
Debt and Redeemable Interests of the Company that has been converted into
Capital Stock (other than Redeemable Interests) of the Company after the
date of the Indenture, provided that any such net proceeds received by the
Company from an employee stock ownership plan financed by loans from the
Company or a Subsidiary of the Company shall be included only to the extent
such loans have been repaid with cash on or prior to the date of
determination; plus (c) 50% of any dividends received by the Company or a
Wholly Owned Restricted Subsidiary after the date of the Indenture from an
Unrestricted Subsidiary of the Company; plus (d) to the extent not
otherwise taken into account in this subsection (3), any return of a
capital investment made by the Company in another Person and treated as a
Restricted Payment under Clause (ii) or (iv) to the extent received in cash
or Cash Equivalents and in an amount not in excess of such Restricted
Payment plus (e) $10.0 million. (Section 1010).
The foregoing covenant will not be violated by reason of:
(i) the payment of any dividend within 60 days after declaration thereof
if at the declaration date such payment would have complied with the
foregoing covenant and the amount of such dividend was included in the
aggregate amount of Restricted Payments pursuant to Clause (3) above;
(ii) any renewal, extension, refinancing or refunding of Debt permitted
pursuant to Clause (vii) in the second paragraph under "Limitation on
Incurrence of Debt" above;
(iii) the purchase, redemption or other acquisition or retirement for
value of any Capital Stock of the Company or any options, warrants or
rights to purchase or acquire shares of Capital Stock of the Company in
exchange for, or out of the net cash proceeds of, the substantially
concurrent issuance or sale (other than to a Restricted Subsidiary of the
Company) of Capital Stock (other than Redeemable Interests) of the Company;
provided that the amount of any such net cash proceeds that are utilized
for any such purchase, redemption or other acquisition or retirement for
value shall be excluded from Clause (3)(b) in the foregoing paragraph;
(iv) any purchase or other acquisition of Common Stock of the Company
that is contributed to any employee plan qualified under Section 401(a) of
the Internal Revenue Code or an employee stock purchase plan, in either
case that was either funded by employee contributions or deducted as an
expense in determining Consolidated Net Income of the Company;
85
<PAGE>
(v) the sale, lease or other disposition of any Non-Core Asset; provided
that the Board of Directors determines that such sale, lease or other
disposition is in the best interests of the Company;
(vi) any Permitted Joint Venture Investment made after the date of the
Indenture; provided that the Consolidated EBITDA of the Company
attributable to such Investment for the four full fiscal quarters for which
internal financial statements are available immediately preceding the date
of such Investment, together with the Consolidated EBITDA of the Company
attributable to any other Permitted Joint Venture Investment made pursuant
to this Clause (vi), shall not exceed 10% of the Consolidated EBITDA of the
Company for the four full fiscal quarters for which internal financial
statements are available immediately preceding the making of such Permitted
Joint Venture Investment; and provided, further, that the Company would, at
the time the Company makes a Permitted Joint Venture Investment pursuant to
this Clause (vi) and after giving pro forma effect thereto as if such
Permitted Joint Venture Investment had occurred at the beginning of the
most recently ended four full fiscal quarter period for which internal
financial statements are available immediately preceding the date of such
Permitted Joint Venture Investment, have been permitted to Incur at least
$1.00 of additional Debt pursuant to the Consolidated EBITDA Coverage Ratio
test set forth in the first paragraph under "--Limitation on Incurrence of
Debt;" or
(vii) the redemption of Quest Diagnostics Rights pursuant to the Quest
Diagnostics Rights Agreement (or any successor agreement) in an amount not
to exceed $.01 per Quest Diagnostics Right.
Upon the designation of any Restricted Subsidiary as an Unrestricted
Subsidiary (other than pursuant to Clauses (v) and (vi) above), an amount
equal to the fair market value of all of the assets of such Restricted
Subsidiary prior to such change will be deemed to be a Restricted Payment for
purposes of calculating the aggregate amount of Restricted Payments pursuant
to Clause (3) above. (Section 1010)
Limitation on Leases
The Company may not, and may not permit any Restricted Subsidiary to, Incur
any Operating Lease except:
(i) any Operating Lease in effect on the date of the Indenture;
(ii) any Operating Lease relating to personal property used in the
Company's or a Restricted Subsidiary's ordinary course of business;
(iii) any Operating Lease of real property having an annualized Rental
Expense of less than $0.625 million;
(iv) any Operating Lease (A) Incurred by a Person prior to the time such
Person became a Restricted Subsidiary, (B) acquired by the Company or any
Restricted Subsidiary through a purchase or other acquisition of assets or
(C) Incurred by a Restricted Subsidiary in connection with a merger or
consolidation with or into another Person (other than a Restricted
Subsidiary) in a transaction in which such Person becomes a Restricted
Subsidiary of the Company; provided, that, in the case of any Operating
Lease Incurred pursuant to Clause (A) or (C) of this Clause (iv), such
Operating Lease was not Incurred in anticipation of such transaction and
was outstanding prior to such transaction; and provided further, that the
difference, if any, (but not less than zero) of (A) the annualized Rental
Expense of such Operating Lease and (B) the annualized Rental Expense of
any equivalent or similar Operating Lease relating to assets or properties
disposed of in connection with such transaction and as to which the Company
or such Restricted Subsidiary is no longer, directly or indirectly, liable
or obligated under or as to which another Person with a Credit Rating equal
to or greater than the Company shall have agreed to indemnify and hold
harmless the Company or such Restricted Subsidiary with respect to all of
its liabilities and obligations under such Operating Lease, together with
the annualized Rental Expense of any other Operating Lease Incurred
pursuant to this Clause (iv), shall not exceed $3.0 million in any fiscal
year;
(v) any Operating Lease in addition to those described in Clauses (i)
through (iv) above and Clauses (vi) through (viii) below Incurred after the
date of the Indenture the annualized Rental Expense of which, together with
the annualized Rental Expense of any other Operating Lease Incurred pursuant
to this internal Clause (v), shall not exceed the 3% of the Consolidated
EBITDA of the Company for the four full fiscal quarters for which internal
financial statements are available immediately preceding the Incurrence of
such Operating Lease;
(vi) any Operating Lease between the Company and a Wholly Owned
Restricted Subsidiary or between a Wholly Owned Restricted Subsidiary and
the Company or another Wholly Owned Restricted Subsidiary; provided,
however, that in the case of the issuance (other than directors' qualifying
shares), sale, lease, transfer or other disposition of shares of Capital
Stock (including by a consolidation or merger) of such Wholly Owned
Restricted Subsidiary to a Person other than the Company or another Wholly
Owned Restricted Subsidiary, the provisions of this Clause (vi) shall no
longer be applicable to such Operating Lease and such Operating Lease shall
be deemed to have been Incurred at that time;
86
<PAGE>
(vii) at the election of the Company, any Operating Lease in addition to
that permitted to be Incurred pursuant to Clauses (i) through (vi) above
and Clause (viii) below if (a) the Company treats the Attributable Value of
such Operating Lease as Debt for all purposes under the Indenture,
including for purposes of the pro forma calculation required by this Clause
(vii), (b) the portion of Rental Expense in respect of such Operating Lease
that would have been allocable to interest expense in accordance with
generally accepted accounting principles if such Operating Lease was
treated as a Capitalized Lease Obligation is treated as Consolidated
Interest Expense of the Company for all purposes of the Indenture,
including for purposes of the pro forma calculation required by this Clause
(vii), and (c) the Company would, at the time of such Incurrence and after
giving pro forma effect thereto as if such Incurrence had occurred at the
beginning of the most recently ended four full fiscal quarter period for
which internal financial statements are available immediately preceding the
date of such Incurrence, have been permitted to Incur at least $1.00 of
additional Debt pursuant to the Consolidated EBITDA Coverage Ratio test set
forth in the first paragraph under "--Limitation on Incurrence of Debt";
and
(viii) any renewal, extension or replacement (each a "replacement") of any
Operating Lease permitted by Clause (i), (iv), (v) or (vii) or this Clause
(viii); provided, that the Incurrence of an Operating Lease shall be deemed to
be the replacement of another Operating Lease so long as the obligation to pay
rent or other amounts does not begin earlier than one year prior to the end of
the term of the Operating Lease being replaced; (Section 1011).
Limitations Concerning Distributions by Subsidiaries, Etc.
The Company may not, and may not permit any Restricted Subsidiary to, suffer to
exist any consensual encumbrance or restriction on the ability of any Restricted
Subsidiary (i) to pay, directly or indirectly, dividends or make any other
distributions in respect of its Capital Stock or other ownership interests or
pay any Debt or other obligation owed to the Company or any other Restricted
Subsidiary; (ii) to make loans or advances to the Company or any Restricted
Subsidiary; or (iii) to sell, lease or transfer any of its property or assets to
the Company or any Wholly Owned Restricted Subsidiary, except, in any such case,
any encumbrance or restriction: (a) pursuant to the Notes, the Indenture, the
Credit Facility and any other agreement in effect on the date of the Indenture,
(b) pursuant to an agreement relating to any Debt Incurred by a Restricted
Subsidiary prior to the date on which such Restricted Subsidiary was acquired by
the Company and outstanding on such date and not Incurred in anticipation of
becoming a Restricted Subsidiary, (c) pursuant to an agreement which has been
entered into for the pending sale or disposition of all or substantially all of
the assets of such Restricted Subsidiary or all or substantially all of the
Capital Stock of such Restricted Subsidiary owned by the Company or any other
Restricted Subsidiary, provided that such restriction terminates upon
consummation of such disposition, (d) pursuant to customary provisions
restricting assignments of contracts or subleases of leases, in each case,
entered into in the ordinary course of business, (e) pursuant to purchase money
obligations for property acquired in the ordinary course of business that impose
restrictions of the nature described in Clause (iii) above on the property so
acquired, (f) pursuant to an agreement effecting a renewal, extension,
refinancing or refunding of Debt Incurred pursuant to an agreement referred to
in Clause (a) or (b) above (provided that the provisions relating to such
encumbrance or restriction contained in such renewal, extension, refinancing or
refunding are no more restrictive in any material respect than the provisions
contained in the agreement it replaces) or (g) pursuant to or by reason of
applicable law. (Section 1012).
Limitation on Liens
The Company may not, and may not permit any Restricted Subsidiary to, Incur any
Lien on property or assets of the Company or such Restricted Subsidiary to
secure Debt that is Pari Passu or subordinate in right of payment to the Notes
without making, or causing such Restricted Subsidiary to make, effective
provision for securing the Notes (and, if the Company may so determine, any
other Debt of the Company or of such Restricted Subsidiary that is not Pari
Passu or subordinate to the Notes) (i) in the case of Debt that is Pari Passu
with the Notes, Pari Passu with such Debt and (ii) in the case of Debt that is
subordinated in right of payment to the Notes prior to such Debt, in each case,
as to such property for so long as such Debt will be so secured. (Section 1013).
The Company may not, and may not permit any Restricted Subsidiary to, Incur
any Lien (other than Permitted Liens) on property or assets of the Company or
such Restricted Subsidiary to secure Debt that is not Pari Passu or
subordinate in right of payment to the Notes without making, or causing such
Restricted Subsidiary to make, effective provision for securing the Notes
(and, if the Company may so determine, any other Debt of the Company or of
such Restricted Subsidiary that is not subordinate to the Notes) equally and
ratably with (or prior to) such Debt as to such property for so long as such
Debt will be so secured. (Section 1013).
Limitation on Transactions with Affiliates and Related Persons
The Company may not, and may not permit any Restricted Subsidiary of the
Company to, directly or indirectly, enter into any transaction after the date
of the Indenture with any Affiliate or Related Person of the Company unless
(i) such Affiliate or Related Person is (both before and after such
transaction) (a) a Wholly Owned Subsidiary of the Company or (b) another Sub-
87
<PAGE>
sidiary of the Company the minority interests in which are not held by any
Affiliate or Related Person of the Company; (ii) such transaction is the payment
of directors' fees; (iii) such transaction is the entering into of a laboratory
services agreement in the ordinary course of the Company's or a Restricted
Subsidiary's business on terms that are no less favorable to the Company or such
Restricted Subsidiary as those that could be obtained in a comparable arm's
length transaction; (iv) such transaction is the entering into a compensation
arrangement between the Company or a Restricted Subsidiary and one of its
employees, which transaction is approved by the compensation committee of the
Board of Directors; (v) the transaction contemplated by Clause (ix) of the
definition of Permitted Investments; or (vi) the following action is taken: (a)
if the total consideration paid by the Company or such Restricted Subsidiary in
such transaction (or series of transactions) of which it is a part (including
cash, the fair value of non-cash property and the principal amount of any Debt
assumed) (the "Consideration") is less than $5 million, then a duly authorized
executive officer of the Company will deliver an officer's certificate to the
Trustee within 10 days of such transaction (or series of transactions) wherein
such officer certifies on behalf of the Company that in his or her good faith
judgment the terms of the transaction (or series of transactions) are in the
best interests of the Company and are no less favorable to the Company than
those that could be obtained in a comparable arm's length transaction (or series
of transactions) with an entity that is not a Affiliate or a Related Person; (b)
if the Consideration is between $5 million and $15 million, then the
determinations referred to in Clause (a) above must be made by a majority of the
disinterested members of the Board of Directors; and (c) if the Consideration is
greater than $15 million, then the determinations referred to in Clause (a)
above, in addition to the action required by Clause (b) above, must also be
confirmed by a nationally recognized investment banking firm (which may not be
an Affiliate or Related Person of the Company), in a written opinion delivered
to the Board of Directors prior to consummation of such transaction (or series
of transactions); provided, however, that the foregoing restriction will not
apply to the Intercompany Agreements as in effect on the date of the Indenture
or the transactions contemplated thereby. (Section 1015).
Limitation on Sale of Capital Stock of Restricted Subsidiaries
The Company may not, and may not permit any Restricted Subsidiary to, issue,
transfer, convey or otherwise dispose of any shares of Capital Stock (other than
Preferred Stock that is not required or permitted to be redeemed or otherwise
repaid, at the option of such Restricted Subsidiary or the holders thereof,
prior to the final Stated Maturity of the Notes) of a Restricted Subsidiary or
securities convertible or exchangeable into, or options, warrants, rights or any
other interest with respect to, Capital Stock of a Restricted Subsidiary to any
Person other than the Company or a Wholly Owned Restricted Subsidiary except in
a transaction consisting of a sale of all of the Capital Stock of such
Restricted Subsidiary owned by the Company and any Subsidiary of the Company and
that complies with the provisions described under "Repurchase at the Option of
Holders--Asset Dispositions" above to the extent such provisions apply. (Section
1016).
Provision of Financial Information
Whether or not the Company is subject to the reporting requirements of Section
13(a) or 15(d) of the Exchange Act, the Company will file with the Commission
the annual reports, quarterly reports and other documents that the Company would
have been required to file with the Commission pursuant to Section 13(a) or
15(d) if the Company were subject to such Section and will also provide to all
Holders and file with the Trustee copies of such reports. (Section 1018).
Unrestricted Subsidiaries
The Company may at any time designate any Person that after the date of the
Indenture becomes a Subsidiary of the Company as an "Unrestricted
Subsidiary," whereupon (and until such Person ceases to be an Unrestricted
Subsidiary) such Person and each other Person that is then or thereafter
becomes a Subsidiary of such Person will be deemed to be an Unrestricted
Subsidiary. In addition, the Company may at any time terminate the status of
any Subsidiary of the Company as an Unrestricted Subsidiary, whereupon such
Subsidiary and each other Subsidiary of the Company (if any) of which such
Subsidiary is a Subsidiary will cease to be an Unrestricted Subsidiary.
(Section 1019).
Notwithstanding the foregoing, no change in the status of a Subsidiary of the
Company from a Restricted Subsidiary to an Unrestricted Subsidiary or an
Unrestricted Subsidiary to a Restricted Subsidiary (other than the change in
status of a Non-Core Asset from a Restricted Subsidiary holding only Non-Core
Assets to an Unrestricted Subsidiary) will be effective, unless (i) the Company
would, at the time of such designation and after giving pro forma effect thereto
as if such designation had occurred at the beginning of the most recently ended
four full fiscal quarter period for which internal financial statements are
available immediately preceding the date of such designation, have been
permitted to Incur at least $1.00 of additional Debt pursuant to the
Consolidated EBITDA Coverage Ratio test set forth in the first paragraph under
"--Limitation on Incurrence of Debt"; (ii) in the case of any change in status
of such a Subsidiary from a Restricted Subsidiary to an Unrestricted Subsidiary
(other than pursuant to Clause (vi) of "Limitation on Restricted Payments"
covenant), the fair market value of all assets of such Restricted Subsidiary
prior to such change will be deemed a Restricted Payment for purposes of
calculating the aggregate amount of
88
<PAGE>
Restricted Payments pursuant to the provisions described in the first paragraph
under "Limitation on Restricted Payments" above, and the incurrence of such
Restricted Payment would be permitted by such covenant and (iii) such change
would not otherwise result (after the giving of notice or the lapse of time, or
both) in an Event of Default. In addition and notwithstanding the foregoing, no
change in the status of a Subsidiary of the Company from a Restricted Subsidiary
to an Unrestricted Subsidiary, and the status of any Subsidiary of the Company
as an Unrestricted Subsidiary will be deemed to have been immediately terminated
(with the effect described in the immediately preceding sentence) at any time
when, (i) such Subsidiary (A) has outstanding Debt that is Unpermitted Debt or
(B) owns or holds any Capital Stock of or other ownership interests in, or a
Lien on any property or other assets of, the Company or any of its Restricted
Subsidiaries, (ii) the Company or any Restricted Subsidiary (A) provides credit
support for, or a Guaranty of, any Debt of such Subsidiary (including any
undertaking, agreement or instrument evidencing such Debt) or (B) is directly or
indirectly liable for any Debt of such Subsidiary or (iii) if and only if such
Subsidiary does business under the name "Quest" or "Quest Diagnostics", such
Subsidiary fails to notify in writing the holders of its Debt that such Debt is
without recourse to the property and assets of the Company and its Restricted
Subsidiaries. Any such termination otherwise prohibited by the restrictions
described in the first sentence of this paragraph will be deemed to result in a
default under the Indenture. "Unpermitted Debt" means any Debt of a Subsidiary
of the Company if (x) a default thereunder (or under any instrument or agreement
pursuant to or by which such Debt is issued, secured or evidenced), or any right
that the holders thereof may have to take enforcement action against such
Subsidiary or its property or other assets, would permit (whether or not after
the giving of notice or the lapse of time or both) the holders of any Debt of
the Company or any Restricted Subsidiary to declare the same due and payable
prior to the date on which it otherwise would have become due and payable or
otherwise to take any enforcement action against the Company or any such
Restricted Subsidiary or (y) such Debt is secured by a Lien on any property or
other assets of the Company and any of its Restricted Subsidiaries. (Section
1019).
Mergers, Consolidations and Certain Sales of Assets
The Company (i) may not consolidate with or merge into any Person (other than a
Wholly Owned Restricted Subsidiary) or permit any Person (other than a Wholly
Owned Restricted Subsidiary) to consolidate with or merge into the Company; and
(ii) may not, directly or indirectly, in one or a series of transactions,
transfer, convey, sell, lease or otherwise dispose of all or substantially all
of its properties and assets; unless, in each case: (1) immediately before and
after giving effect to such transaction (or series) and treating any Debt
Incurred by the Company or a Restricted Subsidiary as a result of such
transaction (or series) as having been Incurred by the Company or such
Restricted Subsidiary at the time of the transaction (or series), no Event of
Default or event that with the passing of time or the giving of notice, or both,
will constitute an Event of Default shall have occurred and be continuing; (2)
in a transaction (or series) in which the Company does not survive or in which
the Company transfers, conveys, sells, leases or otherwise disposes of all or
substantially all of its properties and assets, the successor entity is a
corporation, partnership, limited liability company or business trust and is
organized and validly existing under the laws of the United States of America,
any State thereof or the District of Columbia and expressly assumes, by a
supplemental indenture executed and delivered to the Trustee in form
satisfactory to the Trustee, all the Company's obligations under the Indenture;
(3) immediately after giving effect to such transaction (or series), the Company
or the successor entity would have a Consolidated Net Worth not less than 95% of
the Consolidated Net Worth of the Company immediately prior to such transaction
(or series); (4) the Company would, at the time of such transaction (or series)
and after giving pro forma effect thereto as if such transaction (or series) had
occurred at the beginning of the most recently ended four full fiscal quarter
period for which internal financial statements are available immediately
preceding the date of such transaction (or series), have been permitted to Incur
at least $1.00 of additional Debt pursuant to the Consolidated EBITDA Coverage
Ratio test set forth in the first paragraph under "Certain Covenants--Limitation
on Incurrence of Debt" above; (5) if, as a result of any such transaction,
property or assets of the Company or any Restricted Subsidiary would become
subject to a Lien prohibited by the "Certain Covenants--Limitation on Liens"
covenant, the Company or the successor entity will have secured the Notes as
required by such covenant; and (6) the Company has delivered to the Trustee an
Officers' Certificate and an Opinion of Counsel as specified in the Indenture.
(Section 801).
Certain Definitions
Set forth below is a summary of certain of the defined terms used in the
Indenture. Reference is made to the Indenture for the full definition of all
such terms, as well as any other terms used herein for which no definition is
provided. (Section 101).
"Affiliate" of any Person means any other Person directly or indirectly
controlling or controlled by or under direct or indirect common control with
such Person. For the purposes of this definition, "control" when used with
respect to any Person means the power to direct the management and policies
of such Person, directly or indirectly, whether through the ownership of
voting securities, by contract or otherwise; and the terms "controlling" and
"controlled" have meanings correlative to the foregoing.
"Asset Disposition" by any Person means any transfer, conveyance, sale, lease
or other disposition by such Person (including a consolidation or merger or
other sale of any Restricted Subsidiary with, into or to another Person in a
transaction in which such
89
<PAGE>
Restricted Subsidiary ceases to be a Subsidiary of such Person) of (i) shares of
Capital Stock (other than directors' qualifying shares) or other ownership
interests of a Restricted Subsidiary or (ii) the property or assets of such
Person or any Restricted Subsidiary representing a division or line of business
or (iii) other assets or rights of such Person or any Restricted Subsidiary
outside of the ordinary course of business: but excluding (i) one or more Asset
Dispositions that in any fiscal year result in aggregate net proceeds of less
than $1.0 million, (ii) the disposition of all or substantially all of the
assets of the Company in a manner permitted pursuant to the provisions described
above under "Mergers, Consolidations and Certain Sales of Assets," (iii) any
disposition that constitutes a Restricted Payment or Permitted Investment that
is permitted pursuant to the provisions described under "Certain
Covenants--Limitation on Restricted Payments" and (iv) any transfer, conveyance,
lease, sale or other disposition of the Company's laboratory facility in Boston,
Massachusetts.
"Attributable Value" means, as to any Operating Lease of any Person, and at any
date as of which the amount thereof is to be determined, the total net amount of
rent required to be paid by such Person under such lease during the initial term
thereof as determined in accordance with generally accepted accounting
principles, discounted from the last date of such initial term to the date of
determination at a rate per annum equal to the discount rate which would be
applicable to a Capital Lease Obligation with like term in accordance with
generally accepted accounting principles. The net amount of rent required to be
paid under any such lease for any such period shall be the aggregate amount of
rent payable by the lessee with respect to such period excluding amounts
required to be paid on account of insurance, taxes, assessments, utility,
operating and labor costs and similar charges. In the case of any lease which is
terminable by the lessee upon the payment of penalty, such net amount shall also
include the lesser of the amount of such penalty (in which case no rent shall be
considered as required to be paid under such lease subsequent to the first date
upon which it may be so terminated) or the rent which would otherwise be
required to be paid if such lease is not so terminated.
"Board of Directors" means the Board of Directors of the Company or a duly
authorized committee thereof.
"Capital Lease Obligation" of any Person means the obligation to pay rent or
other payment amounts under a lease of (or other arrangements conveying the
right to use) real or personal property of such Person which is required to be
classified and accounted for as a capital lease or a liability on the face of a
balance sheet of such Person in accordance with generally accepted accounting
principles. The stated maturity of such obligation shall be the date of the last
payment of rent or any other amount due under such lease prior to the first date
upon which such lease may be terminated by the lessee without payment of a
penalty.
"Capital Stock" of any Person means any and all shares, interests,
participations or other equivalents (however designated) of equity interests of
such Person.
"Cash Equivalents" means, at any time, (i) any Debt (other than any Debt issued
at a discount) fully guaranteed as to principal and interest by the United
States of America or any agency or instrumentality thereof (provided that the
full faith and credit of the United States is pledged in support thereof); (ii)
certificates of deposit of any financial institution that has combined capital
and surplus and undivided profits of not less than $50,000,000 (or the
equivalent thereof in another currency) and has a long-term debt rating of at
least "AA" by Standard & Poor's Ratings Group ("S&P") or at least "Aa3" by
Moody's Investors Service, Inc. ("Moody's"), (iii) repurchase obligations for
underlying securities of the type described in Clause (i) above entered into
with any financial institution meeting the qualifications specified in Clause
(ii) above or (iv) commercial paper issued by a corporation (other than Corning)
organized under the laws of any State of the United States and rated at least
A-1 by S&P or at least P-1 by Moody's or (v) readily marketable securities
(other than securities issued at a discount) issued or fully and unconditionally
guaranteed by any state of the United States of America, or by any political
subdivision or taxing authority thereof, and rated at least A-1 by S&P or at
least P-1 by Moody's.
"Common Stock" of any Person means Capital Stock of such Person that does not
rank prior, as to the payment of dividends or as to the distribution of assets
upon any voluntary or involuntary liquidation, dissolution or winding up of such
Person, to shares of Capital Stock of any other class of such Person.
"Consolidated EBITDA" of any Person means for any period the Consolidated Net
Income of such Person for such period increased by the sum of (i) Consolidated
Interest Expense of such Person for such period, plus (ii) Consolidated Income
Tax Expense of such Person for such period, plus (iii) the consolidated
depreciation and amortization expense deducted in determining the Consolidated
Net Income of such Person for such period; provided, however, that the
Consolidated Interest Expense, Consolidated Income Tax Expense and consolidated
depreciation and amortization expense of a Consolidated Subsidiary of such
Person shall be added to the Consolidated Net Income pursuant to the foregoing
only (x) to the extent and, in the case of a Restricted Subsidiary that is not a
Wholly Owned Restricted Subsidiary, in the same proportion that the Consolidated
Net Income of such Consolidated Subsidiary was included in calculating the
Consolidated Net Income of such Person and (y) only to the extent that the
amount specified in Clause (x) is not subject to restrictions that prevent the
payment of dividends or the making of distributions to such Person.
90
<PAGE>
"Consolidated EBITDA Coverage Ratio" of any Person means for any period (the
"Reference Perod") with respect to any date of computation (the "Transaction
Date") the ratio of (i) Consolidated EBITDA of such Person for such period to
(ii) Consolidated Interest Expense of such Person for such period. In making the
foregoing calculation, (A) pro forma effect shall be given to any Debt Incurred
during such Reference Period or subsequent to the end of such Reference Period
and on or prior to the Transaction Date to the extent such Debt is outstanding
at the Transaction Date, in each case as if such Debt had been Incurred on the
first day of such Reference Period and after giving pro forma effect to the
application of the proceeds thereof as if such application had occurred on such
first day; (B) Consolidated Interest Expense attributable to interest on any
Debt (whether existing or being Incurred) computed on a pro forma basis and
bearing a floating interest rate shall be computed as if the rate in effect on
the Transaction Date (taking into account any Interest Rate Agreement applicable
to such Debt if such Interest Rate Agreement has a remaining term in excess of
12 months or at least equal to the remaining term of such Debt) had been the
applicable rate for the entire period; (C) there shall be excluded from
Consolidated Interest Expense any Consolidated Interest Expense related to any
amount of Debt that was outstanding during such Reference Period or thereafter
but that is not outstanding or is to be repaid on the Transaction Date; and (D)
pro forma effect shall be given to asset dispositions and asset acquisitions by
such Person (including giving pro forma effect to the application of proceeds of
any asset disposition) that occur during such Reference Period or thereafter and
prior to the Transaction Date as if they had occurred and such proceeds had been
applied on the first day of such Reference Period.
"Consolidated Income Tax Expense" of any Person means for any period the
consolidated provision for income taxes of such Person and its Consolidated
Subsidiaries for such period determined in accordance with generally accepted
accounting principles.
"Consolidated Interest Expense" of any Person means for any period the
consolidated interest expense included in a consolidated income statement
(without deduction of interest income) of such Person and its Consolidated
Subsidiaries for such period determined in accordance with generally accepted
accounting principles, including without limitation or duplication (or, to the
extent not so included, with the addition of), (i) the portion of any rental
obligation in respect of any Capital Lease Obligation allocable to interest
expense in accordance with generally accepted accounting principles; (ii) the
amortization of Debt discounts; (iii) any payments or fees with respect to
letters of credit, bankers' acceptances or similar facilities; (iv) fees with
respect to Interest Rate Agreements or foreign currency hedge, exchange or
similar agreements; (v) an amount calculated by dividing the Preferred Stock
dividends declared and paid or payable in cash by a number equal to (a) one
minus (b) the then current combined federal, state and local statutory tax rate
of such Person, expressed as a decimal; (vi) the portion of the rental
obligation in respect of any Sale and Leaseback Transaction allocable to
interest expense (determined as if such obligation were a Capital Lease
Obligation); (vii) any interest capitalized in accordance with generally
accepted accounting principles and (viii) the portion of any Rental Expense in
respect of any Specified Operating Lease which would have been allocable to
interest expense in accordance with generally accepted accounting principles if
such Specified Operating Lease were treated as a Capitalized Lease Obligation.
"Consolidated Net Income" of any Person means for any period the consolidated
net income (or loss) of such Person and its Consolidated Subsidiaries for such
period determined in accordance with generally accepted accounting principles;
provided that there shall be excluded therefrom to the extent included therein,
without duplication, (a) the net income (or loss) of any Person acquired by such
Person or a Restricted Subsidiary of such Person in a pooling-of-interests
transaction for any period prior to the date of such transaction, (b) the net
income (but not net loss) of any Consolidated Subsidiary of such Person that is
subject to restrictions that prevent the payment of dividends or the making of
distributions to such Person to the extent of such restrictions, (c) the net
income (or loss) of any Person that is not a Consolidated Subsidiary of such
Person except to the extent of the amount of dividends or other distributions
actually paid to such Person by such other Person during such period, (d) net
gains or losses on asset dispositions by such Person or its Consolidated
Subsidiaries, (e) any net income (loss) of a Consolidated Subsidiary that is
attributable to a minority interest in such Consolidated Subsidiary, (f) all
extraordinary gains and extraordinary losses except to the extent such gain or
loss involves a present or future cash payment, (g) all write-offs of goodwill
and other items and non-cash adjustments, including charges associated with
grants or awards of restricted stock, (h) $46.0 million and $155.7 million of
charges taken in the second and third quarters, respectively, of fiscal 1996 and
up to a $25.0 million charge to be taken in the fourth fiscal quarter of 1996 in
connection with the Spin-Off Distributions (provided that, except to the extent
provided by Clause (i) below, any cash payments made with respect to such
charges on or after January 1, 1997, shall be subtracted from Consolidated Net
Income in the period actually paid) and (i) any charge taken by the Company
after the date of the Indenture to the extent the Company is reimbursed in cash
for such charge pursuant to, and in accordance with, the Transaction Agreement.
"Consolidated Net Worth" of any Person means the consolidated stockholders'
equity of such Person and its Consolidated Subsidiaries, as determined on a
consolidated basis in accordance with generally accepted accounting principles,
less amounts attributable to Redeemable Interests of such Person; provided,
however, that, with respect to the Company and its Consolidated Subsidiaries,
adjustments following the date of the Indenture to the accounting books and
records of the Company and its Consolidated Subsidiaries (other than the change
in accounting policy for intangible assets as described in the first paragraph
under
91
<PAGE>
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Changes in Accounting Policies") in accordance with Accounting
Principles Board Opinions Nos. 16 and 17 (or successor opinions thereto) or
otherwise resulting from the acquisition of control of the Company by another
Person shall not be given effect to.
"Consolidated Subsidiaries" of any Person means all other Persons that would be
accounted for as consolidated Persons in such Person's financial statements in
accordance with generally accepted accounting principles; provided, however,
that, for any particular period during which any Subsidiary was an Unrestricted
Subsidiary, "Consolidated Subsidiaries" will exclude such Subsidiary for such
period (or portion thereof) during which it was an Unrestricted Subsidiary.
"Credit Facility" means the Credit Agreement, dated as of December ___, 1996,
among the Company, the banks named therein, 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 (and any related guarantee
agreements), as amended from time to time, and including any and all renewals,
refinancings, refundings or replacements thereof and successive renewals,
refinancings, refundings and replacements thereof.
"Credit Rating" means the long-term unsecured debt rating provided by either
S&P or Moody's, or any successor to either thereof; provided, however, that
if there is a difference in such ratings the lower rating shall be used.
"Debt" means (without duplication), with respect to any Person, whether recourse
is to all or a portion of the assets of such Person, (i) every obligation of
such Person for money borrowed, (ii) every obligation of such Person evidenced
by bonds, debentures, notes or other similar instruments, including obligations
incurred in connection with the acquisition of property, assets or businesses,
(iii) every reimbursement obligation of such Person with respect to letters of
credit, bankers' acceptances or similar facilities issued for the account of
such Person, (iv) every obligation of such Person issued or assumed as the
deferred purchase price of property or services (but excluding trade accounts
payable or accrued liabilities arising in the ordinary course of business), (v)
every Capital Lease Obligation of such Person, (vi) the Attributable Value in
respect of any Specified Operating Lease, (vii) the maximum fixed redemption or
repurchase price of Redeemable Interests of such Person at the time of
determination, (viii) every payment obligation of such Person under Interest
Rate Agreements or foreign currency hedge, exchange or similar agreements at the
time of determination and (ix) every obligation of the type referred to in
Clauses (i) through (viii) of another Person and all dividends of another Person
the payment of which, in either case, such Person has Guaranteed or for which
such Person is responsible or liable, directly or indirectly, jointly or
severally, as obligor, Guarantor or otherwise.
"Guaranty" by any Person means any obligation, contingent or otherwise, of such
Person guaranteeing any Debt, or dividends or distributions on any equity
security, of any other Person (the "primary obligor") in any manner, whether
directly or indirectly, and including, without limitation, any obligation of
such Person (i) to purchase or pay (or advance or supply funds for the purchase
or payment of) such Debt or to purchase (or to advance or supply funds for the
purchase of) any security for the payment of such Debt, (ii) to purchase
property, securities or services for the purpose of assuring the holder of such
Debt of the payment of such Debt, or (iii) to maintain working capital, equity
capital or other financial statement condition or liquidity of the primary
obligor so as to enable the primary obligor to pay such Debt (and "Guaranteed,"
"Guaranteeing" and "Guarantor" shall have meanings correlative to the
foregoing); provided, however, that the Guaranty by any Person shall not include
endorsements by such Person for collection or deposit, in either case, in the
ordinary course of business.
"Incur" means, with respect to any Debt, Operating Lease, or other obligation of
any Person, to create, issue, incur (by conversion, exchange or otherwise),
assume, Guarantee or otherwise become liable in respect of such Debt or other
obligation or the recording, as required pursuant to generally accepted
accounting principles or otherwise, of any such Debt or other obligation on the
balance sheet of such Person (and "Incurrence," "Incurred," "Incurrable" and
"Incurring" shall have meanings correlative to the foregoing); provided,
however, that a change in generally accepted accounting principles that results
in an obligation of such Person that exists at such time becoming Debt shall not
be deemed an incurrence of such Debt.
"Intercompany Agreement" means the Transaction Agreement, the Corning/Quest
Diagnostics Spin-Off Tax Indemnification Agreement, the Quest
Diagnostics/Covance Spin-Off Tax Indemnification Agreement, the Tax Sharing
Agreement and any other agreements contemplated by the foregoing.
"Interest Rate Agreement" means, with respect to any Person, any interest rate
swap agreement, interest rate cap agreement or other similar agreement designed
to protect such Person or its Subsidiaries (or in the case of the Company, the
Company and its Restricted Subsidiaries) against fluctuations in interest rates.
"Investment" by any Person in any other Person means (i) any direct or indirect
loan, advance or other extension of credit or capital contribution to or for the
account of such other Person (by means of any transfer of cash or other property
to any Person or any payment for property or services for the account or use of
any Person, or otherwise), (ii) any direct or indirect purchase or other
acquisition, including by way of merger or consolidation, of any Capital Stock,
bond, note, debenture or other debt or
92
<PAGE>
equity security or evidence of Debt, or any other ownership interest, issued by
such other Person, whether or not such acquisition is from such or any other
Person, (iii) any direct or indirect payment by such Person on a Guaranty of any
obligation of or for the account of such other Person or any direct or indirect
issuance by such Person of such a Guaranty or (iv) any other investment of cash
or other property by such Person in or for the account of such other Person.
"Lien" means, with respect to any property or assets, any mortgage or deed of
trust, pledge, hypothecation, assignment, deposit arrangement, security
interest, lien, charge, easement or title exception, encumbrance, preference,
priority or other security agreement or preferential arrangement of any kind
or nature whatsoever on or with respect to such property or assets (including
any conditional sale or other title retention agreement having substantially
the same economic effect as any of the foregoing).
"Net Available Proceeds" from any Asset Disposition by any Person means cash or
Cash Equivalents received (including by way of sale or discounting of a note,
installment receivable or other receivable, but excluding any other
consideration received in the form of assumption by the acquiree of Debt or
other obligations relating to such properties or assets or received in any other
noncash form) therefrom by such Person, net of (i) all legal, title and
recording tax expenses, commissions and other fees and expenses Incurred and all
federal, state, provincial, foreign and local taxes required to be accrued as a
liability as a consequence of such Asset Disposition, (ii) all payments made by
such Person or its Restricted Subsidiaries on any Debt that is secured by such
assets in accordance with the terms of any Lien upon or with respect to such
assets or that must, by the terms of such Lien, or in order to obtain a
necessary consent to such Asset Disposition, or by applicable law, be repaid out
of the proceeds from such Asset Disposition, (iii) all distributions and other
payments made to minority interest holders in Restricted Subsidiaries of such
Person or joint ventures as a result of such Asset Disposition and (iv) any
amounts required to be escrowed or reserved by such Person or its Restricted
Subsidiaries with respect to liabilities retained by such Person or its
Restricted Subsidiaries, including any indemnification or purchase price
adjustments (provided that when such amounts are released from escrow or such
reserve, such amounts will be treated as Net Available Proceeds and applied as
required by the Indenture).
"Non-Core Assets" means (i) the Company's domestic diagnostic kits business and
(ii) those of the Company's domestic regional laboratories (and the assets and
liabilities related thereto, including branch laboratories and patient service
centers) (each hereinafter, a "Specified Laboratory") which had Operating Margin
(as defined below) less than 3% for the nine month period ended September 30,
1996 as reflected in the internal financial statements of the Company for such
period; provided, however, that, in the case of Clause (ii), a Specified
Laboratory shall cease to be a Non-Core Asset if the Operating Margin of such
Specified Laboratory for any four full fiscal quarters commencing with the four
fiscal quarters ended December 31, 1996 exceeds 5% as reflected in the internal
financial statements of the Company for such period. "Operating Margin" means
with respect to a Specified Laboratory, the quotient of (x) the Consolidated
EBITDA of the Company attributable to such Specified Laboratory (assuming for
this purpose that corporate overhead is allocated to the Specified Laboratory in
an amount equal to 5% of the revenues of such Specified Laboratory) and (y) the
Company's net revenues attributable to such Specified Laboratory, in each case,
as reflected in the internal financial statements of the Company. Five of the
Company's regional laboratories are Specified laboratories. The aggregate net
revenues and EBITDA of the Company related to the Non-Core Assets for the year
ended December 31, 1995 were $312.8 million and $18.6 million, respectively, and
for the nine months ended September 30, 1996 were $233.6 million and $5.2
million, respectively. The Non-Core Assets had a tangible asset value of $116.7
million at September 30, 1996.
"Operating Lease" of any Person means the obligation of such Person to pay rent
or other payment amounts under a lease of (or other Debt arrangements conveying
the right to use) real or personal property, other than a Capital Lease
Obligation or a Sale and Leaseback Transaction; but excluding the Company's
laboratory facility in Cambridge, Massachusetts..
"Pari Passu", when used with respect to the ranking of any Debt of any Person in
relation to other Debt of such Person, means that each such Debt (a) either (i)
is not subordinated in right of payment to any other Debt of such Person or (ii)
is subordinate in right of payment to the same Debt of such Person as is the
other and is so subordinate to the same extent and (b) is not subordinate in
right of payment to the other or to any Debt of such Person as to which the
other is not so subordinate.
"Permitted Business" of the Company or any Restricted Subsidiary means a
business carried on by the Company or any Restricted Subsidiary at the date of
the Indenture and any business related, ancillary or complementary to any such
business.
"Permitted Investment" means (i) any Investment in a Wholly Owned Subsidiary of
such Person, (ii) securities either issued directly or fully guaranteed or
insured by the government of the United States of America or any agency or
instrumentality thereof (provided that the full faith and credit of the United
States is pledged in support thereof) having maturities of not more than one
year, (iii) time deposits and certificates of deposit, having maturities of not
more than one year from the date of deposit, of any domestic commercial bank
having capital and surplus in excess of $500.0 million and having peer group
rating of B or better (or the equivalent thereof) by Thompson BankWatch, Inc. or
outstanding long-term debt rated BBB or better (or the equivalent thereof) by
S&P or Baa or better (or the equivalent thereof) by Moody's, (iv) repurchase
obligations with a term
93
<PAGE>
of not more than seven days for underlying securities of the types described in
Clauses (ii) and (iii) above entered into with any bank meeting the
qualifications specified in Clause (iii) above, (v) commercial paper (other than
commercial paper issued by an Affiliate or Related Person) rated A-1 or the
equivalent thereof by S&P or P-1 or the equivalent thereof by Moody's, and in
each case maturing within 90 days, (vi) any Investment in a Person that, as a
consequence of such Investment, becomes a Restricted Subsidiary and that is
engaged in a Permitted Business if (A) the Company would, at the time of such
Investment and after giving pro forma effect thereto as if such Investment had
been made at the beginning of the most recently ended four full fiscal quarter
period for which internal financial statements are available immediately
preceding the date of such Investment, have been permitted to Incur at least
$1.00 of additional Debt pursuant to the Consolidated EBITDA Coverage Ratio test
set forth in the first paragraph under "Certain Covenants--Limitation on
Incurrence of Debt" above and (B) immediately after giving effect to such
Investment, the Company would have a Consolidated Net Worth not less than 95% of
the Consolidated Net Worth of the Company immediately prior to such Investment,
(vii) receivables owing to the Company or a Subsidiary of the Company if created
or acquired in the ordinary course of business and payable or dischargeable in
accordance with customary trade terms, (viii) extensions of trade credit made in
the ordinary course of business and on customary terms, (ix) the letter of
credit issued pursuant to the Credit Facility in favor of Kenneth W. Freeman to
secure his pension benefits in an amount not to exceed $10.0 million and (x) any
Investment in addition to Investments permitted to be made by Clauses (i)
through (ix) above if the aggregate amount (including cash and the fair value of
property other than cash, as determined by the Board of Directors) of such
Investment, together with all other investments made pursuant to this Clause (x)
and then held by the Company and its Restricted Subsidiaries (determined as of
the time made), does not exceed $5.0 million.
"Permitted Joint Venture" means any Person which is engaged in the acquisition,
ownership, operation or management of assets in a Permitted Business.
"Permitted Joint Venture Investment" means an Investment in a Permitted Joint
Venture.
"Permitted Liens" means (i) Liens existing at the date of the Indenture; (ii)
Liens securing only Senior Debt; (iii) Liens securing only the Notes; (iv) Liens
in favor of only the Company; (v) Liens on property of a Person existing at the
time such Person is merged into or consolidated with the Company (provided that
such Lein was not Incurred in anticipation of such transaction and was in
existence prior to such transaction); (vi) Liens on property existing
immediately prior to the acquisition thereof (provided that such Lien was not
Incurred in anticipation of such transaction and was in existence prior to such
transaction); (vii) Liens to secure Debt Incurred for the purpose of financing
all or any part of the purchase price or the cost of construction or improvement
of the property subject to such Liens; provided that (a) the principal amount of
any Debt secured by such Lien does not exceed 100% of such purchase price or
cost, (b) such Lien does not extend to or cover any other property other than
such item of property and any improvements on such item, (c) such Lien is
incurred prior to or within 270 days after the acquisition of such property or
the completion of the relevant improvements and (d) the Incurrence of such Debt
is permitted pursuant to the covenants described under "Certain
Covenants--Limitation on Incurrence of Debt" and "--Limitation on Layered and
Junior Debt"; (viii) Liens on property of the Company or any of its Subsidiaries
in favor of the United States of America or any state thereof, or any
instrumentality of either, to secure certain payments pursuant to any contract
or statute; (ix) Liens for taxes or assessments or other governmental charges or
levies which are being contested in good faith and for which adequate reserves
are being maintained, to the extent required by generally accepted accounting
principles; (x) title exceptions, easements and other similar Liens that are not
consensual and that do not materially impair the use of the property subject
thereto; (xi) Liens to secure obligations under workmen's compensation laws,
unemployment compensation, old-age pensions and other social security benefits
or similar legislation, including Liens with respect to judgments which are not
currently dischargeable; (xii) warehousemen's, materialmen's and other similar
Liens for sums being contested in good faith and with respect to which adequate
reserves are being maintained, to the extent required by generally accepted
accounting principles; (xiii) Liens Incurred to secure the performance of
statutory obligations, surety or appeal bonds, performance or return-of-money
bonds or other obligations of a like nature incurred in the ordinary course of
business; (xiv) Liens to secure payment of the Company's sinking fund
obligations in respect of certain Debt of the Company outstanding at the date of
the Indenture in the amount of (pound)5 million in connection with the Company's
acquisition of J.S. Pathology PLC in 1992; and (xv) Liens to secure any
extension, renewal, refinancing or refunding (or successive extensions,
renewals, refinancings or refundings), in whole or in part, of any Debt secured
by Liens referred to in the foregoing Clauses (i) to (xiv) so long as such Lien
does not extend to any other property and the Debt so secured is not increased.
"Preferred Stock", as applied to the Capital Stock of any Person, means Capital
Stock of such Person of any class or classes (however designated) that ranks
prior, as to the payment of dividends or as to the distribution of assets upon
any voluntary or involuntary liquidation, dissolution or winding up of such
Person, to shares of Capital Stock of any other class of such Person.
"Redeemable Interest" of any Person means any equity security of or other
ownership interest in such Person that by its terms or otherwise is required to
be redeemed or repaid prior to the Stated Maturity of the Notes or is redeemable
or repayable at the option of the holder thereof at any time prior to the Stated
Maturity of the Notes.
94
<PAGE>
"Related Person" of any Person means any other Person owning (a) 5% or more of
the outstanding Common Stock of such Person or (b) 5% or more of the Voting
Stock of such Person.
"Rental Expense" in respect of an Operating Lease means the total rental expense
under such Operating Lease determined in accordance with generally accepted
accounting principles.
"Restricted Subsidiary" means any Subsidiary of the Company other than an
Unrestricted Subsidiary.
"Sale and Leaseback Transaction" means an arrangement with any lender or
investor or to which such lender or investor is a party (excluding the Company's
laboratory facility in Cambridge, Massachusetts and the real property leased by
the Company in Des Plaines, Illinois) providing for the leasing by a Person of
any property or asset of such Person which has been or is being sold or
transferred by such Person more than 270 days after the acquisition thereof or
the completion of construction or commencement of operation thereof to such
lender or investor or to any person to whom funds have been or are to be
advanced by such lender or investor on the security of such property or asset.
The stated maturity of such arrangement shall be the date of the last payment of
rent or any other amount due under such arrangement prior to the first date on
which such arrangement may be terminated by the lessee without payment of a
penalty.
"Senior Debt" means (i) Debt of the Company created pursuant to the Credit
Facility including all reborrowings by the Company, (ii) all other Debt of the
Company referred to in clauses (i), (ii), (iii) or (viii) of the definition of
Debt, whether Incurred on or prior to the date of the Indenture or thereafter
Incurred and (iii) amendments, modifications, renewals, extensions, refinancings
and refundings by the Company of any such Debt; provided, however, the following
shall not constitute Senior Debt: (A) any Debt owed to a Person when such Person
is a Subsidiary of the Company, (B) any Debt which by the terms of the
instrument creating or evidencing the same is not superior in right of payment
to the Notes, (C) any Debt Incurred in violation of the Indenture or (D) any
Debt which is subordinated in right of payment in any respect to any other Debt
of the Company. For purposes of this definition, "Debt" includes any obligation
to pay principal, premium (if any), interest, penalties, reimbursement or
indemnity amounts, fees and expenses (including interest accruing on or after
the filing of any petition in bankruptcy or for reorganization relating to the
Company whether or not a claim for post-petition interest is allowed in such
proceeding).
"Specified Operating Lease" means any Operating Lease that the Company elects to
Incur pursuant to Clause (vii) of the provisions of the Indenture described
under "Certain Covenants--Limitation on Leases."
"Spin-Off Distributions" means, collectively, (i) the distribution to holders of
common stock of Corning of all of the outstanding shares of common stock of the
Company and (ii) the distribution to holders of common stock of the Company of
all of the outstanding shares of common stock of Covance.
"Spin-Off Payments" means: (i) the distribution to holders of Company Common
Stock of all of the outstanding shares of Covance Common Stock, (ii) the
repayment of $500 million (A) intercompany obligations owed to Corning by the
Company and (B) payments under the Tax Sharing Agreement; (iii) the issuance by
the Company of up to $1.0 million liquidation preference preferred stock to
Corning and the payment of cash dividends thereon; provided, however, that the
aggregate amount of all such dividends following the date of the Indenture shall
not exceed $150,000 per year; (iv) the transfer of $140 million from Covance to
the Company and subsequent transfer from the Company to Corning of such $140
million in repayment of intercompany debt owed by Covance to Corning and the
Company and in repayment of certain tax liabilities of Covance and in
satisfaction of a dividend from Covance to the Company and (v) the payment of
any amount of cash by the Company to Corning that may be necessary so that the
Company will not have more than $40 million of cash at the time of the
Distribution Date plus the Net Available Proceeds from any asset dispositions
made prior to the Distribution Date.
"Subordinated Debt" means Debt of the Company as to which the payment of
principal of (and premium, if any) and interest and other payment obligations in
respect of such Debt shall be subordinate to the prior payment in full of the
Notes to at least the following extent: (i) no payments of principal of (or
premium, if any) or interest on or otherwise due in respect of such Debt may be
permitted for so long as any default in the payment of principal (or premium, if
any) or interest on the Notes exists; (ii) in the event that any other default
that with the passing of time or the giving of notice, or both, would constitute
an event of default exists with respect to the Notes, upon notice by 25% or more
in principal amount of the Notes to the Trustee, the Trustee shall have the
right to give notice to the Company and the holders of such Debt (or trustees or
agents therefor) of a payment blockage, and thereafter no payments of principal
of (or premium, if any) or interest on or otherwise due in respect of such Debt
may be made for a period of 179 days from the date of such notice; and (iii)
such Debt may not (x) provide for payments of principal of such Debt at the
stated maturity thereof or by way of a sinking fund applicable thereto or by way
of any mandatory redemption, defeasance, retirement or repurchase thereof by the
Company (including any redemption, retirement or repurchase which is contingent
upon events or circumstances, but excluding any retirement required by virtue of
acceleration of such Debt upon an event of default thereunder), in each case
prior to the final Stated Maturity of the Notes or (y) permit redemption or
other retirement (including pursuant to an offer to purchase made by the
Company) of such other Debt at the
95
<PAGE>
option of the holder thereof prior to the final Stated Maturity of the Notes,
other than a redemption or other retirement at the option of the holder of such
Debt (including pursuant to an offer to purchase made by the Company) which is
conditioned upon a change of control of the Company pursuant to provisions
substantially similar to those described under "Repurchase at the Option of
Holders--Change of Control" (and which shall provide that such Debt will not be
repurchased pursuant to such provisions prior to the Company's repurchase of the
Notes required to be repurchased by the Company pursuant to the provisions
described under "Repurchase at the Option of Holders--Change of Control").
"Subsidiary" of any Person means (i) a corporation more than 50% of the
outstanding Voting Stock of which is owned, directly or indirectly, by such
Person or by one or more other Subsidiaries of such Person or by such Person and
one or more Subsidiaries thereof, (ii) a partnership of which such Person, or
one or more other Subsidiaries of such Person or such Person and one or more
other Subsidiaries thereof, directly or indirectly, is the general partner and
has the power to direct the policies, management and affairs or (iii) any other
Person (other than a corporation or partnership) in which such Person, or one or
more other Subsidiaries of such Person or such Person and one or more other
Subsidiaries thereof, directly or indirectly, has at least a majority ownership
interest and power to direct the policies, management and affairs thereof.
"Transaction Agreement" means the Transaction Agreement among Corning, the
Company Corning Life Sciences Inc., Corning Clinical Laboratories Inc. (MI) and
Covance dated December __, 1996.
"Unrestricted Subsidiary" means Associated Clinical Laboratories L.P., Damon
Investment Holdings, Inc., Corning Laboratorios Clinicos, S.A. de C.V.,
Laboratorios Clinicos de Mexico, S.A. de C.V., Servicios de Laboratorio, S.A. de
C.V., Laboratorios de Frontera Polanco, S.A. de C.V., Laboratorios de Analisis
Biomedicus, S.A., Metpath Europe Limited, Nichols Institute International
Holding B.V., Nichols Institute Sales Corporation, Nichols Institute Diagnostics
Limited, Nichols Institute Diagnostics Trading S.A.; Nichols Institute
Diagnostics GMBH, Nichols Institute Diagnostics B.V. Analisis, D.A.,
Nomad-Massachusetts Inc., Trans United Casualty and Indemnity Insurance Company,
and each other Subsidiary of the Company that is deemed to be an Unrestricted
Subsidiary in accordance with the provisions in the Indenture described under
the caption "Certain Covenants--Unrestricted Subsidiaries." The aggregate net
revenues, and net loss from the Unrestricted Subsidiaries for the year ended
December 31, 1995 were $21.7 million, and $0.5 million, respectively. The
Unrestricted Subsidiaries had an aggregate net book value of $0.1 million, at
December 31, 1995. The aggregate net revenues and net income for the
Unrestricted Subsidiaries was less than 3% of the Company's net revenues and net
income for the nine months ended September 30, 1996. The Unrestricted
Subsidiaries had an aggregate net book value of less than 3% of the Company's
net book value at September 30, 1996.
"U.S. Government Obligations" means securities that are (x) direct
obligations of the United States of America for the payment of which its full
faith and credit is pledged or (y) obligations of a Person controlled or
supervised by and acting as an agency or instrumentality of the United States
of America the payment of which is unconditionally guaranteed as a full faith
and credit obligation by the United States of America, which, in either case,
are not callable or redeemable at the option of the issuer thereof, and shall
also include a depository receipt issued by a bank (as defined in Section 3
(a) (2) of the Securities Act of 1933, as amended) as custodian with respect
to any such U.S. Government Obligation or a specific payment of principal of
or interest on any such U.S. Government Obligation held by such custodian for
the account of the holder of such depository receipt, provided that (except
as required by law) such custodian is not authorized to make any deduction
from the amount payable to the holder of such depository receipt from any
amount received by the custodian in respect of the U.S. Government Obligation
or the specific payment of principal of or interest on the U.S. Government
Obligation evidenced by such depository receipt.
"Voting Stock" of any Person means Capital Stock of such Person that
ordinarily has voting power for the election of directors (or persons
performing similar functions) of such Person, whether at all times or only so
long as no senior class of securities has such voting power by reason of any
contingency.
"Weighted Average Life" means, as of the date of determination, with respect
to any Debt, the quotient obtained by dividing (i) the sum of the products of
the number of years from the date of determination to the dates of each
successive scheduled principal payment of such Debt and the amount of such
principal by (ii) the sum of all such principal payments.
"Wholly Owned" means, with respect to any Subsidiary of any Person, the
ownership of all of the outstanding Capital Stock or other ownership
interests of such Subsidiary (other than directors' qualifying shares or
Investments by foreign nationals mandated by applicable law) by such Person
or one or more Wholly Owned Subsidiaries of such Person or any combination of
the foregoing.
Events of Default
The following will be Events of Default under the Indenture: (a) failure to
pay any interest on any Note when due (whether or not prohibited by the
subordination provisions described under "Subordination" above), continued
for 30 days; (b) failure to pay principal of (or premium, if any, on) any
Note when due (whether or not prohibited by the subordination provisions
described
96
<PAGE>
under "Subordination" above); (c) failure to perform or comply with the
provisions described under "Mergers, Consolidations and Certain Sales of Assets"
or the provisions described under "Repurchase at the Option of Holders--Asset
Dispositions" and "--Change of Control"; (d) failure to perform any other
covenant or warranty of the Company in the Indenture, continued for 60 days
after written notice to the Company as provided in the Indenture; (e) a default
or defaults under any bonds, debentures, notes or other evidences of, or
obligations constituting, Debt by the Company or any Restricted Subsidiary or
under any mortgages, indentures, instruments or agreements under which there may
be issued or existing or by which there may be secured or evidenced any Debt of
the Company or any such Restricted Subsidiary with a principal or similar amount
then outstanding, individually or in the aggregate, in excess of $15.0 million,
whether such Debt now exists or is hereafter created, which default or defaults
constitute a failure to pay any portion of the principal of such Debt at final
stated maturity when due and payable after the expiration of any applicable
grace period with respect thereto or will have resulted in such Debt becoming or
being declared due and payable prior to the date on which it would otherwise
have become due and payable; (f) the rendering of a final judgment or judgments
(not subject to appeal) against the Company or any of its Restricted
Subsidiaries in an aggregate amount in excess of $15.0 million which remains
unstayed, undischarged or unbonded for a period of 60 days thereafter; and (g)
certain events of bankruptcy, insolvency or reorganization affecting the Company
or any Restricted Subsidiary of the Company. (Section 501).
Subject to the provisions of the Indenture relating to the duties of the Trustee
in case an Event of Default occurs and is continuing, the Trustee will be under
no obligation to exercise any of its rights or powers under the Indenture at the
request or direction of any of the Holders, unless such Holders have offered to
the Trustee reasonable indemnity. (Section 603). Subject to such provisions for
the indemnification of the Trustee, the Holders of a majority in aggregate
principal amount of the Outstanding Notes will have the right to direct the
time, method and place of conducting any proceeding for any remedy available to
the Trustee or exercising any trust or power conferred on the Trustee. (Section
512).
If an Event of Default (other than an Event of Default of the type described in
Clause (g) above insofar as the Company is concerned) occurs and is continuing,
either the Trustee or the Holders of at least 25% in aggregate principal amount
of the Outstanding Notes may accelerate the maturity of all Notes, and if an
Event of Default of the type described in Clause (g) above occurs insofar as the
Company is concerned, the principal of and any accrued interest on the Notes
then outstanding will become immediately due and payable; provided, however,
that after such acceleration, but before a judgment or decree based on
acceleration, the Holders of a majority in aggregate principal amount of
Outstanding Notes may, under certain circumstances, rescind and annul such
acceleration if all Events of Default, other than the non-payment of accelerated
principal, have been cured or waived as provided in the Indenture. (Section
502). For information as to waiver of defaults, see "Modification and Waiver."
No Holder of any Note will have any right to institute any proceeding with
respect to the Indenture or for any remedy thereunder, unless such Holder has
previously given to the Trustee written notice of a continuing Event of Default
and unless also the Holders of at least 25% in aggregate principal amount of the
Outstanding Notes have made written request, and offered reasonable indemnity,
to the Trustee to institute such proceeding as trustee, and the Trustee has not
received from the Holders of a majority in aggregate principal amount of the
Outstanding Notes a direction inconsistent with such request, and the Trustee
has failed to institute such proceeding within 60 days of receipt of such
written notice. However, such limitations do not apply to a suit instituted by a
Holder of a Note for enforcement of payment of the principal of (and premium, if
any) or interest on such Note on or after the respective due dates expressed in
such Note. (Sections 507 and 508).
In the case of any Event of Default occurring by reason of any willful action
(or inaction) taken (or not taken) by or on behalf of the Company with the
intention of avoiding payment of the premium that the Company would have had to
pay if the Company then had elected to redeem the Notes pursuant to the
provisions described in the first paragraph above under "Optional Redemption,"
an equivalent premium will also become and be immediately due and payable upon
the acceleration of the Notes.
The Company will be required to furnish to the Trustee annually a statement as
to the performance by the Company of certain of its obligations under the
Indenture and as to any default in such performance. The Company will be
required to deliver to the Trustee, as soon as possible and in any event within
10 days after the Company becomes aware of the occurrence of an Event of Default
or an event which, with notice or the lapse of time or both, would constitute an
Event of Default, an Officers' Certificate setting forth the details of such
Event of Default or default, and the action which the Company proposes to take
with respect thereto. (Section 1020).
Defeasance
The Indenture will provide that (A) if applicable, the Company will be
discharged from any and all obligations in respect of the Outstanding Notes
(including the provisions described under "Subordination") or (B) if applicable,
the Company may omit to comply with certain restrictive covenants, and that such
omission will not be deemed to be an Event of Default under the
97
<PAGE>
Indenture and the Notes and the provisions described under "Subordination" shall
cease to apply, in either case (A) or (B) upon irrevocable deposit with the
Trustee, in trust, of money and/or U.S. Government Obligations that will provide
money in an amount sufficient in the opinion of a nationally recognized firm of
independent certified public accountants to pay the principal of, and premium,
if any, and each installment of interest, if any, on the Outstanding Notes. With
respect to clause (B), the obligations under the Indenture other than with
respect to such covenants and the Events of Default other than the Event of
Default relating to such covenants above will remain in full force and effect.
Such trust may only be established if, among other things (i) with respect to
clause (A), the Company has received from, or there has been published by, the
Internal Revenue Service a ruling or there has been a change in law, which in
the Opinion of Counsel provides that Holders of the Notes will not recognize
gain or loss for Federal income tax purposes as a result of such deposit,
defeasance and discharge and will be subject to Federal income tax on the same
amount, in the same manner and at the same times as would have been the case if
such deposit, defeasance and discharge had not occurred; or, with respect to
clause (B), the Company has delivered to the Trustee an Opinion of Counsel to
the effect that the Holders of the Notes will not recognize gain or loss for
Federal income tax purposes as a result of such deposit and defeasance and will
be subject to Federal income tax on the same amount, in the same manner and at
the same times as would have been the case if such deposit and defeasance had
not occurred; (ii) no Event of Default (or event that with the passing of time
or the giving of notice, or both, will constitute an Event of Default) shall
have occurred or be continuing; (iii) the Company has delivered to the Trustee
an Opinion of Counsel to the effect that such deposit shall not cause the
Trustee or the trust so created to be subject to the Investment Company Act of
1940; (iv) no default on any Senior Debt shall have occurred and be continuing;
and (v) certain other customary conditions precedent are satisfied. (Sections
1501, 1502, 1503 and 1504).
In the event the Company omits to comply with its remaining obligations under
the Indenture and the Notes after a defeasance of the Indenture with respect to
the Notes as described under Clause (B) above and the Notes are declared due and
payable because of the occurrence of any Event of Default, the amount of money
and U.S. Government Obligations on deposit with the Trustee may be insufficient
to pay amounts due on the Notes at the time of the acceleration resulting from
such Event of Default. However, the Company will remain liable in respect of
such payments.
Modification and Waiver
Modifications and amendments of the Indenture may be made by the Company and the
Trustee with the consent of the Holders of a majority in aggregate principal
amount of the Outstanding Notes; provided, however, that no such modification or
amendment may, without the consent of the Holder of each Outstanding Note
affected thereby, (a) change the Stated Maturity of the principal of, or any
installment of interest on, any Note, (b) reduce the principal amount of (or the
premium, if any), or interest on, any Note, (c) change the place or currency of
payment of principal of (or premium, if any), or interest on, any Note, (d)
impair the right to institute suit for the enforcement of any payment on or with
respect to any Note, (e) reduce the above-stated percentage of Outstanding Notes
necessary to modify or amend the Indenture, (f) reduce the percentage of
aggregate principal amount of Outstanding Notes necessary for waiver of
compliance with certain provisions of the Indenture or for waiver of certain
defaults, (g) modify any provisions of the Indenture relating to the
modification and amendment of the Indenture or the waiver of past defaults or
covenants, except as otherwise specified, (h) modify any of the provisions of
the Indenture relating to the subordination of the Notes in a manner adverse to
the Holders or (i) modify the provisions described under "Repurchase at the
Option of Holders--Asset Dispositions" and under "--Change of Control" in a
manner adverse to the Holders thereof. (Section 902).
The Holders of a majority in aggregate principal amount of the Outstanding Notes
may waive compliance by the Company with certain restrictive provisions of the
Indenture. (Section 1021). The Holders of a majority in aggregate principal
amount of the Outstanding Notes may waive any past default under the Indenture,
except a default in the payment of principal (or premium, if any) or interest.
(Section 513).
Notices
Notices to Holders of Notes will be given by mail to the addresses of such
Holders as they may appear in the Security Register. (Sections 101 and 106).
Title
The Company, the Trustee and any agent of the Company or the Trustee may treat
the Person in whose name a Note is registered as the absolute owner thereof
(whether or not such Note may be overdue) for the purpose of making payment and
for all other purposes. (Section 308).
Governing Law
The Indenture and the Notes will be governed by, and construed in accordance
with, the law of the State of New York. (Section 112).
98
<PAGE>
Underwriting
Under the terms and subject to the conditions in an Underwriting Agreement,
dated December , 1996 (the "Underwriting Agreement"), each of the Underwriters
named below (the "Underwriters") has severally agreed to purchase, and Quest
Diagnostics has agreed to sell to it, the principal amount of the Notes set
forth opposite its name below:
<TABLE>
<CAPTION>
Principal
Amount
Underwriter of Notes
- ----------- ---------
<S> <C>
J.P. Morgan Securities Inc. $
Goldman, Sachs & Co.
Lazard Freres & Co. LLC
TOTAL $150,000,000
==============
</TABLE>
Under the terms and conditions of the Underwriting Agreement, the Underwriters
are committed to take and pay for all of the Notes, if any are taken. Under
certain circumstances, the commitments of non-defaulting Underwriters may be
increased as provided in the Underwriting Agreement.
The Underwriters propose to offer the Notes in part directly to the public at
the initial public offering price set forth on the cover page of this
Prospectus and in part to certain securities dealers at such price less a
concession of % of the principal amount of the Notes. The Underwriters may
allow, and such dealers may reallow, a concession not to exceed % of the
principal amount of the Notes to certain brokers and dealers. After the Notes
are released for sale to the public, the offering price and other selling
terms may from time to time be varied by the Underwriters.
The Notes will be issued prior to the consummation of the Distributions. See
"The Distributions."
The Notes are a new issue of securities with no established trading market. The
Notes have been approved for listing on the New York Stock Exchange, subject to
official notice of issuance. Quest Diagnostics has been advised by the
Underwriters that the Underwriters intend to make a market in the Notes but they
are not obligated to do so and may discontinue any such market making at any
time without notice. No assurance can be given as to the liquidity of the
trading market for the Notes. See "Risk Factors--Absence of a Prior Public
Market."
Corning has engaged Goldman, Sachs & Co. and Lazard Freres & Co. LLC as its
financial advisors in connection with the Distributions and has agreed to pay
Goldman, Sachs & Co. and Lazard Freres & Co. LLC a customary fee for their
services and to indemnify Goldman, Sachs & Co. and Lazard Freres & Co. LLC
against certain liabilities. J.P. Morgan Securities, Inc. is the Administration
Agent under the Credit Facility and is entitled to certain fees and
indemnification in that capacity, see "Description of the Credit Facility," and
has provided structuring and capital markets advice to Corning in connection
with the Offering and the Distributions for which it is receiving a fee of
$500,000. The Underwriters also perform other investment banking and financial
advisory services for Corning from time to time.
Quest Diagnostics and Corning have agreed to indemnify the several
Underwriters against certain liabilities, including liabilities under the
Securities Act of 1933.
99
<PAGE>
Validity of the Notes and Guarantees
The validity of the Notes and Guarantees offered hereby will be passed upon
for Quest Diagnostics by Shearman & Sterling, New York, New York and for the
Underwriters by Sullivan & Cromwell, New York, New York. In rendering their
opinions on the validity of the Guarantees, Shearman & Sterling and Sullivan
& Cromwell will express no opinion as to Federal or state laws relating to
fraudulent transfers. See "Risk Factors--Fraudulent Conveyance."
Experts
The combined financial statements of Corning Clinical Laboratories Inc. at
December 31, 1995 and 1994 and for the years then ended, included in this
Prospectus have been so included in reliance on the report of Price
Waterhouse LLP, independent accountants, given on the authority of said firm
as experts in auditing and accounting. The combined financial statements of
Corning Clinical Laboratories Inc. for the year ended December 31, 1993
included in this Prospectus have been so included in reliance on the report
of Price Waterhouse LLP, independent accountants, which is based in part on
(i) the report of Deloitte & Touche LLP, independent auditors, in respect of
the consolidated financial statements of Nichols Institute for the year ended
December 31, 1993 (not presented separately in this Prospectus) which report
includes explanatory paragraphs related to uncertainties as to an
investigation by the Office of the Inspector General of the Department of
Health and Human Services and substantial doubt as to the Company's ability
to continue as a going concern, (ii) the report of Ernst and Young LLP,
independent auditors, in respect of the combined financial statements of
Maryland Medical Laboratory, Inc. and affiliates as of and for the year ended
March 31, 1994 (not presented separately in this Prospectus), and (iii) the
report of Leverone & Company, independent accountants, in respect of the
financial statements of Moran Research Labs (d/b/a Bioran Medical Laboratory,
a Massachusetts Business Trust) as of and for the year ended December 31,
1993 (not presented separately in this Prospectus). The combined financial
statements of Corning Clinical Laboratories Inc. for the year ended December
31, 1993, included in this Prospectus have been so included in reliance on
the reports of said firms, given on the authority of such firms as experts in
accounting and auditing.
100
<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
Quarterly Operating Results (unaudited) F-22
Interim Combined Financial Statements (unaudited):
Combined Balance Sheets--September 30, 1996 and December 31, 1995 F-23
Combined Statements of Operations--Three and Nine Months ended September 30, 1996
and 1995 F-24
Combined Statements of Cash Flows--Nine Months ended September 30, 1996 and 1995 F-25
Notes to Interim Combined Financial Statements F-26
</TABLE>
F-1
<PAGE>
Report of Independent Accountants
To the Boards of Directors and Stockholders
of Corning Incorporated and Corning Clinical Laboratories Inc.
In our opinion, based upon our audits and the reports of other auditors,
the accompanying combined balance sheets and the related combined statements
of operations and of cash flows and of stockholder's equity appearing on
pages F-6 through F-21 present fairly, in all material respects, the
financial position of Corning Clinical Laboratories Inc. (to be renamed Quest
Diagnostics Incorporated) and the combined companies as discussed in Note 1
(collectively, the "Company"), a wholly-owned business of Corning
Incorporated, at December 31, 1995 and 1994, and the results of their
operations and their cash flows for each of the three years in the period
ended December 31, 1995, in conformity with generally accepted accounting
principles. These financial statements are the responsibility of the
Company's management; our responsibility is to express an opinion on these
financial statements based on our audits. We did not audit the 1993 financial
statements of Maryland Medical Laboratory, Inc., Nichols Institute and Bioran
Medical Laboratory, which were acquired by the Company in 1994 in separate
transactions accounted for as poolings of interests and which collectively
reflect total revenues of $438 million for the year ended December 31, 1993.
Those statements were audited by other auditors whose reports thereon have
been furnished to us, and our opinion expressed herein, insofar as it relates
to the amounts included for Maryland Medical Laboratory, Inc., Nichols
Institute and Bioran Medical Laboratory, is based solely on the reports of
the other auditors. We conducted our audits of these statements in accordance
with generally accepted auditing standards which require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on
a test basis, evidence supporting the amounts and disclosures in the
financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits and the reports
of other auditors provide a reasonable basis for the opinion expressed above.
As discussed in Note 2 to the combined financial statements, in 1993 the
Company adopted Statement of Financial Accounting Standards No. 109,
"Accounting for Income Taxes."
/s/ Price Waterhouse LLP
Price Waterhouse LLP
New York, New York
September 20, 1996, except for Note 13
as to which the date is November 4, 1996
F-2
<PAGE>
Report of Independent Auditors
To the Board of Directors and Stockholders of
Nichols Institute:
We have audited the consolidated statements of operations, stockholders'
equity and cash flows for the year ended December 31, 1993 of Nichols
Institute and its subsidiaries (the Company) (not presented separately
herein). These consolidated financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on
these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the results of operations and cash flows of Nichols
Institute and its subsidiaries for the year ended December 31, 1993, in
conformity with generally accepted accounting principles.
As discussed in Note 11 to the consolidated financial statements, the
Company has received a subpoena from the Office of the Inspector General of
the Department of Health and Human Services (OIG) requesting documents in
connection with an investigation and internal review concerning the possible
submission of false or improper claims to the Medicare and Medicaid programs.
No claim or charges have been made against the Company relating to this
investigation. The ultimate outcome of this investigation cannot presently be
determined. Accordingly, no provision for any loss that may result from this
investigation has been made in the accompanying consolidated financial
statements.
As discussed in Notes 1 and 3 to the consolidated financial statements, at
December 31, 1993, the Company was not in compliance with certain covenants
of its senior note agreements and the senior lenders have not waived those
covenants. The senior note agreements provide that, as a result of failure to
comply with the covenants, the note holders have the right to declare the
entire unpaid balance immediately due and payable, and if that were to occur,
the Company would not have the funds required to retire the debt unless
alternative financing is obtained. Management's plans in regard to these
matters are described in Notes 1 and 3. The note holders' right to declare
the entire unpaid balance under the note agreements immediately due and
payable raises substantial doubt about the Company's ability to continue as a
going concern. The accompanying consolidated financial statements have been
prepared assuming that the Company will continue as a going concern. The
financial statements do not include any adjustments that might result from
the outcome of this uncertainty, except for the classification of amounts due
under the senior note agreements as current.
/s/ Deloitte & Touche LLP
Deloitte & Touche LLP
Costa Mesa, California
February 28, 1994
F-3
<PAGE>
Report of Independent Auditors
Board of Directors
Maryland Medical Laboratory, Inc.
We have audited the combined balance sheet of Maryland Medical Laboratory,
Inc. and affiliates as of March 31, 1994, and the related combined statements
of income, changes in equity and cash flows for the year then ended (not
presented separately herein). These financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the combined financial position of Maryland Medical
Laboratory, Inc. and affiliates at March 31, 1994, and the combined results
of their operations and their cash flows for the year then ended in
conformity with generally accepted accounting principles.
/s/ Ernst & Young LLP
Ernst & Young LLP
Baltimore, Maryland
May 19, 1994
F-4
<PAGE>
Report of Independent Accountants
To the Board of Directors
Moran Research Labs
415 Massachusetts Avenue
Cambridge, MA 02139
We have audited the accompanying balance sheet of Moran Research Labs
(d/b/a Bioran Medical Laboratory, a Massachusetts Business Trust) as of
December 31, 1993, and the related statements of income, retained earnings,
and cash flows for the year then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Moran Research Labs
(d/b/a Bioran Medical Laboratory, a Massachusetts Business Trust) at December
31, 1993 and the results of its operations and its cash flows for the year
then ended in conformity with generally accepted accounting principles.
/s/ Leverone & Company
Leverone & Company
Billerica, Massachusetts
November 10, 1994
F-5
<PAGE>
CORNING CLINICAL LABORATORIES INC.
(to be renamed Quest Diagnostics Incorporated)
(a wholly-owned business of Corning Incorporated)
Combined Balance Sheets
December 31, 1995 and 1994
(in thousands)
<TABLE>
<CAPTION>
1995 1994
------------- -------------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ 36,446 $ 38,719
Accounts receivable, net of allowance of $147,947 and
$74,829 for 1995 and 1994, respectively 318,252 360,410
Inventories 26,601 28,248
Deferred taxes on income 98,845 53,696
Prepaid expenses and other assets 22,014 19,241
------------- -------------
Total current assets 502,158 500,314
Property, plant and equipment, net 296,116 287,562
Intangible assets, net 1,030,633 1,053,194
Deferred taxes on income 6,062 19,593
Other assets 18,416 22,000
------------- -------------
TOTAL ASSETS $1,853,385 $1,882,663
============= =============
LIABILITIES AND STOCKHOLDER'S EQUITY
Current Liabilities:
Accounts payable and accrued expenses $ 240,525 $ 236,887
Current portion of long-term debt 12,148 12,572
Income taxes payable 39,766 30,454
Due to Corning Incorporated and affiliates 8,979 6,043
------------- -------------
Total current liabilities 301,418 285,956
Long-term debt (principally due to Corning Incorporated) 1,195,566 1,153,054
Other liabilities 60,600 56,841
------------- -------------
Total liabilities 1,557,584 1,495,851
------------- -------------
Commitments and Contingencies
Stockholder's Equity:
Contributed capital 297,823 297,823
Retained earnings (accumulated deficit) (3,118) 85,893
Cumulative translation adjustment 2,325 3,096
Market valuation adjustment (1,229) --
------------- -------------
Total stockholder's equity 295,801 386,812
------------- -------------
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY $1,853,385 $1,882,663
============= =============
</TABLE>
The accompanying notes are an integral part of these statements.
F-6
<PAGE>
CORNING CLINICAL LABORATORIES INC.
(to be renamed Quest Diagnostics Incorporated)
(a wholly-owned business of Corning Incorporated)
Combined Statements of Operations
For the Years Ended December 31, 1995, 1994 and 1993
(in thousands)
<TABLE>
<CAPTION>
1995 1994 1993
------------- ------------- -------------
<S> <C> <C> <C>
Net revenues $1,629,388 $1,633,699 $1,416,338
Costs and expenses:
Cost of services 980,232 969,844 805,729
Selling, general and administrative 523,271 411,939 363,579
Provision for restructuring and other special charges 50,560 79,814 99,600
Interest expense, net 82,016 63,295 41,898
Amortization of intangible assets 44,656 42,588 28,421
Other, net 6,221 3,464 6,423
------------- ------------- -------------
Total 1,686,956 1,570,944 1,345,650
------------- ------------- -------------
Income (loss) before taxes (57,568) 62,755 70,688
Income tax expense (benefit) (5,516) 34,410 25,929
------------- ------------- -------------
Income (loss) before cumulative effect of change in
accounting principle (52,052) 28,345 44,759
Cumulative effect of change in accounting principle -- -- (10,562)
------------- ------------- -------------
Net income (loss) $ (52,052) $ 28,345 $ 34,197
============= ============= =============
</TABLE>
The accompanying notes are an integral part of these statements.
F-7
<PAGE>
CORNING CLINICAL LABORATORIES INC.
(to be renamed Quest Diagnostics Incorporated)
(a wholly-owned business of Corning Incorporated)
Combined Statements of Cash Flows
For the Years Ended December 31, 1995, 1994 and 1993
(in thousands)
<TABLE>
<CAPTION>
1995 1994 1993
------------- ------------ ------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $ (52,052) $ 28,345 $ 34,197
Adjustments to reconcile net income (loss) to net cash provided by
operating activities:
Depreciation and amortization 101,513 89,517 66,479
Provision for doubtful accounts 152,590 59,480 47,240
Provision for restructuring and other special charges 50,560 79,814 99,600
Deferred income tax provision (32,384) (4,742) (23,841)
Cumulative effect of change in accounting principle -- -- 10,562
Other, net 8,303 14,600 1,765
Changes in operating assets and liabilities:
Accounts receivable (109,500) (103,402) (61,828)
Accounts payable and accrued expenses 14,604 (32,756) (33,903)
Restructuring, integration and other special charges (57,768) (88,093) (46,917)
Due from/to Corning Incorporated and affiliates 2,934 14,783 (2,581)
Other assets and liabilities, net 7,028 (19,583) 8,841
------------- ------------ ------------
Net cash provided by operating activities 85,828 37,963 99,614
------------- ------------ ------------
Cash flows from investing activities:
Capital expenditures (74,045) (93,354) (65,317)
Proceeds from disposition of assets 2,880 55,762 --
Acquisition of businesses, net of cash acquired (22,907) (12,154) (401,428)
Decrease (increase) in investments 985 3,560 (6,942)
------------- ------------ ------------
Net cash used in investing activities (93,087) (46,186) (473,687)
------------- ------------ ------------
Cash flows from financing activities:
Proceeds from borrowings, primarily with Corning Incorporated 55,729 186,046 709,630
Repayment of long-term debt (13,784) (118,046) (265,196)
Dividends paid (36,959) (60,468) (51,478)
------------- ------------ ------------
Net cash provided by financing activities 4,986 7,532 392,956
------------- ------------ ------------
Net change in cash and cash equivalents (2,273) (691) 18,883
Cash and cash equivalents, beginning of year 38,719 39,410 20,527
------------- ------------ ------------
Cash and cash equivalents, end of year $ 36,446 $ 38,719 $ 39,410
============= ============ ============
</TABLE>
The accompanying notes are an integral part of these statements.
F-8
<PAGE>
CORNING CLINICAL LABORATORIES INC.
(to be renamed Quest Diagnostics Incorporated)
(a wholly-owned business of Corning Incorporated)
Combined Statements of Stockholder's Equity For the Years Ended December 31,
1995, 1994 and 1993
(in thousands)
<TABLE>
<CAPTION>
Cumulative Market Total
Retained Translation Valuation Stockholder's
Contributed Capital Earnings Adjustment Adjustment Equity
------------------- -------- ----------- ---------- -------------
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1992 $261,499 $146,938 $ (288) $ $ 408,149
Net income 34,197 34,197
Dividends to CLSI (28,088) (28,088)
Dividends to S-Corporation
shareholders (23,390) (23,390)
Equity of pooled entity 4,150 (4,096) 54
Translation adjustment 4,587 4,587
-------------------------------- ------------- ------------- ---------------
Balance, December 31, 1993 265,649 125,561 4,299 395,509
Net income 28,345 28,345
Dividends to CLSI (33,275) (33,275)
Dividends to S-Corporation
shareholders (27,193) (27,193)
Dividends in-kind to S-Corporation
shareholders (7,545) (7,545)
Capital contribution 32,174 32,174
Translation adjustment (1,203) (1,203)
-------------------------------- ------------- ------------- ---------------
Balance, December 31, 1994 297,823 85,893 3,096 386,812
Net loss (52,052) (52,052)
Dividends to CLSI (36,959) (36,959)
Translation adjustment (771) (771)
Market valuation adjustment (1,229) (1,229)
-------------------------------- ------------- ------------- ---------------
Balance, December 31, 1995 $297,823 $ (3,118) $2,325 $(1,229) $ 295,801
================================ ============= ============= ===============
</TABLE>
The accompanying notes are an integral part of these statements.
F-9
<PAGE>
CORNING CLINICAL LABORATORIES INC.
(to be renamed Quest Diagnostics Incorporated)
(a wholly-owned business of Corning Incorporated)
NOTES TO COMBINED FINANCIAL STATEMENTS
(dollars in thousands, unless otherwise indicated)
1. BASIS OF PRESENTATION
Corning Clinical Laboratories Inc. and Corning Nichols Institute Inc.
(collectively referred to as "CCL" or the "Company") are wholly-owned
subsidiaries of Corning Life Sciences Inc. ("CLSI") which in turn is a
wholly-owned subsidiary of Corning Incorporated ("Corning"). The Company is
one of the largest clinical laboratory testing businesses in the United
States. The accompanying financial statements present the carved-out results
of operations, cash flows and financial position of Corning's clinical
laboratory testing business. Covance Inc. (formerly Corning Pharmaceutical
Services Inc.), a subsidiary of CCL, and its related entities ("Covance") as
well as environmental testing services formerly provided by CCL are excluded.
In 1994, Corning acquired three clinical laboratory testing businesses on the
behalf of CCL in separate transactions accounted for as poolings of interests
(see Note 3). Results presented for 1994 and 1993 include the results of CCL
and the pooled entities on a combined basis.Corning Clinical Laboratories
Inc.
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 Distributions, 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 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.
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)
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>
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)
Income taxes payable at December 31, 1995 and 1994 consist of Federal
income taxes payable of $34.2 million and $28.7 million, respectively, state
income taxes payable of $5.0 million and $1.5 million, respectively, and
foreign income taxes payable of $0.6 million and $0.3 million, respectively.
The Company paid income taxes of $21.7 million, $58.5 million and $52.0
million during 1995, 1994 and 1993, respectively.
5. PROVISION FOR RESTRUCTURING AND OTHER SPECIAL CHARGES
In the second quarter of 1995, the Company recorded a provision for
restructuring totaling $33.0 million primarily for workforce reduction
programs and the costs of exiting a number of leased facilities.
Additionally, in the first quarter of 1995, the Company recorded a special
charge of $12.8 million for the settlement of claims related to inadvertent
billing errors of certain laboratory tests that were not completely and/or
successfully performed or reported due to insufficient samples and/or invalid
results. Additionally, in the fourth quarter of 1995, the Company recorded a
charge of $4.8 million related to claims by the Civil Division of the U.S.
Department of Justice ("DOJ") of alleged billing errors related to a
laboratory test performed by Bioran prior to its acquisition by the Company.
In the third quarter of 1994, the Company recorded a provision for
restructuring and other special charges totaling $79.8 million which included
$48.2 million of integration costs, $21.6 million of transaction expenses
related to the Nichols, MML and Bioran acquisitions, and $10 million of
settlement reserves primarily related to government investigations of billing
practices by Nichols prior to its acquisition by the Company. The integration
costs represent the expected costs for closing clinical laboratories in
certain markets where duplicate Company, Nichols, MML or Bioran facilities
existed at the time of the acquisitions.
In the third quarter of 1993, the Company recorded a provision for
restructuring costs and other special charges totaling $99.6 million. The
restructuring component of this special charge aggregated $56.6 million and
consisted primarily of asset write-offs, facility related costs and costs for
workforce reduction programs related principally to the integration of the
Company's operations with those acquired in the Damon acquisition.
The special charge of $43 million consists of a $36.5 million charge to
reflect the settlement and related legal expenses associated with a
compromise agreement with the DOJ to settle claims brought on behalf of the
Inspector General, U.S. Department of Health and Human Services and a $6.5
million charge for related asserted and unasserted claims. The DOJ claims
related to the marketing, sale, pricing and billing of certain blood-test
series provided to Medicare patients. The DOJ settlement does not constitute
an admission with respect to any issue arising from subsequent civil actions.
The following summarizes the Company's restructuring activity (in
millions):
<TABLE>
<CAPTION>
1993 and 1994 Amounts Balance at 1995 Amounts Balance at
Restructuring Utilized December 31, Restructuring Utilized December 31,
Provisions Through 1994 1994 Provision in 1995 1995
--------------- --------------- -------------- --------------- --------- --------------
<S> <C> <C> <C> <C> <C> <C>
Employee
termination costs $ 32.5 $14.8 $17.7 $23.4 $27.0 $14.1
Write-off of fixed
assets 35.6 19.1 16.5 3.7 9.2 11.0
Costs of exiting
leased facilities 21.7 9.3 12.4 3.1 6.8 8.7
Other 15.0 13.4 1.6 2.8 .5 3.9
--------------- --------------- -------------- --------------- --------- --------------
Total $104.8 $56.6 $48.2 $33.0 $43.5 $37.7
=============== =============== ============== =============== ========= ==============
</TABLE>
F-14
<PAGE>
CORNING CLINICAL LABORATORIES INC.
(to be renamed Quest Diagnostics Incorporated)
(a wholly-owned business of Corning Incorporated)
NOTES TO COMBINED FINANCIAL STATEMENTS (Continued)
(dollars in thousands, unless otherwise indicated)
The substantial portion of the balance at December 31, 1995 is expected to
be expended in 1996.
Employee termination costs included severance benefits related to
approximately 3,300 employees (700, 2,000 and 600 in 1995, 1994 and 1993,
respectively). The estimated number of employees to be terminated has been
reduced to 2,355, all of which have been terminated or notified of their
termination at December 31, 1995. Management expects that approximately 300
terminations and the remaining business or facility exits will occur by the
end of 1996. The decrease in the number of actual versus anticipated employee
terminations is primarily attributable to higher than expected attrition. As
a result of higher than expected average termination costs, management's
estimate of total employee termination costs is unchanged. Certain severance
and facility exit costs have payment terms extending beyond 1997.
6. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment at December 31, 1995 and 1994 consist of the
following:
1995 1994
------------ ------------
Land $ 18,568 $ 18,969
Buildings and improvements 186,192 173,546
Laboratory equipment, furniture and fixtures 286,326 247,200
Leasehold improvements 39,078 30,050
Construction-in-progress 19,490 33,508
------------ ------------
Property and equipment, at cost 549,654 503,273
Less: accumulated depreciation and amortization (253,538) (215,711)
------------ ------------
Property and equipment, net $ 296,116 $ 287,562
============ ============
Depreciation and amortization expense aggregated $56.8 million, $46.9
million and $38.1 million for 1995, 1994 and 1993, respectively.
7. INTANGIBLE ASSETS
Intangible assets at December 31, 1995 and 1994 consist of the following:
1995 1994
------------- -------------
Goodwill $1,056,073 $1,043,089
Customer lists 84,558 100,428
Other (principally non-compete covenants) 50,626 61,401
------------- -------------
Intangible assets, at cost 1,191,257 1,204,918
Less: accumulated amortization (160,624) (151,724)
------------- -------------
Intangible assets, net $1,030,633 $1,053,194
============= =============
Amortization expense aggregated $44.7 million, $42.6 million and $28.4
million for 1995, 1994 and 1993, respectively.
8. ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses at December 31, 1995 and 1994
consist of the following:
<TABLE>
<CAPTION>
1995 1994
----------- -----------
<S> <C> <C>
Accrued wages and benefits $ 81,985 $ 74,519
Restructuring, integration and other special charges 61,878 69,812
Accrued expenses 57,338 34,851
Trade accounts payable 31,129 36,169
Accrued acquisition commitments 8,195 21,536
----------- -----------
Accounts payable and accrued expenses $240,525 $236,887
=========== ===========
</TABLE>
F-15
<PAGE>
CORNING CLINICAL LABORATORIES INC.
(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)
9. LONG-TERM DEBT
Long-term debt, exclusive of current maturities, at December 31, 1995 and
1994, respectively, consists of the following:
<TABLE>
<CAPTION>
1995 1994
------------- ------------
<S> <C> <C>
Notes payable to Corning:
Revolving credit notes--interest at the London Interbank
offered rate ("LIBOR") plus 1/8% to 1/4%, maturing 1997 $ 605,636 $ 551,982
Installment note with interest at 9%, maturing 2001 90,000 100,000
Term note with interest at 6.24%, maturing 2003 100,000 100,000
Term note with interest at 6.93%, maturing 2013 100,000 100,000
Term note with interest at 7.17%, maturing 2004 150,000 150,000
Term note with interest at 7.77%, maturing 2024 100,000 100,000
Note payable denominated in pounds Sterling, interest at the
London Interbank Sterling Rate minus 1%, due 2002 8,049 8,516
Mortgage note payable through 2011, interest at 9.25% 6,138 6,355
Capital lease obligations expiring through 2031 32,518 32,538
Other 3,225 3,663
------------- ------------
Total $1,195,566 $1,153,054
============= ============
</TABLE>
Current maturities on long-term debt totaled $12.1 million and $12.6
million at December 31, 1995 and 1994, respectively.
Long-term debt, including capital leases, maturing in each of the years
subsequent to December 31, 1996 is as follows:
<TABLE>
<CAPTION>
<S> <C>
Fiscal year ending December 31,
1997 $ 261,131
1998 10,493
1999 10,530
2000 10,576
2001 and thereafter 902,836
------------
Total long-term debt $1,195,566
============
</TABLE>
Future minimum payments under capital leases and the present value thereof
are as follows:
<TABLE>
<CAPTION>
<S> <C>
Fiscal year ending December 31,
1997 $ 4,061
1998 3,846
1999 3,840
2000 3,948
2001 and thereafter 116,102
-----------
Total future minimum payments under capital leases 131,797
Less amount representing interest (99,279)
-----------
Present value of minimum payments under capital leases $ 32,518
===========
</TABLE>
F-16
<PAGE>
CORNING CLINICAL LABORATORIES INC.
(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 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 each of the Company's wholly-owned, domestic
subsidiaries (Subsidiary Guarantors). Non-guarantor subsidiaries, individually
and in the aggregate, are inconsequential to the Company. Full financial
statements of the Subsidiary Guarantors are not presented because management
believes they are not 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>
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>
F-17
<PAGE>
CORNING CLINICAL LABORATORIES INC.
(to be renamed Quest Diagnostics Incorporated)
(a wholly-owned business of Corning Incorporated)
NOTES TO COMBINED FINANCIAL STATEMENTS (Continued)
(dollars in thousands, unless otherwise indicated)
Certain executives of the Company are included in various stock
compensation programs of Corning. Expenses related to these programs have
been included in the Company's combined financial statements.
In 1994, Corning contributed capital of $25.2 million through the
reduction of revolving credit notes and former S-Corporation shareholders
contributed capital of a building approximating $4.4 million.
12. COMMITMENTS AND CONTINGENCIES
Minimum rental commitments under noncancellable operating leases,
primarily real estate, in effect at December 31, 1995 are as follows:
<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>
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 $72 million, 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.
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)
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.
Management estimated that the range of reasonably possible amounts necessary to
satisfy claims related to Damon and other related and similar investigations was
between $72 million and approximately $300 million at June 30, 1996, and,
because no amount in the range was more probable than other amounts, CCL
increased its reserves to equal the low end of the range. 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 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
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)
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 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 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
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)
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 arm's-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 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. Management's estimate of fair value is currently based on
multiples of revenue primarily ranging from 0.5 to 0.7 times revenue and on
multiples of EBITDA primarily ranging from 5 to 6 times EBITDA. 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. Changes to
the method of valuing regional laboratories will be made only when there is a
significant and fundamental change in facts and circumstances, such as
significant changes in market position or the entrance or exit of a significant
competitor from a regional market.
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 a 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.
Should the estimated fair value of a regional laboratory be less than the net
book value for such laboratory at the end of a quarter, the Company would record
a charge to operations to recognize an impairment of its intangible assets for
such difference.
F-21
<PAGE>
Quarterly Operating Results (unaudited)
<TABLE>
<CAPTION>
First Second Third Fourth Total
Quarter Quarter Quarter Quarter Year
------------- --------------- --------------- --------------- -------------
<S> <C> <C> <C> <C> <C>
1996
Net revenues $401,395 $ 424,543 $ 405,352
Gross profit 154,277 158,242 149,962
Loss before taxes (1,642) (37,518) (1) (162,989)(1)
Net loss (1,511) (37,922) (119,436)
1995
Net revenues $417,662 $ 421,853 $ 399,959 $ 389,914 $1,629,388
Gross profit 168,606 175,793 159,091 145,666 649,156
Income (loss) before taxes 19,827 (1) (5,088) (1) (56,405) (2) (15,902) (1) (57,568)
Net income (loss) 4,423 (3,852) (38,595) (14,028) (52,052)
1994
Net revenues $399,063 $ 422,942 $ 408,478 $ 403,216 $1,633,699
Gross profit 159,050 182,050 163,391 159,364 663,855
Income (loss) before taxes 40,624 45,109 (51,250) (1) 28,272 62,755
Net income (loss) 24,152 24,148 (36,535) 16,580 28,345
</TABLE>
(1) Includes impact of restructuring and other special charges of $46.0
million, $155.7 million, $12.8 million, $33.0 million, $4.8 million and
$79.8 million in second quarter 1996, third quarter 1996, first quarter
1995, second quarter 1995, fourth quarter 1995 and third quarter 1994,
respectively, which are discussed in Notes 5 and 13 to the CCL Combined
Financial Statements.
(2) Includes a $62.0 million charge to increase the reserve for doubtful
accounts and allowances resulting from billing systems implementation and
integration problems at certain laboratories and increased regulatory
requirements.
F-22
<PAGE>
CORNING CLINICAL LABORATORIES INC.
(to be renamed Quest Diagnostics Incorporated)
(a wholly-owned business of Corning Incorporated)
Combined Balance Sheets
September 30, 1996 and December 31, 1995
(in thousands)
<TABLE>
<CAPTION>
September 30, December 31,
1996 1995
--------------- --------------
(unaudited)
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ 48,319 $ 36,446
Accounts receivable, net of allowance of $116,996 and $147,947 for
September 30, 1996 and December 31, 1995, respectively 323,171 318,252
Inventories 25,559 26,601
Deferred taxes on income 126,906 98,845
Prepaid expenses and other assets 25,217 22,014
--------------- --------------
Total current assets 549,172 502,158
Property and equipment, net 293,490 296,116
Intangible assets, net 1,001,500 1,030,633
Other assets 42,216 24,478
--------------- --------------
TOTAL ASSETS $1,886,378 $1,853,385
=============== ==============
LIABILITIES AND STOCKHOLDER'S EQUITY
Current Liabilities:
Accounts payable and accrued expenses $ 374,058 $ 240,525
Current portion of long-term debt 11,885 12,148
Income taxes payable 34,212 39,766
Due to Corning Incorporated and affiliates 14,299 8,979
--------------- --------------
Total current liabilities 434,454 301,418
Long-term debt (principally due to Corning Incorporated) 1,219,900 1,195,566
Other liabilities 99,354 60,600
--------------- --------------
Total liabilities 1,753,708 1,557,584
=============== ==============
Stockholder's Equity:
Contributed capital 297,823 297,823
Accumulated deficit (163,158) (3,118)
Cumulative translation adjustment 1,801 2,325
Market valuation adjustment (3,796) (1,229)
--------------- --------------
Total stockholder's equity 132,670 295,801
--------------- --------------
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY $1,886,378 $1,853,385
=============== ==============
</TABLE>
The accompanying notes are an integral part of these statements.
F-23
<PAGE>
CORNING CLINICAL LABORATORIES INC.
(to be renamed Quest Diagnostics Incorporated)
(a wholly-owned business of Corning Incorporated)
Combined Statements of Operations
For the Three and Nine Months Ended September 30, 1996 and 1995
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30, September 30, September 30,
1996 1995 1996 1995
--------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
Net revenues $ 405,352 $399,959 $1,231,290 $1,239,474
Costs and expenses:
Cost of services 255,390 240,868 768,809 735,984
Selling, general and administrative 125,190 181,346 371,439 399,635
Provision for restructuring and
other special
charges 155,730 -- 201,730 45,885
Interest expense, net 19,866 20,927 59,887 61,529
Amortization of intangible assets 10,328 11,293 31,772 33,678
Other, net 1,837 1,930 (198) 4,429
--------------- --------------- --------------- ---------------
Total 568,341 456,364 1,433,439 1,281,140
--------------- --------------- --------------- ---------------
Loss before taxes (162,989) (56,405) (202,149) (41,666)
Income tax benefit (43,553) (17,810) (43,280) (3,642)
--------------- --------------- --------------- ---------------
Net loss $(119,436) $(38,595) $ (158,869) $ (38,024)
=============== =============== =============== ===============
</TABLE>
The accompanying notes are an integral part of these statements.
F-24
<PAGE>
CORNING CLINICAL LABORATORIES INC.
(to be renamed Quest Diagnostics Incorporated)
(a wholly-owned business of Corning Incorporated)
Combined Statements of Cash Flows
For the Nine Months Ended September 30, 1996 and 1995
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
1996 1995
------------- ------------
<S> <C> <C>
Cash flows from operating activities:
Net loss $(158,869) $ (38,024)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation and amortization 75,232 76,036
Provision for doubtful accounts 81,891 127,297
Provision for restructuring and other special charges 201,730 45,885
Deferred income tax provision (31,612) (39,403)
Other, net (753) 4,984
Changes in operating assets and liabilities:
Accounts receivable (87,339) (112,110)
Accounts payable and accrued expenses 3,355 18,732
Restructuring, integration and other special charges (19,863) (49,836)
Due from/to Corning Incorporated and affiliates 5,320 4,572
Changes in other assets and liabilities (27,155) 15,656
------------- ------------
Net cash provided by operating activities 41,937 53,789
------------- ------------
Cash flows from investing activities:
Capital expenditures (58,802) (56,062)
Acquisition of businesses, net of cash acquired -- (22,907)
(Increase) decrease in investments (7,580) 1,058
Proceeds from sale of assets 13,285 --
------------- ------------
Net cash used in investing activities (53,097) (77,911)
------------- ------------
Cash flows from financing activities:
Proceeds from borrowings, primarily with Corning Incorporated 59,090 63,795
Repayment of long-term debt (34,885) (3,766)
Dividends paid (1,172) (27,718)
------------- ------------
Net cash provided by financing activities 23,033 32,311
------------- ------------
Net change in cash and cash equivalents 11,873 8,189
Cash and cash equivalents, beginning of year 36,446 38,719
------------- ------------
Cash and cash equivalents, end of period $ 48,319 $ 46,908
============= ============
</TABLE>
The accompanying notes are an integral part of these statements.
F-25
<PAGE>
CORNING CLINICAL LABORATORIES INC.
(to be renamed Quest Diagnostics Incorporated
(a wholly-owned business of Corning Incorporated)
NOTES TO INTERIM COMBINED FINANCIAL STATEMENTS
(unaudited)
1. BASIS OF PRESENTATION
Corning Clinical Laboratories Inc. and Corning Nichols Institute Inc.
(collectively referred to as "CCL" or the "Company") are wholly-owned
subsidiaries of Corning Life Sciences Inc. ("CLSI") which in turn is a
wholly-owned subsidiary of Corning Incorporated ("Corning"). The Company is
one of the largest clinical laboratory testing businesses in the United
States. These financial statements present the carved-out results of
operations, cash flows and financial position of Corning's clinical
laboratory testing business. Covance Inc. (formerly Corning Pharmaceutical
Services Inc.), a subsidiary of CCL, and its related entities ("Covance") as
well as environmental testing services formerly provided by CCL are excluded.
In May 1996, Corning's Board of Directors approved a plan to distribute to
its shareholders on a pro rata basis all of the shares of CCL and Covance
(the "CCL and Covance Spin-Off Distributions"). The result of the plan will
be the creation of two independent, publicly-owned companies. As a result of
the Spin-Off Distributions, CCL will operate Corning's clinical laboratory
testing business as an independent public company and Covance will own and
operate Corning's contract research business as an independent public
company. The Spin-Off Distributions will be effected by the distribution of a
dividend to holders of Corning Common Stock of all of the outstanding CCL
Common Stock, followed immediately by the distribution of a dividend to the
holders of CCL Common Stock of all of the Covance Common Stock. Corning has
submitted to the Internal Revenue Service a request for a ruling that the
Spin-Off Distributions qualify as tax-free distributions under the Internal
Revenue Code of 1986. Coincident with the Spin-Off Distributions, 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 $72 million, 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.
Management estimated that the range of reasonably possible amounts necessary to
satisfy claims related to Damon and other related and similar investigations was
between $72 million and approximately $300 million at June 30, 1996, and,
because no amount in the range was more probable than other amounts, CCL
increased its reserves to equal the low end of the range. 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.
F-26
<PAGE>
CORNING CLINICAL LABORATORIES INC.
(to be renamed Quest Diagnostics Incorporated
(a wholly-owned business of Corning Incorporated)
NOTES TO INTERIM COMBINED FINANCIAL STATEMENTS (Continued)
(unaudited)
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.
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.
F-27
<PAGE>
CORNING CLINICAL LABORATORIES INC.
(to be renamed Quest Diagnostics Incorporated
(a wholly-owned business of Corning Incorporated)
NOTES TO INTERIM COMBINED FINANCIAL STATEMENTS (Continued)
(unaudited)
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
development of a billing system which had been intended as its standard
company-wide billing system. Management now plans to standardize billing
systems using a system already implemented in seven of its sites.
4. RESTRUCTURING RESERVES
As described in Note 5 to the CCL Combined Financial statements, CCL has
recorded charges for restructuring plans in previous years. Reserves relating
to these programs totaled approximately $37.7 million and $23.5 million at
December 31, 1995 and September 30, 1996, respectively. Management believes
that the costs of the restructuring plans will be financed through cash from
operations and does not anticipate any significant impact on its liquidity as
a result of the restructuring plans.
5. SPIN-OFF DISTRIBUTION
Coincident with the CCL Spin-Off Distribution, the Company plans to record
a non-recurring charge of approximately $20 million ($13 million after tax)
associated with the CCL Spin-Off Distribution. The largest component of the
charge will be the cost of establishing an employee stock ownership plan ($11
million). The remainder of the charge will consist principally of the costs
for advisors and other fees associated with establishing the Company as a
separate publicly-traded entity. The amount of the charge is subject to
change based on the price of the CCL stock on the Distribution Date.
Prior to the CCL Spin-Off Distribution, the Company will borrow
approximately $500 million in long-term debt to repay Corning for certain
intercompany borrowings. The debt is assumed to consist of $350 million of
bank borrowings and $150 million of publicly-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 Spin-Off Distributions and provide for computing and apportioning tax
liabilities and tax benefits for such periods among the parties.
F-28
<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)
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 arm's-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 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. Management's estimate of fair value is currently based on
multiples of revenue primarily ranging from 0.5 to 0.7 times revenue and on
multiples of EBITDA primarily ranging from 5 to 6 times EBITDA. 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. Changes to
the method of valuing regional laboratories will be made only when there is a
significant and fundamental change in facts and circumstances, such as
significant changes in market position or the entrance or exit of a significant
competitor from a regional market.
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 a 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.
Should the estimated fair value of a regional laboratory be less than the net
book value for such laboratory at the end of a quarter, the Company would record
a charge to operations to recognize an impairment of its intangible assets for
such difference.
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)
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 each of the Company's wholly-owned, domestic
subsidiaries (Subsidiary Guarantors). Non-guarantor subsidiaries, individually
and in the aggregate, are inconsequential to the Company. Full financial
statements of the Subsidiary Guarantors are not presented because management
believes they are not 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-30
<PAGE>
Inside Back Cover
Photo Descriptions
- ------------------
Photo of Corning Clinical Lab testing machinery:
Caption: As one of the nation's leading providers of clinical laboratory testing
services, Quest Diagnostics processes approximately 60 million requisitions for
diagnostic tests a year.
Photo of robot.
Caption: A test for lead poisoning once required several manual steps. Now, with
robots, the test is fully automated from specimen preparation to reporting
results.
Photo of meeting.
Caption: With this unusual microscope, more than a dozen Quest Diagnostics
doctors or technicians can simultaneously view the same slide and discuss
results.
Photo molecular biologist.
Caption: A Quest Diagnostics molecular biologist studies an autoradiogram,
looking for mutated genes as part of a molecular genetics test.
<PAGE>
OUTSIDE BACK COVER
[LOGO] QUEST DIAGNOSTICS
<PAGE>
PART II
Information Not Required in Prospectus
Item 13. Other Expenses of Issuance and Distribution
The following table sets forth the costs and expenses, other than
underwriting discounts and commissions, payable by the Registrants in
connection with the sale of the securities being registered. All amounts are
estimates except for the fees payable to the Commission and to the NASD.
---------------
Amount
to be paid
---------------
SEC registration fee $ 45,455
Printing and engraving expenses 170,000
Legal fees and expenses of CCL 325,000
Accounting fees and expenses 50,000
Blue Sky and NASD filing fees 38,500
Rating Agency fees and expenses 100,000
Trustee fees and expenses 15,000
Miscellaneous 56,045
---------------
TOTAL $800,000
===============
Item 14. Indemnification of Directors and Officers
Limitation on Liability of Directors
Pursuant to authority conferred by Section 102 of the Delaware General
Corporation Law (the "DGCL"), Paragraph 11 of CCL's certificate of incorporation
(the "Certificate") ("Paragraph 11") eliminates the personal liability of CCL's
directors to CCL or its stockholders for monetary damages for breach of
fiduciary duty, including without limitation, directors serving on committees of
CCL's board of directors (the "Board"). Directors remain liable for (1) any
breach of the duty of loyalty to CCL or its stockholders, (2) any act or
omission not in good faith or which involves intentional misconduct or a knowing
violation of law, (3) any violation of Section 174 of the DGCL, which proscribes
the payment of dividends and stock purchases or redemptions under certain
circumstances, and (4) any transaction from which directors derive an improper
personal benefit.
Indemnification and Insurance
In accordance with Section 145 of the DGCL, which provides for the
indemnification of directors, officers and employees under certain
circumstances, Paragraph 11 grants CCL's directors and officers a right to
indemnification for all expenses, liabilities and losses relating to civil,
criminal, administrative or investigative proceedings to which they are a party
(1) by reason of the fact that they are or were directors or officers of CCL or
(2) by reason of the fact that, while they are or were directors or officers of
CCL, they are or were serving at the request of CCL as directors or officers of
another corporation, partnership, joint venture, trust or enterprise. Paragraph
11 further provides for the mandatory advancement of expenses incurred by
officers and directors in defending such proceedings in advance of their final
disposition upon delivery to CCL by the indemnitee of an undertaking to repay
all amounts so advanced if it is ultimately determined that such indemnitee is
not entitled to be indemnified under Paragraph 11. CCL may not indemnify or make
advance payments to any person in connection with proceedings initiated against
CCL by such person without the authorization of the Board.
In addition, Paragraph 11 provides that directors and officers therein described
shall be indemnified to the fullest extent permitted by Section 145 of the DGCL,
or any successor provisions or amendments thereunder. In the event that any such
successor provisions or amendments provide indemnification rights broader than
permitted prior thereto, Paragraph 11 allows such broader indemnification rights
to apply retroactively with respect to any predating alleged action or inaction
and also allows the indemnification to continue after an indemnitee has ceased
to be a director or officer of CCL and to inure to the benefit of the
indemnitee's heirs, executors and administrators.
Paragraph 11 further provides that the right to indemnification is not exclusive
of any other right which any indemnitee may have or thereafter acquire under any
statute, the Certificate, any agreement or vote of stockholders or disinterested
directors or otherwise,
II-1
<PAGE>
and allows CCL to indemnify and advance expenses to any person whom the
corporation has the power to indemnify under the DGCL or otherwise.
Insofar as indemnification for liabilities arising under the Securities Act may
be permitted for directors and officers and controlling persons pursuant to the
foregoing provisions, CCL has been advised that in the opinion of the Commission
such indemnification is against public policy as expressed in the Securities Act
and is, therefore, unenforceable.
The Certificate authorizes CCL to purchase insurance for directors and officers
of CCL and persons who serve at the request of CCL as directors, officers,
employees or agents of another corporation, partnership, joint venture, trust or
enterprise, against any expense, liability or loss incurred in such capacity,
whether or not CCL would have the power to indemnify such persons against such
expense or liability under the DGCL. CCL intends to maintain insurance coverage
of its officers and directors as well as insurance coverage to reimburse CCL for
potential costs of its corporate indemnification of directors and officers.
Item 15. Recent Sale of Unregistered Securities
On November 26, 1996, in connection with the dissolution of Corning Life
Sciences Inc. ("CLSI"), CLSI assigned to CCL all of its tangible and intangible
assets (other than the common stock of CCL owned by CLSI and certain other
assets as described in the Contribution Agreement entered into by and between
CLSI and CCL on the aforementioned date). In exchange for the assets contributed
to CCL, CCL issued to CLSI 200,000 shares of common stock of CCL and 1,000
shares of voting preferred stock and CCL transferred to CLSI $250,000.
CCL believes that the transactions were exempt from the registration provisions
of the Securities Act of 1933 pursuant to Section 4(2) of such Act.
Item 16. Exhibits and Financial Statement Schedules
(a) A list of the exhibits included as part of this Registration
Statement is set forth in the Exhibit Index that immediately
precedes such exhibits and such list is incorporated herein by this
reference.
(b) Schedule II: Valuation Accounts and Reserves (previously filed).
Item 17. Undertakings
Each of the undersigned Registrants hereby undertakes:
Insofar as indemnification for liabilities arising under the Securities Act of
1933 may be permitted to directors, officers and controlling persons of the
Registrant, pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities Act
of 1933 and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a director, officer or controlling
person of the Registrant in the successful defense of any action, suit or
proceeding) is asserted by any such director, officer or controlling person in
connection with the securities being registered, the Registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question of whether or not
such indemnification is against public policy as expressed in the Securities Act
of 1933 and will be governed by the final adjudication of such issue.
Each of the undersigned Registrants hereby undertakes:
(1) For purposes of determining any liability under the Securities Act
of 1933, the information omitted from the form of prospectus filed
by the registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under
the Securities Act shall be deemed to be part of this registration
statement as of the time it was declared effective.
(2) For purposes of determining any liability under the Securities Act
of 1933, each post-effective amendment that contains a form of
prospectus shall be a new registration statement relating to the
securities offered therein, and the offering of such securities at
that time shall be deemed to be the initial bona fide offering
thereof.
II-2
<PAGE>
Signatures
Pursuant to the requirements of the Securities Act of 1933, as amended, the
Registrant has duly caused this amendment to the Registration Statement to be
signed on its behalf by the undersigned, thereunto duly authorized, in the
City of New York, State of New York, on December 11, 1996.
CORNING CLINICAL LABORATORIES INC.
By: /s/ Kenneth W. Freeman
-------------------------------------------
Kenneth W. Freeman
President and Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, as amended, this
amendment to the Registration Statement has been signed by the following
persons in the capacities indicated on December 11, 1996.
<TABLE>
<CAPTION>
Signature Title
--------- -----
<S> <C>
/s/ Kenneth W. Freeman President and Chief Executive Officer and Director
- ---------------------------- (principal executive officer)
Kenneth W. Freeman
/s/ Douglas M. VanOort Senior Vice President and Chief Financial Officer
- ---------------------------- (principal financial officer)
Douglas M. VanOort
/s/ Robert A. Hagemann Vice President and Controller
- ---------------------------- (principal accounting officer)
Robert A. Hagemann
/s/ Van C. Campbell
- ---------------------------- Director
Van C. Campbell
/s/ David A. Duke
- ---------------------------- Director
David A. Duke
/s/ Roger G. Ackerman
- ---------------------------- Director
Roger G. Ackerman
</TABLE>
II-3
<PAGE>
Signatures
Pursuant to the requirements of the Securities Act of 1933, as amended, the
Registrant has duly caused this amendment to the Registration Statement to be
signed on its behalf by the undersigned, thereunto duly authorized, in the
City of New York, State of New York, on December 11, 1996.
CORNING CLINICAL LABORATORIES INC. (MI)
By: /s/ Leo C. Farrenkopf, Jr.
---------------------------------------
Leo C. Farrenkopf, Jr., Secretary
Pursuant to the requirements of the Securities Act of 1933, as amended, this
amendment to the Registration Statement has been signed by the following
persons in the capacities indicated on December 11, 1996.
<TABLE>
<CAPTION>
Signature Title
--------- -----
<S> <C>
*
- ---------------------------------- Vice President and Director
Douglas M. VanOort
*
- ---------------------------------- Director
Alister W. Reynolds
*By: /s/ Leo C. Farrenkopf, Jr.
-----------------------------
Leo C. Farrenkopf, Jr.
Attorney-in-fact
</TABLE>
II-4
<PAGE>
Signatures
Pursuant to the requirements of the Securities Act of 1933, as amended, the
Registrant has duly caused this amendment to the Registration Statement to be
signed on its behalf by the undersigned, thereunto duly authorized, in the
City of New York, State of New York, on December 11, 1996.
CORNING NICHOLS INSTITUTE INC.
By: /s/ Leo C. Farrenkopf, Jr.
--------------------------------------
Leo C. Farrenkopf, Jr., Secretary
Pursuant to the requirements of the Securities Act of 1933, as amended, this
amendment to the Registration Statement has been signed by the following
persons in the capacities indicated on December 11, 1996.
<TABLE>
<CAPTION>
Signature Title
--------- -----
<S> <C>
*
- --------------------------------- Chairman and Director
Kenneth W. Freeman
*
- --------------------------------- Director
Roger G. Ackerman
*
- --------------------------------- Director
Van C. Campbell
*
- --------------------------------- Director
David A. Duke
*By: /s/ Leo C. Farrenkopf, Jr.
----------------------------
Leo C. Farrenkopf, Jr.
Attorney-in-fact
</TABLE>
II-5
<PAGE>
Signatures
Pursuant to the requirements of the Securities Act of 1933, as amended, the
Registrant has duly caused this amendment to the Registration Statement to be
signed on its behalf by the undersigned, thereunto duly authorized, in the
City of New York, State of New York, on December 11, 1996.
DAMON CLINICAL LABORATORIES INC.
By: /s/ Leo C. Farrenkopf, Jr.
-------------------------------------
Leo C. Farrenkopf, Jr., Secretary
Pursuant to the requirements of the Securities Act of 1933, as amended, this
amendment to the Registration Statement has been signed by the following
persons in the capacities indicated on December 11, 1996.
<TABLE>
<CAPTION>
Signature Title
--------- -----
<S> <C>
*
- ------------------------------------ Vice President and Director
Douglas M. VanOort
*
- ------------------------------------- Director
Alister W. Reynolds
*By: /s/ Leo C. Farrenkopf, Jr.
--------------------------------
Leo C. Farrenkopf, Jr.
Attorney-in-fact
</TABLE>
II-6
<PAGE>
Signatures
Pursuant to the requirements of the Securities Act of 1933, as amended, the
Registrant has duly caused this amendment to the Registration Statement to be
signed on its behalf by the undersigned, thereunto duly authorized, in the
City of New York, State of New York, on December 11, 1996.
CORNING CLINICAL LABORATORIES INC. (CT)
By: /s/ Leo C. Farrenkopf, Jr.
--------------------------------------
Leo C. Farrenkopf, Jr., Secretary
Pursuant to the requirements of the Securities Act of 1933, as amended, this
amendment to the Registration Statement has been signed by the following
persons in the capacities indicated on December 11, 1996.
<TABLE>
<CAPTION>
Signature Title
--------- -----
<S> <C>
*
- ------------------------------------- Vice President and Director
Douglas M. VanOort
*
- ------------------------------------- Director
Alister W. Reynolds
*By: /s/ Leo C. Farrenkopf, Jr.
-----------------------------
Leo C. Farrenkopf, Jr.
Attorney-in-fact
</TABLE>
II-7
<PAGE>
Signatures
Pursuant to the requirements of the Securities Act of 1933, as amended, the
Registrant has duly caused this amendment to the Registration Statement to be
signed on its behalf by the undersigned, thereunto duly authorized, in the
City of New York, State of New York, on December 11, 1996.
CORNING CLINICAL LABORATORIES INC. (MA)
By: /s/ Leo C. Farrenkopf, Jr.
-----------------------------------------
Leo C. Farrenkopf, Secretary
Pursuant to the requirements of the Securities Act of 1933, as amended, this
amendment to the Registration Statement has been signed by the following
persons in the capacities indicated on December 11, 1996.
<TABLE>
<CAPTION>
Signature Title
--------- -----
<S> <C>
*
- ----------------------------------- Vice President and Director
Douglas M. VanOort
*
- ----------------------------------- Director
Alister W. Reynolds
*By: /s/ Leo C. Farrenkopf, Jr.
--------------------------
Leo C. Farrenkopf, Jr.
Attorney-in-fact
</TABLE>
II-8
<PAGE>
Signatures
Pursuant to the requirements of the Securities Act of 1933, as amended, the
Registrant has duly caused this amendment to the Registration Statement to be
signed on its behalf by the undersigned, thereunto duly authorized, in the
City of New York, State of New York, on December 11, 1996.
CORNING CLINICAL LABORATORIES OF PENNSYLVANIA INC.
By: /s/ Leo C. Farrenkopf, Jr.
----------------------------------------
Leo C. Farrenkopf, Jr., Secretary
Pursuant to the requirements of the Securities Act of 1933, as amended, this
amendment to the Registration Statement has been signed by the following
persons in the capacities indicated on December 11, 1996.
<TABLE>
<CAPTION>
Signature Title
--------- -----
<S> <C>
*
- ------------------------------------ Vice President and Director
Douglas M. VanOort
*
- ------------------------------------ Director
Alister W. Reynolds
*By: /s/ Leo C. Farrenkopf, Jr.
--------------------------------
Leo C. Farrenkopf, Jr.
Attorney-in-fact
</TABLE>
II-9
<PAGE>
Signatures
Pursuant to the requirements of the Securities Act of 1933, as amended, the
Registrant has duly caused this amendment to the Registration Statement to be
signed on its behalf by the undersigned, thereunto duly authorized, in the
City of New York, State of New York, on December 11, 1996.
DEYOR CPF/METPATH, INC.
By: /s/ Leo C. Farrenkopf, Jr.
--------------------------------------
Leo C. Farrenkopf, Jr., Secretary
Pursuant to the requirements of the Securities Act of 1933, as amended, this
amendment to the Registration Statement has been signed by the following
persons in the capacities indicated on December 11, 1996.
<TABLE>
<CAPTION>
Signature Title
--------- -----
<S> <C>
*
- ----------------------------------- Vice President and Director
Douglas M. VanOort
*
- ----------------------------------- Director
Alister W. Reynolds
*By: /s/ Leo C. Farrenkopf, Jr.
--------------------------
Leo C. Farrenkopf, Jr.
Attorney-in-fact
</TABLE>
II-10
<PAGE>
Signatures
Pursuant to the requirements of the Securities Act of 1933, as amended, the
Registrant has duly caused this amendment to the Registration Statement to be
signed on its behalf by the undersigned, thereunto duly authorized, in the
City of New York, State of New York, on December 11, 1996.
SOUTHGATE MEDICAL SERVICES, INC.
By: /s/ Leo C. Farrenkopf, Jr.
-----------------------------------
Leo C. Farrenkopf, Jr., Secretary
Pursuant to the requirements of the Securities Act of 1933, as amended, this
amendment to the Registration Statement has been signed by the following
persons in the capacities indicated on December 11, 1996.
<TABLE>
<CAPTION>
Signature Title
--------- -----
<S> <C>
*
---------------------------------- Vice President and Director
Douglas M. VanOort
*
---------------------------------- Director
Alister W. Reynolds
*By: /s/ Leo C. Farrenkopf, Jr.
-------------------------
Leo C. Farrenkopf, Jr.
Attorney-in-fact
</TABLE>
II-11
<PAGE>
Signatures
Pursuant to the requirements of the Securities Act of 1933, as amended, the
Registrant has duly caused this amendment to the Registration Statement to be
signed on its behalf by the undersigned, thereunto duly authorized, in the
City of New York, State of New York, on December 11, 1996.
CORNING MRL INC.
By: /s/ Leo C. Farrenkopf, Jr.
----------------------------------
Leo C. Farrenkopf, Jr., Secretary
Pursuant to the requirements of the Securities Act of 1933, as amended, this
amendment to the Registration Statement has been signed by the following
persons in the capacities indicated on December 11, 1996.
<TABLE>
<CAPTION>
Signature Title
--------- -----
<S> <C>
*
---------------------------------- Vice President and Director
Douglas M. VanOort
*
----------------------------------- Director
Alister W. Reynolds
*By: /s/ Leo C. Farrenkopf, Jr.
---------------------------
Leo C. Farrenkopf, Jr.
Attorney-in-fact
</TABLE>
II-12
<PAGE>
Signatures
Pursuant to the requirements of the Securities Act of 1933, as amended, the
Registrant has duly caused this amendment to the Registration Statement to be
signed on its behalf by the undersigned, thereunto duly authorized, in the
City of New York, State of New York, on December 11, 1996.
DPD HOLDINGS, INC.
By: /s/ Leo C. Farrenkopf, Jr.
--------------------------------------
Leo C. Farrenkopf, Jr., Secretary
Pursuant to the requirements of the Securities Act of 1933, as amended, this
amendment to the Registration Statement has been signed by the following
persons in the capacities indicated on December 11, 1996.
<TABLE>
<CAPTION>
Signature Title
--------- -----
<S> <C>
*
- ------------------------------------ Vice President and Director
Douglas M. VanOort
*
- ------------------------------------- Director
Alister W. Reynolds
*By: /s/ Leo C. Farrenkopf, Jr.
--------------------------
Leo C. Farrenkopf, Jr.
Attorney-in-fact
</TABLE>
II-13
<PAGE>
Signatures
Pursuant to the requirements of the Securities Act of 1933, as amended, the
Registrant has duly caused this amendment to the Registration Statement to be
signed on its behalf by the undersigned, thereunto duly authorized, in the
City of New York, State of New York, on December 11, 1996.
METWEST INC.
By: /s/ Leo C. Farrenkopf, Jr.
-----------------------------------
Leo C. Farrenkopf, Jr., Secretary
Pursuant to the requirements of the Securities Act of 1933, as amended, this
amendment to the Registration Statement has been signed by the following
persons in the capacities indicated on December 11, 1996.
<TABLE>
<CAPTION>
Signature Title
--------- -----
<S> <C>
*
- ------------------------------------ Vice President and Director
Douglas M. VanOort
*
- ------------------------------------ Director
Alister W. Reynolds
*By: /s/ Leo C. Farrenkopf, Jr.
---------------------------
Leo C. Farrenkopf, Jr.
Attorney-in-fact
</TABLE>
II-14
<PAGE>
Signatures
Pursuant to the requirements of the Securities Act of 1933, as amended, the
Registrant has duly caused this amendment to the Registration Statement to be
signed on its behalf by the undersigned, thereunto duly authorized, in the
City of New York, State of New York, on December 11, 1996.
CORNING CLINICAL LABORATORIES INC. (MD)
By: /s/ Leo C. Farrenkopf, Jr.
---------------------------------
Leo C. Farrenkopf, Jr., Secretary
Pursuant to the requirements of the Securities Act of 1933, as amended, this
amendment to the Registration Statement has been signed by the following
persons in the capacities indicated on December 11, 1996.
<TABLE>
<CAPTION>
Signature Title
--------- -----
<S> <C>
*
- ---------------------------------- Vice President and Director
Douglas M. VanOort
*
- ---------------------------------- Director
Alister W. Reynolds
*By:/s/ Leo C. Farrenkopf, Jr.
--------------------------
Leo C. Farrenkopf, Jr.
Attorney-in-fact
</TABLE>
II-15
<PAGE>
Signatures
Pursuant to the requirements of the Securities Act of 1933, as amended, the
Registrant has duly caused this amendment to the Registration Statement to be
signed on its behalf by the undersigned, thereunto duly authorized, in the
City of New York, State of New York, on December 11, 1996.
NICHOLS INSTITUTE DIAGNOSTICS
By: /s/ Leo C. Farrenkopf, Jr.
--------------------------------------
Leo C. Farrenkopf, Jr., Secretary
Pursuant to the requirements of the Securities Act of 1933, as amended, this
amendment to the Registration Statement has been signed by the following
persons in the capacities indicated on December 11, 1996.
<TABLE>
<CAPTION>
Signature Title
--------- -----
<S> <C>
*
- ---------------------------------- Vice President and Director
Douglas M. VanOort
*
- ---------------------------------- Director
Alister W. Reynolds
*By:/s/ Leo C. Farrenkopf, Jr.
-------------------------
Leo C. Farrenkopf, Jr.
Attorney-in-fact
</TABLE>
II-16
<PAGE>
Signatures
Pursuant to the requirements of the Securities Act of 1933, as amended, the
Registrant has duly caused this amendment to the Registration Statement to be
signed on its behalf by the undersigned, thereunto duly authorized, in the
City of New York, State of New York, on December 11, 1996.
NOMAD-MASSACHUSETTS, INC.
By: /s/ Leo C. Farrenkopf, Jr.
----------------------------------
Leo C. Farrenkopf, Jr., Secretary
Pursuant to the requirements of the Securities Act of 1933, as amended, this
amendment to the Registration Statement has been signed by the following
persons in the capacities indicated on December 11, 1996.
<TABLE>
<CAPTION>
Signature Title
--------- -----
<S> <C>
*
- ----------------------------------- Vice President and Director
Douglas M. VanOort
*
- ------------------------------------ Director
Alister W. Reynolds
*By:/s/ Leo C. Farrenkopf, Jr.
------------------------
Leo C. Farrenkopf, Jr.
Attorney-in-fact
</TABLE>
II-17
<PAGE>
Signatures
Pursuant to the requirements of the Securities Act of 1933, as amended, the
Registrant has duly caused this amendment to the Registration Statement to be
signed on its behalf by the undersigned, thereunto duly authorized, in the
City of New York, State of New York, on December 11, 1996.
QUEST DIAGNOSTICS INCORPORATED (MI)
By: /s/ Leo C. Farrenkopf, Jr.
-----------------------------------
Leo C. Farrenkopf, Jr., Secretary
Pursuant to the requirements of the Securities Act of 1933, as amended, this
amendment to the Registration Statement has been signed by the following
persons in the capacities indicated on December 11, 1996.
<TABLE>
<CAPTION>
Signature Title
--------- -----
<S> <C>
*
---------------------------- Vice President and Director
Douglas M. VanOort
*
---------------------------- Director
Alister W. Reynolds
*By: /s/ Leo C. Farrenkopf, Jr.
----------------------------
Leo C. Farrenkopf, Jr.
Attorney-in-fact
</TABLE>
II-18
<PAGE>
Signatures
Pursuant to the requirements of the Securities Act of 1933, as amended, the
Registrant has duly caused this amendment to the Registration Statement to be
signed on its behalf by the undersigned, thereunto duly authorized, in the
City of New York, State of New York, on December 11, 1996.
QUEST DIAGNOSTICS INCORPORATED (MD)
By: /s/ Leo C. Farrenkopf, Jr.
-----------------------------------
Leo C. Farrenkopf, Jr., Secretary
Pursuant to the requirements of the Securities Act of 1933, as amended, this
amendment to the Registration Statement has been signed by the following
persons in the capacities indicated on December 11, 1996.
<TABLE>
<CAPTION>
Signature Title
--------- -----
<S> <C>
*
---------------------------- Vice President and Director
Douglas M. VanOort
*
---------------------------- Director
Alister W. Reynolds
*By: /s/ Leo C. Farrenkopf, Jr.
----------------------------
Leo C. Farrenkopf, Jr.
Attorney-in-fact
</TABLE>
II-19
<PAGE>
Signatures
Pursuant to the requirements of the Securities Act of 1933, as amended, the
Registrant has duly caused this amendment to the Registration Statement to be
signed on its behalf by the undersigned, thereunto duly authorized, in the
City of New York, State of New York, on December 11, 1996.
CLMP INC.
By: /s/ Peter C. Fulweiler
----------------------------------
Peter C. Fulweiler, President
Power of Attorney
KNOW ALL MEN BY THESE PRESENTS that each individual whose signature appears
below constitutes and appoints Robert A. Carothers, Raymond C. Marier, Leo C.
Farrenkopf, Jr. and each of them singly, his or her true and lawful
attorneys-in-fact and agents with full power of substitution, for him or her
and in his or her name, place and stead, in any and all capacities, to sign
this Registration Statement and any and all amendments thereto, including
post-effective amendments, and to file the same, with all exhibits thereto,
any related registration filed pursuant to Rule 462(b) under the Securities
Act of 1933, as amended, and other documents in connection therewith, with
the Securities and Exchange Commission, granting unto said attorneys-in-fact
and agents, and each of them, full power and authority to do and perform each
and every act and thing requisite and necessary to be done in and about the
premises, as fully to all intents and purposes as he or she might or could do
in person, hereby ratifying and confirming all the said attorneys-in-fact and
agents or any of them or their or his or her substitute or substitutes, may
lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, as amended, this
amendment to the Registration Statement has been signed by the following
persons in the capacities indicated on December 11, 1996.
<TABLE>
<CAPTION>
Signature Title
--------- -----
<S> <C>
/s/ Peter C. Fulweiler
- ------------------------------ President and Director
Peter C. Fulweiler
/s/ Robert S. Galen
- ------------------------------ Vice President and Director
Robert S. Galen
/s/ Stephen A. Calamari
- ------------------------------ Treasurer
Stephen A. Calamari
/s/ Louis M. Heidelberger
- ------------------------------ Director
Louis M. Heidelberger
</TABLE>
II-20
<PAGE>
Signatures
Pursuant to the requirements of the Securities Act of 1933, as amended, the
Registrant has duly caused this amendment to the Registration Statement to be
signed on its behalf by the undersigned, thereunto duly authorized, in the
City of New York, State of New York, on December 11, 1996.
DIAGNOSTIC REFERENCE SERVICES, INC.
By: /s/ Leo C. Farrenkopf, Jr.
-----------------------------------
Leo C. Farrenkopf, Jr., Secretary
Pursuant to the requirements of the Securities Act of 1933, as amended, this
amendment to the Registration Statement has been signed by the following
persons in the capacities indicated on December 11, 1996.
<TABLE>
<CAPTION>
Signature Title
--------- -----
<S> <C>
*
- ----------------------------------
Douglas M. VanOort Vice President and Director
*
- ----------------------------------
Alister W. Reynolds Director
*By: /s/ Leo C. Farrenkopf, Jr.
- -----------------------------------
Leo C. Farrenkopf, Jr.
Attorney-in-fact
</TABLE>
II-21
<PAGE>
Signatures
Pursuant to the requirements of the Securities Act of 1933, as amended, the
Registrant has duly caused this amendment to the Registration Statement to be
signed on its behalf by the undersigned, thereunto duly authorized, in the City
of New York, State of New York, on December 11, 1996.
PATHOLOGY BUILDING PARTNERSHIP
By: CORNING CLINICAL LABORATORIES INC. (MD)
As General Partner
By: /s/ Leo C. Farrenkopf, Jr.
Leo C. Farrenkopf, Jr., Secretary
By: DIAGNOSTIC REFERENCE SERVICES, INC.
As General Partner
By: /s/ Leo C. Farrenkopf, Jr.
Leo C. Farrenkopf, Jr., Secretary
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Registrant Statement has been signed below by the following persons in
the capacities indicated on December 11, 1996.
PATHOLOGY BUILDING PARTNERSHIP
By: CORNING CLINICAL LABORATORIES INC. (MD)
As General Partner
By: /s/ Leo C. Farrenkopf, Jr.
Leo C. Farrenkopf, Jr., Secretary
By: DIAGNOSTIC REFERENCE SERVICES, INC.
As General Partner
By: /s/ Leo C. Farrenkopf, Jr.
Leo C. Farrenkopf, Jr., Secretary
II-22
<PAGE>
Exhibit Index
<TABLE>
<CAPTION>
Exhibit
Number Description Page
- ----------- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
1.1 Form of Underwriting Agreement
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 as of
November 22, 1996 (filed as an exhibit to Corning Clinical Laboratories Inc.'s ("CCL") Registration
Statement on Form 10 (File No. 1-12215) and incorporated herein by this reference)
3.1 Certificate of Incorporation of the Registrant (filed as an exhibit to CCL's Registration Statement on
Form 10 (File No. 1-12215) and incorporated herein by this reference)
3.2 By-Laws of the Registrant (filed as an exhibit to CCL's Registration Statement on Form 10 (File No.
1-12215) and incorporated herein by this reference)
3.3** Certificate of Incorporation of Corning Clinical Laboratories Inc. (MI)
3.4** Certificate of Incorporation of Corning Nichols Institute Inc.
3.5** Certificate of Incorporation of Damon Clinical Laboratories Inc.
3.6** Certificate of Incorporation of Corning Clinical Laboratories Inc. (CT)
3.7** Certificate of Incorporation of Corning Clinical Laboratories Inc. (MA)
3.8** Certificate of Incorporation of Corning Clinical Laboratories of Pennsylvania Inc.
3.9** Certificate of Incorporation of Deyor CPF/Metpath, Inc.
3.10** Certificate of Incorporation of Southgate Medical Services, Inc.
3.11** Certificate of Incorporation of Corning MRL Inc.
3.12** Certificate of Incorporation of DPD Holdings, Inc.
3.13** Certificate of Incorporation of Metwest Inc.
3.14** Certificate of Incorporation of Corning Clinical Laboratories Inc. (MD)
3.15** Certificate of Incorporation of Nichols Institute Diagnostics
3.16** Certificate of Incorporation of Nomad-Massachusetts, Inc.
3.17** Certificate of Incorporation of Quest Diagnostics Incorporated (MI)
3.18** Certificate of Incorporation of Quest Diagnostics Incorporated (MD)
3.19** Certificate of Incorporation of CLMP Inc.
3.20** Certificate of Incorporation of Diagnostic Reference Services, Inc.
3.21** By-Laws of Corning Nichols Institute Inc.
3.22** By-Laws of CLMP Inc.
3.23** By-Laws of Corning Clinical Laboratories Inc. (MI); Damon Clinical Laboratories Inc.; Corning Clinical
Laboratories Inc. (CT); Corning Clinical Laboratories Inc. (MA); Corning Clinical Laboratories of
Pennsylvania Inc.; Deyor CPF/Metpath, Inc.; Southgate Medical Services, Inc.; Corning MRL Inc.; DPD
Holdings, Inc.; Metwest Inc.; Corning Clinical Laboratories Inc. (MD); Nichols Institute Diagnostics;
Nomad-Massachusetts, Inc.; Quest Diagnostics Incorporated (MI); Quest Diagnostics Incorporated (MD);
Diagnostic Reference Services, Inc.
3.24 Partnership Agreement of Pathology Building Partnership
4.1 Form of [ ]% Senior Subordinated Notes due 2006 (included in Exhibit 4.2)
4.2 Form of Indenture between Corning Clinical Laboratories Inc. and The Bank of New York, as Trustee, dated
December , 1996
5.1 Opinion of Shearman & Sterling
<PAGE>
Exhibit
Number Description Page
- ----------- -----------------------------------------------------------------------------------------------------------------
10.1 Form of Tax Sharing Agreement among Corning Incorporated, Corning Clinical Laboratories Inc.
and Covance Inc., dated [ ], 1996 (filed as an exhibit to CCL's Registration Statement on
Form 10 (File No. 1-12215) and incorporated herein by this reference)
10.2 Form of Spin-Off Tax Indemnification Agreement between Corning Incorporated and Corning
Clinical Laboratories Inc., dated [ ], 1996 (filed as an exhibit to CCL's Registration
Statement on Form 10 (File No. 1-12215) and incorporated herein by this reference)
10.3 Form of Spin-Off Tax Indemnification Agreement between Corning Clinical Laboratories Inc.
and Covance Inc., dated [ ], 1996 (filed as an exhibit to CCL's Registration Statement on
Form 10 (File No. 1-12215) and incorporated herein by this reference)
10.4 Form of Spin-Off Tax Indemnification Agreement between Covance Inc. and Corning Clinical
Laboratories Inc., dated [ ], 1996 (filed as an exhibit to CCL's Registration Statement on
Form 10 (File No. 1-12215) and incorporated herein by this reference)
10.5 Form of Corning Clinical Laboratories Inc. Executive Retirement Supplemental Plan, dated
[ ], 1996 (filed as an exhibit to CCL's Registration Statement on Form 10 (File No.
1-12215) and incorporated herein by this reference)
10.6 Form of Corning Clinical Laboratories Inc. Variable Compensation Plan, dated [ ], 1996
(filed as an exhibit to CCL's Registration Statement on Form 10 (File No. 1-12215) and
incorporated herein by this reference)
10.7 Form of Corning Clinical Laboratories Inc. Employees Stock Purchase Program, dated [ ],
1996 (filed as an exhibit to CCL's Registration Statement on Form 10 (File No. 1-12215) and
incorporated herein by this reference)
10.8 Form of Corning Clinical Laboratories Inc. Employee Equity Participation Program, dated
[ ], 1996 (filed as an exhibit to CCL's Registration Statement on Form 10
(File No. 1-12215) and incorporated herein by this reference)
10.9 Corning Clinical Laboratories Inc. Profit Sharing Plan, dated [ ], 1996 (filed as an
exhibit to CCL's Registration Statement on Form 10 (File No. 1-12215) and incorporated
herein by this reference)
10.10 Form of Corning Clinical Laboratories Inc. Director's Restricted Stock Plan, dated [ ],
1996 (filed as an exhibit to CCL's Registration Statement on Form 10 (File No. 1-12215) and
incorporated herein by this reference)
10.11 Form of Credit Agreement among Corning Clinical Laboratories Inc., J.P. Morgan Securities
Inc., NationsBanc Capital Markets Inc. and Wachovia Bank of Georgia, N.A., as CoArrangers,
dated December 5, 1996
12.1** Computation of Consolidated Ratio of Earnings to Fixed Charges
21.1 Subsidiaries of Corning Clinical Laboratories Inc. (filed as an exhibit to CCL's
Registration Statement on Form 10 (File No. 1-12215) and incorporated herein by this
reference)
23.1 Consent of Shearman & Sterling (included in Exhibit 5.1)
23.2 Consent of Price Waterhouse LLP
23.3 Consent of Leverone & Company
23.4 Consent of Deloitte & Touche LLP
23.5 Consent of Ernst & Young LLP
23.6** Consent of Gail R. Wilensky, Ph.D.
24.1** Powers of Attorney
25.1 Form T-1 Statement of Eligibility under the Trust Indenture Act of 1939
of The Bank of New York
27.1** Financial Data Schedules
</TABLE>
**Previously filed.
Draft of December 10, 1996
CORNING CLINICAL LABORATORIES INC.
[___]% Senior Subordinated Notes due 2006
Underwriting Agreement
December __, 1996
J.P. Morgan Securities Inc.,
Goldman, Sachs & Co.,
Lazard Freres & Co. LLC,
c/o J.P. Morgan Securities Inc.,
60 Wall Street,
New York, New York 10260.
Ladies and Gentlemen:
Corning Clinical Laboratories, Inc., a Delaware corporation (the
"Company"), proposes, subject to the terms and conditions stated herein, to
issue and sell to the Underwriters named above (the "Underwriters") an aggregate
of $150,000,000 principal amount of the Senior Subordinated Notes specified
above (the "Notes"). The Notes are to have the benefit of the full and
unconditional, joint and several, Guarantees of the Guarantors (each as defined
below). The Notes together with the Guarantees are hereinafter collectively
referred to as the "Securities."
1. (a) The Company represents and warrants to, and agrees with, each
of the Underwriters that:
(i) A registration statement on Form S-1 (File No. 333-15867) (the
"Initial Registration Statement") in respect of the Securities has
been filed with the Securities and Exchange Commission (the
"Commission"); the Initial Registration Statement and any
post-effective amendment thereto, each in the form heretofore
delivered to you, have been declared effective by the Commission in
such form; other than a registration statement, if any, increasing
the size of the offering (a "Rule 462(b) Registration Statement"),
filed pursuant to Rule 462(b) under the Securities Act of 1933, as
amended (the "Act"), which became effective upon filing, no other
document with respect to the Initial Registration Statement has
heretofore been filed with the Commission; and no stop order
suspending the effectiveness of the Initial Registration Statement,
any post-effective amendment thereto or the Rule 462(b) Registration
<PAGE>
Statement, if any, has been issued and no proceeding for that purpose
has been initiated or threatened by the Commission (any preliminary
prospectus included in the Initial Registration Statement, or filed
with the Commission pursuant to Rule 424(a) of the rules and
regulations of the Commission under the Act, is hereinafter called a
"Preliminary Prospectus"; the various parts of the Initial
Registration Statement and the Rule 462(b) Registration Statement, if
any, including all exhibits thereto but excluding Form T-1 and
including the information contained in the form of final prospectus
filed with the Commission pursuant to Rule 424(b) under the Act in
accordance with Section 5(a) hereof and deemed by virtue of Rule 430A
under the Act to be part of the Initial Registration Statement at the
time it was declared effective or such part of the Rule 462(b)
Registration Statement, if any, at the time it became or hereinafter
becomes effective, each as amended at the time such part of the
registration statement became or hereinafter becomes effective, are
hereinafter collectively called the "Registration Statement"; and
such form of final prospectus, in the form first filed pursuant to
Rule 424(b) under the Act, is hereinafter called the "Prospectus");
(ii) No order preventing or suspending the use of any Preliminary
Prospectus has been issued by the Commission, and each Preliminary
Prospectus, at the time of filing thereof, conformed in all material
respects to the requirements of the Act and the Trust Indenture Act
of 1939, as amended (the "Trust Indenture Act"), and the rules and
regulations of the Commission thereunder, and did not contain an
untrue statement of a material fact or omit to state a material fact
required to be stated therein or necessary to make the statements
therein, in the light of the circumstances under which they were
made, not misleading; and the forward looking statements made therein
were made by the Company with a reasonable basis and in good faith;
provided, however, that this representation and warranty shall not
apply to any statements or omissions made in reliance upon and in
conformity with information furnished in writing to the Company by an
Underwriter through J.P. Morgan Securities Inc. expressly for use
therein;
(iii) The Registration Statement conforms, and the Prospectus and
any further amendments or supplements to the Registration Statement
or the Prospectus will conform, in all material respects to the
requirements of the Act and the Trust Indenture Act and the rules and
regulations of the Commission thereunder and do not and will not, as
of the applicable effective date as to the Registration Statement and
any amendment thereto and as of the applicable filing date as to the
Prospectus and any amendment or supplement thereto, contain an
-2-
<PAGE>
untrue statement of a material fact or omit to state a material fact
required to be stated therein or necessary to make the statements
therein not misleading; and the forward looking statements made
therein were made by the Company with a reasonable basis and in good
faith; provided, however, that this representation and warranty shall
not apply to any statements or omissions made in reliance upon and in
conformity with information furnished in writing to the Company by an
Underwriter through J.P. Morgan Securities Inc. expressly for use
therein;
(iv) Neither the Company nor any of its subsidiaries has sustained
since the date of the latest audited financial statements included in
the Prospectus any material loss or interference with its business
from fire, explosion, flood or other calamity, whether or not covered
by insurance, or from any labor dispute or court or governmental
action, order or decree, otherwise than as set forth or contemplated
in the Prospectus; and, since the respective dates as of which
information is given in the Registration Statement and the
Prospectus, there has not been any change in the capital stock or
increase in long-term debt of the Company or any of its subsidiaries
or any material adverse change, or any development involving a
prospective material adverse change, in or affecting the general
affairs, management, financial position, stockholders' equity or
results of operations of the Company and its subsidiaries, taken as a
whole, otherwise than as set forth or contemplated in the Prospectus;
(v) The Company and its subsidiaries own all real property and
personal property material to their businesses described in the
Prospectus as owned by them, in each case free and clear of all
liens, encumbrances and defects except such as are reflected in the
financial statements included in the Prospectus or such as do not
materially affect the value of such property and do not interfere
with the use made and proposed to be made of such property by the
Company and its subsidiaries; and any real property and buildings
held under lease by the Company and its subsidiaries are held by them
under valid, subsisting and enforceable leases with such exceptions
as are not material to the Company and its subsidiaries, taken as a
whole;
(vi) The Company has been duly incorporated and is validly
existing as a corporation in good standing under the laws of
Delaware, with power and authority (corporate and other) to own its
properties and conduct its business as described in the Prospectus,
and has been duly qualified as a foreign corporation for the
transaction of business and is in good standing under the laws of
each other jurisdiction in which it
-3-
<PAGE>
owns or leases properties or conducts any business so as to require
such qualification, except to the extent that the failure so to
qualify or be in good standing would not have a material adverse
effect on the financial condition, results of operations, cash flows
or stockholders' equity of the Company and its subsidiaries, taken as
a whole (a "Material Adverse Effect"); each Guarantor has been duly
incorporated and is validly existing as a corporation in good
standing under the laws of its jurisdiction of incorporation, with
power and authority (corporate and other) to enter into its Guarantee
and own its properties and conduct its business as described in the
Prospectus, and has been duly qualified as a foreign corporation for
the transaction of business and is in good standing under the laws of
each other jurisdiction in which it owns or leases properties or
conducts any business so as to require such qualification, except to
the extent that the failure so to qualify or be in good standing
would not, individually or in the aggregate, have a material adverse
effect on the financial condition, results of operations, cash flows
or stockholders' equity of such Guarantor and its subsidiaries, taken
as a whole (a "Guarantor Material Adverse Effect"); and each other
subsidiary of the Company has been duly incorporated and is validly
existing as a corporation in good standing under the laws of its
jurisdiction of incorporation except to the extent that the failure
so to be in good standing would not, individually or in the
aggregate, have a Material Adverse Effect;
(vii) After giving effect to the Distributions (as defined in the
Prospectus), the Company will have the authorized capitalization as
set forth in the Prospectus, and all of the issued shares of capital
stock of the Company will have been duly and validly authorized and
issued and will be fully paid and non-assessable; all of the issued
shares of capital stock of each subsidiary of the Company have been
duly and validly authorized and issued, are fully paid and
non-assessable and (except for directors' qualifying shares and
except as otherwise set forth in the Prospectus) are owned directly
or indirectly by the Company or its subsidiaries, free and clear of
all liens, encumbrances, equities or claims;
(viii) The Notes have been duly authorized and, when executed,
issued and delivered pursuant to this Agreement and when duly
authenticated by the Trustee, will have been duly executed,
authenticated, issued and delivered and will constitute valid and
binding obligations of the Company, enforceable in accordance with
their terms, except as the enforceability thereof may be limited by
bankruptcy, insolvency, reorganization, moratorium or similar laws
affecting enforcement of creditors' rights generally and except as
enforcement
-4-
<PAGE>
thereof is subject to general principles of equity (regardless of
whether enforcement is considered in a proceeding in equity or at
law) and entitled to the benefits provided by the Indenture dated as
of December __, 1996 (the "Indenture") among the Company, each of the
Guarantors and The Bank of New York , as Trustee (the "Trustee"),
under which they are to be issued, which is substantially in the form
filed as an exhibit to the Registration Statement; the Indenture has
been duly authorized and duly qualified under the Trust Indenture Act
and when executed and delivered by the Company, the Guarantors and
the Trustee, will constitute a valid and binding instrument of the
parties thereto, enforceable in accordance with its terms, except as
the enforceability thereof may be limited by bankruptcy, insolvency,
reorganization, moratorium or similar laws affecting enforcement of
creditors' rights generally and except as enforcement thereof is
subject to general principles of equity (regardless of whether
enforcement is considered in a proceeding in equity or at law); and
the Notes and the Indenture will conform to the descriptions thereof
in the Prospectus;
(ix) Each Guarantor (as defined in the Indenture) has duly
authorized its Guarantee (as defined in the Indenture) of the Notes;
upon issuance of the Notes each Guarantee will be duly executed,
issued and delivered, will constitute a valid and binding obligation
of the related Guarantor, enforceable in accordance with its terms,
except as the enforceability thereof may be limited by bankruptcy,
insolvency, reorganization, moratorium or similar laws affecting
enforcement of creditors' rights generally and except as enforcement
thereof is subject to general principles of equity (regardless of
whether enforcement is considered in a proceeding in equity or at
law); the Notes are entitled to the benefits of the full and
unconditional, joint and several, Guarantees as provided in the
Indenture; and the Guarantees will conform to the description thereof
in the Prospectus;
(x) The issue and sale of the Securities and the compliance by the
Company with all of the provisions of the Securities, the Indenture,
the Intercompany Agreements (as defined in the Indenture) and this
Agreement and the consummation of the transactions herein and therein
contemplated will not conflict with or result in a breach or
violation of any of the terms or provisions of, or constitute a
default under, any indenture, mortgage, deed of trust, sale/leaseback
agreement, loan agreement or other similar financing agreement or
instrument or other agreement or instrument to which the Company or
any of its subsidiaries is a party or by which the Company or any of
its subsidiaries is bound or to which any of the property or assets
of the Company or any of its
-5-
<PAGE>
subsidiaries is subject, except such breaches or violations as would
not, individually or in the aggregate, have a Material Adverse
Effect, nor will such action result in any violation of the
provisions of the Certificate of Incorporation or By-laws of the
Company or any statute or any order, rule or regulation of any court
or governmental agency or body having jurisdiction over the Company
or any of its subsidiaries or any of their properties; and no
consent, approval, authorization, order, registration or
qualification of or with any such court or governmental agency or
body is required for the issue and sale of the Securities or the
consummation by the Company of the transactions contemplated by this
Agreement, the Intercompany Agreements or the Indenture, except (A)
such consents, approvals, authorizations, orders, registrations or
qualifications the failure so to obtain would not, individually or in
the aggregate, have a Material Adverse Effect or as have been
obtained under the Act or the Trust Indenture Act, and as may be
required under state securities or Blue Sky laws in connection with
the purchase and distribution of the Securities by the Underwriters
and (B) notice filings in connection with (1) changing the name of
the Company and certain subsidiaries and (2) substituting the
ultimate parent entity with respect to substantially all licenses and
accreditations, in each case in connection with the Distributions;
(xi) The issuance by each Guarantor of its related Guarantee and
the compliance by such Guarantor with all of the provisions of its
Guarantee and the Indenture and the consummation of the transactions
herein and therein contemplated will not conflict with or result in a
breach or violation of any of the terms or provisions of, or
constitute a default under, any indenture, mortgage, deed of trust,
sale/leaseback agreement, loan agreement or other similar financing
agreement or instrument or other agreement or instrument to which
such Guarantor or any of its subsidiaries is a party or by which such
Guarantor or any of its subsidiaries is bound or to which any of the
property or assets of such Guarantor or any of its subsidiaries is
subject, except such breaches or violations as would not,
individually or in the aggregate, have a Guarantor Material Adverse
Effect, nor will such action result in any violation of the
provisions of the Certificate of Incorporation or By-laws of such
Guarantor or any statute or any order, rule or regulation of any
court or governmental agency or body having jurisdiction over such
Guarantor or any of its subsidiaries or any of their properties; and
no consent, approval, authorization, order, registration or
qualification of or with any such court or governmental agency or
body is required for the issuance of such Guarantor's Guarantee or
the consummation by such Guarantor of the transactions contemplated
by its Guarantee or the
-6-
<PAGE>
Indenture, except (A) such consents, approvals, authorizations,
orders, registrations or qualifications the failure so to obtain
would not, individually or in the aggregate, have a Guarantor
Material Adverse Effect or as have been obtained under the Act or the
Trust Indenture Act, and as may be required under state securities or
Blue Sky laws in connection with the purchase and distribution of the
Securities by the Underwriters and (B) notice filings in connection
with (1) changing the name of the Company and certain subsidiaries
and (2) substituting the ultimate parent entity with respect to
substantially all licenses and accreditation, in each case in
connection with the Distributions;
(xii) None of the Company, the Guarantors or any other subsidiary
of the Company is in violation of its Certificate of Incorporation or
Bylaws or in default in the performance or observance of any
obligation, covenant or condition contained in any indenture,
mortgage, deed of trust, loan agreement, lease or other agreement or
instrument to which it is a party or by which it or any of its
properties may be bound except such defaults which would not,
individually or in the aggregate, have a Material Adverse Effect;
(xiii) Other than as set forth in the Prospectus, there are no
legal, governmental or, to the best of the Company's knowledge, qui
tam proceedings pending to which the Company or any of its
subsidiaries is a party or of which any property of the Company or
any of its subsidiaries is the subject which, if determined adversely
to the Company or any of its subsidiaries, would, individually or in
the aggregate, have a Material Adverse Effect; and, to the best of
the Company's knowledge, no such proceedings are threatened or
contemplated by governmental authorities or threatened by others;
(xiv) The Company is not and, after giving effect to the offering
and sale of the Securities, will not be an "investment company" or an
entity "controlled" by an "investment company", as such terms are
defined in the Investment Company Act of 1940, as amended (the
"Investment Company Act");
(xv) Neither the Company nor any of its affiliates does business
with the government of Cuba or with any person or affiliate located
in Cuba within the meaning of Section 517.075 of the Florida
Statutes;
(xvi) Price Waterhouse LLP, Deloitte & Touche LLP, Ernst & Young
LLP and Leverone & Company, who have certified certain financial
statements of the Company and its subsidiaries, are each independent
-7-
<PAGE>
public accountants as required by the Act and the rules and
regulations of the Commission thereunder;
(xvii) The Company and its subsidiaries hold all licenses,
permits, certificates and approvals that are required by, and have
satisfied all eligibility and other similar requirements that are
imposed by, hospital, health or similar regulatory bodies,
administrative agencies or other governmental bodies, agencies or
officials, or that are related to private or governmental programs
for the reimbursement or payment of health care costs, in each case
as required for the conduct of the respective businesses in which
they are engaged (i) as contemplated by the Prospectus and (ii) in
each jurisdiction or place where the conduct of their respective
businesses requires such licenses, permits, certificates or
approvals, or satisfaction of such requirements, except in each case
where the failure to hold any such license, permit, certificate or
approval, or to satisfy any such requirement, would not, individually
or in the aggregate, have a Material Adverse Effect; and
(xviii) All of the laboratories of the Company and its
subsidiaries eligible for accreditation by the College of American
Pathologists are so accredited; and all of the laboratories of the
Company are in compliance, in all material respects, with the
standards required by the Clinical Laboratory Improvement Amendments
of 1988 ("CLIA");
(b) Corning Incorporated, a New York corporation ("Corning"),
represents and warrants to, and agrees with, each of the Underwriters
that:
(i) The Registration Statement conforms, and the Prospectus and
any further amendments or supplements to the Registration Statement
or the Prospectus will conform, in all material respects to the
requirements of the Act and the Trust Indenture Act and the rules and
regulations of the Commission thereunder and do not and will not, as
of the applicable effective date as to the Registration Statement and
any amendment thereto and as of the applicable filing date as to the
Prospectus and any amendment or supplement thereto, contain an untrue
statement of a material fact or omit to state a material fact
required to be stated therein or necessary to make the statements
therein not misleading; and the forward looking statements made
therein were made by the Company with a reasonable basis and in good
faith; provided, however, that this representation and warranty shall
not apply to any statements or omissions made in reliance upon and in
conformity with information furnished in writing to the Company by an
Underwriter through J.P. Morgan Securities Inc. expressly for use
therein;
-8-
<PAGE>
(ii) The consummation of the Distributions, the issue and sale of
the Securities by the Company and the compliance by Corning with all
of the provisions of the Intercompany Agreements and this Agreement
and the consummation of the transactions herein and therein
contemplated will not conflict with or result in a breach or
violation of any of the terms or provisions of, or constitute a
default under, any indenture, mortgage, deed of trust, sale/leaseback
agreement, loan agreement or other similar financing agreement or
instrument or other agreement or instrument to which Corning or any
of its subsidiaries is a party or by which Corning or any of its
subsidiaries is bound or to which any of the property or assets of
Corning or any of its subsidiaries is subject, except such breaches
or violations as would not, individually or in the aggregate, have a
material adverse effect on the financial position, results of
operations, cash flows or stockholders' equity of Corning and its
subsidiaries, taken as a whole (a "Corning Material Adverse Effect"),
nor will such action result in any violation of the provisions of the
Certificate of Incorporation, as amended, or By-laws of Corning or
any statute or any order, rule or regulation of any court or
governmental agency or body having jurisdiction over Corning or any
of its subsidiaries or any of their properties; and no consent,
approval, authorization, order, registration or qualification of or
with any such court or governmental agency or body is required for
the consummation of the Distributions, the issue and sale of the
Securities by the Company or the consummation by Corning of the
transactions contemplated by the Intercompany Agreements or this
Agreement, except such consents, approvals, authorizations, orders,
registrations or qualifications the failure so to obtain would not,
individually or in the aggregate, have a Corning Material Adverse
Effect, or as have been obtained, and such consents, approvals,
authorizations, registrations or qualifications as may be required
under state securities or Blue Sky laws in connection with the
purchase and distribution of the Securities by the Underwriters; and
Corning has taken all action (corporate and other) to authorize and
approve the Distributions;
(iii) Each of the Intercompany Agreements has been duly authorized
and, at the Time of Delivery, will be duly executed and delivered by
the parties thereto and will constitute a valid and binding agreement
of each of the parties thereto, enforceable against each of such
parties in accordance with its terms, except as the enforceability
thereof may be limited by bankruptcy, insolvency, reorganization,
moratorium or similar laws affecting enforcement of creditors' rights
generally and except as enforcement thereof is subject to general
-9-
<PAGE>
principles of equity (regardless of whether enforcement is considered
in a proceeding in equity or at law);
(c) The Company and Corning, jointly and severally, represent and
warrant to, and agree with, each of the Underwriters that the
representations and other information set forth in the materials submitted
by Corning and the Company to the Internal Revenue Service ("IRS") in
connection with their request for a private letter ruling from the IRS
(the "IRS Ruling") were as of the date submitted, and remain as of the
date of this Agreement and will remain as of the Time of Delivery,
complete and accurate in all material respects; and as of the date of this
Agreement and as of the Time of Delivery, the IRS has neither revoked nor
threatened the revocation of the IRS Ruling and, to the best of Corning's
and the Company's knowledge, there exist no other reasons Corning or the
Company is or is likely to become unable to rely upon the IRS ruling.
2. Subject to the terms and conditions herein set forth, the Company
agrees to issue and sell to the Underwriters, and each of the Underwriters
agrees, severally and not jointly, to purchase from the Company, at a purchase
price of ....% of the principal amount thereof, plus accrued interest, if any,
from December __, 1996 to the Time of Delivery hereunder, the principal amount
of Securities set forth opposite the name of such Underwriter in Schedule I
hereto.
3. Upon the authorization by J.P. Morgan Securities Inc. of the release
of the Securities, the several Underwriters propose to offer the Securities for
sale upon the terms and conditions set forth in the Prospectus.
4. (a) The Securities to be purchased by each Underwriter hereunder, in
definitive form, and in such authorized denominations and registered in
such names as J.P. Morgan Securities Inc. may request upon at least
forty-eight hours' prior notice to the Company, shall be delivered by or
on behalf of the Company to J.P. Morgan Securities Inc., for the account
of each Underwriter, against payment by or on behalf of such Underwriter
of the purchase price therefor by wire transfer of immediately available
funds. The Company will cause the certificates representing the Securities
to be made available for checking and packaging at least twenty-four hours
prior to the Time of Delivery (as defined below) at the office of J.P.
Morgan Securities Inc., 60 Wall Street, New York, New York 10260 (the
"Designated Office"). The time and date of such delivery and payment shall
be 9:30 a.m., New York City time, on December __, 1996 or such other time
and date as J.P. Morgan Securities Inc., Corning and the Company may agree
upon in writing. Such time and date are herein called the "Time of
Delivery".
-10-
<PAGE>
(b) The documents to be delivered at the Time of Delivery by or on
behalf of the parties hereto pursuant to Section 7 hereof, including the
cross- receipt for the Securities and any additional documents requested
by the Underwriters pursuant to Section 7(p) hereof, will be delivered at
the offices of Sullivan & Cromwell, 125 Broad Street, New York, New York
(the "Closing Location"), and the Securities will be delivered at the
Designated Office, all at the Time of Delivery. A meeting will be held at
the Closing Location at 2:00 p.m., New York City time, on the New York
Business Day next preceding the Time of Delivery, at which meeting the
final drafts of the documents to be delivered pursuant to the preceding
sentence will be available for review by the parties hereto. "New York
Business Day" shall mean each Monday, Tuesday, Wednesday, Thursday and
Friday which is not a day on which banking institutions in New York are
generally authorized or obligated by law or executive order to close.
5. (a) The Company and Corning, jointly and severally, agree with each
of the Underwriters:
(i) To prepare the Prospectus in a form approved by you and to
file such Prospectus pursuant to Rule 424(b) under the Act not later
than the Commission's close of business on the second business day
following the execution and delivery of this Agreement, or, if
applicable, such earlier time as may be required by Rule 430A(a)(3)
under the Act; to make no further amendment or any supplement to the
Registration Statement, Prospectus or, prior to the Distributions,
the Company's Registration Statement on Form 10, dated November 26,
1996 (the "Company's Form 10"), which shall be disapproved by the
Underwriters promptly after reasonable notice thereof; to advise the
Underwriters promptly after either of them receives notice thereof,
of the time when the Registration Statement, or any amendment
thereto, has been filed or becomes effective or any supplement to the
Prospectus or any amended Prospectus has been filed and to furnish
the Underwriters with copies thereof; to advise the Underwriters,
promptly after either of them receives notice thereof, of the
issuance by the Commission of any stop order or of any order
preventing or suspending the use of any Preliminary Prospectus or
Prospectus or the Company's Form 10 or the Registration Statement on
Form 10, dated November 22, 1996, of Covance Inc. (together with the
Company's Form 10, the "Form 10s") of the suspension of the
qualification of the Securities, the Company's common stock with
attached preferred stock purchase rights (the "Company Common Stock")
and Covance's common stock with attached preferred stock purchase
rights (the "Covance Common Stock") for offering or sale in any
jurisdiction, of the initiation or threatening of any proceeding for
-11-
<PAGE>
any such purpose, or of any request by the Commission for the
amending or supplementing of the Registration Statement or Prospectus
or Form 10s or for additional information; and, in the event of the
issuance of any stop order or of any order preventing or suspending
the use of any Preliminary Prospectus or Prospectus or Form 10s or
suspending any such qualification, to promptly use its best efforts
to obtain the withdrawal of such order;
(ii) Promptly from time to time to take such action as the
Underwriters may reasonably request to qualify the Securities for
offering and sale under the securities laws of such jurisdictions as
the Underwriters may request and to comply with such laws so as to
permit the continuance of sales and dealings therein in such
jurisdictions for as long as may be necessary to complete the
distribution of the Securities, provided that in connection therewith
the Company shall not be required to qualify as a foreign corporation
or to file a general consent to service of process in any
jurisdiction;
(iii) Prior to 5:00 p.m., New York City time, on the New York
Business Day next succeeding the date of this Agreement and from time
to time, to furnish the Underwriters with copies of the Prospectus in
New York City in such quantities as the Underwriters may reasonably
request, and, if the delivery of a prospectus is required at any time
prior to the expiration of nine months after the time of issue of the
Prospectus in connection with the offering or sale of the Securities
and if at such time any event shall have occurred as a result of
which the Prospectus as then amended or supplemented would include an
untrue statement of a material fact or omit to state any material
fact necessary in order to make the statements therein, in light of
the circumstances under which they were made when such Prospectus is
delivered, not misleading, or, if for any other reason it shall be
necessary during such same period to amend or supplement the
Prospectus in order to comply with the Act or the Trust Indenture
Act, to notify the Underwriters and upon the request of any
Underwriter to prepare and furnish without charge to such Underwriter
and to any dealer in securities as many copies as such Underwriter
may reasonably request of an amended Prospectus or a supplement to
the Prospectus which will correct such statement or omission or
effect such compliance; and in case any Underwriter is required to
deliver a prospectus in connection with sales of any of the
Securities at any time nine months or more after the time of issue of
the Prospectus, upon request of such Underwriter but at the expense
of such Underwriter, to prepare and deliver to such Underwriter as
many
-12-
<PAGE>
copies as such Underwriter may request of an amended or supplemented
Prospectus complying with Section 10(a)(3) of the Act;
(iv) If the Company elects to rely upon Rule 462(b), the Company
shall file a Rule 462(b) Registration Statement with the Commission
in compliance with Rule 462(b) by 10:00 p.m., Washington, D.C. time,
on the date of this Agreement, and the Company shall at the time of
filing either pay to the Commission the filing fee for the Rule
462(b) Registration Statement or give irrevocable instructions for
the payment of such fee pursuant to Rule 111(b) under the Act;
(v) To use the net proceeds received by it from the sale of the
Securities pursuant to this Agreement in the manner specified in the
Prospectus under the caption "Use of Proceeds";
(vi) Until the earlier of (A) the termination of the Escrow
Agreement in accordance with its terms and (B) the occurrence of the
Distributions, to take no action, directly or indirectly, to amend or
alter, in any material respect, or terminate any Intercompany
Agreement without the prior consent of the Underwriters, which
consent shall not be unreasonably withheld; provided, however, that
Corning and the Company may amend the Transaction Agreement (as
defined in the Indenture) to change or abandon the Distribution Date
(as defined therein) to such date as may be determined by Corning's
Board of Directors; and
(vii) In the event the Distributions occur, to cause the Company
to have the capitalization contemplated by the Prospectus as of the
date of the Distributions.
(b) The Company agrees with each of the Underwriters:
(i) To make generally available to its security holders as soon as
practicable, but in any event not later than eighteen months after
the effective date of the Registration Statement (as defined in Rule
158(c) under the Act), an earnings statement of the Company and its
subsidiaries (which need not be audited) complying with Section 11(a)
of the Act and the rules and regulations of the Commission thereunder
(including, at the option of the Company, Rule 158);
(ii) During the period beginning from the date hereof and
continuing to and including the later of the Time of Delivery and
such earlier time as you may notify the Company, not to offer, sell,
contract
-13-
<PAGE>
to sell or otherwise dispose of, except as provided hereunder, debt
securities of the Company with a maturity of more than one year;
(iii) During a period of five years from the effective date of the
Registration Statement, to furnish to the Underwriters copies of all
written reports or other communications (financial or other)
furnished to stockholders, and to deliver to the Underwriters
(without duplication) as soon as they are available, (A) copies of
any reports and financial statements furnished to or filed with the
Commission or any national securities exchange on which the
Securities or any class of securities of the Company is listed and
(B) the documents specified in Section 1018 of the Indenture as in
effect at the Time of Delivery; and
(iv) To file with the Commission such reports on Form SR as may be
required by Rule 463 under the Act.
6. The Company covenants and agrees with the several Underwriters that the
Company will pay or cause to be paid the following: (i) the fees, disbursements
and expenses of the Company's counsel and accountants in connection with the
registration of the Securities under the Act and all other expenses in
connection with the preparation, printing and filing of the Registration
Statement, any Preliminary Prospectus and the Prospectus and amendments and
supplements thereto and the mailing and delivering of copies thereof to the
Underwriters and dealers; (ii) the cost of printing or producing any Agreement
among Underwriters, this Agreement, the Indenture, the Blue Sky and Legal
Investment Memoranda, closing documents (including any compilations thereof) and
any other documents in connection with the offering, purchase, sale and delivery
of the Securities; (iii) all expenses in connection with the qualification of
the Securities for offering and sale under state securities laws as provided in
Section 5(b) hereof, including the fees and disbursements of counsel for the
Underwriters in connection with such qualification and in connection with the
Blue Sky and legal investment surveys; (iv) any fees charged by securities
rating services for rating the Securities; (v) the filing fees incident to, and
fees and disbursements of counsel for the Underwriters in connection with, any
required review by the National Association of Securities Dealers, Inc. of the
terms of the sale of the Securities; (vi) the cost of preparing the Securities;
(vii) the fees and expenses of the Trustee and any agent of the Trustee and the
fees and disbursements of counsel for the Trustee in connection with the
Indenture and the Securities; and all other costs and expenses incident to the
performance of its obligations hereunder which are not otherwise specifically
provided for in this Section. It is understood, however, that, except as
provided in this Section, and Sections 8 and 11 hereof, the Underwriters will
pay all of their own costs and expenses, including the fees of their counsel,
transfer taxes on resale of any of the Securities by them, and any advertising
expenses connected with any offers they may make.
-14-
<PAGE>
7. The obligations of the Underwriters hereunder shall be subject, in the
sole discretion of the Underwriters, to the condition that all representations
and warranties and other statements of the Company and Corning herein are, at
and as of the Time of Delivery, true and correct, the condition that the Company
and Corning shall have performed all of their obligations hereunder theretofore
to be performed, and the following additional conditions:
(a) The Prospectus shall have been filed with the Commission pursuant
to Rule 424(b) within the applicable time period prescribed for such
filing by the rules and regulations under the Act and in accordance with
Section 5 (a) hereof; if the Company has elected to rely upon Rule 462(b),
the Rule 462(b) Registration Statement shall have become effective by
10:00 p.m., Washington, D.C. time, on the date of this Agreement; no stop
order suspending the effectiveness of the Registration Statement or any
part thereof shall have been issued and no proceeding for that purpose
shall have been initiated or threatened by the Commission; and all
requests for additional information on the part of the Commission shall
have been complied with to the reasonable satisfaction of the
Underwriters;
(b) Sullivan & Cromwell, counsel for the Underwriters, shall have
furnished to the Underwriters such opinion or opinions, dated the Time of
Delivery, with respect to the incorporation of the Company, the validity
of the Indenture, the Securities, the Registration Statement, the
Prospectus, and such other related matters as the Underwriters may
reasonably request, and such counsel shall have received such papers and
information as they may reasonably request to enable them to pass upon
such matters;
(c) Shearman & Sterling, counsel for the Company, shall have
furnished to the Underwriters their written opinion, dated the Time of
Delivery, in form and substance satisfactory to the Underwriters, to the
effect that:
(i) The Notes have been duly authorized, executed, authenticated,
issued and delivered and constitute valid and binding obligations of
the Company, enforceable in accordance with their terms, except as
the enforceability thereof may be limited by bankruptcy, insolvency
(including all laws relating to fraudulent transfer), reorganization,
moratorium or similar laws affecting enforcement of creditors' rights
generally and except as enforcement thereof is subject to general
principles of equity (regardless of whether enforcement is considered
in a proceeding in equity or at law), and entitled to the benefits
provided by the Indenture;
-15-
<PAGE>
(ii) The Indenture has been duly authorized, executed and
delivered by the Company and, assuming due authorization, execution
and delivery by the Trustee and due authorization by each Guarantor,
constitutes a valid and binding agreement of the Company and each
Guarantor, enforceable against the Company and each Guarantor in
accordance with its terms, except as the enforceability thereof may
be limited by bankruptcy, insolvency (including all laws relating to
fraudulent transfer), reorganization, moratorium or similar laws
affecting enforcement of creditors' rights generally and except as
enforcement thereof is subject to general principles of equity
(regardless of whether enforcement is considered in a proceeding in
equity or at law); duly qualified under the Trust Indenture Act;
(iii) Assuming due incorporation of each of the Guarantors and due
authorization, execution and delivery by each Guarantor, the
Guarantees of each Guarantor constitute valid and binding obligations
of each such Guarantor, enforceable in accordance with their terms,
except as the enforceability thereof may be limited by bankruptcy,
insolvency (including all laws relating to fraudulent transfer),
reorganization, moratorium or similar laws affecting enforcement of
creditors' rights generally and except as enforcement thereof is
subject to general principles of equity (regardless of whether
enforcement is considered in a proceeding in equity or at law);
(iv) The statements set forth in the Prospectus under the caption
"Description of the Notes", insofar as they purport to constitute a
summary of the terms of the Securities, and under the captions
"Description of the Credit Facility" and "Underwriting", insofar as
they purport to describe the provisions of the laws and documents
referred to therein, fairly present in all material respects the
information called for with respect to such matters and documents and
fairly summarize the matters and documents referred to therein;
(v) The Registration Statement and the Prospectus and any further
amendments and supplements thereto made by the Company prior to the
Time of Delivery (in each case, other than the financial statements
and related schedules and other financial and statistical data
included therein or omitted therefrom and the Statement of
Eligibility of the Trustee on Form T-1, as to which such counsel need
express no opinion) comply as to form in all material respects with
the requirements of the Act and the Trust Indenture Act and the rules
and regulations thereunder. Such counsel shall also state that such
counsel has not verified, and is not passing upon and does not assume
any responsibility for, the accuracy,
-16-
<PAGE>
completeness or fairness of the statements contained in the
Registration Statement or the Prospectus, except those set forth in
subparagraph (iv) above. Such counsel shall state that it has,
however, generally reviewed and discussed such statements with
certain officers of the Company, its counsel and its auditors, and
with your representatives. Such counsel shall state that in the
course of this review and discussion, no facts have come to such
counsel's attention that lead such counsel to believe that (i) the
Registration Statement or any amendment thereto (except for the
financial statements and other financial or statistical data included
therein or omitted therefrom, as to which such counsel need not
comment), at the time the Registration Statement or any such
amendment became effective, contained any untrue statement of a
material fact or omitted to state a material fact required to be
stated therein or necessary to make the statements therein not
misleading or (ii) the Prospectus or any amendment or supplement
thereto (except for the financial statements and related schedules
and other financial and statistical data included therein or omitted
therefrom, as to which such counsel need not comment), as of its date
or the Time of Delivery, contained or contains any untrue statement
of a material fact or omitted or omits to state any material fact
necessary in order to make the statements therein, in the light of
the circumstances under which they were made, not misleading.
(d) Raymond C. Marier, Vice President and General Counsel of the
Company, shall have furnished to the Underwriters his written opinion,
dated the Time of Delivery, in form and substance satisfactory to the
Underwriters, to the effect that:
(i) The Company has been duly incorporated and is validly existing
as a corporation in good standing under the laws of Delaware, with
corporate power and authority to own its properties and conduct its
business as described in the Prospectus;
(ii) The Company has been duly qualified as a foreign corporation
for the transaction of business and is in good standing under the
laws of each other jurisdiction in which it owns or leases properties
or conducts any business so as to require such qualification, except
to the extent that the failure so to qualify or be in good standing
would not, individually or in the aggregate, have a Material Adverse
Effect (such counsel being entitled to rely in respect of the opinion
in this clause upon opinions of local counsel and in respect of
matters of fact upon certificates of officers of the Company,
provided that such counsel shall
-17-
<PAGE>
state that such counsel believes that both the Underwriters and such
counsel are justified in relying upon such opinions and
certificates);
(iii) After giving effect to the Distributions, the Company will
have the authorized capitalization as set forth in the Prospectus,
and all of the issued shares of capital stock of the Company will
have been duly and validly authorized and issued and will be fully
paid and non-assessable;
(iv) Each Guarantor has been duly incorporated and is validly
existing as a corporation in good standing under the laws of its
jurisdiction of incorporation; and all of the issued shares of
capital stock of each such Guarantor have been duly and validly
authorized and issued, are fully paid and non-assessable, and (except
for directors' qualifying shares and except as otherwise set forth in
the Prospectus) are owned directly or indirectly by the Company, free
and clear of all liens, encumbrances, equities or claims;
(v) Each Guarantor has been duly qualified as a foreign
corporation for the transaction of business and is in good standing
under the laws of each other jurisdiction in which it owns or leases
properties or conducts any business so as to require such
qualification, except to the extent that the failure so to qualify or
be in good standing would not, individually or in the aggregate, have
a Guarantor Material Adverse Effect; and each Guarantor has duly
authorized, executed and delivered its Guarantee and the Indenture
(such counsel being entitled to rely in respect of the opinion in
this clause upon opinions of local counsel and in respect of matters
of fact upon certificates of officers of the Guarantors, provided
that such counsel shall state that such counsel believes that both
the Underwriters and such counsel are justified in relying upon such
opinions and certificates);
(vi) To the best of such counsel's knowledge and other than as set
forth in the Prospectus, there are no legal, governmental or qui tam
proceedings pending to which the Company or any of its subsidiaries
is a party or of which any property of the Company or any of its
subsidiaries is the subject which, if determined adversely to the
Company or any of its subsidiaries, would, individually or in the
aggregate, have a Material Adverse Effect; and, to the best of such
counsel's knowledge, no such proceedings are threatened or
contemplated by governmental authorities or threatened by others;
(vii) This Agreement has been duly authorized, executed and
delivered by the Company;
-18-
<PAGE>
(viii) The issue and sale of the Securities and the compliance by
the Company with all of the provisions of the Securities, the
Indenture, the Intercompany Agreements and this Agreement and the
consummation of the transactions herein and therein contemplated will
not conflict with or result in a breach or violation of any of the
terms or provisions of, or constitute a default under, any indenture,
mortgage, deed of trust, sale/leaseback agreement, loan agreement or
other similar financing agreement or any other agreement or
instrument known to such counsel to which the Company or any of its
subsidiaries is a party or by which the Company or any of its
subsidiaries is bound or to which any of the property or assets of
the Company or any of its subsidiaries is subject, except such
breaches or violations as would not, individually or in the
aggregate, have a Material Adverse Effect, nor will such action
result in any violation of the provisions of the Certificate of
Incorporation or By-laws of the Company or any statute or any order,
rule or regulation of any court or governmental agency or body having
jurisdiction over the Company or any of its subsidiaries or any of
their properties;
(ix) No consent, approval, authorization, order, registration or
qualification of or with any such court or governmental agency or
body is required for the issue and sale of the Securities or the
consummation by the Company of the transactions contemplated by this
Agreement, the Intercompany Agreements or the Indenture, except (A)
such consents, approvals, authorizations, orders, registrations or
qualifications the failure so to obtain would not, individually or in
the aggregate, have a Material Adverse Effect or as have been
obtained under the Act or the Trust Indenture Act and as may be
required under state securities or Blue Sky laws in connection with
the purchase and distribution of the Securities, by the Underwriters
and (B) notice filings in connection with (1) changing the name of
the Company and certain subsidiaries and (2) substituting the
ultimate parent entity with respect to substantially all licenses and
accreditation, in each case in connection with the Distributions;
(x) To the best of such counsel's knowledge, the issuance of the
Guarantees and the compliance by each of the Guarantors with all of
the provisions of the Guarantees and the Indenture and the
consummation of the transactions herein and therein contemplated will
not conflict with or result in a breach or violation of any of the
terms or provisions of, or constitute a default under, any indenture,
mortgage, deed of trust, sale/leaseback agreement, loan agreement or
other similar financing agreement or any other agreement or
instrument known to such counsel to which any Guarantor or any of its
subsidiaries is a party or by which
-19-
<PAGE>
any Guarantor or any of its subsidiaries is bound or to which any of
the property or assets of any Guarantor or any of its subsidiaries is
subject, except such breaches of violations as would not,
individually or in the aggregate, have a Guarantor Material Adverse
Effect, nor will such action result in any violation of the
provisions of the Certificate of Incorporation or By-laws of any
Guarantor or any statute or any order, rule or regulation of any
court or governmental agency or body having jurisdiction over any
Guarantor or any of its subsidiaries or any of their properties;
(xi) To the best of such counsel's knowledge, no consent,
approval, authorization, order, registration or qualification of or
with such court or governmental agency or body is required by any
Guarantor for the issuance of the Guarantees or the consummation by
such Guarantor of the transactions contemplated by this Agreement or
the Indenture, except (A) such consents, approvals, authorizations,
orders, registrations or qualifications the failure so to obtain
would not, individually or in the aggregate, have a Guarantor
Material Adverse Effect or as have been obtained under the Act or the
Trust Indenture Act and as may be required under state securities or
Blue Sky laws in connection with the purchase and distribution of the
Securities by the Underwriters and (B) notice filings in connection
with (1) changing the name of the Company and certain subsidiaries
and (2) substituting the ultimate parent entity with respect to
substantially all licenses and accreditation, in each case in
connection with the Distributions;
(xii) The statements set forth in the Prospectus under the
captions "Risk Factors -- Government Regulation" and "-- Government
Investigations and Related Claims", and "Business -- Regulation and
Reimbursement" and "-- Government Investigations and Related Claims",
insofar as they purport to describe the provisions of the laws and
documents referred to therein, fairly present in all material
respects the information called for with respect to such matters,
documents and laws and fairly summarize the matters, documents and
laws referred to therein;
(xiii) The Company is not an "investment company" or an entity
"controlled" by an "investment company", as such terms are defined in
the Investment Company Act;
(xiv) To the best of such counsel's knowledge, other than as
disclosed in the Prospectus, there are no current, pending or
threatened administrative or legal proceedings which are reasonably
likely to affect
-20-
<PAGE>
(i) any of the Company's laboratory's accreditation with CAP, (ii)
the Company's qualification to perform services for, and receive
reimbursement from, Medicaid or Medicare or (iii) the Company's
ability to conduct the clinical testing business in any state,
except, in each case, for any such proceedings that, individually or
in the aggregate, would not have a Material Adverse Effect;
(xv) Each of the Intercompany Agreements to which the Company is a
party has been duly authorized, executed and delivered by the Company
and constitutes a valid and binding agreement of the Company,
enforceable in accordance with its terms, except as the
enforceability thereof may be limited by bankruptcy, insolvency
(including all laws relating to fraudulent transfer), reorganization,
moratorium or similar laws affecting enforcement of creditors' rights
generally and except as enforcement thereof is subject to general
principles of equity (regardless of whether enforcement is considered
in a proceeding in equity or at law);
(xvi) The Registration Statement and the Prospectus and any
further amendments and supplements thereto made by the Company prior
to the Time of Delivery (in each case other than the financial
statements and related schedules and other financial and statistical
data included therein or omitted therefrom and the Statement of
Eligibility of the Trustee on Form T-1, as to which such counsel need
express no opinion) comply as to form in all material respects with
the requirements of the Act and the Trust Indenture Act and the rules
and regulations thereunder. Such counsel shall also state that such
counsel has not verified, and is not passing upon and does not assume
any responsibility for, the accuracy, completeness or fairness of the
statements contained in the Registration Statement or the Prospectus,
except those set forth in subparagraph (xii) above. Such counsel
shall state that it has, however, generally reviewed and discussed
such statements with certain officers of the Company, its counsel and
its auditors, and with your representatives. Such counsel shall state
that in the course of this review and discussion, no facts have come
to such counsel's attention that lead such counsel to believe that
(i) the Registration Statement or any amendment thereto (except for
the financial statements and other financial or statistical data
included therein or omitted therefrom, as to which such counsel need
not comment), at the time the Registration Statement or any such
amendment became effective, contained any untrue statement of a
material fact or omitted to state a material fact required to be
stated therein or necessary to make the statements therein not
misleading or (ii) the Prospectus or any amendment or supplement
thereto (except for
-21-
<PAGE>
the financial statements and related schedules and other financial
and statistical data included therein or omitted therefrom, as to
which such counsel need not comment), as of its date or the Time of
Delivery, contained or contains any untrue statement of a material
fact or omitted or omits to state any material fact necessary in
order to make the statements therein, in the light of the
circumstances under which they were made, not misleading. Such
counsel shall also state that such counsel does not know of any
amendment to the Registration Statement required to be filed or of
any contracts or other documents of a character required to be filed
as an exhibit to the Registration Statement or required to be
described in the Registration Statement or the Prospectus which are
not filed or described as required;
(e) William C. Ughetta, Senior Vice President and General Counsel of
Corning, shall have furnished to the Underwriters his written opinion,
dated the Time of Delivery, in form and substance satisfactory to the
Underwriters, to the effect that:
(i) Corning has been duly incorporated and is validly existing as
a corporation in good standing under the laws of the State of New
York;
(ii) Each of the Intercompany Agreements to which Corning is a
party has been duly authorized, executed and delivered by Corning and
constitutes a valid and binding agreement of Corning, enforceable in
accordance with its terms, except as the enforceability thereof may
be limited by bankruptcy, insolvency (including all laws relating to
fraudulent transfer), reorganization, moratorium or similar laws
affecting enforcement of creditors' rights generally and except as
enforcement thereof is subject to general principles of equity
(regardless of whether enforcement is considered in a proceeding in
equity or at law);
(iii) The consummation of the Distributions, the issue and sale of
the Securities by the Company and the compliance by Corning with all
of the provisions of the Intercompany Agreements and this Agreement
and the consummation of the transactions herein and therein
contemplated will not conflict with or result in a breach or
violation of any of the terms or provisions of, or constitute a
default under, any indenture, mortgage, deed of trust, sale/leaseback
agreement, loan agreement or other similar financing agreement or
instrument or other agreement or instrument to which Corning or any
of its subsidiaries is a party or by which Corning or any of its
subsidiaries is bound or to which any of the property or assets of
Corning or any of its subsidiaries is subject, except such breaches
or violations as would not, individually or
-22-
<PAGE>
in the aggregate, have a Corning Material Adverse Effect, nor will
such action result in any violation of the provisions of the
Certificate of Incorporation, as amended, or By-laws of Corning or
any statute or any order, rule or regulation of any court or
governmental agency or body having jurisdiction over Corning or any
of its subsidiaries or any of their properties; and no consent,
approval, authorization, order, registration or qualification of or
with any such court or governmental agency or body is required for
the consummation of the Distributions, the issue and sale of the
Securities by the Company or the consummation by Corning of the
transactions contemplated by the Intercompany Agreements or this
Agreement, except such consents, approvals, authorizations, orders,
registrations or qualifications the failure so to obtain would not,
individually or in the aggregate, have a Corning Material Adverse
Effect or as have been obtained, and such consents, approvals,
authorizations, registrations or qualifications as may be required
under state securities or Blue Sky laws in connection with the
purchase and distribution of the Securities by the Underwriters; and
Corning has taken all action (corporate and other) to authorize and
approve the Distributions;
(f) Jeffrey S. Hurwitz, Corporate Senior Vice President, General
Counsel and Secretary of Covance, shall have furnished to the Underwriters
his written opinion, dated the Time of Delivery, in form and substance
satisfactory to the Underwriters, to the effect that:
(i) Covance has been duly incorporated and is validly existing as
a corporation in good standing under the laws of the State of
Delaware; and
(ii) Each of the Intercompany Agreements to which Covance is a
party has been duly authorized, executed and delivered by Covance and
constitutes a valid and binding agreement of Covance, enforceable in
accordance with its terms, except as the enforceability thereof may
be limited by bankruptcy, insolvency (including all laws relating to
fraudulent transfer), reorganization, moratorium or similar laws
affecting enforcement of creditors' rights generally and except as
enforcement thereof is subject to general principles of equity
(regardless of whether enforcement is considered in a proceeding in
equity or at law);
(g) On the date of the Prospectus at a time prior to the execution of
this Agreement, at 9:30 a.m., New York City time, on the effective date of
any post-effective amendment to the Registration Statement filed
subsequent to the date of this Agreement and also at the Time of Delivery,
Price Waterhouse LLP, shall have furnished to you, a letter or letters,
dated the respective dates of
-23-
<PAGE>
delivery thereof, in form and substance satisfactory to the Underwriters
(the executed copy of the letter delivered prior to the execution of this
Agreement is attached as Annex I(a) hereto);
(h) (i) Neither the Company nor any of its subsidiaries shall have
sustained since the date of the latest audited financial statements
included in the Prospectus any loss or interference with its business from
fire, explosion, flood or other calamity, whether or not covered by
insurance, or from any labor dispute or court or governmental action,
order or decree, otherwise than as set forth or contemplated in the
Prospectus, (ii) since the respective dates as of which information is
given in the Prospectus there shall not have been any change in the
capital stock or increase in long-term debt of the Company or any of its
subsidiaries or any change, or any development involving a prospective
change, in or affecting the general affairs, management, financial
position, stockholders' equity or results of operations of the Company and
its subsidiaries, otherwise than as set forth or contemplated in the
Prospectus, or (iii) there shall not have been any adverse development in
the litigation described under "Business -- Government Investigations and
Related Claims", the effect of which, in any such case described in Clause
(i), (ii) or (iii), is in your judgment so material and adverse as to make
it impracticable to proceed with the public offering or the delivery of
the Securities on the terms and in the manner contemplated in the
Prospectus;
(i) The Securities shall have been rated at least B+ and B2 by
Standard & Poor's Rating Group and Moody's Investor Services, Inc.,
respectively, and on or after the date hereof (i) no downgrading shall
have occurred in such ratings and (ii) such ratings shall not have been
put under surveillance or review, with possible negative implications;
(j) On or after the date hereof there shall not have occurred any of
the following: (i) a suspension or material limitation in trading in
securities generally on the NYSE or on NASDAQ; (ii) a suspension or
material limitation in trading in the Company's or Corning's securities on
the NYSE; (iii) a general moratorium on commercial banking activities in
New York declared by either Federal or New York State authorities; or (iv)
the outbreak or escalation of hostilities involving the United States or
the declaration by the United States of a national emergency or war, if
the effect of any such event specified in this Clause (iv) in your
judgment makes it impracticable to proceed with the public offering or the
delivery of the Securities on the terms and in the manner contemplated in
the Prospectus; or (v) the occurrence of any material adverse change in
the existing financial, political or economic conditions in the United
States or elsewhere which, in your judgment, would materially and
adversely
-24-
<PAGE>
affect the financial markets or the market for the Securities and other
debt securities;
(k) The Company has entered into the Credit Facility (as defined in
the Prospectus) in substantially the form contemplated by the Prospectus;
the Company has borrowed $350 million under the Credit Facility and has up
to $100 million available under the working capital portion of the Credit
Facility, substantially all of which will be available for borrowing at
the Time of Delivery; and there shall be no default or event of default
under the Credit Facility or the existence of any event which with notice
or lapse of time, or both, would constitute a default or an event of
default under the Credit Facility;
(l) The IRS Ruling shall be in full force and effect;
(m) The "no-action" letter from the Commission to Corning with
respect to the absence of a need to register the Company Common Stock and
Covance Common Stock issued in the Distributions shall be in full force
and effect;
(n) The Company shall have complied with the provisions of Section
5(c) hereof with respect to the furnishing of prospectuses on the New York
Business Day next succeeding the date of this Agreement;
(o) The Escrow Agreement, in a form reasonably satisfactory to you,
shall have been duly executed and delivered by each of the parties
thereto, and all of the Intercompany Agreements (other than the Escrow
Agreement) shall have been duly and irrevocably placed in escrow with the
Escrow Agent pursuant to, and in accordance with, the Escrow Agreement;
(p) All of the conditions to the consummation of the Distributions
set forth in the Transaction Agreement, dated as of November 22, 1996,
among the Company, Corning, Corning Life Sciences Inc., Corning Clinical
Laboratories Inc. (MI) and Covance, shall have been satisfied or waived,
other than the sale of the Securities and the application of the proceeds
therefrom and the events contemplated by Section 5(a)(vii); and
(q) The Company and Corning shall have furnished or caused to be
furnished at the Time of Delivery certificates of officers of the Company
and Corning reasonably satisfactory to you as to the accuracy of the
representations and warranties of the Company and Corning herein at and as
of such Time of Delivery, as to the performance by the Company and Corning
of all of their obligations hereunder to be performed at or prior to such
Time of Delivery, as to the matters set forth in subsections (a) and (h)
of this Section and as to such other matters as you may reasonably
request.
-25-
<PAGE>
8. (a) The Company and Corning will, jointly and severally, indemnify and
hold harmless each Underwriter against any losses, claims, damages or
liabilities, to which such Underwriter may become subject, under the Act
or otherwise, insofar as such losses, claims, damages or liabilities (or
actions in respect thereof) arise out of or are based upon an untrue
statement or alleged untrue statement of a material fact contained in any
Preliminary Prospectus, the Registration Statement or the Prospectus, or
any amendment or supplement thereto, or arise out of or are based upon the
omission or alleged omission to state therein a material fact required to
be stated therein or necessary to make the statements therein not
misleading, and will reimburse each Underwriter for any legal or other
expenses reasonably incurred by such Underwriter in connection with
investigating or defending any such action or claim as such expenses are
incurred; provided, however, that the Company shall not be liable in any
such case to the extent that any such loss, claim, damage or liability
arises out of or is based upon an untrue statement or alleged untrue
statement or omission or alleged omission made in any Preliminary
Prospectus, the Registration Statement or the Prospectus or any such
amendment or supplement in reliance upon and in conformity with written
information furnished to the Company by any Underwriter through J.P.
Morgan Securities Inc. expressly for use therein and provided, further,
that the Company and Corning shall not be liable to any Underwriter under
the indemnity agreement in this subsection (a) with respect to any
Preliminary Prospectus to the extent that any such loss, claim, damage or
liability of such Underwriter results from the fact that such Underwriter
sold Securities to a person as to whom it shall be established that there
was not sent or given, at or prior to the written confirmation of such
sale, a copy of the Prospectus in any case where such delivery is required
by the Act if the Company has previously furnished copies thereof in
sufficient quantity to such Underwriter and the loss, claim, damage or
liability of such Underwriter results from an untrue statement or omission
of a material fact contained in the Preliminary Prospectus which was
identified in writing prior to the date of this Agreement to such
Underwriter and corrected in the Prospectus.
(b) Each Underwriter will indemnify and hold harmless the Company and
Corning against any losses, claims, damages or liabilities to which the
Company may become subject, under the Act or otherwise, insofar as such
losses, claims, damages or liabilities (or actions in respect thereof)
arise out of or are based upon an untrue statement or alleged untrue
statement of a material fact contained in any Preliminary Prospectus, the
Registration Statement or the Prospectus, or any amendment or supplement
thereto, or arise out of or are based upon the omission or alleged
omission to state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading, in each case to
the extent, but only to the extent, that such untrue
-26-
<PAGE>
statement or alleged untrue statement or omission or alleged omission was
made in any Preliminary Prospectus, the Registration Statement or the
Prospectus or any such amendment or supplement in reliance upon and in
conformity with written information furnished to the Company by such
Underwriter through J.P. Morgan Securities Inc. expressly for use therein;
and will reimburse the Company or Corning for any legal or other expenses
reasonably incurred by the Company in connection with investigating or
defending any such action or claim as such expenses are incurred.
(c) Promptly after receipt by an indemnified party under subsection
(a) or (b) above of notice of the commencement of any action, such
indemnified party shall, if a claim in respect thereof is to be made
against the indemnifying party under such subsection, notify the
indemnifying party in writing of the commencement thereof; provided,
however, that in the case of subsection (a)(i) or (b) the omission so to
notify the indemnifying party shall not relieve it from any liability
which it may have to any indemnified party otherwise than under such
subsection; and provided, further that in the case of subsection (a)(ii)
the omission so to notify the indemnifying party shall relieve the
indemnifying party from liability only to the extent it is actually
prejudiced by such omission. In case any such action shall be brought
against any indemnified party and it shall notify the indemnifying party
of the commencement thereof, the indemnifying party shall be entitled to
participate therein and, to the extent that it shall wish, jointly with
any other indemnifying party similarly notified, to assume the defense
thereof, with counsel satisfactory to such indemnified party (who shall
not, except with the consent of the indemnified party, be counsel to the
indemnifying party), and, after notice from the indemnifying party to such
indemnified party of its election so to assume the defense thereof, the
indemnifying party shall not be liable to such indemnified party under
such subsection for any legal expenses of other counsel or any other
expenses, in each case subsequently incurred by such indemnified party, in
connection with the defense thereof other than reasonable costs of
investigation. No indemnifying party shall, without the written consent of
the indemnified party, effect the settlement or compromise of, or consent
to the entry of any judgment with respect to, any pending or threatened
action or claim in respect of which indemnification or contribution may be
sought hereunder (whether or not the indemnified party is an actual or
potential party to such action or claim) unless such settlement,
compromise or judgment (i) includes an unconditional release of the
indemnified party from all liability arising out of such action or claim
and (ii) does not include a statement as to or an admission of fault,
culpability or a failure to act, by or on behalf of any indemnified party.
(d) If the indemnification provided for in this Section 8 is
unavailable to or insufficient to hold harmless an indemnified party under
subsection (a) or (b)
-27-
<PAGE>
above in respect of any losses, claims, damages or liabilities (or actions
in respect thereof) referred to therein, then each indemnifying party
shall contribute to the amount paid or payable by such indemnified party
as a result of such losses, claims, damages or liabilities (or actions in
respect thereof) in such proportion as is appropriate to reflect the
relative benefits received by the Company on the one hand and the
Underwriters on the other from the offering of the Securities. If,
however, the allocation provided by the immediately preceding sentence is
not permitted by applicable law or if the indemnified party failed to give
the notice required under subsection (c) above, then each indemnifying
party shall contribute to such amount paid or payable by such indemnified
party in such proportion as is appropriate to reflect not only such
relative benefits but also the relative fault of the Company and Corning
on the one hand and the Underwriters on the other in connection with the
statements or omissions which resulted in such losses, claims, damages or
liabilities (or actions in respect thereof), as well as any other relevant
equitable considerations. The relative benefits received by the Company
and Corning on the one hand and the Underwriters on the other shall be
deemed to be in the same proportion as the total net proceeds from the
offering (before deducting expenses) received by the Company bear to the
total underwriting discounts and commissions received by the Underwriters,
in each case as set forth in the table on the cover page of the
Prospectus. The relative fault shall be determined by reference to, among
other things, whether the untrue or alleged untrue statement of a material
fact or the omission or alleged omission to state a material fact relates
to information supplied by the Company or Corning on the one hand or the
Underwriters on the other and the parties' relative intent, knowledge,
access to information and opportunity to correct or prevent such statement
or omission. The Company, Corning and the Underwriters agree that it would
not be just and equitable if contribution pursuant to this subsection (d)
were determined by pro rata allocation (even if the Underwriters were
treated as one entity for such purpose) or by any other method of
allocation which does not take account of the equitable considerations
referred to above in this subsection (d). The amount paid or payable by an
indemnified party as a result of the losses, claims, damages or
liabilities (or actions in respect thereof) referred to above in this
subsection (d) shall be deemed to include any legal or other expenses
reasonably incurred by such indemnified party in connection with
investigating or defending any such action or claim. Notwithstanding the
provisions of this subsection (d), no Underwriter shall be required to
contribute any amount in excess of the amount by which the total price at
which the Securities underwritten by and distributed to the public were
offered to the public exceeds the amount of any damages which such
Underwriter has otherwise been required to pay by reason of such untrue or
alleged untrue statement or omission or alleged omission. No person guilty
of fraudulent misrepresentation (within the meaning of Section 11(f) of
the Act) shall be
-28-
<PAGE>
entitled to contribution from any person who was not guilty of such
fraudulent misrepresentation. The Underwriters' obligations in this
subsection (d) to contribute are several in proportion to their respective
underwriting obligations and not joint.
(e) The obligations of the Company and Corning under this Section 8
shall be in addition to any liability which the Company or Corning may
otherwise have, including under the letter agreement, dated June 13, 1996,
between Corning and Goldman, Sachs & Co., under the letter agreement,
dated as of May 14, 1996, between Corning and Lazard Freres & Co. LLC and
under the letter agreement, dated as of December 11, 1996, between Corning
and J.P. Morgan Securities Inc., and shall extend, upon the same terms and
conditions, to each person, if any, who controls any Underwriter within
the meaning of the Act; and the obligations of the Underwriters under this
Section 8 shall be in addition to any liability which the respective
Underwriters may otherwise have and shall extend, upon the same terms and
conditions, to each officer and director of the Company or Corning
(including any person who, with his or her consent, is named in the
Registration Statement as about to become a director of the Company) and
to each person, if any, who controls the Company within the meaning of the
Act.
9. (a) If any Underwriter shall default in its obligation to purchase the
Securities which it has agreed to purchase hereunder, the non-defaulting
Underwriters may in their discretion arrange for one or more of the
non-defaulting Underwriters or another party or other parties to purchase
such Securities on the terms contained herein. If within thirty-six hours
after such default by any Underwriter the non-defaulting Underwriters do
not arrange for the purchase of such Securities, then the Company shall be
entitled to a further period of thirty-six hours within which to procure
another party or other parties satisfactory to the non-defaulting
Underwriters to purchase such Securities on such terms. In the event that,
within the respective prescribed periods, the non-defaulting Underwriters
notify the Company that they have so arranged for the purchase of such
Securities, or the Company notifies the non-defaulting Underwriters that
it has so arranged for the purchase of such Securities, the non-defaulting
Underwriters or the Company shall have the right to postpone the Time of
Delivery for a period of not more than seven days, in order to effect
whatever changes may thereby be made necessary in the Registration
Statement or the Prospectus, or in any other documents or arrangements,
and the Company and Corning, jointly and severally, agree to file promptly
any amendments to the Registration Statement or the Prospectus which in
the opinion of the non-defaulting Underwriters may thereby be made
necessary. The term "Underwriter" as used in this Agreement shall include
any person
-29-
<PAGE>
substituted under this Section with like effect as if such person had
originally been a party to this Agreement with respect to such Securities.
(b) If, after giving effect to any arrangements for the purchase of
the Securities of a defaulting Underwriter or Underwriters by the
non-defaulting Underwriters and the Company as provided in subsection (a)
above, the aggregate principal amount of such Securities which remains
unpurchased does not exceed one-eleventh of the aggregate principal amount
of all the Securities, then the Company shall have the right to require
each non-defaulting Underwriter to purchase the principal amount of
Securities which such Underwriter agreed to purchase hereunder and, in
addition, to require each non-defaulting Underwriter to purchase its pro
rata share (based on the principal amount of Securities which such
Underwriter agreed to purchase hereunder) of the Securities of such
defaulting Underwriter or Underwriters for which such arrangements have
not been made; but nothing herein shall relieve a defaulting Underwriter
from liability for its default.
(c) If, after giving effect to any arrangements for the purchase of
the Securities of a defaulting Underwriter or Underwriters by the
non-defaulting Underwriters and the Company as provided in subsection (a)
above, the aggregate principal amount of Securities which remains
unpurchased exceeds one-eleventh of the aggregate principal amount of all
the Securities, or if the Company shall not exercise the right described
in subsection (b) above to require non-defaulting Underwriters to purchase
Securities of a defaulting Underwriter or Underwriters, then this
Agreement shall thereupon terminate, without liability on the part of any
non-defaulting Underwriter or the Company, except for the expenses to be
borne by the Company and the Underwriters as provided in Section 6 hereof
and the indemnity and contribution agreements in Section 8 hereof; but
nothing herein shall relieve a defaulting Underwriter from liability for
its default.
10. The respective indemnities, agreements, representations, warranties
and other statements of the Company, Corning and the several Underwriters, as
set forth in this Agreement or made by or on behalf of them, respectively,
pursuant to this Agreement, shall remain in full force and effect, regardless of
any investigation (or any statement as to the results thereof) made by or on
behalf of any Underwriter or any controlling person of any Underwriter or the
Company or Corning, or any officer or director or controlling person of the
Company or Corning, and shall survive delivery of and payment for the
Securities.
11. If this Agreement shall be terminated pursuant to Section 9 hereof,
the Company and Corning shall not then be under any liability to any Underwriter
except as provided in Sections 6 and 8 hereof; but, if for any other reason, the
Securities are
-30-
<PAGE>
not delivered by or on behalf of the Company as provided herein, the Company
will reimburse the Underwriters for all out-of-pocket expenses, including fees
and disbursements of counsel, reasonably incurred by the Underwriters in making
preparations for the purchase, sale and delivery of the Securities, but the
Company and Corning shall then be under no further liability to any Underwriter
except as provided in Sections 6 and 8 hereof.
12. In all dealings hereunder, J.P. Morgan Securities Inc. shall act on
behalf of each of the Underwriters, and the parties hereto shall be entitled to
act and rely upon any statement, request, notice or agreement on behalf of any
Underwriter made or given by J.P. Morgan Securities Inc.
All statements, requests, notices, and agreements hereunder shall be in
writing, and if to the Underwriters shall be delivered or sent by mail, telex or
facsimile transmission to J.P. Morgan Securities Inc., 60 Wall Street, New York,
New York 10260, Attention: Registration Department; and if to the Company shall
be delivered or sent by mail, telex or facsimile transmission to the address of
the Company set forth in the Registration Statement, Attention: Secretary;
provided, however, that any notice to an Underwriter pursuant to Section 8 (c)
hereof shall be delivered or sent by mail, telex or facsimile transmission to
such Underwriter at its address set forth in its Underwriters' Questionnaire, or
telex constituting such Questionnaire, which address will be supplied to the
Company by J.P. Morgan Securities Inc. upon request. Any such statements,
requests, notices or agreements shall take effect upon receipt thereof.
13. This Agreement shall be binding upon, and inure solely to the benefit
of, the Underwriters, the Company, Corning and, to the extent provided in
Sections 8 and 10 hereof, the officers and directors of the Company and Corning
and each person who controls the Company, Corning or any Underwriter, and their
respective heirs, executors, administrators, successors and assigns, and no
other person shall acquire or have any right under or by virtue of this
Agreement. No purchaser of any of the Securities from any Underwriter shall be
deemed a successor or assign by reason merely of such purchase.
14. Time shall be of the essence of this Agreement. As used herein, the
term "business day" shall mean any day when the Commission's office in
Washington, D.C. is open for business.
15. This Agreement shall be governed by and construed in accordance with
the laws of the State of New York.
16. This Agreement may be executed by any one or more of the parties
hereto in any number of counterparts, each of which shall be deemed to be an
-31-
<PAGE>
original, but all such respective counterparts shall together constitute one and
the same instrument.
-32-
<PAGE>
If the foregoing is in accordance with your understanding, please sign and
return to us seven counterparts hereof, and upon the acceptance hereof by you,
this letter and such acceptance hereof shall constitute a binding agreement
between each of the Underwriters, the Company and Corning.
Very truly yours,
Corning Clinical Laboratories Inc.
By: ......................................
Name:
Title:
Corning Incorporated
By: .......................................
Name:
Title:
Accepted as of the date hereof:
J.P. Morgan Securities Inc.
................................................
Name:
Title:
................................................
(Goldman, Sachs & Co.)
................................................
(Lazard Freres & Co. LLC)
-33-
<PAGE>
SCHEDULE I
Principal Amount
of Securities
Underwriter to be Purchased
J.P. Morgan Securities Inc............. $
Goldman, Sachs & Co....................
Lazard Freres & Co. LLC................
Total.......................................... $150,000,000
============
-34-
<PAGE>
ANNEX I(a)
Pursuant to Section 7(g) of the Underwriting Agreement, Price Waterhouse LLP
shall furnish letters to the Underwriters to the effect that
(i) They are independent certified public accountants with respect to the
Company and its subsidiaries within the meaning of the Act and the
applicable published rules and regulations thereunder;
(ii) In their opinion, the financial statements and any supplementary
financial information and schedules (and, if applicable, financial forecasts
and/or pro forma financial information) examined by them and included in the
Prospectus or the Registration Statement comply as to form in all material
respects with the applicable accounting requirements of the Act and the
related published rules and regulations thereunder; and, if applicable, they
have made a review in accordance with standards established by the American
Institute of Certified Public Accountants of the unaudited consolidated
interim financial statements, selected financial data, pro forma financial
information, financial forecasts and/or condensed financial statements
derived from audited financial statements of the Company for the periods
specified in such letter, as indicated in their reports thereon, copies of
which have been furnished to the Underwriters and are attached hereto;
(iii) They have made a review in accordance with standards established by
the American Institute of Certified Public Accountants of the unaudited
condensed consolidated statements of income, consolidated balance sheets and
consolidated statements of cash flows included in the Prospectus as
indicated in their reports thereon copies of which are attached hereto and
on the basis of specified procedures including inquiries of officials of the
Company who have responsibility for financial and accounting matters
regarding whether the unaudited condensed consolidated financial statements
referred to in paragraph (vi)(A)(i) below comply as to form in all material
respects with the applicable accounting requirements of the Act and the
related published rules and regulations, nothing came to their attention
that cause them to believe that the unaudited condensed consolidated
financial statements do not comply as to form in all material respects with
the applicable accounting requirements of the Act and the related published
rules and regulations;
(iv) The unaudited selected financial information with respect to the
consolidated results of operations and financial position of the Company for
the five most recent fiscal years included in the Prospectus agrees with the
<PAGE>
corresponding amounts (after restatements where applicable) in the audited
consolidated financial statements for such five fiscal years;
(v) They have compared the information in the Prospectus under selected
captions with the disclosure requirements of Regulation S-K and on the basis
of limited procedures specified in such letter nothing came to their
attention as a result of the foregoing procedures that caused them to
believe that this information does not conform in all material respects with
the disclosure requirements of Items 301, 302, 402 and 503(d), respectively,
of Regulation S-K;
(vi) On the basis of limited procedures, not constituting an examination
in accordance with generally accepted auditing standards, consisting of a
reading of the unaudited financial statements and other information referred
to below, a reading of the latest available interim financial statements of
the Company and its subsidiaries, inspection of the minute books of the
Company and its subsidiaries since the date of the latest audited financial
statements included in the Prospectus, inquiries of officials of the Company
and its subsidiaries responsible for financial and accounting matters and
such other inquiries and procedures as may be specified in such letter,
nothing came to their attention that caused them to believe that:
(A) (i) the unaudited consolidated statements of income, consolidated
balance sheets and consolidated statements of cash flows included in the
Prospectus do not comply as to form in all material respects with the
applicable accounting requirements of the Act and the related published
rules and regulations, or (ii) any material modifications should be made
to the unaudited condensed consolidated statements of income,
consolidated balance sheets and consolidated statements of cash flows
included in the Prospectus for them to be in conformity with generally
accepted accounting principles;
(B) any other unaudited income statement data and balance sheet items
included in the Prospectus do not agree with the corresponding items in
the unaudited consolidated financial statements from which such data and
items were derived, and any such unaudited data and items were not
determined on a basis substantially consistent with the basis for the
corresponding amounts in the audited consolidated financial statements
included in the Prospectus;
(C) the unaudited financial statements which were not included in the
Prospectus but from which were derived any unaudited condensed financial
statements referred to in Clause (A) and any unaudited income statement
data and balance sheet items included in the Prospectus and referred to
in
2
<PAGE>
Clause (B) were not determined on a basis substantially consistent with
the basis for the audited consolidated financial statements included in
the Prospectus;
(D) any unaudited pro forma consolidated condensed financial
statements included in the Prospectus do not comply as to form in all
material respects with the applicable accounting requirements of the Act
and the published rules and regulations thereunder or the pro forma
adjustments have not been properly applied to the historical amounts in
the compilation of those statements;
(E) as of a specified date not more than five days prior to the date
of such letter, there have been any changes in the consolidated capital
stock or any increase in the consolidated long-term debt of the Company
and its subsidiaries, or any decreases in consolidated net current assets
or stockholders' equity or other items specified by the Underwriters, or
any increases in any items specified by the Underwriters, in each case as
compared with amounts shown in the latest balance sheet included in the
Prospectus, except in each case for changes, increases or decreases which
the Prospectus discloses have occurred or may occur or which are
described in such letter; and
(F) for the period from the date of the latest financial statements
included in the Prospectus to the specified date referred to in Clause
(E) there were any decreases in consolidated net revenues, EBITDAR,
income (loss) before taxes or net income or other items specified by the
Underwriters, or any increases in any items specified by the
Underwriters, in each case as compared with the comparable period of the
preceding year and with any other period of corresponding length
specified by the Underwriters, except in each case for decreases or
increases which the Prospectus discloses have occurred or may occur or
which are described in such letter; and
(vii) In addition to the examination referred to in their report(s)
included in the Prospectus and the limited procedures, inspection of minute
books, inquiries and other procedures referred to in paragraphs (iii) and
(vi) above, they have carried out certain specified procedures, not
constituting an examination in accordance with generally accepted auditing
standards, with respect to certain amounts, percentages and financial
information specified by the Underwriters, which are derived from the
general accounting records of the Company and its subsidiaries, which appear
in the Prospectus, or in Part II of, or in exhibits and schedules to, the
Registration Statement specified by the Underwriters, and have compared
certain of such amounts, percentages and financial information with the
3
<PAGE>
accounting records of the Company and its subsidiaries and have found them
to be in agreement.
4
RESTATED PARTNERSHIP AGREEMENT, made as of this 8th day of June, 1994, by and
between Corning Clinical Laboratories Inc., a Maryland corporation ("CCL") and
Diagnostic Reference Services, Inc., a Maryland corporation ("DRS")
(individually a "Partner" and collectively the "Partners")
1. FORMATION, NAME AND PURPOSE OF PARTNERSHIP - The Partners hereby
form a Partnership under the name of PATHOLOGY BUILDING PARTNERSHIP (the
"Partnership"), or such other name as the Partners may adopt from time to time.
The Partnership shall be conducted for the purpose of acquiring, selling,
leasing, mortgaging, encumbering, developing and owning real estate. The
Partnership may engage in such investment business of a similar or related
nature as shall be unanimously agreed upon by the Partners. The foregoing powers
and purposes of the Partnership shall also apply to personal or mixed property
relating to such real estate investments. In furtherance of the business and
purposes of the Partnership, the Partnership may enter into such contracts,
agreements, ventures or arrangement with such other joint ventures,
partnerships, corporations, trusts, associations, individual or other entities
as may be unanimously agreed by the Partners to be necessary to accomplish any
of the Partnership purposes.
2. PRINCIPAL OFFICE - The principal office of the Partnership shall be
located at 1901 Sulphur Spring Road, Baltimore, Maryland 21227 or such other
locations as may be agreed upon by the Partners.
3. TERM - The Partnership shall begin and become effective as of the
date hereof and shall continue until terminated as hereinafter provided.
4. CAPITAL AND CAPITAL ACCOUNTS
(a) Capital Accounts - A capital account shall be maintained for
each Partner and shall be credited with the amounts of contributions to the
Partnership when made, shall be credited or charged, as the case may be, with
its distributive share of the Partnership profit, gain or loss, and shall be
charged with the amounts of any distributions to its Partners pursuant to
subparagraph 6 (c).
(b) No Interest - No interest shall be paid by the Partnership on
any capital contributed to the Partnership by any Partner.
5. LOANS AND ADDITIONAL CAPITAL CONTRIBUTIONS -
(a) Loans - Any Partner may, at any time, loan to the Partnership
such additional funds as may be mutually agreed upon by the Partners upon such
terms as the Partners may from time to time agree.
(b) Additional Capital - In the event that, at any time, additional
funds in excess of the funds contributed or loaned to the Partnership are
required by the Partnership for or
1
<PAGE>
in respect of the acquisition, ownership, development, construction, management,
lease and /or operation of any Partnership property or any improvements thereon,
or for or in respect of any other Partnership purpose (including the payment of
carrying charges and costs, real estate taxes and assessments, hazard and
liability insurance, principal and/or interest on any mortgage on Partnership
property or on any other Partnership loan, operating expenses and/or any other
expenses of the Partnership), the Partners may, if they so elect, endeavor, on
behalf of the Partnership to borrow such required funds, with interest at then
prevailing rates, from commercial banks, savings and loan associations and/or
other lending institutions or persons (including any Partner) and if and to the
extent such required funds are not so obtained, the entire amount of such
required funds shall be contributed or loaned, as the Partners may agree, to the
capital of the Partnership by the Partners in proportion to their interest in
the profits of the Partnership, as provided in subparagraph 6 (a).
6. INCOME ACCOUNTS, PROFITS AND LOSSES -
(a) Percentage of Interest - The net profit or net loss of the
Partnership shall be distributable or chargeable, as the case may be, to the
Partners in the following proportions.
CCL 50%
DRS 50%
(b) Profits and Losses - An individual income account shall be
maintained for each Partner to which the net profits and losses in the
proportions set forth in subparagraph 6 (a) shall be lcredited or debited, as
the case may be.
(c) Accounting - An accounting shall be made by the Partnership for
each calendar year, not later than ninety (90) days after the end of each such
year, to determine the Partners' respective shares of net profits or net losses,
which shall be credited or debited as the case may be, to the Partners'
respective capital accounts.
(d) Balance in Income Account - A credit balance in a Partnership
income account shall constitute a liability of the Partnership payable to the
Partner; it shall not constitute a part of that Partner's interest in the
capital of the Partnership. A debit balance in a Partner's income account,
whether occasioned by drawings in excess of his or her share of Partnership net
profits or by charging him or her for his or her share of Partnership net
losses, shall constitute an obligation of that Partner to the Partnership and
shall not reduce his or her interest in the capital of the Partnership.
7. SALARIES AND DRAWINGS - No Partner shall receive any compensation
for services rendered to the Partnership unless salary or compensation therefor
has been approved in writing by all of the Partners. Each Partner may, from time
to time, withdraw the credit balance from its income account. No additional
share of profits shall inure to any Partner by reason of capital or income
account being in excess of the capital or income account of the others.
2
<PAGE>
8. TITLE TO PROPERTY - Legal title to any real estate owned by the
Partnership shall be held in the name of the Partnership; provided, however, the
Partnership; may, with the written approval of all Partners, hold title to its
real and personal property in the names of nominees, trustees or agents or in
whatever manner the Partners may find convenient and advantageous. Each Partner
holding title to such property agrees to abide by and do whatever act is
required by the partnership with respect to such property including, but not by
way of limitation, the execution of all requisite deeds, assignments, deeds of
trust or other instruments and further agrees that all property so held shall be
treated as Partnership property subject to the terms of this Partnership
Agreement.
9. TIME DEVOTED TO PARTNERSHIP AFFAIRS - It is expressly agreed and
understood that each Partner shall devote only such time and efforts to the
Partnership business as the Partners shall mutually determine to be necessary.
Each partner may have other business interests and may engage in any other
business or trade, profession, or employment whatsoever, on his or her own
account, or in partnership with or as an employee of or as an officer, director
or shareholder of any other person, firm or corporation.
10. MANAGEMENT OF PARTNERSHIP BUSINESS
(a) UNANIMOUS CONSENT - Unanimous consent of the Partners shall be
required for the management, conduct and operation of the Partnership business,
respecting the following transactions:
(i) Purchasing or selling or contracting to purchase or sell any
real property of or for the Partnership;
(ii) Mortgaging any property of the Partnership, whether such
mortgage be a first or second mortgage;
(iii) Modifying any Partnership mortgage;
(iv) Borrowing or lending money on behalf of the Partnership;
(v) Assigning, pledging or transferring any claims or debts due
to the Partnership or releasing any such claims or debts except upon payment in
full;
(vi) Making an assignment for the benefit of creditors;
(vii) Making, delivering or accepting any commercial paper or
executing any note or bond on behalf of the Partnership;
(viii) Endorsing any note or acting as an accommodation party or
otherwise becoming a surety for any person on behalf of the Partnership; or
3
<PAGE>
(ix) Assigning, mortgaging, pledging, selling or in any way
transferring a Partner's interest in the Partnership or in its capital assets or
property, except as may be otherwise specifically provided herein.
(b) Managing Partner - Subject to the foregoing subparagraph 10 (a),
the Partners hereby agree that CCL shall be the managing Partner of the
Partnership, and in that capacity, shall have the power to carry out the
day-to-day business of the Partnership, including, but not limited to, the
following:
(i) Carrying out the duties of the Partnership under the terms
of any lease pursuant to which the Partnership is a landlord;
(ii) Carrying out the Partnership's duties under its
CrossEasement Agreement with Beltway Professional Building Partnership; and
(iii) Keeping and attending to the financial records of the
Partnership, communicating and coordinating with the attorneys and accountants
retained to represent the Partnership, and the performance of all other
activities of the Partnership in the ordinary course of its business.
11. VOLUNTARY TERMINATION
(a) Dissolution - The Partners may voluntarily agree to dissolve the
Partnership, and in such event or upon the dissolution of the Partnership for
any reason except as otherwise provided in paragraphs 13, 14 and 15 hereof, the
affairs of the Partnership shall be liquidated and terminated as follows:
(1) A full accounting shall be made. The profits and losses of
the Partnership shall be determined to the date of dissolution and transferred
to the respective income accounts of the Partners.
(ii) All Partnership property shall be sold at its fair market
value at the date of dissolution. All real property owned by the Partnership
shall be listed for sale with a licensed Maryland Real Estate Broker within
sixty (60) days of the date of dissolution at a mutually agreeable price, and
shall be sold in accordance with the terms thereof. Any gain or loss on
disposition of Partnership properties shall be credited or charged to the
Partners in the proportion of their interests under paragraph 6 hereof in the
net profits and losses of the Partnership.
(iii) The assets of the Partnership shall be applied or
distributed in the following order of priorities:
(aa) In payment of debts of the Partnership to creditors
other than the Partners;
4
<PAGE>
(bb) In payment of loans to the Partnership by the
Partners;
(cc) In payment of the amounts due to the Partners as
reflected in their income accounts; and
(dd) The remaining assets, if any, shall be distributed in
proportionate discharge of the respective capital accounts of the Partners. Any
debit balance in the income account of a Partner, however arising, shall be
treated as a reduction of his or her capital account, and the excess as a
reduction of his or her capital account, and the excess thereof or any debit
balance in his or her capital account shall be repaid to the Partnership
promptly upon the demand of any other partner.
(b) Applicability - This paragraph shall not apply where paragraphs
13 or 14 apply, dealing respectively with withdrawal of a Partner and
involuntary transfers, unless such paragraphs make this paragraph 11 applicable.
12. RESTRICTIONS ON TRANSFER - No Partner may give, transfer, sell,
convey or assign all or any part of his or her interest in the Partnership
without the written prior consent of all of the other Partners.
(a) Right of First Refusal - In the absence of such written consent
to all of the other Partners, any Partner desiring to sell (the "selling
Partner") all or any part of its Partnership interest, shall give written notice
of such intention to the other Partners (the "remaining Partners"), and such
notice shall contain a true copy of the terms and conditions of any bona fide
offer of sale it has then received, together with the name and address of the
prospective purchaser making said offer (the "Offeror"). For a period of thirty
(30) days after receipt of such notice, there shall be rights of first refusal
as follows:
An election by a Partner to exercise its right of first refusal
shall be in writing with a copy to all other Partners. If any applicable right
of first refusal is not exercised within the thirty (3) day period, all of the
remaining Partners shall have the option to purchase the selling Partner's
Partnership share in proportion to their interests in the Partnership, within
the following thirty (30) days. If all remaining Partners do not desire to
acquire their proportionate interest of the selling Partner's interest, any
remaining Partner or Partners who do desire to acquire such interest, shall be
entitled to acquire a proportionate share of the selling Partner's interest. If
the option(s) to purchase the interest of the selling Partner has/have not been
exercised within the sixty (60) day period so that one hundred percent (100%) of
the selling Partner's interest has been purchased, the selling Partner shall
then be free to sell the interest to the Offeror uon the terms and conditions of
said offer, provided however, that the sale must be consummated within sixty
(60) days after the expiration of the optional sixty (60) day period or the sale
shall be prohibited unless otherwise mutually agreed in writing by the Partners.
5
<PAGE>
13. WITHDRAWAL OF PARTNER -
(a) No Termination - The withdrawal from the Partnership of a
Partner shall not automatically terminate or dissolve the Partnership, but the
Partnership and the Partnership business shall continue.
(b) Rights of First Refusal - Notwithstanding the foregoing
provision, the remaining Partners shall have the right to purchase the interest
of a withdrawing Partner in the Partnership, or to terminate and liquidate the
Partnership business. The rights and orders of first refusal outlined in
subparagraph 12 (a) shall apply, except that the purchase price shall be as
described in subparagraph 13 (c).
(c) Purchase Price - For the purpose of this paragraph 13, the
purchase price for a withdrawing Partner's Partnership interest shall be the
fair market value of such Partner's interest as of the day on which the Partner
elects to withdraw. For purposes of this subparagraph, the Partner(s) who
elect(s) the purchase shall be referred to as "Buyer"; the withdrawing Partner
shall be referred to as "Seller."
(i) The fair market value of the tangible property of the
Partnership shall, for the foregoing purposes, be determined as follows:
(aa) Within thirty (30) days after the Buyer elects to
purchase Seller's Partnership interest, an appraiser or appraisers shall be
jointly selected by the Buyer and the Seller and the determination of such
jointly selected appraiser or appraisers as to the fair market value of the
tangible property of the Partnership shall be binding and conclusive on all
parties.
(bb) If the Seller and the Buyer (or Buyers) do not agree
upon the selection of an appraiser, or appraisers, as porvided in subparagraph
13 (c) (i) (aa) hereof, the Seller shall appoint an appraiser and the Buyer (or
each Buyer, if necessary) shall appoint an appraiser. The appraisers so
appointed shall select another appraiser within fifteen (15) days after they
shall have been appointed. If either the Seller or Buyer fail to so appoint an
appraiser, the appraiser duly appointed by the other shall serve as the sole
appraiser. The appraiser(s) so appointed shall, as promptly and diligently as
possible, determine the fair market value of the tangible property of the
Partnership, and the determination of a majority of said appraisers, or the sole
appraiser if only one is appointed, shall be determinative of the fair market
value of the tangible property of the Partnership for the purpose of this
Partnership Agreement and shall be binding and conclusive on all parties. Each
such appraiser shall be a member of the American Institute of Real Estate
Appraisers. The appraisers' fees shall be divided equally between Seller and
Buyer.
(ii) After the determination of the fair market value of the
tangible property of the Partnership in accordance with the foregoing
provisions, the difference between such fair market value and the book value of
such tangible property shall be credited or debited, as the case may be, to the
capital accounts of the Partners in the proportion in which they share
6
<PAGE>
net profits or net losses, as provided in subparagraph 6 (a) hereof. After the
foregoing adjustments have been made, the value of the Partnership interest of
the Seller shall be equal to the sum of the following items as of the date it
elected to withdraw.
(aa) The balance in the Seller's capital account, as
adjusted;
(bb) The balance in the Seller's income account; and
(cc) The Seller's share of Partnership profits or losses,
as the case may be, realized between the end of the last calendar year and the
date of the valuation of the Partnership interest as hereinbefore provided.
(d) Payment of Purchase - The Seller shall be paid for its interest by
certified or cashier's check or wire transfer of immediately available funds by
each such Buyer's by each such buyer at Closing, which shall be held not later
than one hundred eighty (180) days after notice to withdraw.
(e) Termination - In the event that one hundred percent (100%) of the
withdrawing Partner's Partnership interest is not purchased pursuant to
subparagraph 13 (b), then the Partnership shall be deemed to have been
terminated pursuant to paragraph 11 hereof as of sixty (60) days from the
effective date of withdrawal, death or adjudication of mental incompetence, as
the case may be.
14. INVOLUNTARY TRANSFER - In the event that the interest of a Partner
shall be attached or taken in execution, or in the event that a Partner shall be
adjudicated bankrupt or shall make an assignment for the benefit of creditors
(despite the restrictions set forth in subparagraph 10 (a)), or in the event
that its interest in the Partnership shall be made subject to a charging order,
the Partnership may liquidate the Partnership business and terminate the
Partnership pursuant to Paragraph 11 or may elect to continue to carry on the
Partnership business without interruption. If the Partnership elects to continue
to carry on the Partnership business, the Partnership shall have the right to
liquidate the interest of such Partner in the Partnership by settling with such
assignee, trustee in bankruptcy, or attaching court or officer taking the same
in execution, by determining the value of such Partner's interest in accordance
with Paragraph 13, and by paying the value of such Partnership interest to such
Partner's assignee, trustee in bankruptcy, or attaching court or officer, but
not exceeding the indebtedness and proper items of expense. The balance of the
value of the Partnership interest shall be distributable to the Partner so
affected pursuant to the provisions of Paragraph 13.
15. SALE OR DISPOSITION - In the event of the sale or disposition of
all or substantially all of the property of the Partnership, the net proceeds
therefrom shall be distributed among the Partners in accordance with the
provisions of Paragraph 11. The Partnership shall terminate when all the
property owned by the Partnership shall have been disposed of and the net
proceeds, after making proper provision for the liabiities of the Partnership,
shall have been distributed among the parties in accordance with the provisions
of Paragraph 11.
7
<PAGE>
16. BOOKS, RECORDS, ACCOUNTING AND REPORTS -
(a) Availability - At all times during the existence of the
Partnership, the Partners shall keep or cause to be kept full and true books of
account in accordance with the accounting method followed by the Partnership for
federal income tax purposes and otherwise in accordance with good accounting
principles and procedures applied in a consistent manner, which shall reflect
all Partnership transactions and shall be appropriate and adequate for the
Partnership's business. Such books of account, together with a copy of this
Agreement and any amendments thereto, shall at all times be maintained at the
offices of the Partnership at its principal office. Any Partner or a duly
authorized representative shall have the right at any time to inspect and copy
such books and documents during normal business hours upon reasonable notice.
(b) Financial Reports - An independent certified public accountant
of the Partnership, as shall be selected by the Partners, shall, within (90)
days after the end of each fiscal year of the Partnership, prepare and deliver
to each Partner a financial report of the Partnership for such period including
(i) a statement of Partnership income and expenses; (ii) a balance sheet and a
profit and loss statement; (iii) a schedule of distributions to the Partners
allocating to the Partners each item of taxable income, gain, loss, deduction,
credit and item of tax preference, (iv) all necessary tax reporting information
required by the Partners for preparation of their respective income tax returns;
(v) a copy of the tax returns (federal, state and local, if any) of the
Partnership for each fiscal year; and (vi) such other matters as the Partners
may reasonably deem material to the operations of the Partnership.
The costs and expenses of preparing and furnishing the financial
reports required by this Paragraph 16 in respect of all fiscal years of the
Partnership shall be paid by the Partnership.
(c) Accounting Decisions - All decisions as to accounting matters
shall be made by the Partners in accordance with the cash receipts and
disbursements method of accounting and, otherwise, in accordance with good
accounting principles applied on a consistent basis.
(d) Accounting Method - The Partnership shall use the cash method
of accounting.
17. BANK ACCOUNTS - All funds of the Partnership are to be deposited in
the Partnership's name in such separate bank account or accounts as may be
designated by the Partners and shall be withdrawn on the signature of the
Partners. Funds of the Partnership shall not be comingled with any other funds.
18. NOTICES - All notices, demands, requests, consents or other
communications required or permitted to be given or made under this Agreement
shall be in writing and signed by the party giving the same and shall be deemed
to have been given or made when mailed by certified mail, postage prepaid, to
the addresses as follows:
8
<PAGE>
Corning Clinical Laboratories Inc.
1901 Sulphur Spring Road
Baltimore, MD 21227
Diagnostic Reference Services Inc.
1901 Sulphur SpringRoad
Baltimore, MD 21227
w/a copy to:
Corning Clinical Laboratories Inc.
One Malcolm Avenue
Teterboro, NJ 07608
Attention: General Counsel
19. JUDICIAL MODIFICATION - If any court shall determine that any
provision contained in this Agreement is unenforceable in accordance with its
terms, it is the intention of the parties that this Agreement shall not thereby
be terminated but shall be deemed to be amended to the extent required to render
it valid and enforceable, such amendment to apply only with respect to the
operation of this Agreement in the jurisdiction of the court that has made the
determination.
20. TITLES AND CAPTIONS - Paragraph titles or captions contained in
this Agreement are inserted only as a matter of convenience and for reference
purposes and in no way define, limit, extend or describe the scope of this
Agreement or the intent of any provisions hereof.
21. PERSON AND GENDER - Whenever the singular number is used in this
Agreement and when required by the context, the same shall include the plural,
and the masculine gender shall include the feminine and neuter genders and the
word "person" shall include a corporation, firm, partnership or other form of
association.
22. BINDING AGREEMENT - Subject to the restrictions on assignment
herein contained, the terms and provisions of this Agreement shall be binding
upon and inure to the benefit of the sucessors, assigns, personal
representatives, estates, heirs and legatees of the respective Partners.
23. APPLICABLE LAW - The terms and provisions of this Agreement and any
dispute arising hereunder shall be governed by the laws of the State of
Maryland.
24. NO AGENCY INTENDED - Nothing herein contained shall be construed to
constitute any Partner the agent of another Partner, except as provided herein,
or in any manner to limit the Partners in the carrying on of their own
respective businesses or activities.
9
<PAGE>
25. AGREEMENTS BEYOND TERM - The Partnership shall have the power to
enter into leases for a period of years extending beyond the dissolution of the
Partnership.
26. FINAL AGREEMENT - This Agreement constitutes the entire Partnership
Agreement between the parties hereto and is intended to be an integration of all
prior agreements, oral or written, between the parties hereto with respect to
the subject matter hereof.
27. COUNTERPARTS - This Agreement may be executed simultaneously and in
any number of counterparts, each of which shall be deemed an original, but all
of which shall constitute one and the same instrument.
IN WITNESS WHEREOF, the parties hereto have hereunto set their hands
and seals the day and year first above written.
CORNING CLINICAL LABORATORIES INC. DIAGNOSTIC REFERENCE SERVICES, INC.
By:________________________ By:_________________________
Name: Name:
Title: Title:
10
Draft of December 10, 1996
- -------------------------------------------------------------------------------
CORNING CLINICAL LABORATORIES INC.
As Issuer
THE BANK OF NEW YORK
As Trustee
THE SUBSIDIARY GUARANTORS NAMED HEREIN
As Subsidiary Guarantors
----------------------
Indenture
Dated as of December __, 1996
----------------------
$150,000,000
__% Senior Subordinated Notes due 2006
- -------------------------------------------------------------------------------
<PAGE>
Reconciliation and tie between Trust Indenture Act
of 1939 and Indenture, dated as of December __, 1996
Trust Indenture Indenture
Act Section Section
ss.310 (a) (1) .......................................... 609
(a) (2) .......................................... 609
(a) (3) .......................................... Not Applicable
(a) (4) .......................................... Not Applicable
(b) .......................................... 608
610
ss.311 (a) .......................................... 613
(b) .......................................... 613
ss.312 (a) .......................................... 701
........................................... 702(a)
(b) .......................................... 702(b)
(c) .......................................... 702(c)
ss.313 (a) .......................................... 703(a)
(a) (4) .......................................... 101
1024
(b) .......................................... 703(a)
(c) .......................................... 703(a)
(d) .......................................... 703(c)
ss.314 (a) .......................................... 704
(b) .......................................... Not Applicable
(c) (1) .......................................... 102
(c) (2) .......................................... 102
(c) (3) .......................................... Not Applicable
(d) .......................................... Not Applicable
(e) .......................................... 102
ss.315 (a) .......................................... 601
(b) .......................................... 602
(c) .......................................... 601
(d) .......................................... 601
(e) .......................................... 514
ss.316 (a) .......................................... 101
(a) (1)(A) .......................................... 502
512
(a) (1)(B) .......................................... 513
(a) (2) .......................................... Not Applicable
(b) .......................................... 508
(c) .......................................... 508
ss.317 (a) (1) .......................................... 503
-i-
<PAGE>
Trust Indenture Indenture
Act Section Section
(a) (2) .......................................... 504
(b) .......................................... 1003
ss.318 (a) .......................................... 1071
- --------
Note: This reconciliation and tie shall not, for any purpose, be deemed
to be a part of the Indenture.
-ii-
<PAGE>
TABLE OF CONTENTS
Page
Parties.....................................................................1
Recitals of the Company and the Subsidiary Guarantors.......................1
ARTICLE ONE
Definitions and Other Provisions
of General Application
SECTION 101. Definitions............................................... 1
Act................................................................ 2
Affiliate.......................................................... 2
Asset Disposition.................................................. 2
Attributable Value................................................. 2
Authenticating Agent............................................... 3
Board of Directors................................................. 3
Board Resolution................................................... 3
Business Day....................................................... 3
Capital Lease Obligation........................................... 3
Capital Stock...................................................... 3
Cash Equivalents................................................... 3
Change of Control.................................................. 4
Commission......................................................... 4
Common Stock....................................................... 4
Company............................................................ 4
Company Request or Company Order................................... 4
Consolidated EBITDA................................................ 4
Consolidated EBITDA Coverage Ratio................................. 5
Consolidated Income Tax Expense.................................... 5
Consolidated Interest Expense...................................... 5
Consolidated Net Income............................................ 6
Consolidated Net Worth............................................. 6
Consolidated Subsidiaries.......................................... 6
Corning............................................................ 6
Corning/Quest Diagnostics Spin-Off Tax Indemnification Agreement... 7
Corporate Trust Office............................................. 7
corporation........................................................ 7
Covance............................................................ 7
Credit Facility.................................................... 7
Credit Rating...................................................... 7
Debt............................................................... 7
Defaulted Interest................................................. 7
Distribution Date.................................................. 8
-iii-
<PAGE>
Page
Escrow Agreement................................................... 8
Event of Default................................................... 8
Exchange Act....................................................... 8
Guaranty........................................................... 8
Holder............................................................. 8
Incur.............................................................. 8
Indenture.......................................................... 8
Intercompany Agreements............................................ 8
Interest Payment Date.............................................. 9
Interest Rate Agreement............................................ 9
Investment......................................................... 9
Lien............................................................... 9
Maturity........................................................... 9
Moody's............................................................ 9
Net Available Proceeds............................................. 9
Non-Core Assets.................................................... 10
Offer.............................................................. 10
Offer to Purchase.................................................. 10
Officers' Certificate.............................................. 12
Operating Lease.................................................... 12
Operating Margin................................................... 12
Opinion of Counsel................................................. 12
Outstanding........................................................ 12
Pari Passu......................................................... 13
Paying Agent....................................................... 13
Payment Blockage Period............................................ 13
Permitted Business................................................. 13
Permitted Investment............................................... 13
Permitted Joint Venture............................................ 14
Permitted Joint Venture.Investment................................. 14
Permitted Liens.................................................... 14
Person............................................................. 15
Predecessor Security............................................... 15
Preferred Stock.................................................... 15
Purchase Amount.................................................... 15
Purchase Date...................................................... 15
Purchase Price..................................................... 15
Quest Diagnostics/CPS Spin-Off Tax Indemnification Agreements...... 16
Quest Diagnostics Rights........................................... 16
Quest Diagnostics Rights Agreement................................. 16
Redemption Date.................................................... 16
Redemption Price................................................... 16
Regular Record Date................................................ 16
Related Person..................................................... 16
Rental Expense..................................................... 16
-iv-
<PAGE>
Page
Responsible Officer................................................ 16
Restricted Payment................................................. 16
Restricted Subsidiary.............................................. 17
S&P................................................................ 17
Sale and Leaseback Transaction..................................... 17
Securities......................................................... 17
Securities Payment................................................. 17
Security Register and Security Registrar........................... 17
Senior Debt........................................................ 17
Senior Gurantee.................................................... 17
Senior Nonmonetary Default......................................... 17
Senior Payment Default............................................. 17
Special Record Date................................................ 18
Specified Operating Lease.......................................... 18
Spin-Off Distributions............................................. 18
Spin-Off Payments.................................................. 18
Stated Maturity.................................................... 18
Subordinated Debt.................................................. 18
Subsidiary......................................................... 19
Subsidiary Guarantees.............................................. 19
Subsidiary Guarantor............................................... 19
Subsidiary Guarantor Payment....................................... 19
Subsidiary Guarantor Proceeding.................................... 19
Tax Sharing Agreement.............................................. 20
Transaction Agreement.............................................. 20
Trustee............................................................ 20
Trust Indenture Act................................................ 20
Unpermitted Debt................................................... 20
Unrestricted Subsidiary............................................ 20
U.S. Government Obligations........................................ 20
Vice President..................................................... 20
Voting Stock....................................................... 21
Weighted Average Life.............................................. 21
Wholly Owned....................................................... 21
Working Capital Facility........................................... 21
SECTION 102. Compliance Certificates and Opinions...................... 21
SECTION 103. Form of Documents Delivered to Trustee.................... 22
SECTION 104. Acts of Holders; Record Date.............................. 22
SECTION 105. Notices, Etc., to Trustee and Company..................... 24
SECTION 106. Notice to Holders; Waiver................................. 25
SECTION 107. Conflict with Trust Indenture Act......................... 25
SECTION 108. Effect of Headings and Table of Contents.................. 26
SECTION 109. Successors and Assigns.................................... 26
SECTION 110. Separability Clause....................................... 26
SECTION 111. Benefits of Indenture..................................... 26
-v-
<PAGE>
Page
SECTION 112. Governing Law............................................. 26
SECTION 113. Legal Holidays............................................ 26
SECTION 114. No Recourse Against Others................................ 26
ARTICLE TWO
Security and Subsidiary Guarantee Forms
SECTION 201. Forms Generally........................................... 27
SECTION 202. Form of Face of Security.................................. 27
SECTION 203. Form of Reverse of Security............................... 29
SECTION 204. Form of Trustee's Certificate of Authentication........... 33
SECTION 205. Form of Guarantee......................................... 33
ARTICLE THREE
The Securities
SECTION 301. Title and Terms........................................... 37
SECTION 302. Denominations............................................. 38
SECTION 303. Execution, Authentication, Delivery and Dating............ 38
SECTION 304. Temporary Securities...................................... 38
SECTION 305. Registration, Registration of Transfer and Exchange....... 39
SECTION 306. Mutilated, Destroyed, Lost and Stolen Securities.......... 40
SECTION 307. Payment of Interest; Interest Rights Preserved............ 41
SECTION 308. Persons Deemed Owners..................................... 42
SECTION 309. Cancellation.............................................. 42
SECTION 310. Computation of Interest................................... 43
SECTION 311. CUSIP Numbers............................................. 43
ARTICLE FOUR
Satisfaction and Discharge
SECTION 401. Satisfaction and Discharge of Indenture................... 43
SECTION 402. Application of Trust Money................................ 44
ARTICLE FIVE
Remedies
SECTION 501. Events of Default......................................... 45
SECTION 502. Acceleration of Maturity; Rescission and Annulment........ 47
SECTION 503. Collection of Indebtedness and Suits for Enforcement
by Trustee....................................... 48
-vi-
<PAGE>
Page
SECTION 504. Trustee May File Proofs of Claim.......................... 48
SECTION 505. Trustee May Enforce Claims Without Possession
of Securities or Subsidiary Guarantees........... 49
SECTION 506. Application of Money Collected............................ 49
SECTION 507. Limitation on Suits....................................... 50
SECTION 508. Unconditional Right of Holders to Receive Principal,
Premium and Interest............................. 50
SECTION 509. Restoration of Rights and Remedies........................ 51
SECTION 510. Rights and Remedies Cumulative............................ 51
SECTION 511. Delay or Omission Not Waiver.............................. 51
SECTION 512. Control by Holders........................................ 51
SECTION 513. Waiver of Past Defaults................................... 52
SECTION 514. Undertaking for Costs..................................... 52
SECTION 515. Waiver of Stay or Extension Laws.......................... 52
ARTICLE SIX
The Trustee
SECTION 601. Certain Duties and Responsibilities....................... 53
SECTION 602. Notice of Defaults........................................ 53
SECTION 603. Certain Rights of Trustee................................. 53
SECTION 604. Not Responsible for Recitals or Issuance of Securities.... 54
SECTION 605. May Hold Securities....................................... 55
SECTION 606. Money Held in Trust....................................... 55
SECTION 607. Compensation and Reimbursement............................ 55
SECTION 608. Disqualification; Conflicting Interests................... 56
SECTION 609. Corporate Trustee Required; Eligibility................... 56
SECTION 610. Resignation and Removal; Appointment of Successor......... 56
SECTION 611. Acceptance of Appointment by Successor.................... 57
SECTION 612. Merger, Conversion, Consolidation or Succession
to Business............................................. 58
SECTION 613. Preferential Collection of Claims Against Company......... 58
SECTION 614. Appointment of Authenticating Agent....................... 58
ARTICLE SEVEN
Holders' Lists and Reports by Trustee and Company
SECTION 701. Company to Furnish Trustee Names and Addresses
of Holders............................................. 60
SECTION 702. Preservation of Information; Communications to Holders.... 60
SECTION 703. Reports by Trustee........................................ 61
SECTION 704. Reports by Company........................................ 61
-vii-
<PAGE>
Page
ARTICLE EIGHT
Merger, Consolidation, Etc.
SECTION 801. Mergers, Consolidations and Certain Sales of Assets....... 62
SECTION 802. Mergers, Consolidations and Certain Sales of Assets by
Subsidiary Guarantors.................................. 63
SECTION 803. Successor Substituted..................................... 64
ARTICLE NINE
Supplemental Indentures
SECTION 901. Supplemental Indentures Without Consent of Holders........ 64
SECTION 902. Supplemental Indentures with Consent of Holders........... 65
SECTION 903. Execution of Supplemental Indentures...................... 66
SECTION 904. Effect of Supplemental Indentures......................... 66
SECTION 905. Conformity with Trust Indenture Act....................... 66
SECTION 906. Reference in Securities to Supplemental Indentures........ 66
ARTICLE TEN
Covenants
SECTION 1001. Payment of Principal, Premium and Interest............... 67
SECTION 1002. Maintenance of Office or Agency.......................... 67
SECTION 1003. Money for Security Payments to be Held in Trust.......... 67
SECTION 1004. Existence................................................ 69
SECTION 1005. Maintenance of Properties................................ 69
SECTION 1006. Payment of Taxes and Other Claims........................ 69
SECTION 1007. Maintenance of Insurance................................. 69
SECTION 1008. Limitation on Incurrence of Debt......................... 70
SECTION 1009. Limitation on Layered and Junior Debt.................... 72
SECTION 1010. Limitation on Restricted Payments........................ 72
SECTION 1011. Limitation on Leases..................................... 75
SECTION 1012. Limitations Concerning Distributions by Subsidiaries, Etc 76
SECTION 1013. Limitation on Liens...................................... 77
SECTION 1014. Asset Dispositions....................................... 77
SECTION 1015. Limitation on Transactions with Affiliates and Related
Persons............................................... 79
SECTION 1016. Limitation on Sale of Capital Stock of Subsidiaries...... 79
SECTION 1017. Change of Control........................................ 80
SECTION 1018. Provision of Financial Information....................... 81
SECTION 1019. Unrestricted Subsidiaries................................ 81
-viii-
<PAGE>
Page
SECTION 1020. Statement by Officers as to Default;
Compliance Certificates............................... 82
SECTION 1021. Waiver of Certain Covenants.............................. 83
ARTICLE ELEVEN
Redemption of Securities
SECTION 1101. Right of Redemption...................................... 83
SECTION 1102. Applicability of Article................................. 83
SECTION 1103. Election to Redeem; Notice to Trustee.................... 84
SECTION 1104. Selection by Trustee of Securities to Be Redeemed........ 84
SECTION 1105. Notice of Redemption..................................... 84
SECTION 1106. Deposit of Redemption Price.............................. 85
SECTION 1107. Securities Payable on Redemption Date.................... 85
SECTION 1108. Securities Redeemed in Part.............................. 86
ARTICLE TWELVE
Subordination of Securities
SECTION 1201. Securities Subordinate to Senior Debt.................... 86
SECTION 1202. Payment Over of Proceeds Upon Dissolution, Etc........... 86
SECTION 1203. No Payment When Senior Debt in Default................... 88
SECTION 1204. Payment Permitted If No Default.......................... 89
SECTION 1205. Subrogation to Rights of Holders of Senior Debt.......... 89
SECTION 1206. Provisions Solely to Define Relative Rights.............. 89
SECTION 1207. Trustee to Effectuate Subordination...................... 90
SECTION 1208. No Waiver of Subordination Provisions.................... 90
SECTION 1209. Notice to Trustee........................................ 91
SECTION 1210. Reliance on Judicial Order or Certificate of
Liquidating Agent..................................... 91
SECTION 1211. Trustee Not Fiduciary for Holders of Senior Debt......... 92
SECTION 1212. Rights of Trustee as Holder of Senior Debt;
Preservation of Trustee's Rights...................... 92
SECTION 1213. Article Applicable to Paying Agents...................... 92
SECTION 1214. Defeasance of this Article Twelve........................ 92
ARTICLE THIRTEEN
Subsidiary Guarantee
SECTION 1301. Subsidiary Guarantee..................................... 93
SECTION 1302. Execution and Delivery of Subsidiary Guarantees.......... 95
SECTION 1303. Release of Subsidiary Guarantors......................... 95
-ix-
<PAGE>
Page
SECTION 1304. Additional Subsidiary Guarantors......................... 96
ARTICLE FOURTEEN
Subordination of Subsidiary Guarantees
SECTION 1401. Subsidiary Guarantees Subordinate to Senior
Guarantees............................................ 96
SECTION 1402. Payment Over of Proceeds Upon Dissolution, Etc........... 97
SECTION 1403. No Payment When Senior Debt of the Company
in Default............................................ 98
SECTION 1404. Payment Permitted If No Default.......................... 98
SECTION 1405. Subrogation to Rights of Holders of Senior Guarantees
of a Subsidiary Guarantor............................. 99
SECTION 1406. Provisions Solely to Define Relative Rights.............. 99
SECTION 1407. Trustee to Effectuate Subordination......................100
SECTION 1408. No Waiver of Subordination Provisions....................100
SECTION 1409. Notice to Trustee........................................101
SECTION 1410. Reliance on Judicial Order or Certificate of
Liquidating Agent.....................................101
SECTION 1411. Trustee Not Fiduciary for Holders of Senior Guarantees
of the Subsidiary Guarantors..........................102
SECTION 1412. Rights of Trustee as Holder of Senior Guarantees of
the Subsidiary Guarantors; Preservation of
Trustee's Rights......................................102
SECTION 1413. Article Applicable to Paying Agents......................102
SECTION 1414. Defeasance of this Article Fourteen......................103
ARTICLE FIFTEEN
Defeasance and Covenant Defeasance
SECTION 1501. Company's Option to Effect Defeasance or
Covenant Defeasance...................................103
SECTION 1502. Defeasance and Discharge.................................103
SECTION 1503. Covenant Defeasance......................................104
SECTION 1504. Conditions to Defeasance or Covenant Defeasance..........104
SECTION 1505. Deposited Money and U.S. Government Obligations to be
Held in Trust; Other Miscellaneous Provisions.........106
SECTION 1506. Reinstatement............................................107
-x-
<PAGE>
INDENTURE, dated as of December __, 1996, among Corning Clinical
Laboratories Inc. (to be renamed Quest Diagnostics Incorporated), a corporation
duly organized and existing under the laws of the State of Delaware (herein
called the "Company"), having its principal office at One Malcolm Avenue,
Teterboro, New Jersey, 07608, each of the Subsidiary Guarantors (as hereinafter
defined), and The Bank of New York, a New York banking corporation duly
organized and existing under the laws of the State of New York, as Trustee
(herein called the "Trustee").
RECITALS OF THE COMPANY AND THE SUBSIDIARY GUARANTORS
The Company has duly authorized the creation of an issue of its ___%
Senior Subordinated Notes due 2006 of substantially the tenor and amount
hereinafter set forth, and to provide therefor the Company has duly authorized
the execution and delivery of this Indenture.
The Company, directly or indirectly, owns as of the date hereof
beneficially and of record 100% of the Capital Stock of the Subsidiary
Guarantors; the Company and the Subsidiary Guarantors are members of the same
consolidated group of companies and are engaged in related businesses; the
Subsidiary Guarantors will derive direct and indirect economic benefit from the
issuance of the Securities; accordingly, each Subsidiary Guarantor has duly
authorized the execution and delivery of this Indenture to provide for its full,
unconditional and joint and several guarantee of the Securities.
All things necessary to make the Securities, when executed by the
Company and authenticated and delivered hereunder and duly issued by the
Company, the valid obligations of the Company, to make the Guarantees (as
hereinafter defined) of each of the Subsidiary Guarantors, when executed by the
respective Subsidiary Guarantors and endorsed on the Securities, the valid
obligations of the respective Subsidiary Guarantors, and to make this Indenture
a valid agreement of the Company and each of the Subsidiary Guarantors in
accordance with its terms, have been done.
NOW, THEREFORE, THIS INDENTURE WITNESSETH:
For and in consideration of the premises and the purchase of the
Securities by the Holders thereof, it is mutually covenanted and agreed, for the
equal and proportionate benefit of all Holders of the Securities, as follows:
ARTICLE ONE
Definitions and Other Provisions
of General Application
SECTION 101. Definitions.
For all purposes of this Indenture, except as otherwise expressly
provided or unless the context otherwise requires:
<PAGE>
(1) the terms defined in this Article have the meanings
assigned to them in this Article and include the plural as well as the
singular;
(2) all other terms used herein which are defined in the Trust
Indenture Act, either directly or by reference therein, have the
meanings assigned to them therein;
(3) all accounting terms not otherwise defined herein have the
meanings assigned to them in accordance with generally accepted
accounting principles (whether or not such is indicated herein), and,
except as otherwise herein expressly provided, the term "generally
accepted accounting principles" with respect to any computation
required or permitted hereunder shall mean such accounting principles
as are generally accepted as consistently applied by the Company at the
date of such computation; and
(4) the words "herein", "hereof" and "hereunder" and other
words of similar import refer to this Indenture as a whole and not to
any particular Article, Section or other subdivision.
Certain terms, used principally in Article Six, are defined in that Article.
"Act", when used with respect to any Holder, has the meaning specified
in Section 104.
"Affiliate" of any Person means any other Person directly or indirectly
controlling or controlled by or under direct or indirect common control with
such Person. For the purposes of this definition, "control" when used with
respect to any Person means the power to direct the management and policies of
such Person, directly or indirectly, whether through the ownership of voting
securities, by contract or otherwise; and the terms "controlling" and
"controlled" have meanings correlative to the foregoing.
"Asset Disposition" by any Person means any transfer, conveyance, sale,
lease or other disposition by such Person (including a consolidation or merger
or other sale of any Restricted Subsidiary with, into or to another Person in a
transaction in which such Restricted Subsidiary ceases to be a Subsidiary of
such Person) of (i) shares of Capital Stock (other than directors' qualifying
shares) or other ownership interests of a Restricted Subsidiary or (ii) the
property or assets of such Person or any Restricted Subsidiary representing a
division or line of business or (iii) other assets or rights of such Person or
any Restricted Subsidiary outside of the ordinary course of business; but
excluding (a) one or more Asset Dispositions that in any fiscal year result in
aggregate net proceeds of less than $1 million, (b) the disposition of all or
substantially all of the assets of the Company in a manner permitted pursuant to
the provisions of Section 801, (c) any disposition that constitutes a Restricted
Payment or Permitted Investment that is permitted pursuant to the provisions of
Section 1010, and (d) any transfer, conveyance, lease, sale or other disposition
of the Company's laboratory facility in Boston, Massachusetts.
"Attributable Value" means, as to any Operating Lease of any Person,
and at any date as of which the amount thereof is to be determined, the total
net amount of rent required to be
-2-
<PAGE>
paid by such Person under such lease during the initial term thereof as
determined in accordance with generally accepted accounting principles,
discounted from the last date of such initial term to the date of determination
at a rate per annum equal to the discount rate which would be applicable to a
Capital Lease Obligation with like term in accordance with generally accepted
accounting principles. The net amount of rent required to be paid under any such
lease for any such period shall be the aggregate amount of rent payable by the
lessee with respect to such period excluding amounts required to be paid on
account of insurance, taxes, assessments, utility, operating and labor costs and
similar charges. In the case of any lease which is terminable by the lessee upon
the payment of penalty, such net amount shall also include the lesser of the
amount of such penalty (in which case no rent shall be considered as required to
be paid under such lease subsequent to the first date upon which it may be so
terminated) or the rent which would otherwise be required to be paid if such
lease is not so terminated.
"Authenticating Agent" means any Person authorized by the Trustee
pursuant to Section 614 to act on behalf of the Trustee to authenticate
Securities.
"Board of Directors" means, with respect to the Company, either the
board of directors of the Company or any duly authorized committee of that
board, and with respect to any Subsidiary Guarantor, either the board of
directors of such Subsidiary Guarantor or any duly authorized committee of that
board.
"Board Resolution" means, with respect to the Company or a Subsidiary
Guarantor, a copy of a resolution certified by the Secretary or an Assistant
Secretary of the Company or such Subsidiary Guarantor, as the case may be, to
have been duly adopted by its Board of Directors and to be in full force and
effect on the date of such certification, and delivered to the Trustee.
"Business Day" means each Monday, Tuesday, Wednesday, Thursday and
Friday which is not a day on which banking institutions in The City of New York,
New York are authorized or obligated by law or executive order to close.
"Capital Lease Obligation" of any Person means the obligation to pay
rent or other payment amounts under a lease of (or other arrangements conveying
the right to use) real or personal property of such Person which is required to
be classified and accounted for as a capital lease or a liability on the face of
a balance sheet of such Person in accordance with generally accepted accounting
principles. The stated maturity of such obligation shall be the date of the last
payment of rent or any other amount due under such lease prior to the first date
upon which such lease may be terminated by the lessee without payment of a
penalty.
"Capital Stock" of any Person means any and all shares, interests,
participations or other equivalents (however designated) of equity interests of
such Person.
"Cash Equivalents" means, at any time, (i) any Debt (other than any
Debt issued at a discount) fully guaranteed as to principal and interest by the
United States of America or any agency or instrumentality thereof (provided that
the full faith and credit of the United States is pledged in support thereof);
(ii) certificates of deposit of any financial institution that has
-3-
<PAGE>
combined capital and surplus and undivided profits of not less than $50 million
(or the equivalent thereof in another currency) and has a long-term debt rating
of at least "AA" by S&P or at least "Aa3" by Moody's; (iii) repurchase
obligations for underlying securities of the type described in Clause (i) above
entered into with any financial institution meeting the qualifications specified
in Clause (ii) above; (iv) commercial paper issued by a corporation (other than
Corning) organized under the laws of any State of the United States and rated at
least A-1 by S&P or at least P-1 by Moody's; or (v) readily marketable
securities (other than securities issued at a discount) issued or fully and
unconditionally guaranteed by any State of the United States of America, or by
any political subdivision or taxing authority thereof, and rated at least A-1 by
S&P or at least P-1 by Moody's.
"Change of Control" has the meaning specified in Section 1017.
"Commission" means the Securities and Exchange Commission, as from time
to time constituted, created under the Exchange Act, or, if at any time after
the execution of this instrument such Commission is not existing and perform-
ing the duties now assigned to it under the Trust Indenture Act, then the body
performing such duties at such time.
"Common Stock" of any Person means Capital Stock of such Person that
does not rank prior, as to the payment of dividends or as to the distribution of
assets upon any voluntary or involuntary liquidation, dissolution or winding up
of such Person, to shares of Capital Stock of any other class of such Person.
"Company" means the Person named as the "Company" in the first
paragraph of this instrument until a successor Person shall have become such
pursuant to the applicable provisions of this Indenture and thereafter "Company"
shall mean such successor Person.
"Company Request" or "Company Order" means a written request or order
signed in the name of the Company by its Chairman, its President or a Vice
President, and by its Treasurer, an Assistant Treasurer, its Secretary or an
Assistant Secretary, and delivered to the Trustee.
"Consolidated EBITDA" of any Person means for any period the
Consolidated Net Income of such Person for such period increased by the sum of
(i) Consolidated Interest Expense of such Person for such period, plus (ii)
Consolidated Income Tax Expense of such Person for such period, plus (iii) the
consolidated depreciation and amortization expense deducted in determining the
Consolidated Net Income of such Person for such period; provided, however, that
the Consolidated Interest Expense, Consolidated Income Tax Expense and
consolidated depreciation and amortization expense of a Consolidated Subsidiary
of such Person shall be added to the Consolidated Net Income pursuant to the
foregoing only (x) to the extent and, in the case of a Restricted Subsidiary
that is not a Wholly Owned Restricted Subsidiary, in the same proportion that
the Consolidated Net Income of such Consolidated Subsidiary was included in
calculating the Consolidated Net Income of such Person and (y) only to the
extent that the amount specified in Clause (x) is not subject to restrictions
that prevent the payment of dividends or the making of distributions to such
Person.
-4-
<PAGE>
"Consolidated EBITDA Coverage Ratio" of any Person means for any period
(the "Reference Period") with respect to any date of computation (the
"Transaction Date") the ratio of (i) Consolidated EBITDA of such Person for such
period to (ii) Consolidated Interest Expense of such Person for such period. In
making the foregoing calculation, (A) pro forma effect shall be given to any
Debt Incurred during such Reference Period or subsequent to the end of such
Reference Period and on or prior to the Transaction Date to the extent such Debt
is outstanding at the Transaction Date, in each case as if such Debt had been
Incurred on the first day of such Reference Period and after giving pro forma
effect to the application of the proceeds thereof as if such application had
occurred on such first day; (B) Consolidated Interest Expense attributable to
interest on any Debt (whether existing or being Incurred) computed on a pro
forma basis and bearing a floating interest rate shall be computed as if the
rate in effect on the Transaction Date (taking into account any Interest Rate
Agreement applicable to such Debt if such Interest Rate Agreement has a
remaining term in excess of 12 months or at least equal to the remaining term of
such Debt and if profits and losses with respect to such Interest Rate
Agreements are included as Consolidated Interest Expense of such Person) had
been the applicable rate for the entire period; (C) there shall be excluded from
Consolidated Interest Expense any Consolidated Interest Expense related to any
amount of Debt that was outstanding during such Reference Period or thereafter
but that is not outstanding or is to be repaid on the Transaction Date; and (D)
pro forma effect shall be given to asset dispositions and asset acquisitions by
such Person (including giving pro forma effect to the application of proceeds of
any asset disposition) that occur during such Reference Period or thereafter and
prior to the Transaction Date as if they had occurred and such proceeds had been
applied on the first day of such Reference Period.
"Consolidated Income Tax Expense" of any Person means for any period
the consolidated provision for income taxes of such Person and its Consolidated
Subsidiaries for such period determined in accordance with generally accepted
accounting principles.
"Consolidated Interest Expense" of any Person means for any period the
consolidated interest expense included in a consolidated income statement
(without deduction of interest income) of such Person and its Consolidated
Subsidiaries for such period determined in accordance with generally accepted
accounting principles, including without limitation or duplication (or, to the
extent not so included, with the addition of), (i) the portion of any rental
obligation in respect of any Capital Lease Obligation allocable to interest
expense in accordance with generally accepted accounting principles; (ii) the
amortization of Debt discounts; (iii) any payments or fees with respect to
letters of credit, bankers' acceptances or similar facilities; (iv) fees with
respect to Interest Rate Agreements or foreign currency hedge, exchange or
similar agreements; (v) an amount calculated by dividing the Preferred Stock
dividends declared and paid or payable in cash by a number equal to (a) one
minus (b) the then current combined federal, state and local statutory tax rate
of such Person, expressed as a decimal; (vi) the portion of the rental
obligation in respect of any Sale and Leaseback Transaction allocable to
interest expense (determined as if such obligation were a Capital Lease
Obligation), (vii) any interest capitalized in accordance with generally
accepted accounting principles and (viii) the portion of any Rental Expense in
respect of any Specified Operating Lease which would have been allocable to
interest expense in accordance with generally accepted accounting principles if
such Specified Operating Lease were treated as a Capitalized Lease Obligation.
-5-
<PAGE>
"Consolidated Net Income" of any Person means for any period the
consolidated net income (or loss) of such Person and its Consolidated
Subsidiaries for such period determined in accordance with generally accepted
accounting principles; provided that there shall be excluded therefrom to the
extent included therein, without duplication, (i) the net income (or loss) of
any Person acquired by such Person or a Restricted Subsidiary of such Person in
a pooling-of-interests transaction for any period prior to the date of such
transaction, (ii) the net income (but not net loss) of any Consolidated
Subsidiary of such Person that is subject to restrictions that prevent the
payment of dividends or the making of distributions to such Person to the extent
of such restrictions, (iii) the net income (or loss) of any Person that is not a
Consolidated Subsidiary of such Person except to the extent of the amount of
dividends or other distributions actually paid to such Person by such other
Person during such period, (iv) net gains or losses on asset dispositions by
such Person or its Consolidated Subsidiaries, (v) any net income (loss) of a
Consolidated Subsidiary that is attributable to a minority interest in such
Consolidated Subsidiary, (vi) all extraordinary gains and extraordinary losses
except to the extent such gain or loss involves a present or future cash
payment, (vii) all write-offs of goodwill and other items and non-cash
adjustments, including charges associated with grants or awards of restricted
stock, (viii) $46 million and $155.7 million of charges taken by the Company in
the second and third quarters, respectively, of fiscal 1996 and up to a $25
million charge to be taken in the fourth fiscal quarter of 1996 in connection
with the Spin-Off Distributions (provided that, except to the extent provided by
Clause (ix) below, any cash payments made with respect to such charges on or
after January 1, 1997, shall be subtracted from Consolidated Net Income in the
period actually paid) and (ix) any charge taken by the Company after the date of
this Indenture to the extent the Company is reimbursed in cash for such charge
pursuant to, and in accordance with, the Transaction Agreement.
"Consolidated Net Worth" of any Person means the consolidated
stockholders' equity of such Person and its Consolidated Subsidiaries, as
determined on a consolidated basis in accordance with generally accepted
accounting principles, less amounts attributable to Redeemable Interests of such
Person; provided, however, that, with respect to the Company and its
Consolidated Subsidiaries, adjustments following the date of this Indenture to
the accounting books and records of the Company and its Consolidated
Subsidiaries (other than the change in accounting policy for evaluating the
recoverability of intangible assets and measuring possible impairment under
Statement of the Accounting Principles Board No. 17 that was announced by the
Company to be adopted coincident with the Spin-Off Distributions) in accordance
with Accounting Principles Board Opinions Nos. 16 and 17 (or successor opinions
thereto) or otherwise resulting from the acquisition of control of the Company
by another Person shall not be given effect to.
"Consolidated Subsidiaries" of any Person means all other Persons that
would be accounted for as consolidated Persons in such Person's financial
statements in accordance with generally accepted accounting principles;
provided, however, that, for any particular period during which any Subsidiary
was an Unrestricted Subsidiary, "Consolidated Subsidiaries" will exclude such
Subsidiary for such period (or portion thereof) during which it was an
Unrestricted Subsidiary.
"Corning" means Corning Incorporated, a New York corporation, and its
successors.
-6-
<PAGE>
"Corning/Quest Diagnostics Spin-Off Tax Indemnification Agreement"
means the Spin-Off Tax Indemnification Agreement, dated December __, 1996,
between Corning and the Company.
"Corporate Trust Office" means the principal office of the Trustee in
the Borough of Manhattan, The City of New York at which at any particular time
its corporate trust business shall be administered. At the time of the execution
of this Indenture, such principal office of the Trustee is located at 101
Barclay Street, Floor 21 West, New York, New York 10286, in The City of New
York, New York.
"corporation" means a corporation, association, company, limited
liability company, joint-stock company, partnership or business trust.
"Covance" means Covance Inc., a Delaware corporation, and its
successors.
"Credit Facility" means the Credit Agreement, dated as of December 5,
1996, among the Company, the banks named therein, 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 (and any related guarantee
agreements and any related Loan Documents as defined therein), as amended from
time to time, and including any and all renewals, refinancings, refundings or
replacements thereof and successive renewals, refinancings, refundings and
replacements thereof.
"Credit Rating" means the long-term unsecured debt rating provided by
either S&P or Moody's; provided, however, that if there is a difference in such
ratings the lower rating shall be used.
"Debt" means (without duplication), with respect to any Person, whether
recourse is to all or a portion of the assets of such Person. (i) every
obligation of such Person for money borrowed, (ii) every obligation of such
Person evidenced by bonds, debentures, notes or other similar instruments,
including obligations incurred in connection with the acquisition of property,
assets or businesses, (iii) every reimbursement obligation of such Person with
respect to letters of credit, bankers' acceptances or similar facilities issued
for the account of such Person, (iv) every obligation of such Person issued or
assumed as the deferred purchase price of property or services (but excluding
trade accounts payable or accrued liabilities arising in the ordinary course of
business), (v) every Capital Lease Obligation of such Person, (vi) the
Attributable Value in respect of any Specified Operating Lease, (vii) the
maximum fixed redemption or repurchase price of Redeemable Interests of such
Person at the time of determination, (viii) every payment obligation of such
Person under Interest Rate Agreements or foreign currency hedge, exchange or
similar agreements at the time of determination and (ix) every obligation of the
type referred to in Clauses (i) through (viii) of another Person and all
dividends of another Person the payment of which, in either case, such Person
has Guaranteed or for which such Person is responsible or liable, directly or
indirectly, jointly or severally, as obligor, Guarantor or otherwise.
"Defaulted Interest" has the meaning specified in Section 307.
-7-
<PAGE>
"Distribution Date" means the date on which the Spin-Off Distributions
are effected.
"Escrow Agreement" means the Escrow Agreement, dated December __, 1996,
among Corning, the Company, Covance and the Escrow Agent.
"Event of Default" has the meaning specified in Section 501.
"Exchange Act" refers to the Securities Exchange Act of 1934, as
amended, and any successor act thereto.
"Guaranty" by any Person means any obligation, contingent or otherwise,
of such Person guaranteeing any Debt, or dividends or distributions on any
equity security, of any other Person (the "primary obligor") in any manner,
whether directly or indirectly, and including, without limitation, any
obligation of such Person (i) to purchase or pay (or advance or supply funds for
the purchase or payment of) such Debt or to purchase (or to advance or supply
funds for the purchase of) any security for the payment of such Debt, (ii) to
purchase property, securities or services for the purpose of assuring the holder
of such Debt of the payment of such Debt or (iii) to maintain working capital,
equity capital or other financial statement condition or liquidity of the
primary obligor so as to enable the primary obligor to pay such Debt (and
"Guaranteed," "Guaranteeing" and "Guarantor" shall have meanings correlative to
the foregoing); provided, however, that the Guaranty by any Person shall not
include endorsements by such Person for collection or deposit, in either case,
in the ordinary course of business.
"Holder" means a Person in whose name a Security is registered in the
Security Register.
"Incur" means, with respect to any Debt, Operating Lease, or other
obligation of any Person, to create, issue, incur (by conversion, exchange or
otherwise), assume, Guarantee or otherwise become liable in respect of such Debt
or other obligation or the recording, as required pursuant to generally accepted
accounting principles or otherwise, of any such Debt or other obligation on the
balance sheet of such Person (and "Incurrence," "Incurred," and "Incurring"
shall have meanings correlative to the foregoing); provided, however, that a
change in generally accepted accounting principles that results in an obligation
of such Person that exists at such time becoming Debt shall not be deemed an
incurrence of such Debt.
"Indenture" means this instrument as originally executed and as it may
from time to time be supplemented or amended by one or more indentures
supplemental hereto entered into pursuant to the applicable provisions hereof,
including, for all purposes of this instrument and any such supplemental
indenture, the provisions of the Trust Indenture Act that are deemed to be a
part of and govern this instrument and any such supplemental indenture,
respectively.
"Intercompany Agreements" means the Transaction Agreement, the
Corning/Quest Diagnostics Spin-Off Tax Indemnification Agreement, the Quest
Diagnostics/CPS Spin-Off Tax Indemnification Agreements, the Tax Sharing
Agreement, the Escrow Agreement and any other agreements contemplated by the
foregoing.
-8-
<PAGE>
"Interest Payment Date" means the Stated Maturity of an instalment of
interest on the Securities.
"Interest Rate Agreement" means, with respect to any Person, any
interest rate swap agreement, interest rate cap agreement or other similar
agreement designed to protect such Person or its Subsidiaries (or in the case of
the Company, the Company and its Restricted Subsidiaries) against fluctuations
in interest rates.
"Investment" by any Person in any other Person means (i) any direct or
indirect loan, advance or other extension of credit or capital contribution to
or for the account of such other Person (by means of any transfer of cash or
other property to any Person or any payment for property or services for the
account or use of any Person, or otherwise), (ii) any direct or indirect
purchase or other acquisition, including by way of merger or consolidation, of
any Capital Stock, bond, note, debenture or other debt or equity security or
evidence of Debt, or any other ownership interest, issued by such other Person,
whether or not such acquisition is from such or any other Person, (iii) any
direct or indirect payment by such Person on a Guaranty of any obligation of or
for the account of such other Person or any direct or indirect issuance by such
Person of such a Guaranty or (iv) any other investment of cash or other property
by such Person in or for the account of such other Person.
"Lien" means, with respect to any property or assets, any mortgage or
deed of trust, pledge, hypothecation, assignment, deposit arrangement, security
interest, lien, charge, easement or title exception, encumbrance, preference,
priority or other security agreement or preferential arrangement of any kind or
nature whatsoever on or with respect to such property or assets (including any
conditional sale or other title retention agreement having substantially the
same economic effect as any of the foregoing).
"Maturity", when used with respect to any Security, means the date on
which the principal of such Security becomes due and payable as therein or
herein provided, whether at the Stated Maturity or by declaration of
acceleration, call for redemption or otherwise.
"Moody's" means Moody's Investors Service, Inc., and any successor
thereto.
"Net Available Proceeds" from any Asset Disposition by any Person means
cash or Cash Equivalents received (including by way of sale or discounting of a
note, installment receivable or other receivable, but excluding any other
consideration received in the form of assumption by the acquiree of Debt or
other obligations relating to such properties or assets or received in any other
noncash form) therefrom by such Person, net of (i) all legal, title and
recording tax expenses, commissions and other fees and expenses Incurred and all
federal, state, provincial, foreign and local taxes required to be accrued as a
liability as a consequence of such Asset Disposition, (ii) all payments made by
such Person or its Restricted Subsidiaries on any Debt that is secured by such
assets in accordance with the terms of any Lien upon or with respect to such
assets or that must, by the terms of such Lien, or in order to obtain a
necessary consent to such Asset Disposition, or by applicable law, be repaid out
of the proceeds from such Asset Disposition, (iii) all distributions and other
payments made to minority interest holders in Restricted Subsidiaries of such
Person or joint ventures as a result of such Asset Disposition and (iv) any
amounts required to be escrowed or reserved by such Person or its Restricted
Subsidiaries with respect to liabilities retained by such
-9-
<PAGE>
Person or its Restricted Subsidiaries, including any indemnification or
purchase price adjustments (provided that when such amounts are released from
escrow or such reserve, such amounts will be treated as Net Available Proceeds
and applied as required by Section 1014).
"Non-Core Assets" means (i) the Company's domestic diagnostic kits
business and (ii) those of the Company's domestic regional laboratories (and the
assets and liabilities related thereto, including branch laboratories and
patient service centers) (each hereinafter, a "Specified Laboratory") which had
Operating Margin less than 3% for the nine month period ended September 30, 1996
as reflected in the internal financial statements of the Company for such
period; provided, however, that, in the case of Clause (ii), a Specified
Laboratory shall cease to be a Non-Core Asset if the Operating Margin of such
Specified Laboratory for any four full fiscal quarters commencing with the four
fiscal quarters ended December 31, 1996 exceeds 5% as reflected in the internal
financial statements of the Company for such period.
"Offer" has the meaning specified in the definition of Offer to
Purchase.
"Offer to Purchase" means a written offer (the "Offer") sent by the
Company by first class mail, postage prepaid, to each Holder at his address
appearing in the Security Register on the date of the Offer offering to purchase
up to the principal amount of Securities specified in such Offer at the purchase
price specified in such Offer (as determined pursuant to this Indenture). Unless
otherwise required by applicable law, the Offer shall specify an expiration date
(the "Offer Expiration Date") of the Offer to Purchase which shall be, subject
to any contrary requirements of applicable law, not less than 30 days or more
than 60 days after the date of such Offer and a settlement date (the "Purchase
Date") for purchase of Securities within three Business Days after the Offer
Expiration Date. The Company shall notify the Trustee at least 15 Business Days
(or such shorter period as is acceptable to the Trustee) prior to the mailing of
the Offer of the Company's obligation to make an Offer to Purchase, and the
Offer shall be mailed by the Company or, at the Company's request, by the
Trustee in the name and at the expense of the Company. The Offer shall contain
information concerning the business of the Company and its Restricted
Subsidiaries which the Company in good faith believes will enable such Holders
to make an informed decision with respect to the Offer to Purchase (which at a
minimum will include (i) the most recent annual and quarterly financial
statements and "Management's Discussion and Analysis of Financial Condition and
Results of Operations" contained in the documents required to be filed with the
Trustee pursuant to Section 1018 (which requirements may be satisfied by
delivery of such documents together with the Offer), (ii) a description of the
events requiring the Company to make the Offer to Purchase, (iii) if applicable,
appropriate pro forma financial information concerning the Offer to Purchase and
the events requiring the Company to make the Offer to Purchase and (iv) any
other information required by applicable law to be included therein. The Offer
shall contain all instructions and materials necessary to enable such Holders to
tender Securities pursuant to the Offer to Purchase. The Offer shall also state:
(1) the Section of this Indenture pursuant to which the Offer
to Purchase is being made (including that a Change of Control or Asset
Disposition, as applicable, has occurred);
-10-
<PAGE>
(2) the Offer Expiration Date and the Purchase Date;
(3) the aggregate principal amount of the Outstanding
Securities offered to be purchased by the Company pursuant to the
Offer to Purchase (including, if less than 100%, the manner by which
such amount has been determined as required by this Indenture) (the
"Purchase Amount");
(4) the purchase price to be paid by the Company for each
$1,000 aggregate principal amount of Securities accepted for payment
(as specified pursuant to this Indenture) (the "Purchase Price");
(5) that the Holder may tender all or any portion of the
Securities registered in the name of such Holder and that any portion
of a Security tendered must be tendered in an integral multiple of
$1,000 principal amount;
(6) the place or places where Securities are to be surrendered
for tender pursuant to the Offer to Purchase;
(7) that interest on any Security not tendered or tendered but
not purchased by the Company pursuant to the Offer to Purchase will
continue to accrue;
(8) that on the Purchase Date the Purchase Price will become
due and payable upon each Security being accepted for payment pursuant
to the Offer to Purchase and that interest thereon shall cease to
accrue on and after the Purchase Date;
(9) that each Holder electing to tender a Security pursuant to
the Offer to Purchase will be required to surrender such Security at
the place or places specified in the Offer prior to the close of
business on the Offer Expiration Date (such Security being, if the
Company or the Trustee so requires, duly endorsed by, or accompanied by
a written instrument of transfer in form satisfactory to the Company
and the Trustee duly executed by, the Holder thereof or his attorney
duly authorized in writing);
(10) that Holders will be entitled to withdraw all or any
portion of Securities tendered if the Company (or its Paying Agent)
receives, not later than the close of business on the Offer Expiration
Date, a telegram, telex, facsimile transmission or letter setting forth
the name of the Holder, the principal amount of the Security the Holder
tendered, the certificate number of the Security the Holder tendered
and a statement that such Holder is withdrawing all or a portion of his
tender;
(11) that (a) if Securities in an aggregate principal amount
less than or equal to the Purchase Amount are duly tendered and not
withdrawn pursuant to the Offer to Purchase, the Company shall purchase
all such Securities and (b) if Securities in an aggregate principal
amount in excess of the Purchase Amount are tendered and not withdrawn
pursuant to the Offer to Purchase, the Company shall purchase
Securities having an aggregate principal amount equal to the Purchase
Amount on a pro rata
-11-
<PAGE>
basis (with such adjustments as may be deemed appropriate so that only
Securities in denominations of $1,000 or integral multiples thereof
shall be purchased); and
(12) that in the case of any Holder whose Security is
purchased only in part, the Company shall execute, and the Trustee
shall authenticate and deliver to the Holder of such Security without
service charge, a new Security or Securities, of any authorized
denomination as requested by such Holder, in an aggregate principal
amount equal to and in exchange for the unpurchased portion of the
Security so tendered.
Any Offer to Purchase shall be governed by and effected in accordance
with the provisions above pertaining to any Offer.
"Officers' Certificate" means a certificate signed by the Chairman, the
President or a Vice President, and by the Treasurer, an Assistant Treasurer, the
Secretary or an Assistant Secretary, of the Company or a Subsidiary Guarantor,
as the case may be, and delivered to the Trustee.
"Operating Lease" of any Person means the obligation of such Person to
pay rent or other payment amounts under a lease of (or other Debt arrangements
conveying the right to use) real or personal property, other than a Capital
Lease Obligation or a Sale and Leaseback Transaction; but excluding the
Company's laboratory facility in Cambridge, Massachusetts.
"Operating Margin" means with respect to a Specified Laboratory, the
quotient of (x) the Consolidated EBITDA of the Company attributable to such
Specified Laboratory (assuming for this purpose that corporate overhead is
allocated to the Specified Laboratory in an amount equal to 5% of the revenues
of such Specified Laboratory) and (y) the Company's net revenues attributable to
such Specified Laboratory, in each case, as reflected in the internal financial
statements of the Company.
"Opinion of Counsel" means, as to the Company or a Subsidiary
Guarantor, a written opinion of counsel, who may be counsel for the Company or
such Subsidiary Guarantor, as the case may be, and who shall be acceptable to
the Trustee.
"Outstanding", when used with respect to Securities, means, as of the
date of determination, all Securities theretofore authenticated and delivered
under this Indenture, except:
(i) Securities theretofore cancelled by the Trustee or
delivered to the Trustee for cancellation;
(ii) Securities for whose payment or redemption money in the
necessary amount has been theretofore deposited with the Trustee or any
Paying Agent (other than the Company or any Subsidiary Guarantor) in
trust or set aside and segregated in trust by the Company or a
Subsidiary Guarantor (if the Company or a Subsidiary Guarantor shall
act as a Paying Agent) for the Holders of such Securities; provided
that, if such Securities are to be
-12-
<PAGE>
redeemed, notice of such redemption has been duly given pursuant to
this Indenture or provision therefor satisfactory to the Trustee has
been made;
(iii) Securities as to which defeasance has been effected
pursuant to Section 1502; and
(iv) Securities which have been paid pursuant to Section 306
or in exchange for or in lieu of which other Securities have been
authenticated and delivered pursuant to this Indenture, other than any
such Securities in respect of which there shall have been presented to
the Trustee proof satisfactory to it that such Securities are held by a
bona fide purchaser in whose hands such Securities are valid
obligations of the Company;
provided, however, that in determining whether the Holders of the requisite
principal amount of the Outstanding Securities have given any request, demand,
authorization, direction, notice, consent or waiver hereunder, Securities owned
by the Company, any Subsidiary Guarantor or any other obligor upon the
Securities or any Affiliate of the Company, of any Subsidiary Guarantor or of
such other obligor shall be disregarded and deemed not to be Outstanding, except
that, in determining whether the Trustee shall be protected in relying upon any
such request, demand, authorization, direction, notice, consent or waiver, only
Securities which the Trustee actually knows to be so owned shall be so
disregarded. Securities so owned which have been pledged in good faith may be
regarded as Outstanding if the pledgee establishes to the satisfaction of the
Trustee the pledgee's right so to act with respect to such Securities and that
the pledgee is not the Company, a Subsidiary Guarantor or any other obligor upon
the Securities or any Affiliate of the Company, of any Subsidiary Guarantor or
of such other obligor.
"Pari Passu", when used with respect to the ranking of any Debt of any
Person in relation to other Debt of such Person, means that each such Debt (a)
either (i) is not subordinated in right of payment to any other Debt of such
Person or (ii) is subordinate in right of payment to the same Debt of such
Person as is the other and is so subordinate to the same extent and (b) is not
subordinate in right of payment to the other or to any Debt of such Person as to
which the other is not so subordinate.
"Paying Agent" means any Person authorized by the Company to pay the
principal of (and premium, if any) or interest on any Securities on behalf of
the Company.
"Payment Blockage Period" has the meaning specified in Section 1203.
"Permitted Business" of the Company or any Restricted Subsidiary means
a business carried on by the Company or any Restricted Subsidiary at the date of
this Indenture and any business related, ancillary or complementary to any such
business.
"Permitted Investment" means (i) any Investment in a Wholly Owned
Subsidiary of such Person, (ii) securities either issued directly or fully
guaranteed or insured by the government of the United States of America or any
agency or instrumentality thereof (provided that the full faith and credit of
the United States is pledged in support thereof)
-13-
<PAGE>
having maturities of not more than one year, (iii) time deposits and
certificates of deposit, having maturities of not more than one year from the
date of deposit, of any domestic commercial bank having capital and surplus in
excess of $500 million and having peer grouprating of B or better (or the
equivalent thereof) by Thompson BankWatch, Inc. or outstanding long-term debt
rated BBB or better (or the equivalent thereof) by S&P or Baa or better (or the
equivalent thereof) by Moody's, (iv) repurchase obligations with a term of not
more than seven days for underlying securities of the types described in
Clauses (ii) and (iii) above entered into with any bank meeting the
qualifications specified in Clause (iii) above, (v) commercial paper (other
than commercial paper issued by an Affiliate or Related Person) rated A-1 or
the equivalent thereof by S&P or P-1 or the equivalent thereof by Moody's, and
in each case maturing within 90 days, (vi) any Investment in a Person that, as
a consequence of such Investment, becomes a Restricted Subsidiary and that is
engaged in a Permitted Business if (A) the Company would, at the time of such
Investment and after giving pro forma effect thereto as if such Investment had
been made at the beginning of the most recently ended four full fiscal quarter
period for which internal financial statements are available immediately
preceding the date of such Investment, have been permitted to Incur at least
$1.00 of additional Debt pursuant to the Consolidated EBITDA Coverage Ratio test
set forth in the first paragraph of Section 1008 and (B) immediately after
giving effect to such Investment, the Company would have a Consolidated Net
Worth not less than 95% of the Consolidated Net Worth of the Company immediately
prior to such Investment, (vii) receivables owing to the Company or a Subsidiary
of the Company if created or acquired in the ordinary course of business and
payable or dischargeable in accordance with customary trade terms, (viii)
extensions of trade credit made in the ordinary course of business and on
customary terms, (ix) the letter of credit issued pursuant to the Credit
Facility in favor of Kenneth W. Freeman to secure his pension benefits in an
amount not to exceed $10 million and (x) any Investment in addition to
Investments permitted to be made by Clauses (i) through (ix) above if the
aggregate amount (including cash and the fair value of property other than cash,
as determined by the Board of Directors) of such Investment, together with all
other investments made pursuant to this Clause (x) and then held by the Company
and its Restricted Subsidiaries (determined as of the time made), does not
exceed $5 million.
"Permitted Joint Venture" means any Person which is engaged in the
acquisition, ownership, operation or management of assets in a Permitted
Business.
"Permitted Joint Venture Investment" means an Investment in a Permitted
Joint Venture.
"Permitted Liens" means (i) Liens existing at the date of this
Indenture; (ii) Liens securing only Senior Debt; (iii) Liens securing only the
Securities; (iv) Liens in favor of only the Company; (v) Liens on property of a
Person existing at the time such Person is merged into or consolidated with the
Company (provided that such Lien was not Incurred in anticipation of such
transaction and was in existence prior to such transaction); (vi) Liens on
property existing immediately prior to the acquisition thereof (provided that
such Lien was not Incurred in anticipation of such transaction and was in
existence prior to such transaction); (vii) Liens to secure Debt Incurred for
the purpose of financing all or any part of the purchase price or the cost of
construction or improvement of the property subject to such Liens; provided that
(a) the principal amount of any Debt secured by such Lien does not exceed
-14-
<PAGE>
100% of such purchase price or cost, (b) such Lien does not extend to or cover
any other property other than such item of property and any improvements on such
item, (c) such Lien is incurred prior to or within 270 days after the
acquisition of such property or the completionof the relevant improvements and
(d) the Incurrence of such Debt is permitted pursuant to Sections 1008 and
1009; (viii) Liens on property of the Company or any of its Subsidiaries in
favor of the United States of America or any state thereof, or any
instrumentality of either, to secure certain payments pursuant to any contract
or statute; (ix) Liens for taxes or assessments or other governmental charges
or levies which are being contested in good faith and for which adequate
reserves are being maintained, to the extent required by generally accepted
accounting principles; (x) title exceptions, easements and other similar Liens
that are not consensual and that do not materially impair the use of the
property subject thereto; (xi) Liens to secure obligations under workmen's
compensation laws, unemployment compensation, old- age pensions and other
social security benefits or similar legislation, including Liens with respect
to judgments which are not currently dischargeable; (xii) warehousemen's,
materialmen's and other similar Liens for sums being contested in good faith
and with respect to which adequate reserves are being maintained, to the extent
required by generally accepted accounting principles; (xiii) Liens Incurred to
secure the performance of statutory obligations, surety or appeal bonds,
performance or return-of-money bonds or other obligations of a like nature
incurred in the ordinary course of business; (xiv) Liens to secure payment of
the Company's sinking fund obligations in respect of certain Debt of the
Company outstanding at the date of this Indenture in the amount of (pound)5
million in connection with the Company's acquisition of J.S. Pathology PLC in
1992; and (xv) Liens to secure any extension, renewal, refinancing or refunding
(or successive extensions, renewals, refinancings or refundings), in whole or in
part, of any Debt secured by Liens referred to in the foregoing Clauses (i) to
(xiv) so long as such Lien does not extend to any other property and the Debt so
secured is not increased.
"Person" means any individual, corporation, partnership, joint venture,
trust, unincorporated organization or government or any agency or political
subdivision thereof.
"Predecessor Security" of any particular Security means every previous
Security evidencing all or a portion of the same debt as that evidenced by such
particular Security; and, for the purposes of this definition, any Security
authenticated and delivered under Section 306 in exchange for or in lieu of a
mutilated, destroyed, lost or stolen Security shall be deemed to evidence the
same debt as the mutilated, destroyed, lost or stolen Security.
"Preferred Stock", as applied to the Capital Stock of any Person, means
Capital Stock of such Person of any class or classes (however designated) that
ranks prior, as to the payment of dividends or as to the distribution of assets
upon any voluntary or involuntary liquidation, dissolution or winding up of such
Person, to shares of Capital Stock of any other class of such Person.
"Purchase Amount" has the meaning specified in the definition of Offer
to Purchase.
"Purchase Date" has the meaning specified in the definition of Offer to
Purchase.
"Purchase Price" has the meaning specified in the definition of Offer
to Purchase.
-15-
<PAGE>
"Quest Diagnostics/CPS Spin-Off Tax Indemnification Agreements" means
the two Spin-Off Tax Indemnification Agreements, each dated December __, 1996,
in each case between the Company and Covance.
"Quest Diagnostics Rights" means the preferred share purchase rights
issued by the Company pursuant to, and in accordance with, the Quest Diagnostics
Rights Agreement.
"Quest Diagnostics Rights Agreement" means the Rights Agreement, dated
as of December 31, 1996, between the Company and Harris Trust and Savings Bank,
as Rights Agent, as the same may be amended from time to time in accordance with
its terms.
"Redeemable Interest" of any Person means any equity security of or
other ownership interest in such Person that by its terms or otherwise is
required to be redeemed or repaid prior to the Stated Maturity of the Securities
or is redeemable or repayable at the option of the holder thereof at any time
prior to the Stated Maturity of the Securities.
"Redemption Date", when used with respect to any Security to be
redeemed, means the date fixed for such redemption by or pursuant to this
Indenture.
"Redemption Price", when used with respect to any Security to be
redeemed, means the price at which it is to be redeemed pursuant to this
Indenture.
"Regular Record Date" for the interest payable on any Interest Payment
Date means the June 1 or December 1 (whether or not a Business Day), as the case
may be, next preceding such Interest Payment Date.
"Related Person" of any Person means any other Person owning (a) 5% or
more of the outstanding Common Stock of such Person or (b) 5% or more of the
Voting Stock of such Person.
"Rental Expense" in respect of an Operating Lease means the total
rental expense under such Operating Lease determined in accordance with
generally accepted accounting principles.
"Responsible Officer", when used with respect to the Trustee, means the
chairman or any vice-chairman of the board of directors, the chairman or any
vice-chairman of the executive committee of the board of directors, the chairman
of the trust committee, the president, any vice president, the secretary, any
assistant secretary, the treasurer, any assistant treasurer, the cashier, any
assistant cashier, any trust officer or assistant trust officer, the controller
or any assistant controller or any other officer of the Trustee customarily
performing functions similar to those performed by any of the above designated
officers and also means, with respect to a particular corporate trust matter,
any other officer to whom such matter is referred because of his knowledge of
and familiarity with the particular subject.
"Restricted Payment" has the meaning specified in Section 1010.
-16-
<PAGE>
"Restricted Subsidiary" means any Subsidiary of the Company other than
an Unrestricted Subsidiary.
"S&P" means Standard & Poor's Ratings Group, a division of The McGraw
Hill Companies, Inc., and any successor thereto.
"Sale and Leaseback Transaction" means an arrangement with any lender
or investor or to which such lender or investor is a party (excluding the
Company's laboratory facility in Cambridge, Massachusetts and the real property
leased by the Company in Des Plaines, Illinois) providing for the leasing by a
Person of any property or asset of such Person which has been or is being sold
or transferred by such Person more than 270 days after the acquisition thereof
or the completion of construction or commencement of operation thereof to such
lender or investor or to any person to whom funds have been or are to be
advanced by such lender or investor on the security of such property or asset.
The stated maturity of such arrangement shall be the date of the last payment of
rent or any other amount due under such arrangement prior to the first date on
which such arrangement may be terminated by the lessee without payment of a
penalty.
"Securities" means the securities designated in the first paragraph of
the recitals of the Company and the Subsidiary Guarantors.
"Securities Payment" has the meaning set forth in Section 1202.
"Security Register" and "Security Registrar" have the respective
meanings specified in Section 305.
"Senior Debt" means (i) Debt of the Company created pursuant to the
Credit Facility including all reborrowings by the Company, (ii) all other Debt
of the Company referred to in clauses (i), (ii), (iii) or (viii) of the
definition of Debt, whether Incurred on or prior to the date of this Indenture
or thereafter Incurred and (iii) amendments, modifications, renewals,
extensions, refinancings and refundings by the Company of any such Debt;
provided, however, the following shall not constitute Senior Debt: (A) any Debt
owed to a Person when such Person is a Subsidiary of the Company, (B) any Debt
which by the terms of the instrument creating or evidencing the same is not
superior in right of payment to the Securities, (C) any Debt Incurred in
violation of this Indenture or (D) any Debt which is subordinated in right of
payment in any respect to any other Debt of the Company. For purposes of this
definition, "Debt" includes any obligation to pay principal, premium (if any),
interest, penalties, reimbursement or indemnity amounts, fees and expenses
(including interest accruing on or after the filing of any petition in
bankruptcy or for reorganization relating to the Company whether or not a claim
for post-petition interest is allowed in such proceeding).
"Senior Guarantee" means with respect to any Subsidiary Guarantor all
obligations of such Subsidiary Guarantor under a Guarantee of Senior Debt of the
Company.
"Senior Nonmonetary Default" has the meaning specified in Section 1203.
"Senior Payment Default" has the meaning specified in Section 1203.
-17-
<PAGE>
"Special Record Date" for the payment of any Defaulted Interest (as
defined in Section 307) means a date fixed by the Trustee pursuant to Section
307.
"Specified Operating Lease" means any Operating Lease that the Company
elects to Incur pursuant to Clause (vii) of Section 1011.
"Spin-Off Distributions" means, collectively, (i) the distribution to
holders of Common Stock of Corning of all of the outstanding shares of common
stock of the Company and (ii) the distribution to holders of Common Stock of the
Company of all of the outstanding shares of Common Stock of Covance.
"Spin-Off Payments" means: (i) the distribution to holders of the
Company's Common Stock of all of the outstanding shares of the Common Stock of
Covance, (ii) the repayment of $500 million (A) intercompany obligations owed to
Corning by the Company and (B) payments under the Tax Sharing Agreement; (iii)
the issuance by the Company of up to $1 million liquidation preference preferred
stock to Corning and the payment of cash dividends thereon; provided, however,
that the aggregate amount of all such dividends following the date of this
Indenture shall not exceed $150,000 per year; (iv) the transfer of $140 million
from Covance to the Company and subsequent transfer from the Company to Corning
of such $140 million in repayment of intercompany debt owed by Covance to
Corning and the Company and in repayment of certain tax liabilities of Covance
and in satisfaction of a dividend from Covance to the Company and (v) the
payment of any amount of cash by the Company to Corning that may be necessary so
that the Company will not have more than $40 million of cash at the time of the
Distribution Date plus the Net Available Proceeds from any asset dispositions
made prior to the Distribution Date.
"Stated Maturity", when used with respect to any Security or any
installment of interest thereon, means the date specified in such Security as
the fixed date on which the principal of such Security or such installment of
interest is due and payable.
"Subordinated Debt" means Debt of the Company as to which the payment
of principal of (and premium, if any) and interest and other payment obligations
in respect of such Debt shall be subordinate to the prior payment in full of the
Securities to at least the following extent: (i) no payments of principal of (or
premium, if any) or interest on or otherwise due in respect of such Debt may be
permitted for so long as any default in the payment of principal (or premium, if
any) or interest on the Securities exists; (ii) in the event that any other
default that with the passing of time or the giving of notice, or both, would
constitute an event of default exists with respect to the Securities, upon
notice by 25% or more in principal amount of the Securities to the Trustee, the
Trustee shall have the right to give notice to the Company and the holders of
such Debt (or trustees or agents therefor) of a payment blockage, and thereafter
no payments of principal of (or premium, if any) or interest on or otherwise due
in respect of such Debt may be made for a period of 179 days from the date of
such notice; and (iii) such Debt may not (x) provide for payments of principal
of such Debt at the stated maturity thereof or by way of a sinking fund
applicable thereto or by way of any mandatory redemption, defeasance, retirement
or repurchase thereof by the Company (including any redemption, retirement or
repurchase which is contingent upon events or circumstances, but excluding any
retirement required by virtue of acceleration of such Debt
-18-
<PAGE>
upon an event of default thereunder), in each case prior to the final Stated
Maturity of the Securities or (y) permit redemption or other retirement
(including pursuant to an offer to purchase made by the Company) of such other
Debt at the option of the holder thereof prior to the final Stated Maturity of
the Securities, other than a redemption or other retirement at the option of the
holder of such Debt (including pursuant to an offer to purchase made by the
Company) which is conditioned upon a change of control of the Company pursuant
to provisions substantially similar to those contained in Section 1017 (and
which shall provide that such Debt will not be repurchased pursuant to such
provisions prior to the Company's repurchase of the Securities required to be
repurchased by the Company pursuant to the provisions contained in Section
1017).
"Subsidiary" of any Person means (i) a corporation more than 50% of the
outstanding Voting Stock of which is owned, directly or indirectly, by such
Person or by one or more other Subsidiaries of such Person or by such Person and
one or more Subsidiaries thereof, (ii) a partnership of which such Person, or
one or more other Subsidiaries of such Person or such Person and one or more
other Subsidiaries thereof, directly or indirectly, is the general partner and
has the power to direct the policies, management and affairs or (iii) any other
Person (other than a corporation or partnership) in which such Person, or one or
more other Subsidiaries of such Person or such Person and one or more other
Subsidiaries thereof, directly or indirectly, has at least a majority ownership
interest and power to direct the policies, management and affairs thereof.
"Subsidiary Guarantees" means the Guarantees of each Guarantor in the
form of Section 205 and as provided in Article Thirteen.
"Subsidiary Guarantor" means each of (i) CLMP Inc., a Delaware
corporation; Corning Clinical Laboratories Inc., a Connecticut corporation;
Corning Clinical Laboratories Inc., a Massachusetts corporation; Corning
Clinical Laboratories Inc., a Maryland corporation; Corning Clinical
Laboratories Inc., a Michigan corporation; Corning Clinical Laboratories of
Pennsylvania Inc., a Delaware corporation; Corning MRL Inc., a Delaware
corporation; Corning Nichols Institute Inc., a California corporation; Damon
Clinical Laboratories Inc., a Massachusetts corporation; DeYor CPF/Metpath,
Inc., an Ohio corporation; Diagnostic Reference Services, Inc., a Maryland
corporation; DPD Holdings Inc., a Delaware corporation; MetWest Inc., a Delaware
corporation; Nichols Institute Diagnostics, a California corporation; Pathology
Building Partnership, a Maryland partnership; Quest Diagnostics Incorporated, a
Maryland corporation; Quest Diagnostics Incorporated, a Michigan corporation;
Southgate Medical Services, Inc., an Ohio corporation; (ii) any successor of any
of the foregoing and (iii) each other Restricted Subsidiary of the Company that
becomes a Subsidiary Guarantor in accordance with Section 1304 hereof, in each
case (i), (ii) and (iii) until such Subsidiary Guarantor ceases to be such in
accordance with Section 1303 hereof.
"Subsidiary Guarantor Payment" has the meaning specified in
Section 1402.
"Subsidiary Guarantor Proceeding" has the meaning specified in
Section 1402.
-19-
<PAGE>
"Tax Sharing Agreement" means the Tax Sharing Agreement, dated December
__, 1996, among Corning, the Company and Covance.
"Transaction Agreement" means the Transaction Agreement, dated as of
November 22, 1996, among Corning, Corning Life Sciences Inc., the Company,
Corning Clinical Laboratories Inc. (MI) and Covance.
"Trustee" means the Person named as the "Trustee" in the first
paragraph of this instrument until a successor Trustee shall have become such
pursuant to the applicable provisions of this Indenture, and thereafter
"Trustee" shall mean such successor Trustee.
"Trust Indenture Act" means the Trust Indenture Act of 1939, as in
force at the date as of which this instrument was executed, provided, however,
that in the event the Trust Indenture Act of 1939 is amended after such date,
"Trust Indenture Act" means, to the extent required by any such amendment, the
Trust Indenture Act of 1939 as so amended.
"Unpermitted Debt" has the meaning specified in Section 1019.
"Unrestricted Subsidiary" means Associated Clinical Laboratories L.P.,
Damon Investment Holdings, Inc., Corning Laboratorios Clinicos, S.A. de C.V.,
Laboratorios Clinicos de Mexico, S.A. de C.V., Servicios de Laboratorio, S.A. de
C.V., Laboratorios de Frontera Polanco, S.A. de C.V., Laboratorios de Analisis
Biomedicus, S.A., Metpath Europe Limited, Nichols Institute International
Holding B.V., Nichols Institute Sales Corporation, Nichols Institute Diagnostics
Limited, Nichols Institute Diagnostics Trading S.A.; Nichols Institute
Diagnostics GMBH, Nichols Institute Diagnostics B.V., Analisis, S.A., Trans
United Casualty and Indemnity Insurance Company and each other Subsidiary of the
Company that is deemed to be an Unrestricted Subsidiary in accordance with
Section 1019.
"U.S. Government Obligations" means securities that are (x) direct
obligations of the United States of America for the payment of which its full
faith and credit is pledged or (y) obligations of a Person controlled or
supervised by and acting as an agency or instrumentality of the United States of
America the payment of which is unconditionally guaranteed as a full faith and
credit obligation by the United States of America, which, in either case, are
not callable or redeemable at the option of the issuer thereof, and shall also
include a depository receipt issued by a bank (as defined in Section 3(a)(2) of
the Securities Act of 1933, as amended) as custodian with respect to any such
U.S. Government Obligation or a specific payment of principal of or interest on
any such U.S. Government Obligation held by such custodian for the account of
the holder of such depository receipt, provided that (except as required by law)
such custodian is not authorized to make any deduction from the amount payable
to the holder of such depository receipt from any amount received by the
custodian in respect of the U.S. Government Obligation or the specific payment
of principal of or interest on the U.S. Government Obligation evidenced by such
depository receipt.
"Vice President", when used with respect to the Company, a Subsidiary
Guarantor or the Trustee, means any vice president, whether or not designated by
a number or a word or words added before or after the title "vice president".
-20-
<PAGE>
"Voting Stock" of any Person means Capital Stock of such Person that
ordinarily has voting power for the election of directors (or persons performing
similar functions) of such Person, whether at all times or only so long as no
senior class of securities has such voting power by reason of any contingency.
"Weighted Average Life" means, as of the date of determination, with
respect to any Debt, the quotient obtained by dividing (i) the sum of the
products of the number of years from the date of determination to the dates of
each successive scheduled principal payment of such Debt and the amount of such
principal by (ii) the sum of all such principal payments.
"Wholly Owned" means, with respect to any Subsidiary of any Person, the
ownership of all of the outstanding Capital Stock or other ownership interests
of such Subsidiary (other than directors' qualifying shares or Investments by
foreign nationals mandated by applicable law) by such Person or one or more
Wholly Owned Subsidiaries of such Person or any combination of the foregoing.
"Working Capital Facility" means the $100 million six-year revolving
working capital credit facility established under the terms of the Credit
Facility as in effect on the date of this Indenture.
SECTION 102. Compliance Certificates and Opinions.
Upon any application or request by the Company to the Trustee to take
any action under any provision of this Indenture, the Company shall furnish to
the Trustee such certificates and opinions as may be required under the Trust
Indenture Act. Each such certificate or opinion shall be given in the form of an
Officers' Certificate, if to be given by an officer of the Company, or an
Opinion of Counsel, if to be given by counsel, and shall comply with the
requirements of the Trust Indenture Act and any other requirement set forth in
this Indenture.
Every certificate or opinion with respect to compliance with a
condition or covenant provided for in this Indenture shall include
(1) a statement that each individual signing such certificate
or opinion has read such covenant or condition and the definitions
herein relating thereto;
(2) a brief statement as to the nature and scope of the
examination or investigation upon which the statements or opinions
contained in such certificate or opinion are based;
(3) a statement that, in the opinion of each such individual,
he has made such examination or investigation as is necessary to enable
him to express an informed opinion as to whether or not such covenant
or condition has been complied with; and
-21-
<PAGE>
(4) a statement as to whether, in the opinion of each such
individual, such condition or covenant has been complied with.
SECTION 103. Form of Documents Delivered to Trustee.
In any case where several matters are required to be certified by, or
covered by an opinion of, any specified Person, it is not necessary that all
such matters be certified by, or covered by the opinion of, only one such
Person, or that they be so certified or covered by only one document, but one
such Person may certify or give an opinion with respect to some matters and one
or more other such Persons as to other matters, and any such Person may certify
or give an opinion as to such matters in one or several documents.
Any certificate or opinion of an officer of the Company may be based,
insofar as it relates to legal matters, upon a certificate or opinion of, or
representations by, counsel, unless such officer knows, or in the exercise of
reasonable care should know, that the certificate or opinion or representations
with respect to the matters upon which his certificate or opinion is based are
erroneous. Any such certificate or opinion of counsel may be based, insofar as
it relates to factual matters, upon a certificate or opinion of, or
representations by, an officer or officers of the Company stating that the
information with respect to such factual matters is in the possession of the
Company, unless such counsel knows, or in the exercise of reasonable care should
know, that the certificate or opinion or representations with respect to such
matters are erroneous.
Where any Person is required to make, give or execute two or more
applications, requests, consents, certificates, statements, opinions or other
instruments under this Indenture, they may, but need not, be consolidated and
form one instrument.
SECTION 104. Acts of Holders; Record Date.
Any request, demand, authorization, direction, notice, consent, waiver
or other action provided by this Indenture to be given or taken by Holders may
be embodied in and evidenced by one or more instruments of substantially similar
tenor signed by such Holders in person or by agent duly appointed in writing;
and, except as herein otherwise expressly provided, such action shall become
effective when such instrument or instruments are delivered to the Trustee and,
where it is hereby expressly required, to the Company. Such instrument or
instruments (and the action embodied therein and evidenced thereby) are herein
sometimes referred to as the "Act" of the Holders signing such instrument or
instruments. Proof of execution of any such instrument or of a writing
appointing any such agent shall be sufficient for any purpose of this Indenture
and (subject to Section 601) conclusive in favor of the Trustee and the Company,
if made in the manner provided in this Section.
The fact and date of the execution by any Person of any such instrument
or writing may be proved by the affidavit of a witness of such execution or by a
certificate of a notary public or other officer authorized by law to take
acknowledgments of deeds, certifying that the individual signing such instrument
or writing acknowledged to him the execution thereof. Where such execution is by
a signer acting in a capacity other than his individual capacity,
-22-
<PAGE>
such certificate or affidavit shall also constitute sufficient proof of his
authority. The fact and date of the execution of any such instrument or writing,
or the authority of the Person executing the same, may also be proved in any
other manner which the Trustee deems sufficient.
The ownership of Securities shall be proved by the Security Register.
Any request, demand, authorization, direction, notice, consent, waiver
or other Act of the Holder of any Security shall bind every future Holder of the
same Security and the Holder of every Security issued upon the registration of
transfer thereof or in exchange therefor or in lieu thereof in respect of
anything done, omitted or suffered to be done by the Trustee or the Company in
reliance thereon, whether or not notation of such action is made upon such
Security.
The Company may set any day as a record date for the purpose of
determining the Holders of Outstanding Securities entitled to give, make or take
any request, demand, authorization, direction, notice, consent, waiver or other
action provided or permitted by this Indenture to be given, made or taken by
Holders of Securities, provided that the Company may not set a record date for,
and the provisions of this paragraph shall not apply with respect to, the giving
or making of any notice, declaration, request or direction referred to in the
next paragraph. If not set by the Company prior to the first solicitation of a
Holder made by any Person in respect of any such matter referred to in the
foregoing sentence, the record date for any such matter shall be the 30th day
(or, if later, the date of the most recent list of Holders required to be
provided pursuant to Section 701) prior to such first solicitation. If any
record date is set pursuant to this paragraph, the Holders of Outstanding
Securities on such record date, and no other Holders, shall be entitled to take
the relevant action, whether or not such Holders remain Holders after such
record date; provided that no such action shall be effective hereunder unless
taken on or prior to the applicable Expiration Date by Holders of the requisite
principal amount of Outstanding Securities on such record date. Nothing in this
paragraph shall be construed to prevent the Company from setting a new record
date for any action for which a record date has previously been set pursuant to
this paragraph (whereupon the record date previously set shall automatically and
with no action by any Person be cancelled and of no effect), and nothing in this
paragraph shall be construed to render ineffective any action taken by Holders
of the requisite principal amount of Outstanding Securities on the date such
action is taken. Promptly after any record date is set pursuant to this
paragraph, the Company, at its own expense, shall cause notice of such record
date, the proposed action by Holders and the applicable Expiration Date to be
given to the Trustee in writing and to each Holder of Securities in the manner
set forth in Section 106.
The Trustee may set any day as a record date for the purpose of
determining the Holders of Outstanding Securities entitled to join in the giving
or making of (i) any notice of a default, (ii) any declaration of acceleration
referred to in Section 502, (iii) any request to institute proceedings referred
to in Section 507(2) or (iv) any direction referred to in Section 512. If any
record date is set pursuant to this paragraph, the Holders of Outstanding
Securities on such record date, and no other Holders, shall be entitled to join
in such notice, declaration, request or direction, whether or not such Holders
remain Holders after such record date; provided that no such action shall be
effective hereunder unless taken on or prior to the
-23-
<PAGE>
applicable Expiration Date by Holders of the requisite principal amount of
Outstanding Securities on such record date. Nothing in this paragraph shall be
construed to prevent the Trustee from setting a new record date for any action
for which a record date has previously been set pursuant to this paragraph
(whereupon the record date previously set shall automatically and with no
action by any Person be cancelled and of no effect), and nothing in this
paragraph shall be construed to render ineffective any action taken by Holders
of the requisite principal amount of Outstanding Securities on the date such
action is taken. Promptly after any record date is set pursuant to this
paragraph, the Trustee, at the Company's expense, shall cause notice of such
record date, the proposed action by Holders and the applicable Expiration Date
to be given to the Company in writing and to each Holder of Securities in the
manner set forth in Section 106.
With respect to any record date set pursuant to this Section, the party
hereto which sets such record date may designate any day as the "Expiration
Date" and from time to time may change the Expiration Date to any earlier or
later day; provided that no such change shall be effective unless notice of the
proposed new Expiration Date is given to the other party hereto in writing, and
to each Holder of Securities in the manner set forth in Section 106, on or prior
to the existing Expiration Date. If an Expiration Date is not designated with
respect to any record date set pursuant to this Section, the party hereto which
set such record date shall be deemed to have initially designated the 180th day
after such record date as the Expiration Date with respect thereto, subject to
its right to change the Expiration Date as provided in this paragraph.
Notwithstanding the foregoing, no Expiration Date shall be later than the 180th
day after the applicable record date.
Without limiting the foregoing, a Holder entitled hereunder to take any
action hereunder with regard to any particular Security may do so with regard to
all or any part of the principal amount of such Security or by one or more duly
appointed agents each of which may do so pursuant to such appointment with
regard to all or any part of such principal amount.
SECTION 105. Notices, Etc., to Trustee and Company.
Any request, demand, authorization, direction, notice, consent, waiver
or Act of Holders or other document provided or permitted by this Indenture to
be made upon, given or furnished to, or filed with,
(1) the Trustee by any Holder or by the Company or any
Subsidiary Guarantor shall be sufficient for every purpose hereunder if
made, given, furnished or filed in writing to or with the Trustee and
received by the Trustee at its Corporate Trust office; Attention:
Corporate Trust Office and Agencies Administration, or
(2) the Company or any Subsidiary Guarantor by the Trustee or
by any Holder shall be sufficient for every purpose hereunder (unless
otherwise herein expressly provided) if in writing and mailed,
first-class postage prepaid, in the case of the Company to it at the
address of its princi-
-24-
<PAGE>
pal office specified in the first paragraph of this instrument or at
any other address previously furnished in writing to the Trustee by the
Company and, in the case of any Subsidiary Guarantor, to it at the
address of the Company's principal office specified in the first
paragraph of this instrument or at any other address previously
furnished in writing to the Trustee by such Subsidiary Guarantor.
SECTION 106. Notice to Holders; Waiver.
Where this Indenture provides for notice to Holders of any event, such
notice shall be sufficiently given (unless otherwise herein expressly provided)
if in writing and mailed, first-class postage prepaid, to each Holder affected
by such event, at his address as it appears in the Security Register, not later
than the latest date (if any), and not earlier than the earliest date (if any),
prescribed for the giving of such notice. In any case where notice to Holders is
given by mail, neither the failure to mail such notice, nor any defect in any
notice so mailed, to any particular Holder shall affect the sufficiency of such
notice with respect to other Holders. Where this Indenture provides for notice
in any manner, such notice may be waived in writing by the Person entitled to
receive such notice, either before or after the event, and such waiver shall be
the equivalent of such notice. Waivers of notice by Holders shall be filed with
the Trustee, but such filing shall not be a condition precedent to the validity
of any action taken in reliance upon such waiver.
In case by reason of the suspension of regular mail service or by
reason of any other cause it shall be impracticable to give such notice by mail,
then such notification as shall be made with the approval of the Trustee shall
constitute a sufficient notification for every purpose hereunder.
Where this Indenture or any Security requires notice by publication,
such notice shall be sufficient if published in The Wall Street Journal (Eastern
Edition) or if publication in The Wall Street Journal (Eastern Edition) is
impracticable in such other publication of national circulation that the Trustee
may approve.
SECTION 107. Conflict with Trust Indenture Act.
If any provision hereof limits, qualifies or conflicts with a provision
of the Trust Indenture Act that is required under such Act to be part of and
govern this Indenture, the latter provision shall control. If any provision of
this Indenture modifies or excludes any provision of the Trust Indenture Act
that may be so modified or excluded, the latter provision shall be deemed to
apply to this Indenture as so modified or to be excluded, as the case may be.
SECTION 108. Effect of Headings and Table of Contents.
The Article and Section headings herein and the Table of Contents are
for convenience only and shall not affect the construction hereof.
-25-
<PAGE>
SECTION 109. Successors and Assigns.
All covenants and agreements in this Indenture by the Company or any
Subsidiary Guarantor shall bind its respective successors and assigns, whether
so expressed or not.
SECTION 110. Separability Clause.
In case any provision in this Indenture or in the Securities or any
Subsidiary Guarantee shall be invalid, illegal or unenforceable, the validity,
legality and enforceability of the remaining provisions shall not in any way be
affected or impaired thereby.
SECTION 111. Benefits of Indenture.
Nothing in this Indenture or in the Securities or in the Subsidiary
Guarantees, express or implied, shall give to any Person, other than the parties
hereto and their successors hereunder, the holders of Senior Debt (subject to
Article Twelve hereof), the holders of Senior Guarantees (subject to Article
Fourteen hereof) and the Holders of Securities, any benefit or any legal or
equitable right, remedy or claim under this Indenture.
SECTION 112. Governing Law.
THIS INDENTURE, THE SECURITIES AND THE SUBSIDIARY GUARANTEES ENDORSED
THEREON SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE
STATE OF NEW YORK, WITHOUT REGARD TO THE CONFLICTS OF LAWS PRINCIPLES THEREOF.
SECTION 113. Legal Holidays.
In any case where any Interest Payment Date, Redemption Date, Purchase
Date or Stated Maturity of any Security shall not be a Business Day, then
(notwithstanding any other provision of this Indenture or of the Securities)
payment of interest or principal (and premium, if any) need not be made on such
date, but may be made on the next succeeding Business Day with the same force
and effect as if made on the Interest Payment Date, Redemption Date or Purchase
Date, or at the Stated Maturity, provided that, to the extent such payment is so
made on such next succeeding Business Day, no interest shall accrue for the
period from and after such Interest Payment Date, Redemption Date or Purchase
Date or Stated Maturity, as the case may be.
SECTION 114. No Recourse Against Others.
No director, officer, employee, incorporator or stockholder of the
Company shall have any liability for any obligation of the Company under this
Indenture or the Securities.
-26-
<PAGE>
Each Holder by accepting a Security waives and releases such Persons from all
such liability and such waiver and release is part of the consideration for the
issuance of the Securities
ARTICLE TWO
Security and Subsidiary Guarantee Forms
SECTION 201. Forms Generally.
The Securities, the Subsidiary Guarantees to be endorsed thereon and
the Trustee's certificates of authentication shall be in substantially the forms
set forth in this Article, with such appropriate insertions, omissions,
substitutions and other variations as are required or permitted by this
Indenture, and may have such letters, numbers or other marks of identification
and such legends or endorsements placed thereon as may be required to comply
with the rules of any securities exchange or as may, consistently herewith, be
determined by the officers executing such Securities or Subsidiary Guarantees,
as the case may be, as evidenced by their execution of such Securities or
Subsidiary Guarantees, as the case may be.
The definitive Securities and Subsidiary Guarantees to be endorsed
thereon shall be printed, lithographed or engraved or produced by any
combination of these methods on steel engraved borders or may be produced in any
other manner provided that such manner is permitted by the rules of any
securities exchange on which the Securities may be listed, all as determined by
the officers executing such Securities or Subsidiary Guarantees, as the case may
be, as evidenced by their execution of such Securities or Subsidiary Guarantees,
as the case may be.
SECTION 202. Form of Face of Security.
CORNING CLINICAL LABORATORIES INC.
___% SENIOR SUBORDINATED NOTE DUE 2006
GUARANTEED AS TO PAYMENT OF PRINCIPAL,
PREMIUM, IF ANY, AND INTEREST BY CERTAIN
SUBSIDIARIES OF QUEST DIAGNOSTICS INCORPORATED
No. __________ $________
Corning Clinical Laboratories Inc., a corporation duly organized and
existing under the laws of the State of Delaware that will change its name on
December 31, 1996 to Quest Diagnostice Incorporated (herein called the
"Company", which term includes any successor Person under the Indenture
hereinafter referred to), for value received, hereby promises to pay to
_____________, or registered assigns, the principal sum of ________________
Dollars on December 15, 2006, and to pay interest thereon from December __, 1996
or from the most recent Interest Payment Date to which interest has been paid or
duly provided for, semi-
-27-
<PAGE>
annually on June 15 and December 15 in each year, commencing June 15, 1997, at
the rate of ___% per annum, until the principal hereof is paid or made
available for payment, and at the rate of ___% per annum on any overdue
principal and premium and on any overdue installment of interest until paid.
The interest so payable, and punctually paid or duly provided for, on any
Interest Payment Date will, as provided in such Indenture, be paid to the
Person in whose name this Security (or one or more Predecessor Securities) is
registered at the close of business on the Regular Record Date for such
interest, which shall be the June 1 or December 1 (whether or not a Business
Day), as the case may be, next preceding such Interest Payment Date. Any such
interest not so punctually paid or duly provided for will forthwith cease to be
payable to the Holder on such Regular Record Date and may either be paid to the
Person in whose name this Security (or one or more Predecessor Securities) is
registered at the close of business on a Special Record Date for the payment of
such Defaulted Interest to be fixed by the Trustee, notice whereof shall be
given to Holders of Securities not less than 10 days prior to such Special
Record Date, or be paid at any time in any other lawful manner not inconsistent
with the requirements of any securities exchange on which the Securities may be
listed, and upon such notice as may be required by such exchange, all as more
fully provided in said Indenture.
Payment of the principal of (and premium, if any) and interest on this
Security will be made at the office or agency of the Company maintained for that
purpose in the Borough of Manhattan, The City of New York, New York in such coin
or currency of the United States of America as at the time of payment is legal
tender for payment of public and private debts; provided, however, that at the
option of the Company payment of interest may be made by check mailed to the
address of the Person entitled thereto as such address shall appear in the
Security Register and provided, further, that upon the written request of any
Holder to the Company or a Paying Agent not later than the 10th Business Day
immediately preceding the relevant payment date, such Holder may receive payment
of the principal of (and premium, if any) or interest on this Security by wire
transfer of immediately available funds to the account specified by such Holder
in such request. Unless such designation is revoked, any such designation made
by the Holder with respect to this Security will remain in effect with respect
to future payments with respect to this Security payable to the Holder.
Reference is hereby made to the further provisions of this Security set
forth on the reverse hereof, which further provisions shall for all purposes
have the same effect as if set forth at this place.
Unless the certificate of authentication hereon has been executed by
the Trustee referred to on the reverse hereof by manual signature, this Security
shall not be entitled to any benefit under the Indenture or be valid or
obligatory for any purpose.
IN WITNESS WHEREOF, the Company has caused this instrument to be duly
executed under its corporate seal.
-28-
<PAGE>
CORNING CLINICAL LABORATORIES INC.
[Seal]
By_________________________________
Title:
Attest:
______________________________
Title:
SECTION 203. Form of Reverse of Security.
This Security is one of a duly authorized issue of Securities of the
Company designated as its ___% Senior Subordinated Notes due 2006 (herein called
the "Securities"), limited in aggregate principal amount to $150,000,000, issued
and to be issued under an Indenture, dated as of December __, 1996 (herein
called the "Indenture"), among the Company, the Subsidiary Guarantors named
therein and The Bank of New York, as Trustee (herein called the "Trustee", which
term includes any successor trustee under the Indenture), to which Indenture and
all indentures supplemental thereto reference is hereby made for a statement of
the respective rights, limitations of rights, duties and immunities thereunder
of the Company, the Subsidiary Guarantors, the Trustee, the holders of Senior
Debt, the holders of Senior Guarantees and the Holders of the Securities and of
the terms upon which the Securities and the Subsidiary Guarantees endorsed
thereon are, and are to be, authenticated and delivered.
The Securities are subject to redemption upon not less than 30 nor more
than 60 days' notice by mail, at any time on or after December 15, 2001 as a
whole or in part, at the election of the Company, at the following Redemption
Prices (expressed as percentages of the principal amount): If redeemed during
the 12-month period beginning December 15 of the years indicated,
Redemption
Year Price
2001 ______%
2002 ______%
2003 ______%
and thereafter at a Redemption Price equal to 100% of the principal amount,
together in the case of any such redemption with accrued interest to the
Redemption Date, but interest installments whose Stated Maturity is on or prior
to such Redemption Date will be payable to the Holders of such Securities, or
one or more Predecessor Securities, of record at the close
-29-
<PAGE>
of business on the relevant Record Dates referred to on the face hereof, all as
provided in the Indenture.
The Securities are also subject to redemption, upon not less than 15
nor more than 30 days' notice by mail and publication, at any time on or prior
to June 30, 1997, as a whole and not in part, at the election of the Company, if
as a result of an event outside the control of Corning, the Company and Covance,
the Spin-Off Distributions do not occur prior to March 31, 1997, at a Redemption
Price equal to 101% of the principal amount of the Securities plus accrued
interest to the Redemption Date, but interest installments whose Stated Maturity
is on or prior to such Redemption Date will be payable to the Holders of such
Securities, or one or more Predecessor Securities, of record at the close of
business on the relevant Record Dates referred to on the face hereof, all as
provided in the Indenture.
The Securities do not have the benefit of any sinking fund obligations.
The Indenture provides that, subject to certain conditions, if (i)
certain Excess Proceeds are available to the Company as a result of Asset
Dispositions or (ii) a Change of Control occurs, the Company shall be required
to make an Offer to Purchase for all or a specified portion of the Securities.
In the event of redemption or purchase pursuant to an Offer to Purchase
of this Security in part only, a new Security or Securities for the unredeemed
or unpurchased portion hereof will be issued in the name of the Holder hereof
upon the cancellation hereof.
The indebtedness evidenced by this Security is, to the extent provided
in the Indenture, subordinate and subject in right of payment to the prior
payment in full of all Senior Debt of the Company, and this Security is issued
subject to the provisions of the Indenture with respect thereto. Each Holder of
this Security, by accepting the same, (a) agrees to and shall be bound by such
provisions, (b) authorizes and directs the Trustee on his behalf to take such
action as may be necessary or appropriate to effectuate the subordination so
provided and (c) appoints the Trustee his attorney-in-fact for any and all such
purposes.
If an Event of Default shall occur and be continuing, the principal of
all the Securities may be declared due and payable in the manner and with the
effect provided in the Indenture.
As provided in the Indenture and subject to certain limitations therein
set forth, the obligations of the Company under this Security are Guaranteed on
a senior subordinated basis pursuant to the Subsidiary Guarantees endorsed
hereon. The Indenture provides that a Subsidiary Guarantor shall be released
from its Subsidiary Guarantee upon compliance with certain conditions.
The Indenture contains provisions for defeasance at any time of (i) the
entire indebtedness of this Security or (ii) certain restrictive covenants and
Events of Default with respect to this Security, in each case upon compliance
with certain conditions set forth therein.
-30-
<PAGE>
The Indenture permits, with certain exceptions as therein provided, the
amendment thereof and the modification of the rights and obligations of the
Company and the Subsidiary Guarantors and the rights of the Holders of the
Securities under the Indenture at any time by the Company, the Subsidiary
Guarantors and the Trustee with the consent of the Holders of a majority in
aggregate principal amount of the Securities at the time Outstanding. The
Indenture also contains provisions permitting the Holders of specified
percentages in aggregate principal amount of the Securities at the time
Outstanding, on behalf of the Holders of all the Securities, to waive compliance
by the Company or the Subsidiary Guarantors with certain provisions of the
Indenture and certain past defaults under the Indenture and their consequences.
Any such consent or waiver by the Holder of this Security shall be conclusive
and binding upon such Holder and upon all future Holders of this Security and of
any Security issued upon the registration of transfer hereof or in exchange
herefor or in lieu hereof, whether or not notation of such consent or waiver is
made upon this Security.
As provided in and subject to the provisions of the Indenture, the
Holder of this Security shall not have the right to institute any proceeding
with respect to the Indenture or for the appointment of a receiver or trustee or
for any other remedy thereunder, unless such Holder shall have previously given
the Trustee written notice of a continuing Event of Default with respect to the
Securities of this series, the Holders of not less than 25% in principal amount
of the Securities of this series at the time Outstanding shall have made written
request to the Trustee to institute proceedings in respect of such Event of
Default as Trustee and offered the Trustee reasonable indemnity, and the Trustee
shall not have received from the Holders of a majority in principal amount of
Securities of this series at the time Outstanding a direction inconsistent with
such request, and shall have failed to institute any such proceeding, for 60
days after receipt of such notice, request and offer of indemnity. The foregoing
shall not apply to any suit instituted by the Holder of this Security for the
enforcement of any payment of principal hereof or any premium or interest hereon
on or after the respective due dates expressed herein.
No reference herein to the Indenture and no provision of this Security
or of the Indenture shall alter or impair the obligation of the Company, which
is absolute and unconditional, to pay the principal of (and premium, if any) and
interest on this Security at the times, place and rate, and in the coin or
currency, herein prescribed.
As provided in the Indenture and subject to certain limitations therein
set forth, the transfer of this Security is registrable in the Security
Register, upon surrender of this Security for registration of transfer at the
office or agency of the Company maintained for such purpose in the Borough of
Manhattan, The City of New York, New York duly endorsed by, or accompanied by a
written instrument of transfer in form satisfactory to the Company and the
Security Registrar duly executed by, the Holder hereof or his attorney duly
authorized in writing, and thereupon one or more new Securities, of authorized
denominations and for the same aggregate principal amount, will be issued to the
designated transferee or transferees.
The Securities are issuable only in registered form without coupons in
denominations of $1,000 and any integral multiple thereof. As provided in the
Indenture and subject to certain limitations therein set forth, Securities are
exchangeable for a like aggregate principal
-31-
<PAGE>
amount of Securities of a different authorized denomination, as requested by the
Holder surrendering the same.
No service charge shall be made for any such registration of transfer
or exchange, but the Company may require payment of a sum sufficient to cover
any tax or other governmental charge payable in connection therewith.
Prior to due presentment of this Security for registration of transfer,
the Company, the Subsidiary Guarantors, the Trustee and any agent of the
Company, the Subsidiary Guarantors or the Trustee may treat the Person in whose
name this Security is registered as the owner hereof for all purposes, whether
or not this Security be overdue, and neither the Company, the Subsidiary
Guarantors, the Trustee nor any such agent shall be affected by notice to the
contrary.
All terms used in this Security which are defined in the Indenture
shall have the meanings assigned to them in the Indenture.
THE INDENTURE AND THIS SECURITY SHALL BE GOVERNED BY AND CONSTRUED IN
ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK, WITHOUT REGARD TO THE
CONFLICTS OF LAWS PRINCIPLES THEREOF.
OPTION OF HOLDER TO ELECT PURCHASE
If you want to elect to have this Security purchased in its entirety by
the Company pursuant to Section 1014 or 1017 of the Indenture, check the box:
/_/
If you want to elect to have only a part of this Security purchased by
the Company pursuant to Section 1014 or 1017 of the Indenture, state the
amount: $
Dated: Your Signature:____________________
(Sign exactly as name appears on the other
side of this Security)
Signature Guarantee:__________________________________________
(Signature must be guaranteed by an
"eligible guarantor institution"
meeting the requirements of the
Security Registrar, which
requirements include membership or
participation in a "signature
guarantee program" as may be
determined by the Security
Registrar, all in accordance with
the Securities Exchange Act of 1934,
as amended.)
-32-
<PAGE>
SECTION 204. Form of Trustee's Certificate of Authentication.
This is one of the Securities with the Subsidiary Guarantees endorsed
thereon referred to in the within-mentioned Indenture.
Dated:
THE BANK OF NEW YORK
As Trustee
By ______________________________________
Authorized Signatory
SECTION 205. Form of Guarantee.
GUARANTEE
For value received, each of the Subsidiary Guarantors named (or deemed
herein to be named) below hereby jointly and severally fully and unconditionally
guarantees to the Holder of the Security upon which this Subsidiary Guarantee is
endorsed, and to the Trustee on behalf of such Holder, the due and punctual
payment of the principal of (and premium, if any) and interest on such Security
when and as the same shall become due and payable, whether at the Stated
Maturity, by acceleration, call for redemption, Offer to Purchase or otherwise,
according to the terms thereof and of the Indenture referred to therein. In case
of the failure of the Company punctually to make any such payment, each of the
Subsidiary Guarantors hereby jointly and severally agrees to cause such payment
to be made punctually when and as the same shall become due and payable, whether
at the Stated Maturity or by acceleration, call for redemption, Offer to
Purchase or otherwise, and as if such payment were made by the Company.
Each of the Subsidiary Guarantors hereby jointly and severally agrees
that its obligations hereunder shall be absolute and unconditional, irrespective
of, and shall be unaffected by, the validity, regularity or enforceability of
such Security or the Indenture, the absence of any action to enforce the same or
any release, amendment, waiver or indulgence granted to the Company or any other
guarantor, or any consent to departure from any requirement of any other
guarantee of all or of any of the Securities, or any other circumstances which
might otherwise constitute a legal or equitable discharge or defense of a surety
or guarantor. Each of the Subsidiary Guarantors hereby waives the benefits of
diligence, presentment, demand of payment, any requirement that the Trustee or
any of the Holders protect, secure, perfect or insure any security interest in
or other Lien on any property subject thereto or exhaust any right or take any
action against the Company or any other Person or any collateral, filing of
claims with a court in the event of insolvency or bankruptcy of the Company, any
right to require a proceeding first against the Company,
-33-
<PAGE>
protest or notice with respect to such Security or the indebtedness evidenced
thereby and all demands whatsoever, and covenants that this Subsidiary Guarantee
will not be discharged except by complete performance of the obligations
contained in such Security and in this Subsidiary Guarantee. Each Subsidiary
Guarantor agrees that if, after the occurrence and during the continuance of an
Event of Default, the Trustee or any of the Holders are prevented by applicable
law from exercising their respective rights to accelerate the maturity of the
Securities, to collect interest on the Securities, or to enforce or exercise any
other right or remedy with respect to the Securities, such Subsidiary Guarantor
agrees to pay to the Trustee for the account of the Holders, upon demand
therefor, the amount that would otherwise have been due and payable had such
rights and remedies been permitted to be exercised by the Trustee or any of the
Holders.
The indebtedness of each Subsidiary Guarantor evidenced by this
Subsidiary Guarantee is, to the extent provided in the Indenture, subordinate
and subject in right of payment to the prior payment in full of all Senior
Guarantees of such Subsidiary Guarantor, and this Subsidiary Guarantee is issued
subject to the provisions of the Indenture with respect thereto. Each Holder of
this Security, by accepting the same, (a) agrees to and shall be bound by such
provisions, (b) authorizes and directs the Trustee on his behalf to take such
action as may be necessary or appropriate to effectuate the subordination so
provided and (c) appoints the Trustee his attorney-in-fact for any and all such
purposes.
No reference herein to the Indenture and no provision of this
Subsidiary Guarantee or of the Indenture shall alter or impair the Subsidiary
Guarantee of any Subsidiary Guarantor, which is absolute and unconditional, of
the due and punctual payment of the principal (and premium, if any) and interest
on the Security upon which this Subsidiary Guarantee is endorsed.
Each Subsidiary Guarantor shall be subrogated to all rights of the
Holder of this Security against the Company in respect of any amounts paid by
such Subsidiary Guarantor on account of this Security pursuant to the provisions
of its Subsidiary Guarantee or the Indenture; provided, however, that such
Subsidiary Guarantor shall not be entitled to enforce or to receive any payments
arising out of, or based upon, such right of subrogation until the principal of
(and premium, if any) and interest on this Security and all other Securities
issued under the Indenture shall have been paid in full.
This Subsidiary Guarantee shall remain in full force and effect and
continue to be effective should any petition be filed by or against the Company
for liquidation or reorganization, should the Company become insolvent or make
an assignment for the benefit of creditors or should a receiver or trustee be
appointed for all or any part of the Company's assets, and shall, to the fullest
extent permitted by law, continue to be effective or be rein- stated, as the
case may be, if at any time payment and performance of the Securities is,
pursuant to applicable law, rescinded or reduced in amount, or must otherwise be
restored or returned by any Holder of the Securities, whether as a "voidable
preference," "fraudulent transfer," or otherwise, all as though such payment or
performance had not been made. In the event that any payment, or any part
thereof, is rescinded, reduced, restored or returned, the Securities shall, to
the fullest extent permitted by law, be reinstated and deemed reduced only by
such amount paid and not so rescinded, reduced, restored or returned.
-34-
<PAGE>
The Subsidiary Guarantors or any particular Subsidiary Guarantor shall
be released from this Subsidiary Guarantee upon the terms and subject to certain
conditions provided in the Indenture.
By delivery of a Supplemental Indenture to the Trustee in accordance
with the terms of the Indenture, each Person that becomes a Subsidiary Guarantor
after the date of the Indenture will be deemed to have executed and delivered
this Subsidiary Guarantee for the benefit of the Holder of the Security upon
which this Subsidiary Guarantee is endorsed with the same effect as if such
Subsidiary Guarantor was named below and has executed and delivered this
Subsidiary Guarantee.
All terms used in this Subsidiary Guarantee which are defined in the
Indenture referred to in the Security upon which this Subsidiary Guarantee is
endorsed shall have the meanings assigned to them in such Indenture.
This Subsidiary Guarantee shall not be valid or obligatory for any
purpose until the certificate of authentication on the Security upon which this
Subsidiary Guarantee is endorsed shall have been executed by the Trustee under
the Indenture by manual signature.
Reference is made to the Indenture for further provisions with respect
to this Subsidiary Guarantee.
THIS SUBSIDIARY GUARANTEE SHALL BE GOVERNED BY AND CONSTRUED IN
ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK, WITHOUT REGARD TO THE
CONFLICTS OF LAWS PRINCIPLES THEREOF.
-35-
<PAGE>
IN WITNESS WHEREOF, each of the Subsidiary Guarantors has caused this
Subsidiary Guarantee to be duly executed under its corporate seal.
Corning Clinical Laboratories Inc. (CT)
Corning Clinical Laboratories Inc. (MA)
Corning Clinical Laboratories Inc. (MD)
Corning Clinical Laboratories Inc. (MI)
Corning Clinical Laboratories of Pennsylvania
Inc.
Corning MRL Inc.
Corning Nichols Institute Inc.
Damon Clinical Laboratories Inc.
DeYor CPF/Metpath, Inc.
Diagnostic Reference Services, Inc.
DPD Holdings Inc.
MetWest Inc.
Nichols Institute Diagnostics
Pathology Building Partnership
Quest Diagnostics Incorporated (MD)
Quest Diagnostics Incorporated (MI)
Southgate Medical Services, Inc.
By__________________________________
Title:
Attest
__________________________________
Title:
CLMP Inc.
By__________________________________
Attest
__________________________________
Title:
-36-
<PAGE>
ARTICLE THREE
The Securities
SECTION 301. Title and Terms.
The aggregate principal amount of Securities which may be authenticated
and delivered under this Indenture is limited to $150,000,000, except for
Securities authenticated and delivered upon registration of transfer of, or in
exchange for, or in lieu of, other Securities pursuant to Section 304, 305, 306,
906 or 1108 or in connection with an Offer to Purchase pursuant to Section 1014
or 1017.
The Securities shall be known and designated as the "___% Senior
Subordinated Notes due 2006" of the Company. Their Stated Maturity shall be
December 15, 2006 and they shall bear interest at the rate of ___% per annum,
from December __, 1996 or from the most recent Interest Payment Date to which
interest has been paid or duly provided for, as the case may be, payable
semi-annually on June 15 and December 15, commencing June 15, 1997, until the
principal thereof is paid or made available for payment.
The principal of (and premium, if any) and interest on the Securities
shall be payable at the office or agency of the Company maintained for such
purpose in the Borough of Manhattan, The City of New York, New York maintained
for such purpose and at any other office or agency maintained by the Company for
such purpose; provided, however, that at the option of the Company payment of
interest may be made by check mailed to the address of the Person entitled
thereto as such address shall appear in the Security Register and provided,
further, that upon the written request of any Holder to the Company or a Paying
Agent not later than the 10th Business Day immediately preceding the relevant
payment date, such Holder may receive payment of the principal of (and premium,
if any) or interest on such Holder's Security by wire transfer to the account
specified by such Holder in such request. Unless such designation is revoked,
any such designation made by a Holder with respect to its Security will remain
in effect with respect to future payments with respect to such Security payable
to such Holder.
The Securities shall be subject to repurchase by the Company pursuant
to an Offer to Purchase as provided in Sections 1014 and 1017.
The Securities shall be redeemable as provided in Article Eleven.
The Securities shall be subordinated in right of payment to Senior Debt
of the Company as provided in Article Twelve.
The Securities shall be guaranteed by the Subsidiary Guarantors as
provided in Article Thirteen.
The Subsidiary Guarantees shall be subordinated in right of payment to
Senior Guarantees of the Subsidiary Guarantors as provided in Article Fourteen.
-37-
<PAGE>
The Securities shall be subject to defeasance at the option of the
Company as provided in Article Fifteen.
SECTION 302. Denominations.
The Securities shall be issuable only in registered form without
coupons and only in denominations of $1,000 and any integral multiple thereof.
SECTION 303. Execution, Authentication, Delivery
and Dating.
The Securities shall be executed on behalf of the Company by its
Chairman, its Vice Chairman, its President or one of its Vice Presidents, under
its corporate seal reproduced thereon attested by its Secretary or one of its
Assistant Secretaries. The signature of any of these officers on the Securities
may be manual or facsimile.
Securities bearing the manual or facsimile signatures of individuals
who were at any time the proper officers of the Company shall bind the Company,
notwithstanding that such individuals or any of them have ceased to hold such
offices prior to the authentication and delivery of such Securities or did not
hold such offices at the date of such Securities.
At any time and from time to time after the execution and delivery of
this Indenture, the Company may deliver Securities executed by the Company and
having endorsed thereon the Subsidiary Guarantees executed as provided in
Section 1302 by the Subsidiary Guarantors to the Trustee for authentication,
together with a Company Order for the authentication and delivery of such
Securities with such Subsidiary Guarantees endorsed thereon; and the Trustee in
accordance with such Company Order shall authenticate and deliver such
Securities with such Subsidiary Guarantees endorsed thereon as in this Indenture
provided and not otherwise.
Each Security shall be dated the date of its authentication.
No Security or Subsidiary Guarantee endorsed thereon shall be entitled
to any benefit under this Indenture or be valid or obligatory for any purpose
unless there appears on such Security a certificate of authentication
substantially in the form provided for herein executed by the Trustee by manual
signature, and such certificate upon any Security shall be conclusive evidence,
and the only evidence, that such Security has been duly authenticated and
delivered hereunder and that each Subsidiary Guarantee endorsed thereon has been
duly endorsed thereon and delivered hereunder.
SECTION 304. Temporary Securities.
Pending the preparation of definitive Securities, the Company may
execute, and upon Company Order the Trustee shall authenticate and deliver,
temporary Securities which are printed, lithographed, typewritten, mimeographed
or otherwise produced, in any authorized
-38-
<PAGE>
denomination, substantially of the tenor of the definitive Securities in lieu
of which they are issued and having endorsed thereon the Subsidiary Guarantees
substantially of the tenor of the definitive Subsidiary Guarantees in lieu of
which they are issued duly executed by the Subsidiary Guarantors and with such
appropriate insertions, omissions, substitutions and other variations as the
officers executing such Securities and Subsidiary Guarantees may determine, as
evidenced by their execution of such Securities and Subsidiary Guarantees.
If temporary Securities are issued, the Company will cause definitive
Securities to be prepared without unreasonable delay. After the preparation of
definitive Securities, the temporary Securities shall be exchangeable for
definitive Securities upon surrender of the temporary Securities at any office
or agency of the Company designated pursuant to Section 1002, without charge to
the Holder. Upon surrender for cancellation of any one or more temporary
Securities the Company shall execute and the Trustee shall authenticate and
deliver in exchange therefor a like principal amount of definitive Securities of
authorized denominations and like tenor having endorsed thereon Subsidiary
Guarantees executed by the Subsidiary Guarantors. Until so exchanged the
temporary Securities shall in all respects be entitled to the same benefits
under this Indenture as definitive Securities.
SECTION 305. Registration, Registration of Transfer and Exchange.
The Company shall cause to be kept at the Corporate Trust Office of the
Trustee a register (the register maintained in such office and in any other
office or agency designated pursuant to Section 1002 being herein sometimes
collectively referred to as the "Security Register") in which, subject to such
reasonable regulations as it may prescribe, the Company shall provide for the
registration of Securities and of transfers of Securities. The Trustee is hereby
appointed "Security Registrar" for the purpose of registering Securities and
transfers of Securities as herein provided.
Upon surrender for registration of transfer of any Security at an
office or agency of the Company designated pursuant to Section 1002 for such
purpose, the Company shall execute, and the Trustee shall authenticate and
deliver, in the name of the designated transferee or transferees, one or more
new Securities of any authorized denominations and of a like aggregate principal
amount and tenor, each such Security having endorsed thereon the Subsidiary
Guarantees executed by the Subsidiary Guarantors.
At the option of the Holder, Securities may be exchanged for other
Securities of any authorized denominations and of a like aggregate principal
amount, and having the Subsidiary Guarantee endorsed thereon executed by each
Subsidiary Guarantor, upon surrender of the Securities to be exchanged at such
office or agency. Whenever any Securities are so surrendered for exchange, the
Company shall execute, the Subsidiary Guarantors shall execute the Subsidiary
Guarantees endorsed on and the Trustee shall authenticate and deliver, the
Securities which the Holder making the exchange is entitled to receive.
All Securities and the Subsidiary Guarantees endorsed thereon issued
upon any registration of transfer or exchange of Securities shall be the valid
obligations of the Company and the respective Subsidiary Guarantors, evidencing
the same debt and Subsidiary
-39-
<PAGE>
Guarantees, and entitled to the same benefits under this Indenture, as the
Securities and Subsidiary Guarantees surrendered upon such registration of
transfer or exchange.
Every Security presented or surrendered for registration of transfer or
for exchange shall (if so required by the Company or the Trustee) be duly
endorsed, or be accompanied by a written instrument of transfer in form
satisfactory to the Company and the Security Registrar duly executed, by the
Holder thereof or his attorney duly authorized in writing.
No service charge shall be made for any registration of transfer or
exchange of Securities, but the Company may require payment of a sum sufficient
to cover any tax or other governmental charge that may be imposed in connection
with any registration of transfer or exchange of Securities, other than
exchanges pursuant to Section 304, 906 or 1108 or in accordance with any Offer
to Purchase pursuant to Section 1014 or 1017 not involving any transfer.
The Company shall not be required (i) to issue, register the transfer
of or exchange any Security during a period beginning at the opening of business
15 days before the day of the mailing of a notice of redemption of Securities
selected for redemption under Section 1104 and ending at the close of business
on the day of such mailing, or (ii) to register the transfer of or exchange any
Security so selected for redemption in whole or in part, except the unredeemed
portion of any Security being redeemed in part.
SECTION 306. Mutilated, Destroyed, Lost and Stolen Securities.
If any mutilated Security is surrendered to the Trustee, the Company
shall execute, the Subsidiary Guarantors shall execute the Subsidiary Guarantees
endorsed on and the Trustee shall authenticate and deliver in exchange therefor,
a new Security of like tenor and principal amount and bearing a number not
contemporaneously outstanding.
If there shall be delivered to the Company and the Trustee (i) evidence
to their satisfaction of the destruction, loss or theft of any Security and (ii)
such security or indemnity as may be required by them to save each of them
(including an indemnity bond), each Subsidiary Guarantor and any agent of either
of them harmless, then, in the absence of notice to the Company or the Trustee
that such Security has been acquired by a bona fide purchaser, the Company shall
execute and upon its request the Trustee shall authenticate and deliver, in lieu
of any such destroyed, lost or stolen Security, a new Security of like tenor and
principal amount, having endorsed thereon the Subsidiary Guarantees executed by
the Subsidiary Guarantors and bearing a number not contemporaneously
outstanding.
In case any such mutilated, destroyed, lost or stolen Security has
become or is about to become due and payable, the Company in its discretion may,
instead of issuing a new Security, pay such Security.
Upon the issuance of any new Security under this Section, the Company
may require the payment of a sum sufficient to cover any tax or other
governmental charge that may be
-40-
<PAGE>
imposed in relation thereto and any other expenses (including the fees and
expenses of the Trustee) connected therewith.
Every new Security issued pursuant to this Section in lieu of any
mutilated, destroyed, lost or stolen Security, and the Subsidiary Guarantees
endorsed thereon, shall constitute an original additional contractual obligation
of the Company and the respective Subsidiary Guarantors, whether or not the
destroyed, lost or stolen Security and the Subsidiary Guarantees endorsed
thereon shall be at any time enforceable by anyone, and shall be entitled
to all the benefits of this Indenture equally and proportionately with any and
all other Securities duly issued hereunder.
The provisions of this Section are exclusive and shall preclude (to the
extent lawful) all other rights and remedies with respect to the replacement or
payment of mutilated, destroyed, lost or stolen Securities.
SECTION 307. Payment of Interest; Interest Rights Preserved.
Interest on any Security which is payable, and is punctually paid or
duly provided for, on any Interest Payment Date shall be paid to the Person in
whose name that Security (or one or more Predecessor Securities) is registered
at the close of business on the Regular Record Date for such interest.
Any interest on any Security which is payable, but is not punctually
paid or duly provided for, on any Interest Payment Date (herein called
"Defaulted Interest") shall forthwith cease to be payable to the Holder on the
relevant Regular Record Date by virtue of having been such Holder, and such
Defaulted Interest may be paid by the Company, at its election in each case, as
provided in Clause (1) or (2) below:
(1) The Company may elect to make payment of any Defaulted
Interest to the Persons in whose names the Securities (or their
respective Predecessor Securities) are registered at the close of
business on a Special Record Date for the payment of such Defaulted
Interest, which shall be fixed in the following manner. The Company
shall notify the Trustee in writing of the amount of Defaulted Interest
proposed to be paid on each Security and the date of the proposed
payment, and at the same time the Company shall deposit with the
Trustee an amount of money equal to the aggregate amount proposed to be
paid in respect of such Defaulted Interest or shall make arrangements
satisfactory to the Trustee for such deposit prior to the date of the
proposed payment, such money when deposited to be held in trust for the
benefit of the Persons entitled to such Defaulted Interest as in this
Clause provided. Thereupon the Trustee shall fix a Special Record Date
for the payment of such Defaulted Interest which shall be not more than
15 days and not less than 10 days prior to the date of the proposed
payment and not less than 10 days after the receipt by the Trustee of
the notice of the proposed payment. The Trustee shall promptly notify
the Company of such Special Record Date and, in the name and at the
expense of the Company, shall cause notice of the proposed
-41-
<PAGE>
payment of such Defaulted Interest and the Special Record Dat
therefor to be mailed, first-class postage prepaid, to each Holder at
his address as it appears in the Security Register, not less than 10
days prior to such Special Record Date. Notice of the proposed payment
of such Defaulted Interest and the Special Record Date therefor having
been so mailed, such Defaulted Interest shall be paid to the Persons
in whose names the Securities (or their respective Predecessor
Securities) are registered at the close of business on such Special
Record Date and shall no longer be payable pursuant to the following
Clause (2).
(2) The Company may make payment of any Defaulted Interest in
any other lawful manner not inconsistent with the requirements of any
securities exchange on which the Securities may be listed, and upon
such notice as may be required by such exchange, if, after notice given
by the Company to the Trustee of the proposed payment pursuant to this
Clause, such manner of payment shall be deemed practicable by the
Trustee.
Subject to the foregoing provisions of this Section, each Security
delivered under this Indenture upon registration of transfer of or in exchange
for or in lieu of any other Security shall carry the rights to interest accrued
and unpaid, and to accrue, which were carried by such other Security.
SECTION 308. Persons Deemed Owners.
Prior to due presentment of a Security for registration of transfer,
the Company, the Subsidiary Guarantors, the Trustee and any agent of the
Company, the Subsidiary Guarantors or the Trustee may treat the Person in whose
name such Security is registered as the owner of such Security for the purpose
of receiving payment of principal of (and premium, if any) and (subject to
Section 307) interest on such Security and for all other purposes whatsoever,
whether or not such Security be overdue, and neither the Company, the Subsidiary
Guarantors, the Trustee nor any agent of the Company, the Subsidiary Guarantors
or the Trustee shall be affected by notice to the contrary.
SECTION 309. Cancellation.
All Securities surrendered for payment, redemption, registration of
transfer or exchange or for purchase under any Offer to Purchase pursuant to
Section 1014 or 1017 shall, if surrendered to any Person other than the Trustee,
be delivered to the Trustee and shall be promptly cancelled by it. The Company
may at any time deliver to the Trustee for cancellation any Securities
previously authenticated and delivered hereunder which the Company may have
acquired in any manner whatsoever, and all Securities so delivered shall be
promptly cancelled by the Trustee. No Securities shall be authenticated in lieu
of or in exchange for any Securities cancelled as provided in this Section,
except as expressly permitted by this Indenture. All cancelled Securities held
by the Trustee shall be disposed of
-42-
<PAGE>
as directed by a Company Order, provided, however, that the Trustee shall not
be required to destroy cancelled Securities.
SECTION 310. Computation of Interest.
Interest on the Securities shall be computed on the basis of a 360-day
year of twelve 30-day months.
SECTION 311. CUSIP Numbers.
The Company in issuing the Securities may use "CUSIP" numbers (if then
generally in use), and, if so, the Trustee shall use "CUSIP" numbers in notices
of redemption as a convenience to Holders; provided that any such notice may
state that no representation is made as to the correctness of such numbers
whether as printed on the Securities or as contained in any notice of a
redemption and that reliance may be placed on the other identificatin numbers
printed on the Securities, and any such redemption shall not be affected by any
defect in or omission of such numbers. The Company will promptly notify the
Trustee of any change in the CUSIP numbers.
ARTICLE FOUR
Satisfaction and Discharge
SECTION 401. Satisfaction and Discharge of Indenture.
This Indenture shall cease to be of further effect (except as to any
surviving rights of registration of transfer or exchange of Securities herein
expressly provided for), and the Trustee, on demand of and at the expense of the
Company, shall execute proper instruments acknowledging satisfaction and
discharge of this Indenture (including, but not limited to, Articles Twelve and
Fourteen hereof), when
(1) either
(A) all Securities theretofore authenticated and delivered
(other than (i) Securities which have been destroyed, lost or stolen
and which have been replaced or paid as provided in Section 306 and
(ii) Securities for whose payment money has theretofore been deposited
in trust or segregated and held in trust by the Company and thereafter
repaid to the Company or discharged from such trust, as provided in
Section 1003) have been delivered to the Trustee for cancellation; or
-43-
<PAGE>
(B) all such Securities not theretofore delivered to the
Trustee for cancellation
(i) have become due and payable, or
(ii) will become due and payable at their Stated Maturity
within one year, or
(iii) are to be called for redemption within one year under
arrangements satisfactory to the Trustee for the giving of
notice of redemption by the Trustee in the name, and at the
expense, of the Company,
and the Company or a Subsidiary Guarantor, in the case of (i), (ii) or
(iii) above, has deposited or caused to be deposited with the Trustee
as trust funds in trust for the purpose an amount sufficient (without
reinvestment) to pay and discharge the entire indebtedness on such
Securities not theretofore delivered to the Trustee for cancellation,
for principal (and premium, if any) and interest to the date of such
deposit (in the case of Securities which have become due and payable)
or to the Stated Maturity or Redemption Date, as the case may be;
(2) the Company or a Subsidiary Guarantor has paid or caused
to be paid all other sums payable hereunder by the Company and the
Subsidiary Guarantors; and
(3) the Company has delivered to the Trustee an Officers'
Certificate and an Opinion of Counsel, each stating that all conditions
precedent herein provided for relating to the satisfaction and
discharge of this Indenture have been complied with.
Notwithstanding the satisfaction and discharge of this Indenture pursuant to
this Article Four, the obligations of the Company to the Trustee under Section
607, the obligations to any Authenticating Agent under Section 614 and, if money
shall have been deposited with the Trustee pursuant to subclause (B) of Clause
(1) of this Section, the obligations of the Trustee under Section 402, the last
paragraph of Section 1003 and the provisions of Sections 303, 305 and 306 shall
survive.
SECTION 402. Application of Trust Money.
Subject to the provisions of the last paragraph of Section 1003, all
money deposited with the Trustee pursuant to Section 401 shall be held in trust
and applied by it, in accordance with the provisions of the Securities and this
Indenture, to the payment, either directly or through any Paying Agent
(including the Company acting as its own Paying Agent) as the Trustee may
determine, to the Persons entitled thereto, of the principal (and premium, if
any) and interest for whose payment such money has been deposited with the
Trustee.
-44-
<PAGE>
ARTICLE FIVE
Remedies
SECTION 501. Events of Default.
"Event of Default", wherever used herein, means any one of the
following events (whatever the reason for such Event of Default and whether it
shall be occasioned by the provisions of Article Twelve or Article Fourteen or
be voluntary or involuntary or be effected by operation of law or pursuant to
any judgment, decree or order of any court or any order, rule or regulation of
any administrative or governmental body):
(1) default in the payment of the principal of (or premium, if
any, on) any Security at its Maturity; or
(2) default in the payment of any interest upon any Security
when it becomes due and payable, and continuance of such default for a
period of 30 days; or
(3) default in the performance, or breach, of Section 801,
1014 or 1017; or
(4) default in the performance, or breach, of any covenant or
agreement of the Company in this Indenture (other than a covenant or
agreement a default in whose performance or whose breach is elsewhere
in this Section specifically dealt with), and continuance of such
default or breach for a period of 60 days after there has been given,
by registered or certified mail, to the Company by the Trustee or to
the Company and the Trustee by the Holders of at least 25% in principal
amount of the Outstanding Securities a written notice specifying such
default or breach and requiring it to be remedied and stating that such
notice is a "Notice of Default" hereunder; or
(5) a default or defaults under any bond(s), debenture(s),
note(s) or other evidence(s) of Debt by the Company or any Restricted
Subsidiary or under any mortgage(s), indenture(s) or instrument(s)
under which there may be issued or by which there may be secured or
evidenced any Debt of the Company or any such Restricted Subsidiary
with a principal amount then outstanding, individually or in the
aggregate, in excess of $15 million, whether such Debt now exists or
shall hereafter be created, which default or defaults shall constitute
a failure to pay any portion of the principal of such Debt at final
stated maturity when due and payable after the expiration of any
applicable grace period with respect thereto or shall have resulted in
such Debt becoming or being declared due and payable prior to the date
on which it would otherwise have become due and payable without such
Debt having been discharged, or such acceleration having been rescinded
or annulled, within a period of 10 days after there shall have been
given, by registered or
-45-
<PAGE>
certified mail, to the Company by the Trustee or to the Company and
the Trustee by the Holders of at least 25% in principal amount of the
Outstanding Securities a written notice specifying such default and
requiring the Company to cause such Debt to be discharged or cause
such acceleration to be rescinded or annulled and stating that such
notice is a "Notice of Default" hereunder; or
(6) a final judgment or final judgments (not subject to
appeal) for the payment of money are entered against the Company or any
Restricted Subsidiary in an aggregate amount in excess of $15 million
by a court or courts of competent jurisdiction, which judgments remain
undischarged for a period (during which execution shall not be
effectively stayed) of 60 days after the right to appeal all such
judgments has expired; or
(7) the entry by a court having jurisdiction in the premises
of (A) a decree or order for relief in respect of the Company or any
Restricted Subsidiary in an involuntary case or proceeding under any
applicable Federal or State bankruptcy, insolvency, reorganization or
other similar law or (B) a decree or order adjudging the Company or any
such Restricted Subsidiary a bankrupt or insolvent, or approving as
properly filed a petition seeking reorganization, arrangement,
adjustment or composition of or in respect of the
Company or any such Restricted Subsidiary under any applicable Federal
or State law, or appointing a custodian, receiver, liquidator,
assignee, trustee, sequestrator or other similar official of the
Company or any such Restricted Subsidiary or of any substantial part of
the property of the Company or any such Restricted Subsidiary, or
ordering the winding up or liquidation of the affairs of the Company or
any such Restricted Subsidiary, and the continuance of any such decree
or order for relief or any such other decree or order unstayed and in
effect for a period of 60 consecutive days; or
(8) the commencement by the Company or any Restricted
Subsidiary of a voluntary case or proceeding under any applicable
Federal or State bankruptcy, insolvency, reorganization or other
similar law or of any other case or proceeding to be adjudicated as
bankrupt or insolvent, or the consent by the Company or any such
Restricted Subsidiary to the entry of a decree or order for relief in
respect of the Company or any Restricted Subsidiary in an involuntary
case or proceeding under any applicable Federal or State bankruptcy,
insolvency, reorganization or other similar law or to the commencement
of any bankruptcy or insolvency case or proceeding against the Company
or any Restricted Subsidiary, or the filing by the Company or any such
Restricted Subsidiary of a petition or answer or consent seeking
reorganization or relief under any applicable Federal or State law, or
the consent by the Company or any such Restricted Subsidiary to the
filing of such petition or to the appointment of or taking possession
by a custodian, receiver, liquidator, assignee, trustee, sequestrator
or similar official of the Company or any Restricted Subsidiary or of
any substantial part of the property of the Company or any Restricted
Subsidiary, or the making by the Company or any Restricted Subsidiary
of an assignment for the benefit of creditors, or the
-46-
<PAGE>
admission by the Company or any such Restricted Subsidiary in writing
of its inability to pay its debts generally as they become due, or the
taking of corporate action by the Company or any such Restricted
Subsidiary in furtherance of any such action.
SECTION 502. Acceleration of Maturity; Rescission and Annulment.
If an Event of Default (other than an Event of Default specified in
Section 501(7) or (8) occurs insofar as the Company is concerned) and is
continuing, then and in every such case the Trustee or the Holders of not less
than 25% in principal amount of the Outstanding Securities may declare the
principal of all the Securities to be due and payable immediately, by a notice
in writing to the Company (and to the Trustee if given by Holders), and upon any
such declaration such principal of and any accrued interest shall become
immediately due and payable. If an Event of Default specified in Section 501(7)
or (8) occurs insofar as the Company is concerned, the principal of and any
accrued interest on the Securities then Outstanding shall ipso facto become
immediately due and payable without any declaration or other action on the part
of the Trustee or any Holder. In the case of any Event of Default occurring by
reason of any willful action (or inaction) taken (or not taken) by or on behalf
of the Company with the intention of avoiding payment of the premium that the
Company would have had to pay if the Company then had elected to redeem the
Securities pursuant to the provisions described in Section 1101(b), an
equivalent premium will also become and be immediately due and payable upon the
acceleration of the Securities.
At any time after such a declaration of acceleration has been made and
before a judgment or decree for payment of the money due has been obtained by
the Trustee as hereinafter in this Article provided, the Holders of a majority
in principal amount of the Outstanding Securities, by written notice to the
Company and the Trustee, may rescind and annul such declaration and its
consequences if
(1) the Company or any Subsidiary Guarantor has paid or
deposited with the Trustee a sum sufficient to pay
(A) all overdue interest on all Securities,
(B) the principal of (and premium, if any, on) any
Securities which have become due otherwise than by such
declaration of acceleration (including any Securities required
to have been purchased on the Purchase Date pursuant to an
Offer to Purchase made by the Company) and interest thereon at
the rate provided therefor in the Securities,
(C) interest upon overdue interest at the rate provided
therefor in the Securities, and
(D) all sums paid or advanced by the Trustee hereunder
and the reasonable compensation, expenses, disbursements and
advances of the Trustee, its agents and counsel;
-47-
<PAGE>
and
(2) all Events of Default, other than the non-payment of the
principal of Securities which have become due solely by such
declaration of acceleration, have been cured or waived as provided in
Section 513.
No such rescission shall affect any subsequent default or impair any right
consequent thereon.
SECTION 503. Collection of Indebtedness and Suits for Enforcement by Trustee.
The Company covenants that if
(1) default is made in the payment of any interest on any
Security when such interest becomes due and payable and such default
continues for a period of 30 days, or
(2) default is made in the payment of the principal of (or
premium, if any, on) any Security at the Maturity thereof or, with
respect to any Security required to have been purchased pursuant to an
Offer to Purchase made by the Company, at the Purchase Date thereof,
the Company will, upon demand of the Trustee, pay to it, for the benefit of the
Holders of such Securities, the whole amount then due and payable on such
Securities for principal (and premium, if any) and interest, and interest on any
overdue principal (and premium, if any) and on any overdue interest, at the rate
provided therefor in the Securities, and, in addition thereto, such further
amount as shall be sufficient to cover the costs and expenses of collection,
including the reasonable compensation, expenses, disbursements and advances of
the Trustee, its agents and counsel.
If an Event of Default occurs and is continuing, the Trustee may in its
discretion proceed to protect and enforce its rights and the rights of the
Holders by such appropriate judicial proceedings as the Trustee shall deem most
effectual to protect and enforce any such rights, whether for the specific
enforcement of any covenant or agreement in this Indenture or in aid of the
exercise of any power granted herein, or to enforce any other proper remedy.
SECTION 504. Trustee May File Proofs of Claim.
In case of any judicial proceeding relative to the Company, any
Subsidiary Guarantor or any other obligor upon the Securities, or the property
of the Company or its creditors or of any Subsidiary Guarantor and its
creditors, the Trustee shall be entitled and empowered, by intervention in such
proceeding or otherwise, to take any and all actions authorized under the Trust
Indenture Act in order to have claims of the Holders and the Trustee allowed in
any such proceeding. In particular, the Trustee shall be authorized to collect
and receive any moneys or other property payable or deliverable on any such
claims and to distribute the same; and any custodian, receiver, assignee,
trustee, liquidator, sequestrator or other similar
-48-
<PAGE>
official in any such judicial proceeding is hereby authorized by each Holder to
make such payments to the Trustee and, in the event that the Trustee shall
consent to the making of such payments directly to the Holders, to pay to the
Trustee any amount due it for the reasonable compensation, expenses,
disbursements and advances of the Trustee, its agents and counsel, and any
other amounts due the Trustee under Section 607.
No provision of this Indenture shall be deemed to authorize the Trustee
to authorize or consent to or accept or adopt on behalf of any Holder any plan
of reorganization, arrangement, adjustment or composition affecting the
Securities or the rights of any Holder thereof or to authorize the Trustee to
vote in respect of the claim of any Holder in any such proceeding.
SECTION 505. Trustee May Enforce Claims Without Possession of Securities or
Subsidiary Guarantees.
All rights of action and claims under this Indenture or the Securities
or any Subsidiary Guarantee may be prosecuted and enforced by the Trustee
without the possession of any of the Securities or the production thereof in any
proceeding relating thereto, and any such proceeding instituted by the Trustee
shall be brought in its own name as trustee of an express trust, and any
recovery of judgment shall, after provision for the payment of the reasonable
compensation, expenses, disbursements and advances of the Trustee, its agents
and counsel, be for the ratable benefit of the Holders of the Securities in
respect of which such judgment has been recovered.
SECTION 506. Application of Money Collected.
Subject to Articles Twelve and Fourteen, any money collected by the
Trustee pursuant to this Article shall be applied in the following order, at the
date or dates fixed by the Trustee and, in case of the distribution of such
money on account of principal (or premium, if any) or interest, upon
presentation of the Securities and the notation thereon of the payment if only
partially paid and upon surrender thereof if fully paid:
FIRST: To the payment of all amounts due the Trustee under
Section 607;
SECOND: To the payment of the amounts then due and unpaid for
principal of (and premium, if any) and interest on the Securities in
respect of which or for the benefit of which such money has been
collected, ratably, without preference or priority of any kind,
according to the amounts due and payable on such Securities for
principal (and premium, if any) and interest, respectively; and
-49-
<PAGE>
THIRD: To the Company or such other party as a court of
competentjurisdiction shall direct.
SECTION 507. Limitation on Suits.
No Holder of any Security shall have any right to institute any
proceeding, judicial or otherwise, with respect to this Indenture, or for the
appointment of a receiver or trustee, or for any other remedy hereunder, unless
(1) such Holder has previously given written notice to the
Trustee of a continuing Event of Default;
(2) the Holders of not less than 25% in principal amount of
the Outstanding Securities shall have made written request to the
Trustee to institute proceedings in respect of such Event of Default in
its own name as Trustee hereunder;
(3) such Holder or Holders have offered to the Trustee
reasonable indemnity against the costs, expenses and liabilities to be
incurred in compliance with such request;
(4) the Trustee for 60 days after its receipt of such notice,
request and offer of indemnity has failed to institute any such
proceeding; and
(5) no direction inconsistent with such written request has
been given to the Trustee during such 60-day period by the Holders of a
majority in principal amount of the Outstanding Securities;
it being understood and intended that no one or more Holders shall have any
right in any manner whatever by virtue of, or by availing of, any provision of
this Indenture to affect, disturb or prejudice the rights of any other Holders,
or to obtain or to seek to obtain priority or preference over any other Holders
or to enforce any right under this Indenture, except in the manner herein
provided and for the equal and ratable benefit of all the Holders.
SECTION 508. Unconditional Right of Holders to Receive Principal, Premium and
Interest.
Notwithstanding any other provision in this Indenture, the Holder of
any Security shall have the right, which is absolute and unconditional, to
receive payment of the principal of (and premium, if any) and (subject to
Section 307) interest on such Security on the respective Stated Maturities
expressed in such Security (or, in the case of redemption, on the Redemption
Date or in the case of an Offer to Purchase made by the Company, on the Purchase
Date) and to institute suit for the enforcement of any such payment, and such
rights shall not be impaired without the consent of such Holder.
-50-
<PAGE>
SECTION 509. Restoration of Rights and Remedies.
If the Trustee or any Holder has instituted any proceeding to enforce
any right or remedy under this Indenture and such proceeding has been
discontinued or abandoned for any reason, or has been determined adversely to
the Trustee or to such Holder, then and in every such case, subject to any
determination in such proceeding, the Company, the Subsidiary Guarantors the
Trustee and the Holders shall be restored severally and respectively to their
former positions hereunder and thereafter all rights and remedies of the Trustee
and the Holders shall continue as though no such proceeding had been instituted.
SECTION 510. Rights and Remedies Cumulative.
Except as otherwise provided with respect to the replacement or payment
of mutilated, destroyed, lost or stolen Securities in the last paragraph of
Section 306, no right or remedy herein conferred upon or reserved to the Trustee
or to the Holders is intended to be exclusive of any other right or remedy, and
every right and remedy shall, to the extent permitted by law, be cumulative and
in addition to every other right and remedy given hereunder or now or hereafter
existing at law or in equity or otherwise. The assertion or employment of any
right or remedy hereunder, or otherwise, shall not prevent the concurrent
assertion or employment of any other appropriate right or remedy.
SECTION 511. Delay or Omission Not Waiver.
No delay or omission of the Trustee or of any Holder of any Security to
exercise any right or remedy accruing upon any Event of Default shall impair any
such right or remedy or constitute a waiver of any such Event of Default or an
acquiescence therein. Every right and remedy given by this Article or by law to
the Trustee or to the Holders may be exercised from time to time, and as often
as may be deemed expedient, by the Trustee or by the Holders, as the case may
be.
SECTION 512. Control by Holders.
The Holders of a majority in principal amount of the Outstanding
Securities shall have the right to direct the time, method and place of
conducting any proceeding for any remedy available to the Trustee or exercising
any trust or power conferred on the Trustee, provided that
(1) such direction shall not be in conflict with any rule of
law or with this Indenture, and
(2) the Trustee may take any other action deemed proper by the
Trustee which is not inconsistent with such direction.
-51-
<PAGE>
SECTION 513. Waiver of Past Defaults.
The Holders of not less than a majority in aggregate principal amount
of the Outstanding Securities may on behalf of the Holders of all the Securities
waive any past default hereunder and its consequences, except
(1) a default in the payment of the principal of (or premium,
if any) or interest on any Security (including any Security which is required to
have been purchased pursuant to an Offer to Purchase made by the Company), or
(2) in respect of a covenant or provision hereof which under
Article Nine cannot be modified or amended without the consent of the
Holder of each Outstanding Security affected.
Upon any such waiver, such default shall cease to exist, and any Event
of Default arising therefrom shall be deemed to have been cured, for every
purpose of this Indenture; but no such waiver shall extend to any subsequent or
other default or impair any right consequent thereon.
SECTION 514. Undertaking for Costs.
In any suit for the enforcement of any right or remedy under this
Indenture, or in any suit against the Trustee for any action taken, suffered or
omitted by it as Trustee, a court may require any party litigant in such suit to
file an undertaking to pay the costs of such suit, and may assess costs against
any such party litigant, in the manner and to the extent provided in the Trust
Indenture Act; provided, that neither this Section nor the Trust Indenture Act
shall be deemed to authorize any court to require such an undertaking or to make
such an assessment in any suit instituted by the Company or any Subsidiary
Guarantor, to any suit instituted by the Trustee, to any suit instituted by any
Holder, or group of Holders, holding in the aggregate at least 10% in principal
amount of the Outstanding Securities, or to any suit instituted by any Holder
for the enforcement of the payment of the principal of (or premium, if any) or
interest on any Security on or after the Stated Maturity expressed in such
Security (or, in the case of redemption, on or after the Redemption Date or, in
the case of an Offer to Purchase, on or after the Purchase Date).
SECTION 515. Waiver of Usury, Stay or Extension Laws.
Each of the Company and the Subsidiary Guarantors covenants (to the
extent that it may lawfully do so) that it will not at any time insist upon, or
plead, or in any manner whatsoever claim or take the benefit or advantage of,
any usury, stay or extension law wherever enacted, now or at any time hereafter
in force, which may affect the covenants or the performance of this Indenture;
and each of the Company and the Subsidiary Guarantors (to the extent that it may
lawfully do so) hereby expressly waives all benefit or advantage of any such law
and covenants that it will not hinder, delay or impede the execution of any
-52-
<PAGE>
power herein granted to the Trustee, but will suffer and permit the execution of
every such power as though no such law had been enacted.
ARTICLE SIX
The Trustee
SECTION 601. Certain Duties and Responsibilities.
The duties and responsibilities of the Trustee shall be as provided by
the Trust Indenture Act. Notwithstanding the foregoing, no provision of this
Indenture shall require the Trustee to expend or risk its own funds or otherwise
incur any financial liability in the performance of any of its duties hereunder,
or in the exercise of any of its rights or powers, if it shall have reasonable
grounds for believing that repayment of such funds or adequate indemnity against
such risk or liability is not reasonably assured to it. Whether or not therein
expressly so provided, every provision of this Indenture relating to the conduct
or affecting the liability of or affording protection to the Trustee shall be
subject to the provisions of this Section.
SECTION 602. Notice of Defaults.
The Trustee shall give the Holders notice of any default hereunder as
and to the extent provided by the Trust Indenture Act; provided, however, that
in the case of any default of the character specified in Section 501(4), no such
notice to Holders shall be given until at least 30 days after the occurrence
thereof. For the purpose of this Section, the term "default" means any event
which is, or after notice or lapse of time or both would become, an Event of
Default.
SECTION 603. Certain Rights of Trustee.
Subject to the provisions of Section 601:
(a) the Trustee may rely and shall be protected in acting or
refraining from acting upon any resolution, certificate, statement,
instrument, opinion, report, notice, request, direction, consent,
order, bond, debenture, note, other evidence of indebtedness or other
paper or document believed by it to be genuine and to have been signed
or presented by the proper party or parties;
(b) any request or direction of the Company mentioned herein
shall be sufficiently evidenced by a Company Request or Company Order
and any resolution of the Board of Directors may be sufficiently
evidenced by a Board Resolution;
(c) whenever in the administration of this Indenture the
Trustee shall deem it desirable that a matter be proved or established
prior to taking,
-53-
<PAGE>
suffering or omitting any action hereunder, the Trustee (unless other
evidence be herein specifically prescribed) may, in the absence of bad
faith on its part, rely upon an Officers' Certificate;
(d) the Trustee may consult with counsel of its selection and
the written advice of such counsel or any Opinion of Counsel shall be
full and complete authorization and protection in respect of any action
taken, suffered or omitted by it hereunder in good faith and in
reliance thereon;
(e) the Trustee shall be under no obligation to exercise any
of the rights or powers vested in it by this Indenture at the request
or direction of any of the Holders pursuant to this Indenture, unless
such Holders shall have offered to the Trustee reasonable security or
indemnity against the costs, expenses and liabilities which might be
incurred by it in compliance with such request or direction;
(f) the Trustee shall not be bound to make any investigation
into the facts or matters stated in any resolution, certificate,
statement, instrument, opinion, report, notice, request, direction,
consent, order, bond, debenture, note, other evidence of indebtedness
or other paper or document, but the Trustee, in its discretion, may
make such further inquiry or investigation into such facts or matters
as it may see fit, and, if the Trustee shall determine to make such
further inquiry or investigation, it shall be entitled to examine the
books, records and premises of the Company, personally or by agent or
attorney; and
(g) the Trustee may execute any of the trusts or powers
hereunder or perform any duties hereunder either directly or by or
through agents or attorneys and the Trustee shall not be responsible
for any misconduct or negligence on the part of any agent or attorney
appointed with due care by it hereunder.
SECTION 604. Not Responsible for Recitals or Issuance of Securities.
The recitals contained herein and in the Securities and the Subsidiary
Guarantees endorsed thereon, except the Trustee's certificates of
authentication, shall be taken as the statements of the Company or the
Subsidiary Guarantors, as the case may be, and the Trustee assumes no
responsibility for their correctness. The Trustee makes no representations as to
the validity or sufficiency of this Indenture, of the Securities or the
Subsidiary Guarantees endorsed thereon. The Trustee shall not be accountable for
the use or application by the Company of Securities or the proceeds thereof.
-54-
<PAGE>
SECTION 605. May Hold Securities.
The Trustee, any Authenticating Agent, any Paying Agent, any Security
Registrar or any other agent of the Company, or any Subsidiary Guarantor, in its
individual or any other capacity, may become the owner or pledgee of Securities
and, subject to Sections 608 and 613, may otherwise deal with the Company and
any Subsidiary Guarantor with the same rights it would have if it were not
Trustee, Authenticating Agent, Paying Agent, Security Registrar or such other
agent.
SECTION 606. Money Held in Trust.
Money held by the Trustee in trust hereunder need not be segregated
from other funds except to the extent required by law. The Trustee shall be
under no liability for interest on any money received by it hereunder except as
otherwise agreed with the Company or any Subsidiary Guarantor, as the case may
be.
SECTION 607. Compensation and Reimbursement.
The Company agrees
(1) to pay to the Trustee from time to time such compensation
as shall be agreed in writing between the Company and the Trustee for
all services rendered by it hereunder (which compensation shall not be
limited by any provision of law in regard to the compensation of a
trustee of an express trust);
(2) except as otherwise expressly provided herein, to
reimburse the Trustee upon its request for all reasonable expenses,
disbursements and advances incurred or made by the Trustee in
accordance with any provision of this Indenture (including the
reasonable compensation and the expenses and disbursements of its
agents and counsel), except any such expense, disbursement or advance
as may be attributable to its negligence or bad faith; and
(3) to indemnify each of the Trustee and any predecessor
Trustee for, and to hold it harmless against, any and all loss,
damage, claim, liability or expense incurred without negligence or bad
faith on its part, arising out of or in connection with the acceptance
or administration of this trust, including the costs and expenses of
defending itself against any claim or liability in connection with the
exercise or performance of any of its powers or duties hereunder.
The Trustee shall have a lien prior to the Securities as to all
property and funds held by it hereunder for any amount owing it or any
predecessor Trustee pursuant to this Section 607, except with respect to funds
held in trust for the benefit of the Holders of particular Securities.
-55-
<PAGE>
When the Trustee incurs expenses or renders services in connection with
an Event of Default specified in Section 501(7) or Section 501(8), the expenses
(including the reasonable charges and expenses of its counsel) and the
compensation for the services are intended to constitute expenses of
administration under any applicable Federal or State bankruptcy, insolvency or
other similar law.
The provisions of this Section shall survive the termination of this
Indenture.
SECTION 608. Disqualification; Conflicting Interests.
If the Trustee has or shall acquire a conflicting interest within the
meaning of the Trust Indenture Act, the Trustee shall either eliminate such
interest or resign, to the extent and in the manner provided by, and subject to
the provisions of, the Trust Indenture Act and this Indenture.
SECTION 609. Corporate Trustee Required; Eligibility.
There shall at all times be a Trustee hereunder which shall be a Person
that is eligible pursuant to the Trust Indenture Act to act as such and has a
combined capital and surplus of at least $50,000,000, with a Corporate Trust
Office in the Borough of Manhattan, The City of New York. If such Person
publishes reports of condition at least annually, pursuant to law or to the
requirements of its supervising or examining authority, then for the purposes of
this Section, the combined capital and surplus of such Person shall be deemed to
be its combined capital and surplus as set forth in its most recent report of
condition so published. If at any time the Trustee shall cease to be eligible in
accordance with the provisions of this Section, it shall resign immediately in
the manner and with the effect hereinafter specified in this Article.
SECTION 610. Resignation and Removal; Appointment of Successor.
(a) No resignation or removal of the Trustee and no appointment of a
successor Trustee pursuant to this Article shall become effective until the
acceptance of appointment by the successor Trustee under Section 611.
(b) The Trustee may resign at any time by giving written notice thereof
to the Company. If an instrument of acceptance by a successor Trustee shall not
have been delivered to the Trustee within 30 days after the giving of such
notice of resignation, the resigning Trustee may petition any court of competent
jurisdiction for the appointment of a successor Trustee.
(c) The Trustee may be removed at any time by Act of the Holders of a
majority in principal amount of the Outstanding Securities, delivered to the
Trustee and to the Company.
(d) If at any time:
-56-
<PAGE>
(1) the Trustee shall fail to comply with Section 608 after
written request therefor by the Company or by any Holder who has been a
bona fide Holder of a Security for at least six months, or
(2) the Trustee shall cease to be eligible under Section 609
and shall fail to resign after written request therefor by the Company
or by any such Holder, or
(3) the Trustee shall become incapable of acting or shall be
adjudged a bankrupt or insolvent or a receiver of the Trustee or of its
property shall be appointed or any public officer shall take charge or
control of the Trustee or of its property or affairs for the purpose of
rehabilitation, conservation or liquidation,
then, in any such case, (i) the Company by a Board Resolution may remove the
Trustee, or (ii) subject to Section 514, any Holder who has been a bona fide
Holder of a Security for at least six months may, on behalf of himself and all
others similarly situated, petition any court of competent jurisdiction for the
removal of the Trustee and the appointment of a successor Trustee.
(e) If the Trustee shall resign, be removed or become incapable of
acting, or if a vacancy shall occur in the office of Trustee for any cause, the
Company, by a Board Resolution, shall promptly appoint a successor Trustee. If,
within one year after such resignation, removal or incapability, or the
occurrence of such vacancy, a successor Trustee shall be appointed by Act of the
Holders of a majority in principal amount of the Outstanding Securities
delivered to the Company and the retiring Trustee, the successor Trustee so
appointed shall, forthwith upon its acceptance of such appointment, become the
successor Trustee and supersede the successor Trustee appointed by the Company.
If no successor Trustee shall have been so appointed by the Company or the
Holders and accepted appoint- ment in the manner hereinafter provided, any
Holder who has been a bona fide Holder of a Security for at least six months
may, on behalf of himself and all others similarly situated, petition any court
of competent jurisdiction for the appointment of a successor Trustee.
(f) The Company shall give notice of each resignation and each removal
of the Trustee and each appointment of a successor Trustee to all Holders in the
manner provided in Section 106. Each notice shall include the name of the
successor Trustee and the address of its Corporate Trust Office.
SECTION 611. Acceptance of Appointment by Successor.
Every successor Trustee appointed hereunder shall execute, acknowledge
and deliver to the Company, the Subsidiary Guarantors and to the retiring
Trustee an instrument accepting such appointment, and thereupon the resignation
or removal of the retiring Trustee shall become effective and such successor
Trustee, without any further act, deed or conveyance, shall become vested with
all the rights, powers, trusts and duties of the retiring Trustee; but, on
request of the Company or the successor Trustee, such retiring Trustee shall,
upon
-57-
<PAGE>
payment of its charges, execute and deliver an instrument transferring to
such successor Trustee all the rights, powers and trusts of the retiring Trustee
and shall duly assign, transfer and deliver to such successor Trustee all
property and money held by such retiring Trustee hereunder. Upon request of any
such successor Trustee, the Company and the Subsidiary Guarantors shall execute
any and all instruments for more fully and certainly vesting in and confirming
to such successor Trustee all such rights, powers and trusts.
No successor Trustee shall accept its appointment unless at the time of
such acceptance such successor Trustee shall be qualified and eligible under
this Article.
SECTION 612. Merger, Conversion, Consolidation or Succession to Business.
Any corporation into which the Trustee may be merged or converted or
with which it may be consolidated, or any corporation resulting from any merger,
conversion or consolidation to which the Trustee shall be a party, or any
corporation succeeding to all or substantially all the corporate trust business
of the Trustee, shall be the successor of the Trustee hereunder, provided such
corporation shall be otherwise qualified and eligible under this Article,
without the execution or filing of any paper or any further act on the part of
any of the parties hereto. In case any Securities shall have been authenticated,
but not delivered, by the Trustee then in office, any successor by merger,
conversion or consolidation to such authenticating Trustee may adopt such
authentication and deliver the Securities so authenticated with the same effect
as if such successor Trustee had itself authenticated such Securities.
SECTION 613. Preferential Collection of Claims Against Company.
If and when the Trustee shall be or become a creditor of the Company,
any Subsidiary Guarantor or any other obligor upon the Securities or any
Subsidiary Guarantee, the Trustee shall be subject to the provisions of the
Trust Indenture Act regarding the collection of claims against the Company, such
Subsidiary Guarantor or any such other obligor.
SECTION 614. Appointment of Authenticating Agent.
The Trustee may appoint an Authenticating Agent or Agents which shall
be authorized to act on behalf of the Trustee to authenticate Securities issued
upon original issue and upon exchange, registration of transfer, partial
redemption or partial purchase or pursuant to Section 306, and Securities so
authenticated, and the Subsidiary Guarantees endorsed thereon, shall be entitled
to the benefits of this Indenture and shall be valid and obligatory for all
purposes as if authenticated by the Trustee hereunder. Wherever reference is
made in this Indenture to the authentication and delivery of Securities by the
Trustee or the Trustee's certificate of authentication, such reference shall be
deemed to include authentication and delivery on behalf of the Trustee by an
Authenticating Agent and a certificate of authentication executed on behalf of
the Trustee by an Authenticating Agent. Each Authenticating Agent shall be
acceptable to the Company and shall at all times be a
-58-
<PAGE>
corporation organized and doing business under the laws of the United States of
America, any State thereof or the District of Columbia, authorized under such
laws to act as Authenticating Agent, having a combined capital and surplus of
not less than $50 million and subject to supervision or examination by Federal
or State authority. If such Authenticating Agent publishes reports of condition
at least annually, pursuant to law or to the requirements of said supervising
or examining authority, then for the purposes of this Section, the combined
capital and surplus of such Authenticating Agent shall be deemed to be its
combined capital and surplus as set forth in its most recent report of
condition so published. If at any time an Authenticating Agent shall cease to
be eligible in accordance with the provisions of this Section, such
Authenticating Agent shall resign immediately in the manner and with the effect
specified in this Section.
Any corporation into which an Authenticating Agent may be merged or
converted or with which it may be consolidated, or any corporation resulting
from any merger, conversion or consolidation to which such Authenticating Agent
shall be a party, or any corporation succeeding to the corporate agency or
corporate trust business of an Authenticating Agent, shall continue to be an
Authenticating Agent, provided such corporation shall be otherwise eligible
under this Section, without the execution or filing of any paper or any further
act on the part of the Trustee or the Authenticating Agent.
An Authenticating Agent may resign at any time by giving written notice
thereof to the Trustee and to the Company. The Trustee may at any time terminate
the agency of an Authenticating Agent by giving written notice thereof to such
Authenticating Agent and to the Company. Upon receiving such a notice of
resignation or upon such a termination, or in case at any time such
Authenticating Agent shall cease to be eligible in accordance with the
provisions of this Section, the Trustee may appoint a successor Authenticating
Agent which shall be acceptable to the Company and shall send written notice of
such appointment, in the manner provided in Section 106, to all Holders. Any
successor Authenticating Agent upon acceptance of its appointment hereunder
shall become vested with all the rights, powers and duties of its predecessor
hereunder, with like effect as if originally named as an Authenticating Agent.
No successor Authenticating Agent shall be appointed unless eligible under the
provisions of this Section.
The Trustee agrees to pay to each Authenticating Agent from time to
time reasonable compensation for its services under this Section, and the
Trustee shall be entitled to be reimbursed for such payments, subject to the
provisions of Section 607.
If an appointment is made pursuant to this Section, the Securities may
have endorsed thereon, in addition to the Trustee's certificate of
authentication, an alternative certificate of authentication in the following
form:
-59-
<PAGE>
This is one of the Securities described in the within-mentioned
Indenture.
The Bank of New York,
As Trustee
By___________________________,
As Authenticating Agent
By___________________________
Authorized Officer
ARTICLE SEVEN
Holders' Lists and Reports by Trustee and Company
SECTION 701. Company to Furnish Trustee
Names and Addresses of Holders.
The Company will furnish or cause to be furnished to the Trustee
(a) semi-annually, not more than 15 days after each Regular
Record Date, a list, in such form as the Trustee may reasonably
require, of the names and addresses of the Holders as of such Regular
Record Date, and
(b) at such other times as the Trustee may request in writing,
within 30 days after the receipt by the Company of any such request, a
list of similar form and content as of a date not more than 15 days
prior to the time such list is furnished;
excluding from any such list names and addresses received by the Trustee in its
capacity as Security Registrar.
SECTION 702. Preservation of Information;
Communications to Holders.
(a) The Trustee shall preserve, in as current a form as is reasonably
practicable, the names and addresses of Holders contained in the most recent
list furnished to the Trustee
-60-
<PAGE>
as provided in Section 701 and the names and addresses of Holders received by
the Trustee in its capacity as Security Registrar. The Trustee may destroy any
list furnished to it as provided in Section 701 upon receipt of a new list so
furnished.
(b) The rights of Holders to communicate with other Holders with
respect to their rights under this Indenture or under the Securities, and the
corresponding rights and duties of the Trustee, shall be as provided by the
Trust Indenture Act.
(c) Every Holder of Securities, by receiving and holding the same,
agrees with the Company, the Subsidiary Guarantors and the Trustee that neither
the Company, the Subsidiary Guarantors nor the Trustee nor any agent of any of
them shall be held accountable by reason of any disclosure of information as to
names and addresses of Holders made pursuant to the Trust Indenture Act.
SECTION 703. Reports by Trustee.
(a) The Trustee shall transmit to Holders such reports concerning the
Trustee and its actions under this Indenture as may be required pursuant to the
Trust Indenture Act at the times and in the manner provided pursuant thereto.
(b) A copy of each such report shall, at the time of such transmission
to Holders, be filed by the Trustee with each stock exchange upon which the
Securities are listed, with the Commission, with the Company and with the
Subsidiary Guarantors. The Company will promptly notify the Trustee when the
Securities are listed on any stock exchange.
SECTION 704. Reports by Company.
The Company and each of the Subsidiary Guarantors shall file with the
Trustee and the Commission, and transmit to Holders, such information, documents
and other reports, and such summaries thereof, as may be required pursuant to
the Trust Indenture Act at the times and in the manner provided pursuant to such
Act; provided that any such information, documents or reports required to be
filed with the Commission pursuant to Section 13 or 15(d) of the Exchange Act
shall be filed with the Trustee within 15 days after the same is so required to
be filed with the Commission. Delivery of such reports, information and
documents to the Trustee is for informational purposes only and the Trustee's
receipt of such reports, information and documents shall not constitute
constructive notice of any information contained therein or determinable from
information contained therein, including the Company's compliance with any of
its covenants hereunder (as to which the Trustee is entitled to rely exclusively
on Officers' Certificates).
-61-
<PAGE>
ARTICLE EIGHT
Merger, Consolidation, Etc.
SECTION 801. Mergers, Consolidations and Certain Sales of Assets.
The Company (a) shall not consolidate with or merge into any Person
(other than a Wholly Owned Restricted Subsidiary) or permit any Person (other
than a Wholly Owned Restricted Subsidiary) to consolidate with or merge into the
Company; and (b) shall not, directly or indirectly, in one or a series of
transactions, transfer, convey, sell, lease or otherwise dispose of all or
substantially all of its properties and assets; unless, in each case:
(i) immediately before and after giving effect to such
transaction (or series) and treating any Debt Incurred by the Company
or a Restricted Subsidiary as a result of such transaction (or series)
as having been Incurred by the Company or such Restricted Subsidiary at
the time of the transaction (or series), no Event of Default or event
that with the passing of time or the giving of notice, or both, will
constitute an Event of Default shall have occurred and be continuing;
(ii) in a transaction (or series) in which the Company does
not survive or in which the Company transfers, conveys, sells, leases
or otherwise disposes of all or substantially all of its properties and
assets, the successor entity (the "Successor Company") is a
corporation, partnership, limited liability company or business trust
and is organized and validly existing under the laws of the United
States of America, any State thereof or the District of Columbia and
expressly assumes, by a supplemental indenture executed and delivered
to the Trustee, in form satisfactory to
the Trustee, the due and punctual payment of the principal of (and
premium, if any) and interest on all the Securities and the performance
of every covenant of this Indenture on the part of the Company to be
performed or observed;
(iii) immediately after giving effect to such transaction (or
series), the Consolidated Net Worth of the Company or, if applicable,
the Successor Company shall be equal to or greater than 95% of the
Consolidated Net Worth of the Company immediately prior to such
transaction (or series);
(iv) the Company would, at the time of such transaction (or
series) and after giving pro forma effect thereto as if such
transaction (or series) had occurred at the beginning of the most
recently ended four full fiscal quarter period for which internal
financial statements are available immediately preceding the date of
such transaction (or series), have been permitted to Incur at least
$1.00 of additional Debt pursuant to the Consolidated EBITDA Coverage
Ratio test set forth in the first paragraph of Section 1008;
(v) if, as a result of any such transaction, property and
assets of the Company or any Restricted Subsidiary would become subject
to a Lien which would not be permitted by Section 1013, the Company or,
if applicable, the Successor Company, as the case may be, shall take
such steps as shall be
-62-
<PAGE>
necessary effectively to secure the Securities equally and ratably
with (or prior to) Debt secured by such Lien; and
(vi) the Company has delivered to the Trustee an Officers'
Certificate and an Opinion of Counsel, each stating that such
consolidation, merger, transfer, conveyance, sale, lease or other
disposition and, if a supplemental indenture is required in connection
with such transaction, such supplemental indenture, complies with this
Article and that all conditions precedent herein provided for relating
to such transaction have been complied with, and, with respect to such
Officers' Certificate, setting forth the manner of determination of the
ability to Incur Debt and the Consolidated Net Worth in accordance with
Clauses (iii) and (iv) above, of the Company or, if applicable, of the
Successor Company as required pursuant to the foregoing.
SECTION 802. Mergers, Consolidations and Certain Sales of Assets by Subsidiary
Guarantors.
Except in a transaction resulting in the release of a Subsidiary
Guarantor in accordance with Section 1303, each Subsidiary Guarantor shall not,
and the Company shall not permit any Subsidiary Guarantor to, (a) consolidate
with or merge into any Person (other than the Company or a Wholly-Owned
Subsidiary Guarantor) or permit any Person (other than a Wholly-Owned Subsidiary
Guarantor) to consolidate with or merge into such Subsidiary Guarantor or (b)
directly or indirectly, in one or a series of transactions, transfer, convey,
sell, lease or otherwise dispose of all or substantially all of its properties
and assets; unless, in each case:
(i) in a transaction (or series) in which such Subsidiary
Guarantor does not survive or in which all or substantially all of the
properties and assets of such Subsidiary Guarantor are transferred,
conveyed, sold, leased or otherwise disposed of, the successor entity
(the "Successor Subsidiary Guarantor") is a corporation, partnership,
limited liability company or business trust and is organized and
validly existing under the laws of the United States of America, any
State thereof or the District of Columbia and expressly assumes by an
indenture supplemental hereto executed and delivered to the Trustee, in
form satisfactory to the Trustee, the due and punctual payment of all
obligations of such Subsidiary Guarantor under its Subsidiary Guarantee
and this Indenture and the performance of every covenant of this
Indenture on the part of such Subsidiary Guarantor to be performed or
observed; and
(2) the Company has delivered to the Trustee an Officers'
Certificate and an Opinion of Counsel, each stating that such
consolidation, merger, transfer, conveyance, sale, lease or other
disposition and, if a supplemental indenture is required in connection
with such transaction, such supplemental indenture, complies with this
Article and that all conditions precedent herein provided for relating
to such transaction have been complied with.
-63-
<PAGE>
SECTION 803. Successor Substituted.
(a) Upon any consolidation of the Company with, or merger of the
Company into, any other Person or any transfer, conveyance, sale, lease or other
disposition of all or substantially all of the properties and assets of the
Company in accordance with Section 801, the Successor Company shall succeed to,
and be substituted for, and may exercise every right and power of, the Company
under this Indenture with the same effect as if such successor Person had been
named as the Company herein, and thereafter, except in the case of a lease, the
predecessor Person shall be relieved of all obligations and covenants under this
Indenture and the Securities.
(b) Upon any consolidation of a Subsidiary Guarantor with, or merger of
such Subsidiary Guarantor into, any other Person or any transfer, conveyance,
sale, lease or other disposition of all or substantially all of the properties
and assets of such Subsidiary Guarantor in accordance with Section 802, the
Successor Subsidiary Guarantor shall succeed to, and be substituted for, and may
exercise every right and power of, such Subsidiary Guarantor under this
Indenture with the same effect as if such successor Person had been named as a
Subsidiary Guarantor herein, and thereafter, except in the case of a lease, the
predecessor Person shall be relieved of all obligations and covenants under this
Indenture and its Subsidiary Guarantee.
ARTICLE NINE
Supplemental Indentures
SECTION 901. Supplemental Indentures Without Consent of Holders.
Without the consent of any Holders, the Company, when authorized by a
Board Resolution of the Company, the Subsidiary Guarantors, when authorized by
their respective Board Resolutions, and the Trustee, at any time and from time
to time, may enter into one or more indentures supplemental hereto, in form
satisfactory to the Trustee, for any of the following purposes:
(1) to evidence the succession of another Person to the
Company or any Subsidiary Guarantor and the assumption by any such
successor of the covenants of the Company or any Subsidiary Guarantor
herein and in the Securities or Subsidiary Guarantee, as the case may
be;
(2) to add to the covenants of the Company for the benefit of
the Holders, or to surrender any right or power herein conferred upon
the Company;
(3) to secure the Securities pursuant to the requirements of
Section 1013 or otherwise;
-64-
<PAGE>
(4) to comply with any requirements of the Commission in order
to effect and maintain the qualification of this Indenture under the
Trust Indenture Act;
(5) to cure any ambiguity, to correct or supplement any
provision herein which may be inconsistent with any other provision
herein, or to make any other provisions with respect to matters or
questions arising under this Indenture which shall not be inconsistent
with the provisions of this Indenture, provided such action pursuant to
this Clause (5) shall not adversely affect the interests of the Holders
in any material respect; or
(6) to add new Subsidiary Guarantors pursuant to Section 1304.
SECTION 902. Supplemental Indentures with Consent of Holders.
With the consent of the Holders of not less than a majority in
aggregate principal amount of the Outstanding Securities, by Act of said Holders
delivered to the Company, the Subsidiary Guarantors and the Trustee, the
Company, when authorized by a Board Resolution of the Company, the Subsidiary
Guarantors, when authorized by their respective Board Resolutions, and the
Trustee may enter into an indenture or indentures supplemental hereto for the
purpose of adding any provisions to or changing in any manner or eliminating any
of the provisions of this Indenture or of modifying in any manner the rights of
the Holders under this Indenture; provided, however, that no such supplemental
indenture shall, without the consent of the Holder of each Outstanding Security
affected thereby,
(1) change the Stated Maturity of the principal of, or any
installment of interest on, any Security, or reduce the principal
amount thereof or the rate of interest thereon or any premium payable
upon the redemption thereof, or change the place of payment where, or
the coin or currency in which, any Security or any premium or interest
thereon is payable, or impair the right to institute suit for the
enforcement of any such payment on or after the Stated Maturity thereof
(or, in the case of redemption, on or after the Redemption Date or, in
the case of an Offer to Purchase, on or after the applicable Purchase
Date), or
(2) reduce the percentage in principal amount of the
Outstanding Securities, the consent of whose Holders is required for
any such supplemental indenture, or the consent of whose Holders is
required for any waiver (of compliance with certain provisions of this
Indenture or certain defaults hereunder and their consequences)
provided for in this Indenture, or
(3) modify any of the provisions of this Section, Section 513
or Section 1021, except to increase any such percentage or to provide
that certain other provisions of this Indenture cannot be modified or
waived without the consent of the Holder of each Outstanding Security
affected thereby, or
-65-
<PAGE>
(4) modify any of the provisions of this Indenture relating to
the subordination of the Securities or the Subsidiary Guarantees in a
manner adverse to the Holders, or
(5) modify the provisions of Section 1014 or 1017 or the
related definitions in a manner adverse to the Holders.
It shall not be necessary for any Act of Holders under this Section to
approve the particular form of any proposed supplemental indenture, but it shall
be sufficient if such Act shall approve the substance thereof.
SECTION 903. Execution of Supplemental Indentures.
In executing, or accepting the additional trusts created by, any
supplemental indenture permitted by this Article or the modifications thereby of
the trusts created by this Indenture, the Trustee shall be entitled to receive,
and (subject to Section 601) shall be fully protected in relying upon, an
Opinion of Counsel stating that the execution of such supplemental indenture is
authorized or permitted by this Indenture. The Trustee may, but shall not be
obligated to, enter into any such supplemental indenture which affects the
Trustee's own rights, duties or immunities under this Indenture or otherwise.
SECTION 904. Effect of Supplemental Indentures.
Upon the execution of any supplemental indenture under this Article,
this Indenture shall be modified in accordance therewith, and such supplemental
indenture shall form a part of this Indenture for all purposes; and every Holder
of Securities theretofore or thereafter authenticated and delivered hereunder
shall be bound thereby. No such supplemental indenture shall directly or
indirectly modify the provisions of Article Twelve or Article Fourteen in any
manner which might terminate or impair or otherwise adversely affect the rights
of the Senior Debt or the Senior Guarantees, as the case may be, pursuant to
such subordination provisions.
SECTION 905. Conformity with Trust Indenture Act.
Every supplemental indenture executed pursuant to this Article shall
conform to the requirements of the Trust Indenture Act.
SECTION 906. Reference in Securities to Supplemental Indentures.
Securities authenticated and delivered after the execution of any
supplemental indenture pursuant to this Article may, and shall if required by
the Trustee, bear a notation in form approved by the Trustee as to any matter
provided for in such supplemental indenture. If the Company and the Subsidiary
Guarantors shall so determine, new Securities so modified as to conform, in the
opinion of the Trustee, the Company and the Subsidiary Guarantors, to any such
supplemental indenture may be prepared and executed by the Company, the
Subsidiary
-66-
<PAGE>
Guarantees may be endorsed thereon and such new Securities
authenticated and delivered by the Trustee in exchange for Outstanding
Securities.
ARTICLE TEN
Covenants
SECTION 1001. Payment of Principal, Premium and Interest.
The Company will duly and punctually pay the principal of (and premium,
if any) and interest on the Securities in accordance with the terms of the
Securities and this Indenture.
SECTION 1002. Maintenance of Office or Agency.
The Company will maintain in the Borough of Manhattan, The City of New
York, an office or agency where Securities may be presented or surrendered for
payment, where Securities may be surrendered for registration of transfer or
exchange and where notices and demands to or upon the Company or any Subsidiary
Guarantor in respect of the Securities, any Subsidiary Guarantee endorsed
thereon and this Indenture may be served. The Company will give prompt written
notice to the Trustee of the location, and any change in the location,
of such office or agency. If at any time the Company shall fail to maintain any
such required office or agency or shall fail to furnish the Trustee with the
address thereof, such presentations, surrenders, notices and demands may be
made or served at the Corporate Trust Office of the Trustee, and the Company and
each Subsidiary Guarantor hereby appoint the Trustee as their agent to receive
all such presentations, surrenders, notices and demands.
The Company may also from time to time designate one or more other
offices or agencies (in or outside the Borough of Manhattan, The City of New
York) where the Securities may be presented or surrendered for any or all such
purposes and may from time to time rescind such designations; provided, however,
that no such designation or rescission shall in any manner relieve the Company
of its obligation to maintain an office or agency in the Borough of Manhattan,
The City of New York, for such purposes. The Company will give prompt written
notice to the Trustee of any such designation or rescission and of any change in
the location of any such other office or agency.
SECTION 1003. Money for Security Payments to be Held in Trust.
If the Company or any Subsidiary Guarantor shall at any time act as
Paying Agent, it will, on or before each due date of the principal of (and
premium, if any) or interest on any of the Securities, segregate and hold in
trust for the benefit of the Persons entitled thereto a sum sufficient to pay
the principal (and premium, if any) or interest so becoming due until such sums
shall be paid to such Persons or otherwise disposed of as herein provided and
will promptly notify the Trustee of its action or failure so to act.
-67-
<PAGE>
Whenever the Company shall have one or more Paying Agents, it will,
prior to each due date of the principal of (and premium, if any) or interest on
any Securities, deposit with a Paying Agent a sum sufficient to pay the
principal (and premium, if any) or interest so becoming due, such sum to be held
in trust for the benefit of the Persons entitled to such principal, premium or
interest, and (unless such Paying Agent is the Trustee) the Company will
promptly notify the Trustee of its action or failure so to act.
The Company will cause each Paying Agent other than the Trustee to
execute and deliver to the Trustee an instrument in which such Paying Agent
shall agree with the Trustee, subject to the provisions of this Section, that
such Paying Agent will:
(1) hold all sums held by it for the payment of the principal
of (and premium, if any) or interest on Securities in trust for the
benefit of the Persons entitled thereto until such sums shall be paid
to such Persons or otherwise disposed of as herein provided;
(2) give the Trustee notice of any default by the Company (or
any other obligor upon the Securities) in the making of any payment of
principal (and premium, if any) or interest; and
(3) at any time during the continuance of any such default,
upon the written request of the Trustee, forthwith pay to the Trustee
all sums so held in trust by such Paying Agent.
The Company may at any time, for the purpose of obtaining the
satisfaction and discharge of this Indenture or for any other purpose, pay, or
by Company Order direct any Paying Agent to pay, to the Trustee all sums held in
trust by the Company or such Paying Agent, such sums to be held by the Trustee
upon the same trusts as those upon which such sums were held by the Company or
such Paying Agent; and, upon such payment by any Paying Agent to the Trustee,
such Paying Agent shall be released from all further liability with respect to
such money.
Any money deposited with the Trustee or any Paying Agent, or then held
by the Company, in trust for the payment of the principal of (and premium, if
any) or interest on any Security and remaining unclaimed for two years after
such principal (and premium, if any) or interest has become due and payable
shall be paid to the Company on Company Request, or (if then held by the
Company) shall be discharged from such trust; and the Holder of such Security
shall thereafter, as an unsecured general creditor, look only to the Company for
payment thereof, and all liability of the Trustee or such Paying Agent with
respect to such trust money, and all liability of the Company as trustee
thereof, shall thereupon cease; provided, however, that the Trustee or such
Paying Agent, before being required to make any such repayment, may at the
expense of the Company cause to be published once, in a newspaper published in
the English language, customarily published on each Business Day and of general
circulation in The City of New York, notice that such money remains unclaimed
and that, after a date specified therein, which shall not be less than 30 days
from the date of such publication, any unclaimed balance of such money then
remaining will be repaid to the Company.
-68-
<PAGE>
SECTION 1004. Existence.
Subject to Article Eight and Section 1014, the Company will do or cause
to be done all things necessary to preserve and keep in full force and effect
the existence, rights (charter and statutory) and franchises of the Company and
each Subsidiary Guarantor; provided, however, that the Company shall not be
required to preserve any such right or franchise if the Board of Directors of
the Company in good faith shall determine that the preservation thereof is no
longer desirable in the conduct of the business of the Company and that the loss
thereof is not adverse in any material respect to the Holders.
SECTION 1005. Maintenance of Properties.
The Company will cause all properties necessary for the conduct of its
business or the business of any Restricted Subsidiary of the Company to be
maintained and kept in good condition, repair and working order and supplied
with all necessary equipment and will cause to be made all necessary repairs,
renewals, replacements, betterments and improvements thereof, all as in the
judgment of the Company may be necessary so that the business carried on in
connection therewith may be properly and advantageously conducted at all times;
provided, however, that nothing in this Section shall prevent the Company from
discontinuing the operation or maintenance of any of such properties if such
discontinuance is, as determined by the Board of Directors of the Company in
good faith, desirable in the conduct of its business or the business of any
Restricted Subsidiary.
SECTION 1006. Payment of Taxes and Other Claims.
The Company will pay or discharge or cause to be paid or discharged,
before the same shall become delinquent, (1) all taxes, assessments and
governmental charges levied or imposed upon the Company or any of its Restricted
Subsidiaries or upon the income, profits or property of the Company or any of
its Restricted Subsidiaries, and (2) all lawful claims for labor, materials and
supplies which, if unpaid, might by law become a lien upon the property of the
Company or any of its Restricted Subsidiaries; provided, however, that the
Company shall not be required to pay or discharge or cause to be paid or
discharged any such tax, assessment, charge or claim whose amount, applicability
or validity is being contested in good faith by appropriate proceedings and for
which adequate reserves are maintained to the extent required by generally
accepted accounting principles.
SECTION 1007. Maintenance of Insurance.
The Company shall, and shall cause its Restricted Subsidiaries to, keep
at all times all of its and their properties which are of an insurable nature
insured against loss or damage with insurers believed by the Company to be
responsible to the extent that property of similar character is usually so
insured by corporations similarly situated and owning like properties in
accordance with good business practice.
-69-
<PAGE>
SECTION 1008. Limitation on Incurrence of Debt.
The Company shall not, and shall not permit any Restricted Subsidiary
to, Incur any Debt unless, immediately after giving effect to the Incurrence of
such Debt and the receipt and application of the proceeds thereof, the
Consolidated EBITDA Coverage Ratio of the Company for the four full fiscal
quarters for which internal financial statements are available immediately
preceding the Incurrence of such Debt, calculated on a pro forma basis as if
such Debt had been Incurred and the proceeds thereof had been received and so
applied at the beginning of the four full fiscal quarters, would be greater than
2.50 to 1.0 if such date is on or prior to December 31, 1998, 2.75 to 1.0 if
such date is after December 31, 1998 and on or prior to December 31, 1999 and
3.0 to 1.0 if thereafter.
Without regard to the foregoing limitations, the Company or any
Restricted Subsidiary may Incur the following Debt:
(i) Debt under the Credit Facility in an aggregate principal
amount at any one time outstanding not to exceed $450.0 million less
(A) principal payments on any term loan facility under the Credit
Facility required to be made by the terms of the Credit
Facility as in effect on the date of this Indenture and actually made
and (B) any amounts by which the Working Capital Facility commitments
are permanently reduced by the terms of the Credit Facility as in
effect on the date of this Indenture; provided, that Clause (B) shall
not apply to a refinancing or refunding of the Working Capital Facility
so long as such refinancing or refunding complies with Clause (vii)
below.
(ii) Debt evidenced by the Securities;
(iii) Debt of the Company or any Restricted Subsidiary (other
than Debt referred to in Clauses (i) and (ii) above) outstanding on the
date of this Indenture;
(iv) Debt owed by the Company to any Wholly Owned Restricted
Subsidiary or Debt owed by a Wholly Owned Restricted Subsidiary to the
Company; provided, however, that (a) any such Debt owing by the Company
to a Wholly Owned Restricted Subsidiary shall be Subordinated Debt and
(b) upon either (1) the transfer or other disposition by such Wholly
Owned Restricted Subsidiary or the Company of any Debt so permitted to
a Person other than the Company or another Wholly Owned Restricted
Subsidiary or (2) the issuance (other than directors' qualifying
shares), sale, lease, transfer or other disposition of shares of
Capital Stock (including by consolidation or merger) of such Wholly
Owned Restricted Subsidiary to a Person other than the Company or
another such Wholly Owned Restricted Subsidiary, the provisions of this
Clause (iv) shall no longer be applicable to such Debt and such Debt
shall be deemed to have been Incurred at the time of such transfer or
other disposition or such issuance, sale, lease, transfer or other
disposition;
(v) Obligations under Interest Rate Agreements in respect of
Debt permitted to be Incurred by the Company pursuant to this Indenture
to the extent the notional principal amount of such Interest Rate
Agreements does not exceed the aggregate
-70-
<PAGE>
principal amount of the Debt to which such Interest Rate Agreements
relate; provided, however, that (A) such Interest Rate Agreements are
used solely to hedge the related Debt and (B) the profits and losses
with respect to the Interest Rate Agreements are included as interest
expense under generally accepted accounting principles;
(vi) Debt Incurred by the Company or any Restricted Subsidiary
in respect of (x) bid or performance bonds entered into in favor of
governmental entities or (y) surety or appeal bonds which, in each
case, are entered into in the ordinary course of business;
(vii) Debt Incurred to renew, extend, refinance or refund any
outstanding Debt permitted by Clauses (i), (ii) and (iii) above or this
Clause (vii); provided, however, that such Debt does not exceed the
principal amount of Debt (or, in the case of Debt issued at a discount
from its principal amount, the amount then payable upon an acceleration
thereof) so renewed, extended, refinanced or refunded (plus accrued
interest, fees, expenses, premiums and other amounts payable in
connection therewith in an amount not in excess of 1% of the principal
amount (or, in the case of Debt issued at a discount, the amount
payable upon acceleration) of the Debt being renewed, extended,
refinanced or refunded); and provided further, that (A) Debt the
proceeds of which are used to refinance or refund Debt which is Pari
Passu to the Securities or Debt which is subordinate in right of
payment to the Securities shall only be permitted if in the case of any
refinancing or refunding of Debt which is Pari Passu to the Securities,
the refinancing or refunding Debt is made Pari Passu to the Securities
or subordinated to the Securities, and, in the case of any refinancing
or refunding of Debt which is subordinated to the Securities, the
refinancing or refunding Debt is made subordinate to the Securities on
terms at least as favorable to the Holders of Securities as those
contained in the documentation governing the Debt being refinanced or
refunded and (B) such refinancing or refunding Debt (x) does not have a
final scheduled maturity earlier than the final scheduled maturity of
the refinanced or refunded Debt or permit redemption or other
retirement of such Debt (including pursuant to an offer to purchase by
the Company) at the option of the holder thereof prior to the final
stated maturity of the Debt being refinanced or refunded, other than a
redemption or other retirement at the option of the holder of such Debt
on terms at least as favorable to the Holders of the Securities as
those contained in the Debt being refinanced or refunded and (y) does
not have a Weighted Average Life less than the Weighted Average Life of
the Debt being refinanced or refunded; and
(viii) Debt in addition to that otherwise permitted to be
Incurred pursuant to Clauses (i) through (vii) above, which, together
with any other outstanding Debt Incurred pursuant to this Clause
(viii), has an aggregate principal amount not in excess of $20 million
at any one time outstanding.
-71-
<PAGE>
SECTION 1009. Limitation on Layered and Junior Debt.
The Company shall not (i) Incur or suffer to exist any Debt that is by
its terms subordinate in right of payment to any other Debt of the Company
unless such Debt is also Pari Passu with or subordinate by its terms in right of
payment to the Securities or (ii) permit any Subsidiary Guarantor to Incur or
suffer to exist any Debt that is by its terms subordinate in right of payment to
any other Debt of the Guarantor unless such Debt is also Pari Passu with or
subordinate by its terms in right of payment to the Subsidiary Guarantees.
SECTION 1010. Limitation on Restricted Payments.
The Company shall not directly or indirectly, (i) declare or pay any
dividend, or make any distribution, of any kind or character (whether in cash,
property or securities) in respect of its Capital Stock or to the holders
thereof in their capacity as such (excluding the Spin-Off Payments and any
dividends or distributions payable solely in shares of its Capital Stock (other
than Redeemable Interests) or in options, warrants or other rights to acquire
its Capital Stock (other than Redeemable Interests)), (ii) purchase, redeem or
otherwise acquire or retire for value, or permit any Restricted Subsidiary to
purchase, redeem or otherwise acquire or retire for value (a) any Capital Stock
of the Company or any Capital Stock of or other ownership interests in any
Subsidiary or any Affiliate or Related Person of the Company (other than any
such acquisition which results in such Subsidiary, Affiliate or Related Person
becoming a Restricted Subsidiary) or (b) any options, warrants or rights to
purchase or acquire shares of Capital Stock of the Company or any Capital Stock
of or other ownership interests in any Subsidiary or any Affiliate or Related
Person of the Company (excluding the redemption or repurchase by any Restricted
Subsidiary of any of its Capital Stock, other ownership interests or options,
warrants or rights to purchase such Capital Stock or other ownership interests,
in each case, owned by the Company or a Wholly Owned Restricted Subsidiary and
any such acquisition that results in such Subsidiary, Affiliate or Related
Person becoming a Restricted Subsidiary), (iii) permit any Restricted Subsidiary
to declare or pay any dividend, or make any distribution, of any kind or
character (whether in cash, property or securities) in respect of the Capital
Stock of or other ownership interests in such Restricted Subsidiary or to the
holders of such Restricted Subsidiary's Capital Stock or other ownership
interests (excluding any dividends or distributions payable solely in shares of
Capital Stock of or other ownership interests in such Restricted Subsidiary
(other than Redeemable Interests) or in options, warrants or rights to acquire
Capital Stock of or other ownership interests in such Restricted Subsidiary
(other than Redeemable Interests)) other than (A) the payment by any Restricted
Subsidiary of dividends or other distributions to the Company or a Wholly Owned
Restricted Subsidiary, or (B) the payment of pro rata dividends to holders of
both minority and majority interests in the Capital Stock or other ownership
interests of any such Restricted Subsidiary, (iv) make, or permit any Restricted
Subsidiary to make, any Investment in any Person that is not a Permitted
Investment or (v) redeem, defease, repurchase, retire or otherwise acquire or
retire for value prior to any scheduled maturity, repayment or sinking fund
payment, Debt of the Company (other than the Securities) that is Pari Passu with
or subordinate in right of payment to the Securities (each of the transactions
described in Clauses (i) through (v) being a "Restricted Payment"), if:
-72-
<PAGE>
(1) an Event of Default, or an event that with the lapse of
time or the giving of notice, or both, would constitute an Event of
Default, shall have occurred and be continuing;
(2) the Company would, at the time of such Restricted Payment
and after giving pro forma effect thereto as if such Restricted Payment
had been made at the beginning of the most recently ended four full
fiscal quarter period for which internal financial statements are
available immediately preceding the date of such Restricted Payment,
not have been permitted to Incur at least $1.00 of additional Debt
pursuant to the Consolidated EBITDA Coverage Ratio test set forth in
the first paragraph of Section 1008; or
(3) upon giving effect to such Restricted Payment, the
aggregate of all Restricted Payments (excluding Restricted Payments
permitted by Clauses (i) through (vii) of the next succeeding
paragraph) from the date of this Indenture (the amount so expended, if
other than in cash, determined in good faith by the Board of Directors)
exceeds the sum, without duplication, of: (a) 50% of the cumulative
Consolidated Net Income of the Company (or, in the case such
Consolidated Net Income shall be negative, less 100% of such deficit)
for the period (taken as one accounting period) from the beginning of
the first fiscal quarter commencing after the date of this Indenture to
the end of the Company's most recently ended fiscal quarter for which
internal financial statements are available at the time of such
Restricted Payment; provided that for purposes of this Clause (a),
Consolidated Net Income of the Company will be calculated excluding
extraordinary losses resulting from the Spin-Off Distributions; plus
(b) 100% of the aggregate net cash proceeds from the issuance and sale
(other than to a Restricted Subsidiary) of Capital Stock (other than
Redeemable Interests) of the Company and options, warrants or other
rights on Capital Stock (other than Redeemable Interests and Debt
convertible into Capital Stock) of the Company and the principal
amount of Debt and Redeemable Interests of the Company that has been
converted into Capital Stock (other than Redeemable Interests) of the
Company after the date of this Indenture, provided that any such net
proceeds received by the Company from an employee stock ownership plan
financed by loans from the Company or a Subsidiary of the Company
shall be included only to the extent such loans have been repaid with
cash on or prior to the date of determination; plus (c) 50% of any
dividends received by the Company or a Wholly Owned Restricted
Subsidiary after the date of this Indenture from an Unrestricted
Subsidiary of the Company; plus (d) to the extent not otherwise taken
into account in this subsection (3), any return of a capital investment
made by the Company in another Person and treated as a Restricted
Payment under Clause (ii) or (iv) to the extent received in cash or
Cash Equivalents and in an amount not in excess of such Restricted
Payment; plus (e) $10.0 million.
The foregoing covenant will not be violated by reason of:
(i) the payment of any dividend within 60 days after declaration
thereof if at the declaration date such payment would have complied with the
foregoing covenant and the
-73-
<PAGE>
amount of such dividend was included in the aggregate amount of Restricted
Payments pursuant to Clause (3) above;
(ii) any renewal, extension, refinancing or refunding of Debt permitted
pursuant to Clause (vii) of the second paragraph of Section 1008;
(iii) the purchase, redemption or other acquisition or retirement for
value of any Capital Stock of the Company or any options, warrants or rights to
purchase or acquire shares of Capital Stock of the Company in exchange for, or
out of the net cash proceeds of, the substantially concurrent issuance or sale
(other than to a Restricted Subsidiary) of Capital Stock (other than Redeemable
Interests) of the Company; provided that the amount of any such net cash
proceeds that are utilized for any such purchase, redemption or other
acquisition or retirement for value shall be excluded from Clause (3)(b) in the
foregoing paragraph;
(iv) any purchase or other acquisition of Common Stock of the Company
that is contributed to any employee plan qualified under Section 401(a) of the
Internal Revenue Code of 1986, as amended, or an employee stock purchase plan,
in either case that was funded by employee contributions or deducted as an
expense in determining Consolidated Net Income of the Company;
(v) the sale, lease or other disposition of any Non-Core Asset;
provided that the Board of Directors of the Company determines that such sale,
lease or other disposition is in the best interest of the Company, as evidenced
by a Board Resolution;
(vi) any Permitted Joint Venture Investment made after the date of this
Indenture; provided that the Consolidated EBITDA of the Company attributable to
such Investment for the four full fiscal quarters for which internal financial
statements are available immediately preceding the date of such Investment,
together with the Consolidated EBITDA of the Company attributable to any other
Permitted Joint Venture Investment made pursuant to this Clause (vi), shall not
exceed 10% of the Consolidated EBITDA of the Company for the four full fiscal
quarters for which internal financial statements are available immediately
preceding the making of such Permitted Joint Venture Investment; and provided,
further, that the Company would, at the time the Company makes a Permitted Joint
Venture Investment pursuant to this Clause (vi) and after giving pro forma
effect thereto as if such Permitted Joint Venture Investment had occurred at the
beginning of the most recently ended four full fiscal quarter period for which
internal financial statements are available immediately preceding the date of
such Permitted Joint Venture Investment, have been permitted to Incur at least
$1.00 of additional Debt pursuant to the Consolidated EBITDA Coverage Ratio test
set forth in the first paragraph of Section 1008; or
(vii) the redemption of Quest Diagnostics Rights pursuant to the Quest
Diagnostics Rights Agreement (or any successor agreement) in an amount not to
exceed $.01 per Quest Diagnostics Right.
As provided in Section 1019, upon the designation of any Restricted
Subsidiary as an Unrestricted Subsidiary (other than pursuant to Clauses (v) and
(vi) above), an amount equal to the fair market value of all of the assets of
such Restricted Subsidiary prior to such change
-74-
<PAGE>
will be deemed to be a Restricted Payment for purposes of calculating the
aggregate amount of Restricted Payments pursuant to Clause (3) of the first
paragraph of this Section 1010.
SECTION 1011. Limitation on Leases.
The Company shall not, and shall not permit any Restricted Subsidiary
to, Incur any Operating Lease except:
(i) any Operating Lease in effect on the date of this Indenture;
(ii) any Operating Lease relating to personal property used in the
Company's or a Restricted Subsidiary's ordinary course of business;
(iii) any Operating Lease of real property having an annualized Rental
Expense of less than $0.625 million;
(iv) any Operating Lease (A) Incurred by a Person prior to the time
such Person became a Restricted Subsidiary, (B) acquired by the Company or any
Restricted Subsidiary through a purchase or other acquisition of assets or (C)
Incurred by a Restricted Subsidiary in connection with a merger or consolidation
with or into another Person (other than a Restricted Subsidiary) in a
transaction in which such Person becomes a Restricted Subsidiary of the Company;
provided, that, in the case of any Operating Lease Incurred pursuant to Clause
(A) or (C) of this Clause (iv), such Operating Lease was not Incurred in
anticipation of such transaction and was outstanding prior to such transaction;
and provided further, that the difference, if any (but not less than zero) of
(A) the annualized Rental Expense of such Operating Lease and (B) the annualized
Rental Expense of any equivalent or similar Operating Lease relating to assets
or properties disposed of in connection with such transaction and as to which
the Company or such Restricted Subsidiary is no longer, directly or indirectly,
liable or obligated under or as to which another Person with a Credit Rating
equal to or greater than the Company shall have agreed to indemnify and hold
harmless the Company or such Restricted Subsidiary with respect to all of its
liabilities and obligations under such Operating Lease, together with the
annualized Rental Expense of any other Operating Lease Incurred pursuant to this
Clause (iv), shall not exceed $3 million in the fiscal year of such Incurrence;
(v) any Operating Lease in addition to those described in Clauses (i)
through (iv) above and Clauses (vi) through (vii) below Incurred after the date
of this Indenture the annualized Rental Expense of which, together with the
annualized Rental Expense of any other Operating Lease Incurred pursuant to this
Clause (v), shall not exceed 3% of the Consolidated EBITDA of the Company for
the four full fiscal quarters for which internal financial statements are
available immediately preceding the Incurrence of such Operating Lease;
(vi) any Operating Lease between the Company and a Wholly Owned
Restricted Subsidiary or between a Wholly Owned Restricted Subsidiary and the
Company or another Wholly Owned Restricted Subsidiary; provided, however, that
in the case of the issuance (other than directors' qualifying shares), sales,
lease, transfer or other disposition of shares of
-75-
<PAGE>
Capital Stock (including by a consolidation or merger) of such Wholly Owned
Restricted Subsidiary to a Person other than the Company or another Wholly
Owned Restricted Subsidiary, the provisions of this Clause (vi) shall no longer
be applicable to such Operating Lease and such Operating Lease shall be deemed
to have been Incurred at that time;
(vii) at the election of the Company, any Operating Lease in addition
to that permitted to be Incurred pursuant to Clauses (i) through (vi) above and
Clause (viii) below if (a) the Company treats the Attributable Value of such
Operating Lease as Debt for all purposes under this Indenture, including for
purposes of the pro forma calculation required by this Clause (vii), (b) the
portion of Rental Expense in respect of such Operating Lease that would have
been allocable to interest expense in accordance with generally accepted
accounting principles if such Operating Lease was treated as a Capital Lease
Obligation is treated as Consolidated Interest Expense of the Company for all
purposes of this Indenture, including for purposes of the pro forma calculation
required by this Clause (vii), and (c) the Company would, at the time of such
Incurrence and after giving pro forma effect thereto as if such Incurrence had
occurred at the beginning of the most recently ended four full fiscal quarter
period for which internal financial statements are available immediately
preceding the date of such Incurrence, have been permitted to Incur at least
$1.00 of additional Debt pursuant to the Consolidated EBITDA Coverage Ratio test
set forth in the first paragraph of Section 1008; and
(viii) any renewal, extension or replacement (each a "replacement") of
any Operating Lease permitted by Clause (i), (iv), (v) or (vii) or this Clause
(viii); provided, that the Incurrence of an Operating Lease shall be deemed to
be the replacement of another
Operating Lease so long as the obligation to pay rent or other amounts does not
begin earlier than one year prior to the end of the term of the Operating Lease
being replaced.
SECTION 1012. Limitations Concerning Distributions by Subsidiaries, Etc.
The Company shall not, and shall not permit any Restricted Subsidiary
to, suffer to exist any consensual encumbrance or restriction on the ability of
any Restricted Subsidiary (i) to pay, directly or indirectly, dividends or make
any other distributions in respect of its Capital Stock or other ownership
interests or pay any Debt or other obligation owed to the Company or any other
Restricted Subsidiary; (ii) to make loans or advances to the Company or any
Restricted Subsidiary; or (iii) to sell, lease or transfer any of its property
or assets to the Company or any Wholly Owned Restricted Subsidiary, except, in
any such case, any encumbrance or restriction: (a) pursuant to the Securities,
this Indenture, the Credit Facility and any other agreement in effect on the
date of this Indenture, (b) pursuant to an agreement relating to any Debt
Incurred by a Restricted Subsidiary prior to the date on which such Restricted
Subsidiary was acquired by the Company and outstanding on such date and not
Incurred in anticipation of becoming a Restricted Subsidiary, (c) pursuant to an
agreement which has been entered into for the pending sale or disposition of all
or substantially all of the assets of such Restricted Subsidiary or all or
substantially all of the Capital Stock of such Restricted Subsidiary owned by
the Company or any other Restricted Subsidiary, provided that such restriction
terminates upon consummation of such disposition, (d) pursuant to customary
provisions restricting assignments of contracts or subleases of leases, in each
case, entered into in the ordinary course of business, (e) pursuant to purchase
money obligations for
-76-
<PAGE>
property acquired in the ordinary course of business that impose restrictions
of the nature described in Clause (iii) above on the property so acquired, (f)
pursuant to an agreement effecting a renewal, extension, refinancing,
replacement or refunding of Debt Incurred pursuant to an agreement referred to
in Clause (a) or (b) above (provided that the provisions relating to such
encumbrance or restriction contained in such renewal, extension, refinancing,
replacement or refunding are no more restrictive in any material respect than
the provisions contained in the agreement it replaces) or (g) pursuant to or by
reason of applicable law.
SECTION 1013. Limitation on Liens.
The Company shall not, and shall not permit any Restricted Subsidiary
to, Incur any Lien on property or assets of the Company or such Restricted
Subsidiary to secure Debt that is Pari Passu or subordinate in right of payment
to the Securities without making, or causing such Restricted Subsidiary to make,
effective provision for securing the Securities (and, if the Company may so
determine, any other Debt of the Company or of such Restricted Subsidiary that
is not Pari Passu or subordinate to the Securities) (i) in the case of Debt that
is Pari Passu with the Securities, Pari Passu with such Debt and (ii) in the
case of Debt that is subordinated in right of payment to the Securities prior to
such Debt, in each case, as to such property for so long as such Debt will be so
secured.
The Company shall not, and shall not permit any Restricted Subsidiary
to, Incur any Lien (other than Permitted Liens) on property or assets of the
Company or such Restricted
Subsidiary to secure Debt that is not Pari Passu or subordinate in right of
payment to the Securities without making, or causing such Restricted Subsidiary
to make, effective provision for securing the Securities (and, if the Company
may so determine, any other Debt of the Company or of such Restricted Subsidiary
that is not subordinate to the Securities) equally and ratably with (or prior
to) such Debt as to such property for so long as such Debt will be so secured.
SECTION 1014. Asset Dispositions.
(a) The Company shall not make, and shall not permit any Restricted
Subsidiary to make, any Asset Disposition in one or more transactions in any
fiscal year unless: (i) the Company (or such Restricted Subsidiary, as the case
may be) receives consideration at the time of such disposition at least equal to
the fair market value of the shares or the assets disposed of, as determined in
good faith by the Board of Directors and evidenced by a Board Resolution, and
(ii) 100% of the Net Available Proceeds from such disposition (including from
the sale of any Cash Equivalents received therein) are applied by the Company
(or such Restricted Subsidiary, as the case may be) (A) first, either (I) within
270 days of such disposition, to repayment of Senior Debt then outstanding under
any agreements or instruments which would require such application or which
would prohibit payments pursuant to Clause (B) of this sentence or (II) within
60 days before or 270 days after such disposition, to reinvest in assets that
will be used in a Permitted Business (provided, however, that such application
will not be required to be made pursuant to this Clause (A) until the
-77-
<PAGE>
cumulative Net Available Proceeds (less any Net Available Proceeds applied
pursuant to this Section 1014(a)) (such difference being the "Excess Proceeds")
exceed $5 million); (B) second, to the extent the Excess Proceeds exceeds $5
million, to purchases of Outstanding Securities pursuant to an Offer to
Purchase (to the extent such an Offer is not prohibited by the terms of any
Senior Debt then outstanding) at a purchase price equal to 100% of their
principal amount plus accrued interest to the Purchase Date (provided, however,
that installments of interest whose Stated Maturity is on or prior to the
Purchase Date will be payable to the Holders of such Securities, or one or more
Predecessor Securities, registered as such at the close of business on the
relevant Record Dates according to their terms and the provisions of Section
307) and (C) third, if and only if an Offer to Purchase has been made as
described in Clause B above, and to the extent of any remaining Excess Proceeds
following completion of such Offer to Purchase and after giving effect to
Clauses (A) and (B) above, to general corporate purposes.
(b) The Company will mail any Offer for an Offer to Purchase required
pursuant to Section 1014(a) within 270 days after the relevant disposition is
completed. The aggregate principal amount of the Securities to be offered to be
purchased pursuant to the Offer to Purchase shall equal the Excess Proceeds
available therefor pursuant to Clause (ii)(B) of Section 1014(a) (rounded down
to the next lowest integral multiple of $1,000). Each Holder shall be entitled
to tender all or any portion of the Securities owned by such Holder pursuant to
the Offer to Purchase, subject to the requirement that any portion of a Security
tendered must be tendered in an integral multiple of $1,000 principal amount.
The Company shall not be entitled to any credit against its obligations
in connection with any Offer to Purchase made pursuant to this Section 1014 for
the principal amount of any Securities acquired by the Company otherwise than
pursuant to such Offer to Purchase.
(c) Not later than the date of the Offer with respect to an Offer to
Purchase pursuant to this Section 1014, the Company shall deliver to the Trustee
an Officers' Certificate as to (i) the Purchase Amount, (ii) the allocation of
the Net Available Proceeds from the Asset Disposition pursuant to which such
Offer is being made, including, if amounts are invested in assets that will be
used in a Permitted Business, the actual assets acquired, and (iii) the
compliance of such allocation with the provisions of paragraph (a) of this
Section 1014.
The Company and the Trustee shall perform their respective obligations
specified in the Offer for the Offer to Purchase. On or prior to the Purchase
Date, the Company shall (i) accept for payment (on a pro rata basis, if
necessary) Securities or portions thereof tendered pursuant to the Offer, (ii)
deposit with the paying agent (or, if the Company is acting as its own paying
agent, segregate and hold in trust as provided in Section 1003) money sufficient
to pay the purchase price of all Securities or portions thereof so accepted and
(iii) deliver or cause to be delivered to the Trustee all Securities so accepted
together with an Officers' Certificate stating the Securities or portions
thereof accepted for payment by the Company. The Paying Agent (or the Company,
if so acting) shall promptly mail or deliver to Holders of Securities so
accepted payment in an amount equal to the purchase price, and the Trustee shall
promptly authenticate and mail or deliver to such Holders a new Security equal
in principal amount to any unpurchased portion of the Security surrendered. Any
Security not accepted for payment shall be promptly mailed or delivered by the
Company to the Holder
-78-
<PAGE>
thereof. The Company shall publicly announce the results of the Offer on or as
soon as practicable after the Purchase Date.
SECTION 1015. Limitation on Transactions with Affiliates and Related Persons.
The Company shall not, and shall not permit any Restricted Subsidiary
to, directly or indirectly, enter into any transaction after the date of this
Indenture with any Affiliate or Related Person of the Company unless (i) such
Affiliate or Related Person is (both before and after such transaction) (a) a
Wholly Owned Subsidiary of the Company or (b) another Subsidiary of the Company
the minority interests in which are not held by any Affiliate or Related Person
of the Company; (ii) such transaction is the payment of directors' fees; (iii)
such transaction is the entering into of a laboratory services agreement in the
ordinary course of the Company's or a Restricted Subsidiary's business on terms
that are no less favorable to the Company or such Restricted Subsidiary as those
that could be obtained in a comparable arm's length transaction; (iv) such
transaction is the entering into a compensation arrangement between the Company
or a Restricted Subsidiary and one of its employees, which transaction is
approved by the Compensation Committee (or other similar committee) of the Board
of Directors; (v) the transaction contemplated by clause (ix) of the definition
of Permitted Investments; or (vi) the following action is taken: (a) if the
total consideration paid by the Company or such Restricted Subsidiary in such
transaction (or series of transactions) of which it is a part (including cash,
the fair value of non-cash property and the principal amount of any Debt
assumed) (the "Consideration") is less than $5 million, then a duly authorized
executive officer of the Company will deliver an Officers' Certificate within 10
days of such transaction (or series of transactions) wherein such officers
certify on behalf of the Company that in their good faith judgment the terms of
the transaction (or series of transactions) are in the best interests of the
Company and are no less favorable to the Company than those that could be
obtained in a comparable arm's length transaction (or series of transactions)
with an entity that is not an Affiliate or a Related Person; (b) if the
Consideration is between $5 million and $15 million, then the determinations
referred to in Clause (a) above shall be made by a majority of the disinterested
members of the Board of Directors and evidenced by a Board Resolution: and (c)
if the Consideration is greater than $15 million, then the determinations
referred to in Clause (a) above, in addition to the action required by Clause
(b) above, must also be confirmed by a nationally recognized investment banking
firm (which may not be an Affiliate or Related Person of the Company), in a
written opinion delivered to the Board of Directors of the Company prior to
consummation of such transaction (or series of transactions); provided, however,
that the foregoing restriction will not apply to the Intercompany Agreements as
in effect on the date of this Indenture or the transactions contemplated
thereby.
SECTION 1016. Limitation on Sale of Capital Stock of Subsidiaries.
The Company shall not, and shall not permit any Restricted Subsidiary
to, issue, transfer, convey or otherwise dispose of any shares of Capital Stock
(other than Preferred Stock that is not required or permitted to be redeemed or
otherwise repaid, at the option of such Restricted Subsidiary or the holders
thereof, prior to the final Stated Maturity of the
-79-
<PAGE>
Securities) of a Restricted Subsidiary or securities convertible or
exchangeable into, or options, warrants, rights or any other interest with
respect to, Capital Stock of a Restricted Subsidiary to any Person other than
the Company or a Wholly Owned Restricted Subsidiary except in a transaction
consisting of a sale of all of the Capital Stock of such Restricted Subsidiary
owned by the Company and any Subsidiary of the Company and that complies with
the provisions of Section 1014 to the extent such provisions apply.
SECTION 1017. Change of Control.
(a) Within 30 days following the date of the consummation of a
transaction that results in a Change of Control, the Company shall mail an Offer
with respect to an Offer to Purchase all Outstanding Securities at a purchase
price equal to 101% of their principal amount plus accrued interest to the
Purchase Date (provided, however, that installments of interest whose Stated
Maturity is on or prior to the Purchase Date shall be payable to the Holders of
such Securities, or one or more Predecessor Securities, registered as such at
the close of business on the relevant Record Dates according to their terms and
the provisions of Section 307). Each Holder shall be entitled to tender all or
any portion of the Securities owned by such Holder pursuant to the Offer to
Purchase, subject to the requirement that any portion of a Security tendered
must be tendered in an integral multiple of $1,000 principal amount. A "Change
of Control" means the occurrence of any of the following events after the date
of this Indenture: (i) any Person, or any Persons acting together that would
constitute a "group" (a "Group") for purposes of Section 13(d) of the Exchange
Act, beneficially owns 35% or more of the total voting power of all classes of
Voting Stock of the Company, (ii) any Person or Group succeeds in having
sufficient of its nominees elected to the Board of Directors such that such
nominees, when added to any existing director remaining on the Board of
Directors after such election who is an Affiliate or Related Person of such
Person or Group, will constitute a majority of the Board of Directors or (iii)
the occurrence of any transaction or series of related transactions (excluding
the Spin-Off Distributions), in which the beneficial owners of the Voting Stock
of the Company immediately prior to such transaction (or series) do not,
immediately after such transaction (or series), beneficially own Voting Stock
representing more than 35% of the voting power of all classes of Voting Stock of
the Company (or in the case of a transaction (or series) in which another entity
becomes a successor to the Company, of the successor entity).
(b) Prior to the mailing of the Offer with respect to the Offer to
Purchase, but in any event within 30 days following any Change in Control, the
Company shall to the extent required either (i) repay all outstanding Senior
Debt or (ii) obtain the requisite consents, if any, under all agreements
governing outstanding Senior Debt to permit the making of the Offer to Purchase
and the purchase of Securities required by this Section 1017. The failure to
repay any such Senior Debt or to obtain any such consents will not relieve the
Company of its obligation to make the Offer to Purchase or to purchase
Securities pursuant to the Offer to Purchase required by this Section 1017.
(c) The Company and the Trustee shall perform their respective
obligations specified in the Offer for the Offer to Purchase. Prior to the
Purchase Date, the Company shall (i) accept for payment Securities or portions
thereof tendered pursuant to the Offer,
-80-
<PAGE>
(ii) deposit with the Paying Agent (or, if the Company is acting as its own
Paying Agent, segregate and hold in trust as provided in Section 1003) money
sufficient to pay the Purchase Price of all Securities or portions thereof so
tendered and (iii) deliver or cause to be delivered to the Trustee all
Securities so repurchased together with an Officers' Certificate stating the
Securities or portions thereof repurchased by the Company. The Paying Agent
shall promptly mail or deliver to Holders so accepted payment in an amount
equal to the Purchase Price, and the Trustee shall promptly authenticate and
mail or deliver to such Holders a new Security or Securities equal in principal
amount to any unpurchased portion of the Security surrendered as requested by
the Holder. The Company shall publicly announce the results of the Offer on or
as soon as practicable after the Purchase Date.
SECTION 1018. Provision of Financial Information.
Whether or not the Company is subject to the reporting requirements of
Section 13(a) or 15(d) of the Exchange Act, the Company shall file with the
Commission the annual reports, quarterly reports and other documents that the
Company would have been required to file with the Commission pursuant to Section
13(a) or 15(d) if the Company were subject to such Section and will also provide
to all Holders and file with the Trustee copies of such reports.
SECTION 1019. Unrestricted Subsidiaries.
The Company may at any time designate any Person that after the date of
this Indenture becomes a Subsidiary of the Company as an "Unrestricted
Subsidiary," whereupon (and until such Person ceases to be an Unrestricted
Subsidiary) such Person and each other Person that is then or thereafter becomes
a Subsidiary of such Person will be deemed to be an Unrestricted Subsidiary. In
addition, the Company may at any time terminate the status of any Subsidiary of
the Company as an Unrestricted Subsidiary, whereupon such Subsidiary and each
other Subsidiary of the Company (if any) of which such Subsidiary is a
Subsidiary will cease to be an Unrestricted Subsidiary.
Notwithstanding the foregoing, no change in the status of a Subsidiary
of the Company from a Restricted Subsidiary to an Unrestricted Subsidiary or an
Unrestricted Subsidiary to a Restricted Subsidiary (other than the change in
status of a Non-Core Asset from a Restricted Subsidiary holding only Non-Core
Assets to an Unrestricted Subsidiary) will be effective, unless (i) the Company
would, at the time of such designation and after giving pro forma effect thereto
as if such designation had occurred at the beginning of the most recently ended
four full fiscal quarter period for which internal financial statements are
available immediately preceding the date of such designation, have been
permitted to Incur at least $1.00 of additional Debt pursuant to the
Consolidated EBITDA Coverage Ratio test set forth in the first paragraph of
Section 1008; (ii) in the case of any change in status of such a Subsidiary from
a Restricted Subsidiary to an Unrestricted Subsidiary (other than pursuant to
Clause (vi) of the second paragraph of Section 1010), the fair market value of
all assets of such Restricted Subsidiary prior to such change will be deemed a
Restricted Payment for purposes of calculating the aggregate amount of
Restricted Payments pursuant to the
-81-
<PAGE>
provisions of Clause (3) of the first paragraph of Section 1010, and the
Incurrence of such Restricted Payment at such time would be permitted by
Section 1010 and (iii) such change would not otherwise result (after the
giving of notice or the lapse of time, or both) in an Event of Default. In
addition and notwithstanding the foregoing, no change in the status of a
Subsidiary of the Company from a Restricted Subsidiary to an Unrestricted
Subsidiary shall be effective if, and the status of any Subsidiary of the
Company as an Unrestricted Subsidiary will be deemed to have been immediately
terminated (with the effect described in the immediately preceding sentence) at
any time when, (i) such Subsidiary (A) has outstanding Debt that is Unpermitted
Debt or (B) owns or holds any Capital Stock of or other ownership interests in,
or a Lien on any property or other assets of, the Company or any of its
Restricted Subsidiaries, (ii) the Company or any Restricted Subsidiary (A)
provides credit support for, or a Guaranty of, any Debt of such Subsidiary
(including any undertaking, agreement or instrument evidencing such Debt) or (B)
is directly or indirectly liable for any Debt of such Subsidiary or (iii) if and
only if such Subsidiary does business under the name "Quest" or "Quest
Diagnostics", such Subsidiary fails to notify in writing the holders of its Debt
that such Debt is without recourse to the property and assets of the Company and
its Restricted Subsidiaries. Any such termination otherwise prohibited by the
restrictions described in the first sentence of this paragraph will be deemed to
constitute a default in the performance of this Section. "Unpermitted Debt"
means any Debt of a Subsidiary of the Company if (x) a default thereunder (or
under any instrument or agreement pursuant to or by which such Debt is issued,
secured or evidenced), or any right that the holders thereof may have to take
enforcement action against such Subsidiary or its property or other assets,
would permit (whether or not after the giving of notice or the lapse of time or
both) the holders of any Debt of the Company or any Restricted Subsidiary to
declare the same due and payable prior to the date on which it otherwise would
have become due and payable or otherwise to take any enforcement action against
the Company or any such Restricted Subsidiary or (y) such Debt is secured by a
Lien on any property or other assets of the Company and any of its Restricted
Subsidiaries.
SECTION 1020. Statement by Officers as to Default; Compliance Certificates.
(a) The Company and the Subsidiary Guarantors will deliver to the
Trustee, within 90 days after the end of their respective fiscal years, an
Officers' Certificate (one of the signers of which shall be the principal
executive officer, principal financial officer or principal accounting officer),
stating whether or not to the best knowledge of the signers thereof the Company
or such Subsidiary Guarantor, as the case may be, has fulfilled all its
obligations hereunder, is in default in the performance and observance of any of
the terms, provisions and conditions of Section 801 or 802 or Sections 1004 to
1019, inclusive, and if the Company or any Subsidiary Guarantor, as the case may
be, shall be in default, specifying all such defaults and the nature and status
thereof of which they may have knowledge. For purposes of this Section 1020,
such compliance or default shall be determined without regard to any period of
grace or requirement of notice provided under this Indenture.
(b) The Company and each Subsidiary Guarantor shall deliver to the
Trustee, promptly and in any event within 10 days after the Company or such
Subsidiary Guarantor becomes aware or should reasonably become aware of the
occurrence of an Event of Default
-82-
<PAGE>
or an event which, with notice or the lapse of time or both, would constitute
an Event of Default, an Officers' Certificate setting forth the details of such
Event of Default or default, and the action which the Company or such
Subsidiary Guarantor proposes to take with respect thereto.
SECTION 1021. Waiver of Certain Covenants.
The Company or any Subsidiary Guarantor may omit in any particular
instance to comply with any covenant or condition set forth in Section 801,
Section 802, Sections 1004 to 1013, inclusive, and Sections 1015, 1016, 1018 and
1019 if before the time for such compliance the Holders of at least a majority
in principal amount of the Outstanding Securities shall, by Act of such Holders,
either waive such compliance in such instance or generally waive compliance with
such covenant or condition, but no such waiver shall extend to or affect such
covenant or condition except to the extent so expressly waived, and, until such
waiver shall become effective, the obligations of the Company and the duties of
the Trustee in respect of any such covenant or condition shall remain in full
force and effect.
ARTICLE ELEVEN
Redemption of Securities
SECTION 1101. Right of Redemption.
(a) The Securities may be redeemed at the election of the Company on or
prior to June 30, 1997, as a whole and not in part, if as a result of an event
outside the control of Corning, the Company and Covance, the Spin-Off
Distributions do not occur prior to March 31, 1997, at a Redemption Price equal
to 101% of the principal amount of the Securities plus accrued interest to but
excluding the Redemption Date (subject to the right of Holders of record on the
relevant Regular Record Date to receive interest due on an Interest Payment Date
that is on or prior to the Redemption Date).
(b) The Securities also may be redeemed at the election of the Company,
as a whole or from time to time in part, at any time on or after December 15,
2001, at the Redemption Prices specified in the form of Security hereinbefore
set forth plus accrued interest to but excluding the Redemption Date (subject to
the right of Holders of record on the relevant Regular Record Date to receive
interest due on an Interest Payment Date that is on or prior to the Redemption
Date).
SECTION 1102. Applicability of Article.
Redemption of Securities at the election of the Company, as permitted
by any provision of this Indenture, shall be made in accordance with such
provision and this Article.
-83-
<PAGE>
SECTION 1103. Election to Redeem; Notice to Trustee.
The election of the Company to redeem any Securities pursuant to
Section 1101 shall be evidenced by a Board Resolution. In case of any redemption
at the election of the Company of less than all the Securities, the Company
shall, at least 60 days prior to the Redemption Date fixed by the Company
(unless a shorter notice shall be satisfactory to the Trustee), notify the
Trustee of such Redemption Date and of the principal amount of Securities to be
redeemed. In the case of a redemption pursuant to Section 1101(a), the Company
shall furnish to the Trustee an Officers' Certificate that all conditions
precedent for such redemption have been complied with.
SECTION 1104. Selection by Trustee of Securities to Be Redeemed.
If less than all the Securities are to be redeemed, the particular
Securities to be redeemed shall be selected not more than 60 days prior to the
Redemption Date by the Trustee, from the Outstanding Securities not previously
called for redemption, by lot or by such method as the Trustee shall deem fair
and appropriate and which may provide for the selection for redemption of
portions (equal to $1,000 or any integral multiple thereof) of the principal
amount of Securities of a denomination larger than $1,000.
The Trustee shall promptly notify the Company and each Security
Registrar in writing of the Securities selected for redemption and, in the case
of any Securities selected for partial redemption, the principal amount thereof
to be redeemed.
For all purposes of this Indenture, unless the context otherwise
requires, all provisions relating to the redemption of Securities shall relate,
in the case of any Securities redeemed or to be redeemed only in part, to the
portion of the principal amount of such Securities which has been or is to be
redeemed.
SECTION 1105. Notice of Redemption.
Notice of redemption shall be given by first-class mail, postage
prepaid, mailed not less than 30 nor more than 60 days (or, in the case of
redemption pursuant to Section 1101(a), not less than 15 or more than 30 days)
prior to the Redemption Date, to each Holder of Securities to be redeemed, at
his address appearing in the Security Register and, in the case of a redemption
pursuant to Section 1101(a) by publication.
All notices of redemption shall state:
(1) the Redemption Date,
(2) the Redemption Price,
-84-
<PAGE>
(3) if less than all the Outstanding Securities are to be
redeemed, the identification (and, in the case of partial redemption,
the principal amounts) of the particular Securities to be redeemed,
(4) that on the Redemption Date the Redemption Price will
become due and payable upon each such Security to be redeemed and that
interest thereon will cease to accrue on and after said date,
(5) whether the redemption is being made pursuant to Section
1101(a) or Section 1101(b), and if being made pursuant to Section
1101(a), a brief explanation of the basis therefor.
(6) the place or places where such Securities are to be
surrendered for payment of the Redemption Price, and
(7) in case any Security is to be redeemed in part only, the
notice which relates to such Security shall state that on and after the
Redemption Date, upon surrender of such Security, the holder will
receive, without charge, a new Security or Securities of authorized
denominations for the principal amount thereof remaining unredeemed.
Notice of redemption of Securities to be redeemed at the election of
the Company shall be given by the Company or, at the Company's request, by the
Trustee in the name and at the expense of the Company. All notices of redemption
shall be irrevocable.
SECTION 1106. Deposit of Redemption Price.
Prior to any Redemption Date, the Company shall deposit with the
Trustee or with a Paying Agent (or, if the Company is acting as its own Paying
Agent, segregate and hold in trust as provided in Section 1003) an amount of
money sufficient to pay the Redemption Price of, and (except if the Redemption
Date shall be an Interest Payment Date) accrued interest on, all the Securities
which are to be redeemed on that date.
SECTION 1107. Securities Payable on Redemption Date.
Notice of redemption having been given as aforesaid, the Securities so
to be redeemed shall, on the Redemption Date, become due and payable at the
Redemption Price therein specified, and from and after such date (unless the
Company shall default in the payment of the Redemption Price and accrued
interest) such Securities shall cease to bear interest. Upon surrender of any
such Security for redemption in accordance with said notice, such Security shall
be paid by the Company at the Redemption Price, together with accrued interest
to the Redemption Date; provided, however, that installments of interest whose
Stated Maturity is on or prior to the Redemption Date shall be payable to the
Holders of such Securities, or one or more Predecessor Securities, registered as
such at the close of business on the relevant Record Dates according to their
terms and the provisions of Section 307.
-85-
<PAGE>
If any Security called for redemption shall not be so paid upon
surrender thereof for redemption, the principal (and premium, if any) shall,
until paid, bear interest from the Redemption Date at the rate provided by the
Security.
SECTION 1108. Securities Redeemed in Part.
Any Security which is to be redeemed only in part shall be surrendered
at an office or agency of the Company designated for that purpose pursuant to
Section 1002 (with, if the Company or the Trustee so requires, due endorsement
by, or a written instrument of transfer in form satisfactory to the Company and
the Trustee duly executed by, the Holder thereof or his attorney duly authorized
in writing), and the Company shall execute the Security, and the Subsidiary
Guarantors shall execute their Subsidiary Guarantees to be endorsed thereon, and
the Trustee shall authenticate and deliver to the Holder of such Security
without service charge, a new Security or Securities, of any authorized
denomination as requested by such Holder, in aggregate principal amount equal to
and in exchange for the unredeemed portion of the principal of the Security so
surrendered.
ARTICLE TWELVE
Subordination of Securities
SECTION 1201. Securities Subordinate to Senior Debt.
The Company covenants and agrees, and each Holder of a
Security, by his acceptance thereof, likewise covenants and agrees, that, to the
extent and in the manner hereinafter set forth in this Article (subject to the
provisions of Article Four and Article Fifteen), the payment of the principal of
(and premium, if any) and interest on each and all of the Securities are hereby
expressly made subordinate and subject in right of payment to the prior payment
in full of all Senior Debt.
SECTION 1202. Payment Over of Proceeds Upon Dissolution, Etc.
In the event of (a) any insolvency or bankruptcy case or
proceeding, or any receivership, liquidation, reorganization or other similar
case or proceeding in connection therewith, relative to the Company or to its
creditors, as such, or to its assets, or (b) any liquidation, dissolution or
other winding up of the Company, whether voluntary or involuntary and whether or
not involving insolvency or bankruptcy, or (c) any assignment for the benefit of
creditors or any other marshalling of assets and liabilities of the Company,
then and in any such event specified in (a), (b) or (c) above (each such event,
if any, herein sometimes referred to as a "Proceeding") the holders of Senior
Debt shall be entitled to receive payment in full of all amounts due or to
become due on or in respect of all Senior Debt, or provision shall be made for
such payment in cash or cash equivalents or any other manner acceptable to the
holders of such Senior Debt, before the Holders of the Securities are entitled
to receive any payment or distribution of any kind or character, whether in
cash,
-86-
<PAGE>
property or securities (including any payment or distribution which may be
payable or deliverable by reason of the payment of any other Debt of the
Company subordinated to the payment of the Securities, such payment or
distribution being hereinafter referred to as a "Junior Subordinated Payment"
but excluding any payment or distribution of stock or securities of the Company
provided for by a plan of reorganization or readjustment authorized by an order
or decree of a court of competent jurisdiction in a reorganization proceeding
under any applicable bankruptcy law or of any other corporation provided for by
such plan of reorganization or readjustment which stock or securities are
subordinated in right of payment to all then outstanding Senior Debt to
substantially the same extent as the Securities are so subordinated as provided
in this Article), on account of principal of (or premium, if any) or interest on
the Securities or on account of any purchase or redemption or other acquisition
of Securities by the Company or any Subsidiary of the Company (all such
payments, distributions, purchases, redemptions and acquisitions herein referred
to, individually and collectively, as a "Securities Payment"), and to that end
the holders of Senior Debt shall be entitled to receive, for application to the
payment thereof, any Securities Payment which may be payable or deliverable in
respect of the Securities in any such Proceeding.
Any Securities Payments to which the Trustee or the Holders would be
entitled but for the provisions of this Article shall be paid by the liquidating
trustee or agent or other Person making such Securities Payment, whether a
trustee in bankruptcy, a receiver or otherwise, directly to the holders of
Senior Debt or their representative or representatives or to any trustee or
agent under any indenture or other agreement evidencing or governing any such
Senior Debt, ratably according to the aggregate amounts remaining unpaid on
account of the Senior Debt held or represented by each of them, to the extent
necessary to make payment in full of all Senior Debt remaining unpaid, after
giving effect to any concurrent payment or distribution to the holders of such
Senior Debt. As used in this Article, the phrase "payment in full" (or any
similar phrase), when used to refer to the payment of Senior Debt, shall mean
payment in full of the aggregate amount of such Senior Debt in cash or cash
equivalents or any other manner acceptable to the holders of such Senior Debt.
In the event that, notwithstanding the foregoing provisions of this
Section, the Trustee or the Holder of any Security shall have received any
Securities Payment before all Senior Debt is paid in full or payment thereof
provided for in cash or cash equivalents or any other manner acceptable to the
holders of such Senior Debt, then and in such event such Securities Payment
shall be paid over or delivered forthwith to the trustee in bankruptcy,
receiver, liquidating trustee, custodian, assignee, agent or other Person making
payment or distribution of assets of the Company for application to the payment
of all Senior Debt remaining unpaid, to the extent necessary to pay all Senior
Debt in full, after giving effect to any concurrent payment or distribution to
or for the holders of Senior Debt; provided that any portion of any such
Securities Payment allocable to Senior Debt in respect of the Credit Facility
shall be paid over or delivered forthwith directly to the Administrative Agent
under the Credit Facility.
The consolidation of the Company with, or the merger of the Company
into, another Person or the liquidation or dissolution of the Company following
the conveyance or transfer of all or substantially all of its properties and
assets as an entirety to another Person
-87-
<PAGE>
upon the terms and conditions set forth in Article Eight shall not be deemed a
Proceeding for the purposes of this Section if the Person formed by such
consolidation or into which the Company is merged or the Person which acquires
by conveyance or transfer such properties and assets as an entirety, as the
case may be, shall, as a part of such consolidation, merger, conveyance or
transfer, comply with the conditions set forth in Article Eight.
SECTION 1203. No Payment When Senior Debt in Default.
In the event that any Senior Payment Default (as defined below) shall
have occurred and be continuing, then no Securities Payment shall be made unless
and until such Senior Payment Default shall have been cured or waived or shall
have ceased to exist or all amounts then due and payable in respect of Senior
Debt shall have been paid in full, or provision shall have been made for such
payment in cash or cash equivalents or any other manner acceptable to the
holders of the Senior Debt. "Senior Payment Default" means any default in the
payment of principal of (or premium, if any) or interest on or in respect of any
Senior Debt when due, whether at the stated maturity of any such payment or by
declaration of acceleration, call for redemption or otherwise, including any
default in the payment of a reimbursement obligation with respect to a letter of
credit when due.
In the event that any Senior Nonmonetary Default (as defined below)
shall have occurred and be continuing, then, upon the receipt by the Company and
the Trustee of written notice of such Senior Nonmonetary Default and electing to
invoke the provisions of this paragraph from the Administrative Agent under the
Credit Facility (or if the Credit Facility has been terminated, from any holder
of Senior Debt with a principal amount in excess of $15 million), no Securities
Payment shall be made during the period (the "Payment Blockage Period")
commencing on the date of such receipt of such written notice and ending on the
earlier of (i) the date on which the Senior Debt to which such Senior
Nonmonetary Default relates shall have been discharged or such Senior
Nonmonetary Default shall have been waived or otherwise cured and (ii) the 179th
day after the date of such receipt of such written notice. No more than one
Payment Blockage Period may be commenced with respect to the Securities during
any 360-day period and there shall be a period of at least 181 consecutive days
in each 360-day period when no Payment Blockage Period is in effect. For all
purposes of this paragraph, no Senior Nonmonetary Default that existed or was
continuing on the date of commencement of any Payment Blockage Period shall be,
or be made, the basis for the commencement of a subsequent Payment Blockage
Period by holders of Senior Debt or their representatives unless such Senior
Nonmonetary Default shall have been cured or waived for a period of not less
than 90 consecutive days. The limitations on Payment Blockage Periods set forth
in this paragraph shall not be construed to limit or affect the provisions of
the preceding paragraph. "Senior Nonmonetary Default" means the occurrence or
existence and continuance of any default with respect to any Senior Debt, other
than a Senior Payment Default, permitting after notice or lapse of time (or
both) the holders of such Senior Debt (or a trustee or other agent on behalf of
the holders thereof) to declare such Senior Debt due and payable prior to the
date on which it would otherwise become due and payable.
In the event that, notwithstanding the foregoing, any Securities
Payment is made to the Trustee or any Holder prohibited by the foregoing
provisions of this Section, then
-88-
<PAGE>
and in such event such Securities Payment shall be paid over and delivered
forthwith to the Company; provided that any portion of any such Securities
Payment allocable to Senior Debt in respect of the Credit Facility shall be
paid over or delivered forthwith directly to the Administrative Agent under the
Credit Facility.
The provisions of this Section shall not apply to any Securities
Payment with respect to which Section 1202 would be applicable.
SECTION 1204. Payment Permitted If No Default.
Nothing contained in this Article or elsewhere in this Indenture or in
any of the Securities shall prevent (a) the Company, at any time except during
the pendency of any Proceeding referred to in Section 1202 or under the
conditions described in Section 1203, from making Securities Payments, or (b)
the application by the Trustee of any money deposited with it hereunder to
Securities Payments, if, at the time of such application by the Trustee, it did
not have knowledge that such Securities Payment would have been prohibited by
the provisions of this Article; provided that clause (b) of the foregoing shall
not be construed to permit the Holders to retain any Securities Payment received
by such Holders to the extent such Holders would not be permitted to retain such
Securities Payment by reason of any other provisions of this Article.
SECTION 1205. Subrogation to Rights of Holders of Senior Debt.
Subject to the payment in full of all amounts due or to become due on
or in respect of Senior Debt, or the provision for such payment in cash or cash
equivalents or any other manner acceptable to the holders of the Senior Debt,
the Holders of the Securities shall be subrogated to the rights of the holders
of such Senior Debt to receive payments and distributions of cash, property and
securities applicable to the Senior Debt until the principal of (and premium, if
any) and interest on the Securities shall be paid in full. For purposes of such
subrogation, no payments or distributions to the holders of the Senior Debt of
any cash, property or securities to which the Holders of the Securities or the
Trustee would be entitled except for the provisions of this Article, and no
payments over pursuant to the provisions of this Article to the holders of
Senior Debt by Holders of the Securities or the Trustee, shall, as among the
Company, its creditors other than holders of Senior Debt and the Holders of the
Securities, be deemed to be a payment or distribution by the Company to or on
account of the Senior Debt.
SECTION 1206. Provisions Solely to Define Relative Rights.
The provisions of this Article are and are intended solely for the
purpose of defining the relative rights of the Holders on the one hand and the
holders of Senior Debt on the other hand. Nothing contained in this Article or
elsewhere in this Indenture or in the Securities is intended to or shall (a)
impair, as among the Company, its creditors other than holders of Senior Debt
and the Holders of the Securities, the obligation of the Company,
-89-
<PAGE>
which is absolute and unconditional (and which, subject to the rights under
this Article of the holders of Senior Debt, is intended to rank equally with
all other general obligations of the Company), to pay to the Holders of the
Securities the principal of (and premium, if any) and interest on the
Securities as and when the same shall become due and payable in accordance with
their terms; or (b) affect the relative rights against the Company of the
Holders of the Securities and creditors of the Company other than the holders
of Senior Debt; or (c) prevent the Trustee or the Holder of any Security from
exercising all remedies otherwise permitted by applicable law upon default
under this Indenture, subject to the rights, if any, under this Article of the
holders of Senior Debt to receive cash, property and securities otherwise
payable or deliverable to the Trustee or such Holder or to prohibit Securities
Payments under the circumstances set forth in Section 1203.
SECTION 1207. Trustee to Effectuate Subordination.
Each Holder of a Security by his acceptance thereof authorizes and
directs the Trustee on his behalf to take such action as may be necessary or
appropriate to effectuate the subordination provided in this Article and
appoints the Trustee his attorney-in-fact for any and all such purposes,
including, in the event of any Proceeding, the timely filing of a claim for
the unpaid balance of the indebtedness owing to such Holder in respect of any
Securities, in the form required in such Proceeding, and causing such claim to
be approved or allowed in such Proceeding. If after a written request by the
Administrative Agent under the Credit Facility the Trustee does not file a
proper claim in any Proceeding at least ninety days before the expiration of the
time allowed in such Proceeding to file such claim, then the Administrative
Agent under the Credit Facility will be authorized (but shall not have any
obligation) to do so for and on behalf of the Holders.
SECTION 1208. No Waiver of Subordination Provisions.
No right of any present or future holder of any Senior Debt to enforce
subordination as herein provided shall at any time in any way be prejudiced or
impaired by any act or failure to act on the part of the Company or by any act
or failure to act, in good faith, by any such holder, or by any noncompliance by
the Company with the terms, provisions and covenants of this Indenture,
regardless of any knowledge thereof any such holder may have or be otherwise
charged with.
Without in any way limiting the generality of the foregoing paragraph,
the holders of Senior Debt may, at any time and from time to time, without the
consent of or notice to the Trustee or the Holders of the Securities, without
incurring responsibility to the Holders of the Securities and without impairing
or releasing the subordination provided in this Article or the obligations
hereunder of the Holders of the Securities to the holders of Senior Debt, do any
one or more of the following: (i) change the manner, place or terms of payment
or extend the time of payment of, or renew or alter, Senior Debt, or otherwise
amend or supplement in any manner Senior Debt or any instrument evidencing the
same or any agreement under which Senior Debt is outstanding; (ii) sell,
exchange, release or otherwise deal with any property pledged, mortgaged or
otherwise securing Senior Debt;
-90-
<PAGE>
(iii) release any Person liable in any manner
for the collection or payment of Senior Debt; and (iv) exercise or refrain from
exercising any rights against the Company and any other Person.
SECTION 1209. Notice to Trustee.
The Company shall give prompt written notice to the Trustee of any fact
known to the Company which would prohibit the making of any payment to or by the
Trustee in respect of the Securities. Notwithstanding the provisions of this
Article or any other provision of this Indenture, the Trustee shall not be
charged with knowledge of the existence of any facts which would prohibit the
making of any payment to or by the Trustee in respect of the Securities, unless
and until the Trustee shall have received written notice thereof from the
Company or a holder of Senior Debt or from any trustee or agent therefor; and,
prior to the receipt of any such written notice, the Trustee, subject to the
provisions of Section 601, shall be entitled in all respects to assume that no
such facts exist; provided, however, that if the Trustee shall not have received
the notice provided for in this Section at least 2 Business Days prior to the
date upon which by the terms hereof any money may become payable for any purpose
(including, without limitation, the payment of the principal of (and premium, if
any) or interest on any Security), then, anything herein contained to the
contrary notwith- standing, the Trustee shall have full power and authority to
receive such money and to apply the same to the purpose for which such money was
received and shall not be affected by any notice to the contrary which may be
received by it within 2 Business Days prior to such date.
Subject to the provisions of Section 601, the Trustee shall be entitled
to rely on the delivery to it of a written notice by a Person representing
himself to be a holder of Senior Debt (or a trustee or agent therefor) to
establish that such notice has been given by a holder of Senior Debt (or a
trustee or agent therefor). In the event that the Trustee determines in good
faith that further evidence is required with respect to the right of any Person
as a holder of Senior Debt to participate in any payment or distribution
pursuant to this Article, the Trustee may request such Person to furnish
evidence to the reasonable satisfaction of the Trustee as to the amount of
Senior Debt held by such Person, the extent to which such Person is entitled to
participate in such payment or distribution and any other facts pertinent to the
rights of such Person under this Article, and if such evidence is not furnished,
the Trustee may defer any payment to such Person pending judicial determination
as to the right of such Person to receive such payment. A certificate of the
Administrative Agent delivered to the Trustee shall be sufficient evidence with
respect to the amount of Senior Debt under the Credit Facility.
SECTION 1210. Reliance on Judicial Order or Certificate of Liquidating Agent.
Upon any payment or distribution of assets of the Company referred to
in this Article, the Trustee, subject to the provisions of Section 601, and the
Holders of the Securities shall be entitled to rely upon any order or decree
entered by any court of competent jurisdiction in which such Proceeding is
pending, or a certificate of the trustee in bankruptcy, receiver, liquidating
trustee, custodian, assignee for the benefit of creditors, agent or other Person
making such payment or distribution, delivered to the Trustee or to the Holders
of
-91-
<PAGE>
Securities, for the purpose of ascertaining the Persons entitled to
participate in such payment or distribution, the holders of the Senior Debt and
other indebtedness of the Company, the amount thereof or payable thereon, the
amount or amounts paid or distributed thereon and all other facts pertinent
thereto or to this Article.
SECTION 1211. Trustee Not Fiduciary for Holders of Senior Debt.
The Trustee shall not be deemed to owe any fiduciary duty to the
holders of Senior Debt and shall not be liable to any such holders if it shall
in good faith (and absent gross negligence) mistakenly pay over or distribute to
Holders of Securities or to the Company or to any other Person cash, property or
securities to which any holders of Senior Debt shall be entitled by virtue of
this Article or otherwise. With respect to the holders of Senior Debt, the
Trustee undertakes to perform or to observe only such of its covenants or
obligations as are specifically set forth in this Article Twelve and no implied
covenants or obligations with respect to holders of Senior Debt shall be read
into this Indenture against the Trustee.
SECTION 1212. Rights of Trustee as Holder of Senior Debt; Preservation of
Trustee's Rights.
The Trustee in its individual capacity shall be entitled to all the
rights set forth in this Article with respect to any Senior Debt which may at
any time be held by it, to the same extent as any other holder of Senior Debt,
and nothing in this Indenture shall deprive the Trustee of any of its rights as
such holder.
Nothing in this Article shall apply to claims of, or payments to, the
Trustee under or pursuant to Section 607.
SECTION 1213. Article Applicable to Paying Agents.
In case at any time any Paying Agent other than the Trustee shall have
been appointed by the Company and be then acting hereunder, the term "Trustee"
as used in this Article shall in such case (unless the context otherwise
requires) be construed as extending to and including such Paying Agent within
its meaning as fully for all intents and purposes as if such Paying Agent were
named in this Article in addition to or in place of the Trustee; provided,
however, that Section 1212 shall not apply to the Company, any Subsidiary
Guarantor or any Affiliate of the Company or any Subsidiary Guarantor if it,
such Subsidiary Guarantor or such Affiliate acts as Paying Agent.
SECTION 1214. Defeasance of this Article Twelve.
The subordination of the Securities provided by this Article Twelve is
expressly made subject to the provisions for defeasance or covenant defeasance
in Article
-92-
<PAGE>
Fifteen hereof and, anything herein to the contrary notwithstanding,
upon the effectiveness of any such defeasance or covenant defeasance that is
consummated at a time when a Securities Payment would not be prohibited by
Section 1202 or 1203, the Securities then outstanding shall thereupon cease to
be subordinated pursuant to this Article Twelve.
SECTION 1215. Reinstatement.
The provisions of this Article shall continue to be effective or be
reinstated, as the case may be, if at any time any payment of Senior Debt is
rescinded or must otherwise be returned by any holder of Senior Debt upon the
insolvency, bankruptcy or reorganization of the Company or otherwise, all as
though such payment had not been made.
ARTICLE THIRTEEN
Subsidiary Guarantee
SECTION 1301. Subsidiary Guarantee.
Each Subsidiary Guarantor hereby, jointly and severally, fully and
unconditionally guarantees to each Holder of a Security authenticated and
delivered by the Trustee, and to the Trustee on behalf of such Holder, the due
and punctual payment of the principal of (and premium, if any) and interest on
such Security when and as the same shall become due and payable, whether at the
Stated Maturity, by acceleration, call for redemption, Offer to Purchase or
otherwise, in accordance with the terms of such Security and of this Indenture.
In case of the failure of the Company punctually to make any such payment, each
Subsidiary Guarantor hereby, jointly and severally, agrees to cause such payment
to be made punctually when and as the same shall become due and payable, whether
at the Stated Maturity or by acceleration, call for redemption, Offer to
Purchase or otherwise, and as if such payment were made by the Company.
Each of the Subsidiary Guarantors hereby jointly and severally agrees
that its obligations hereunder shall be absolute unconditional, irrespective of,
and shall be unaffected by, the validity, regularity or enforceability of such
Security or this Indenture, the absence of any action to enforce the same or any
release, amendment, waiver or indulgence granted to the Company or any guarantor
or any consent to departure from any requirement of any other guarantee of all
or any of the Securities or any other circumstances which might otherwise
constitute a legal or equitable discharge or defense of a surety or guarantor.
Each of the Subsidiary Guarantors hereby waives the benefits of diligence,
presentment, demand for payment, any requirement that the Trustee or any of the
Holders protect, secure, perfect or insure any security interest in or other
Lien on any property subject thereto or exhaust any right or take any action
against the Company or any other Person or any collateral, filing of claims with
a court in the event of insolvency or bankruptcy of the Company, any right to
require a proceeding first against the Company, protest or notice with respect
to such Security or the indebtedness evidenced thereby and all demands
whatsoever, and covenants that this Subsidiary Guarantee will not be discharged
in respect of such Security except by complete performance of the obligations
contained in such Security and in such Subsidiary Guarantee.
-93-
<PAGE>
Each Subsidiary Guarantor agrees that if, after the occurrence and during the
continuance of an Event of Default, the Trustee or any of the Holders are
prevented by applicable law from exercising their respective rights to
accelerate the maturity of the Securities, to collect interest on the
Securities, or to enforce or exercise any other right or remedy with respect to
the Securities, such Subsidiary Guarantor agrees to pay to the Trustee for the
account of the Holders, upon demand therefor, the amount that would otherwise
have been due and payable had such rights and remedies been permitted to be
exercised by the Trustee or any of the Holders.
The indebtedness evidenced by the Subsidiary Guarantees is, to the
extent provided in this Indenture, subordinate and subject in right of payment
to the prior payment in full of all Senior Guarantees of each Subsidiary
Guarantor, and the Subsidiary Guarantees are issued subject to the provisions of
this Indenture with respect thereto. Each Holder of such Security,
by accepting the same, will be deemed to have (a) agreed to and be bound by such
provisions, (b) authorized and directed the Trustee on his behalf to take such
action as may be necessary or appropriate to effectuate the subordination so
provided and (c) appointed the Trustee his attorney-in-fact for any and all such
purposes.
Each Subsidiary Guarantor shall be subrogated to all rights of the
Holders of the Securities upon which its Guarantee is endorsed against the
Company in respect of any amounts paid by such Subsidiary Guarantor on account
of such Security pursuant to the provisions of its Subsidiary Guarantee or this
Indenture; provided, however, that no Subsidiary Guarantor shall be entitled to
enforce or to receive any payments arising out of, or based upon, such right of
subrogation until the principal of (and premium, if any) and interest on all
Securities issued hereunder shall have been paid in full.
Each Subsidiary Guarantor that makes or is required to make any payment
in respect of its Subsidiary Guarantee shall be entitled to seek contribution
from the other Subsidiary Guarantors to the extent permitted by applicable law;
provided, however, that no Subsidiary Guarantor shall be entitled to enforce or
receive any payments arising out of, or based upon, such right of contribution
until the principal of (premium, if any) and interest on all Securitiesissued
hereunder shall have been paid in full.
Each Subsidiary Guarantee shall remain in full force and effect and
continue to be effective should any petition be filed by or against the Company
for liquidation or reorganization, should the Company become insolvent or make
an assignment for the benefit of creditors or should a receiver or trustee be
appointed for all or any part of the Company's assets, and shall, to the fullest
extent permitted by law, continue to be effective or be reinstated, as the case
may be, if at any time payment and performance of the Securities, is, pursuant
to applicable law, rescinded or reduced in amount, or must otherwise be restored
or returned by any Holder of the Securities, whether as a "voidable preference,"
"fraudulent transfer," or otherwise, all as though such payment or performance
had not been made. In the event that any payment, or any part thereof, is
rescinded, reduced, restored or returned, the Securities shall, to the fullest
extent permitted by law, be reinstated and deemed reduced only by such amount
paid and not so rescinded, reduced, restored or returned.
-94-
<PAGE>
SECTION 1302. Execution and Delivery of Subsidiary Guarantees.
The Subsidiary Guarantees to be endorsed on the Securities shall
include the terms of the Subsidiary Guarantee set forth in Section 1301 and any
other terms that may be set forth in the form established pursuant to Section
205. Each of the Subsidiary Guarantors hereby agrees to execute its Subsidiary
Guarantee, in a form established pursuant to Section 205, to be endorsed on each
Security authenticated and delivered by the Trustee.
The Subsidiary Guarantee shall be executed on behalf of each respective
Subsidiary Guarantor by any one of such Subsidiary Guarantor's Chairman of the
Board, Vice Chairman of the Board, President, Vice Presidents or other person
duly authorized by the Board of Directors of such Subsidiary Guarantor, attested
by its Secretary or Assistant Secretary. The signature of any or all of these
persons on the Subsidiary Guarantee may be manual or facsimile.
A Subsidiary Guarantee bearing the manual or facsimile signature of
individuals who were at any time the proper officers of a Subsidiary Guarantor
shall bind such Subsidiary Guarantor, notwithstanding that such individuals or
any of them have ceased to hold such offices prior to the authentication and
delivery of the Security on which such Subsidiary Guarantee is endorsed or did
not hold such offices at the date of such Subsidiary Guarantee.
The delivery of any Security by the Trustee, after the authentication
thereof hereunder, shall constitute due delivery of the Subsidiary Guarantee
endorsed thereon on behalf of the Subsidiary Guarantors and shall bind each
Subsidiary Guarantor notwithstanding the fact that Subsidiary Guarantee does not
bear the signature of such Subsidiary Guarantor. Each of the Subsidiary
Guarantors hereby jointly and severally agrees that its Subsidiary Guarantee set
forth in Section 1301 and in the form of Subsidiary Guarantee established
pursuant to Section 205 shall remain in full force and effect notwithstanding
any failure to endorse a Subsidiary Guarantee on any Security.
SECTION 1303. Release of Subsidiary Guarantors.
Each Subsidiary Guarantee will remain in effect with respect to the
respective Subsidiary Guarantor until the entire principal of, premium, if any,
and interest on the Securities shall have been paid in full or otherwise
discharged in accordance with the provisions of the Securities and this
Indenture; provided, however, that if (i) such Subsidiary Guarantor ceases to be
a Restricted Subsidiary in compliance with the applicable provisions of this
Indenture, (ii) such Subsidiary Guarantor ceases to guarantee any amounts under
the Credit Facility and the Trustee receives a certificate from the
Administrative Agent under the Credit Facility to such effect, (iii) the
Securities are defeased and discharged pursuant to Section 1502 or (iv) all or
substantially all of the assets of such Subsidiary Guarantor or all of the
Capital Stock of such Subsidiary Guarantor is sold (including by issuance,
merger, consolidation or otherwise) by the Company or any Restricted Subsidiary
in a transaction constituting an Asset Disposition and in which the Net
Available Proceeds from such Assets Disposition are applied in accordance with
requirements of Section 1014, then, in each case of (i), (ii), (iii) or (iv),
upon delivery by the Company of an Officers' Certificate
-95-
<PAGE>
and an Opinion of Counsel stating that all conditions precedent herein provided
for relating to the release of such Subsidiary Guarantor from its obligations
under its Subsidiary Guarantee and this Article Thirteen have been complied
with, such Subsidiary Guarantor or the Person acquiring such assets (in the
event of a sale or other disposition of all or substantially all of the assets
or Capital Stock of such Subsidiary Guarantor) shall be released and discharged
of its obligations under its Subsidiary Guarantee and under this Article
Thirteen without any action on the part of the Trustee or any Holder, and the
Trustee shall execute any documents reasonably required in order to acknowledge
the release of such Subsidiary Guarantor from its obligations under its
Subsidiary Guarantee endorsed on the Securities and under this Article Thirteen.
SECTION 1304. Additional Subsidiary Guarantors.
The Company will cause any Subsidiary of the Company that becomes a
Restricted Subsidiary after the date of this Indenture to become a Subsidiary
Guarantor as soon as practicable after such Subsidiary becomes a Restricted
Subsidiary. The Company shall cause any such Restricted Subsidiary to become a
Subsidiary Guarantor with respect to the Securities by executing and delivering
to the Trustee (a) a supplemental indenture, in form and substance satisfactory
to the Trustee, which subjects such Person to the provisions (including the
representations and warranties) of this Indenture as a Subsidiary Guarantor and
(b) an Opinion of Counsel to the effect that such supplemental indenture has
been duly authorized and executed by such Person and such supplemental indenture
and such Person's obligations under its Subsidiary Guarantee and this Indenture
constitute the legal, valid, binding and enforceable obligations of such Person
(subject to such customary exceptions concerning creditors' rights and equitable
principles as may be acceptable to the Trustee in its discretion).
ARTICLE FOURTEEN
Subordination of Subsidiary Guarantees
SECTION 1401. Subsidiary Guarantees Subordinate to Senior Guarantees.
Each Subsidiary Guarantor covenants and agrees, and each
Holder of a Security, by his acceptance thereof, likewise covenants and agrees,
that, to the extent and in the manner hereinafter set forth in this Article
(subject to the provisions of Article Four and Article Fifteen), the payment of
the principal of (and premium, if any) and interest on the Subsidiary Guarantee
of each Subsidiary Guarantor is hereby expressly made subordinate and subject in
right of payment to the prior payment in full of all Senior Guarantees of such
Subsidiary Guarantor.
-96-
<PAGE>
SECTION 1402. Payment Over of Proceeds Upon Dissolution, Etc.
In the event of (a) any insolvency or bankruptcy case or proceeding, or
any receivership, liquidation, reorganization or other similar case or
proceeding in connection therewith, relative to a Subsidiary Guarantor or to its
creditors, as such, or to its assets, or (b) any liquidation, dissolution or
other winding up of a Subsidiary Guarantor, whether voluntary or involuntary and
whether or not involving insolvency or bankruptcy, or (c) any assignment for the
benefit of creditors or any other marshalling of assets and liabilities of a
Subsidiary Guarantor, then and in any such event specified in (a), (b) or (c)
above (each such event, if any, herein sometimes referred to as a "Subsidiary
Guarantor Proceeding") the holders of Senior Guarantees of such Subsidiary
Guarantor shall be entitled to receive payment in full of all amounts due or to
become due on or in respect of such Senior Guarantees, or provision shall be
made for such payment in cash or cash equivalents or any other manner acceptable
to the holders of such Senior Guarantees, before the Holders of the Securities
are entitled to receive any payment or distribution of any kind or character,
whether in cash, property or securities (including any payment or distribution
which may be payable or deliverable by reason of the payment of any other Debt
of such Subsidiary Guarantor subordinated to the payment of the Subsidiary
Guarantee of such Subsidiary Guarantor, but excluding any payment or
distribution of stock or securities of such Subsidiary Guarantor provided for by
a plan of reorganization or readjustment authorized by an order or decree of a
court of competent jurisdiction in a reorganization proceeding under any
applicable bankruptcy law or of any other corporation provided for by such plan
of reorganization or readjustment which stock or securities are subordinated in
right of payment to all then outstanding Senior Guarantees of such Subsidiary
Guarantor to substantially the same extent as the Subsidiary Guarantees are so
subordinated as provided in this Article), on account of the Subsidiary
Guarantee of such Subsidiary Guarantor (all such payments, distributions,
purchases, redemptions and acquisitions herein referred to, individually and
collectively, as a "Subsidiary Guarantor Payment"), and to that end the holders
of Senior Guarantees of such Subsidiary Guarantor shall be entitled to receive,
for application to the payment thereof, any Subsidiary Guarantor Payment which
may be payable or deliverable in respect of the Subsidiary Guarantee of such
Subsidiary Guarantor in any such Subsidiary Guarantor Proceeding.
Any Subsidiary Guarantor Securities Payments to which the Trustee or
the Holders would be entitled but for the provisions of this Article shall be
paid by the liquidating trustee or agent or other Person making such Subsidiary
Guarantor Securities Payment, whether a trustee in bankruptcy, a receiver or
otherwise, directly to the holders of Senior Guarantees of such Subsidiary
Guarantor or their representative or representatives or to any trustee or agent
under any indenture or other agreement evidencing or governing any such Senior
Guarantees, ratably according to the aggregate amounts remaining unpaid on
account of the Senior Guarantees held or represented by each of them, to the
extent necessary to make payment in full of all Senior Guarantees remaining
unpaid, after giving effect to any concurrent payment or distribution to the
holders of such Senior Guarantees. As used in this Article, the phrase "payment
in full" (or any similar phrase), when used to refer to the payment of Senior
Guarantees, shall mean payment in full of the aggregate amount of such Senior
Guarantees in cash or cash equivalents or any other manner acceptable to the
holders of such Senior Guarantees.
-97-
<PAGE>
In the event that, notwithstanding the foregoing provisions of this
Section, the Trustee or the Holder of any Security shall have received any
Subsidiary Guarantor Payment before all Senior Guarantees of a Subsidiary
Guarantor are paid in full or payment thereof provided for in cash or cash
equivalents or any other manner acceptable to the holders of such Senior
Guarantees, then and in such event such Subsidiary Guarantor Payment shall be
paid over or delivered forthwith to the trustee in bankruptcy, receiver,
liquidating trustee, custodian, assignee, agent or other Person making payment
or distribution of assets of such Subsidiary Guarantor for application to the
payment of all Senior Guarantees of such Subsidiary Guarantor remaining unpaid,
to the extent necessary to pay all such Senior Guarantees in full, after giving
effect to any concurrent payment or distribution to or for the holders of Senior
Guarantees; provided that any portion of any such Subsidiary Guarantor Payment
allocable to Senior Guarantees in respect of the Credit Facility shall be paid
over or delivered forthwith directly to the Administrative Agent under the
Credit Facility.
The consolidation of a Subsidiary Guarantor with, or the merger of a
Subsidiary Guarantor into, another Person or the liquidation or dissolution of a
Subsidiary Guarantor following the conveyance or transfer of all or
substantially all of its properties and assets as an entirety to another Person
upon the terms and conditions set forth in Article Eight shall not be deemed a
Subsidiary Guarantor Proceeding for the purposes of this Section if the Person
formed by such consolidation or into which such Subsidiary Guarantor is merged
or the Person which acquires by conveyance or transfer such properties and
assets as an entirety, as the case may be, shall, as a part of such
consolidation, merger, conveyance or transfer, comply with the conditions set
forth in Article Eight.
SECTION 1403. No Payment When Senior Debt of the Company in Default.
No payment shall be made by a Subsidiary Guarantor under a Subsidiary
Guarantee during any period in which payments by the Company on the Securities
are suspended pursuant to the provisions of Section 1203.
In the event that, notwithstanding the foregoing, a Subsidiary
Guarantor shall make any Subsidiary Guarantor Payment to the Trustee or any
Holder prohibited by the foregoing provisions of this Section, then and in such
event such Subsidiary Guarantor Payment shall be paid over and delivered
forthwith to such Subsidiary Guarantor; provided that any portion of any such
Subsidiary Guarantor Payment allocable to any Senior Guarantees in respect of
the Credit Facility shall be paid over or delivered forthwith directly to the
Administrative Agent under the Credit Facility.
The provisions of this Section shall not apply to any Subsidiary
Guarantor Payment with respect to which Section 1402 would be applicable.
SECTION 1404. Payment Permitted If No Default.
Nothing contained in this Article or elsewhere in this Indenture or in
any of the Subsidiary Guarantees shall prevent (a) any Subsidiary Guarantor at
any time except during
-98-
<PAGE>
the pendency of any Subsidiary Guarantor Proceeding referred to in Section 1402
or under the conditions described in Section 1403, from making Subsidiary
Guarantor Payments, or (b) the application by the Trustee of any money
deposited with it hereunder to Subsidiary Guarantor Payments if, at the time of
such application by the Trustee, it did not have knowledge that such Subsidiary
Guarantor Payment would have been prohibited by the provisions of this Article;
provided that clause (b) of the foregoing shall not be construed to permit the
'Holders to retain any Subsidiary Guarantor payment received by such Holders to
the extent such Holders would not be permitted to retain such Subsidiary
Guarantor Payment by reason of any other provisions of this Article.
SECTION 1405. Subrogation to Rights of Holders of Senior Guarantees of
Subsidiary Guarantor.
Subject to the payment in full of all amounts due or to become due on
or in respect of Senior Guarantees of a Subsidiary Guarantor, or the provision
for such payment in cash or cash equivalents or any other manner acceptable to
the holders of Senior Guarantees of a Subsidiary Guarantor, the Holders of the
Securities shall be subrogated to the rights of the holders of such Senior
Guarantees to receive payments and distributions of cash, property and
securities applicable to such Senior Guarantees until the principal of (and
premium, if any) and interest on the Securities shall be paid in full. For
purposes of such subrogation, no payments or distributions to the holders of the
Senior Guarantees of such Subsidiary Guarantor of any cash, property or
securities to which the Holders of the Securities or the Trustee would be
entitled except for the provisions of this Article, and no payments over
pursuant to the provisions of this Article to the holders of Senior Guarantees
of such Subsidiary Guarantor by Holders of the Securities or the Trustee, shall,
as among any Subsidiary Guarantor, its creditors other than holders of Senior
Guarantees of such Subsidiary Guarantor and the Holders of the Securities, be
deemed to be a payment or distribution by such Subsidiary Guarantor to or on
account of the Senior Guarantees of such Subsidiary Guarantor.
SECTION 1406. Provisions Solely to Define Relative Rights.
The provisions of this Article are and are intended solely for the
purpose of defining the relative rights of the Holders on the one hand and the
holders of Senior Guarantees of each Subsidiary Guarantor on the other hand.
Nothing contained in this Article or elsewhere in this Indenture, in the
Securities or in the Subsidiary Guarantees is intended to or shall (a) impair,
as among any Subsidiary Guarantor, its creditors other than holders of Senior
Guarantees of such Subsidiary Guarantor and the Holders of the Securities, the
obligation of each Subsidiary Guarantor, which is absolute and unconditional
(and which, subject to the rights under this Article of the holders of Senior
Guarantees of such subsidiary Guarantor, is intended to rank equally with all
other general obligations of such Subsidiary Guarantor), to pay to the Holders
the payments of all amounts due on the Securities pursuant to its Subsidiary
Guarantee as and when the same shall become due and payable in accordance with
the terms of such Subsidiary Guarantee; or (b) affect the relative rights
against any Subsidiary Guarantor of the Holders of the Securities and creditors
of such Subsidiary Guarantor other
-99-
<PAGE>
than the holders of Senior Guarantees of such
Subsidiary Guarantor; or (c) prevent the Trustee or the Holder of any Security
from exercising all remedies otherwise permitted by applicable law upon default
under this Indenture, subject to the rights, if any, under this Article of the
holders of Senior Guarantees of a Subsidiary Guarantor to receive cash, property
and securities otherwise payable or deliverable to the Trustee or such Holder or
to prohibit Subsidiary Guarantor Payments under the circumstances set forth in
Section 1403.
SECTION 1407. Trustee to Effectuate Subordination.
Each Holder of a Security by his acceptance thereof authorizes and
directs the Trustee on his behalf to take such action as may be necessary or
appropriate to effectuate the subordination provided in this Article and
appoints the Trustee his attorney-in-fact for any and all such purposes,
including, in the event of any Subsidiary Guarantor Proceeding, the timely
filing of a claim for the unpaid balance of the indebtedness owing to such
Holder in respect of such Subsidiary Guarantor's Subsidiary Guarantee, in the
form required in such Subsidiary Guarantor Proceeding, and causing such claim to
be approved or allowed in such Subsidiary Guarantor Proceeding. If after a
written request by the Administrative Agent under the Credit Facility the
Trustee does not file a proper claim in any Subsidiary Guarantor Proceeding at
least ninety days before the expiration of the time allowed in such Subsidiary
Guarantor Proceeding to file such claim, then the Administrative Agent under the
Credit Facility will be authorized (but shall not have any obligation) to do so
for and on behalf of the Holders.
SECTION 1408. No Waiver of Subordination Provisions.
No right of any present or future holder of any Senior Guarantee of any
Subsidiary Guarantor to enforce subordination as herein provided shall at any
time in any way be prejudiced or impaired by any act or failure to act on the
part of such Subsidiary Guarantor or by any act or failure to act, in good
faith, by any such holder, or by any noncompliance by such Subsidiary Guarantor
with the terms, provisions and covenants of this Indenture, regardless of any
knowledge thereof any such holder may have or be otherwise charged with.
Without in any way limiting the generality of the foregoing paragraph,
the holders of Senior Guarantees of any Subsidiary Guarantor may, at any time
and from time to time, without the consent of or notice to the Trustee or the
Holders of the Securities, without incurring responsibility to the Holders of
the Securities and without impairing or releasing the subordination provided in
this Article or the obligations hereunder of the Holders of the Securities to
the holders of Senior Guarantees of such Subsidiary Guarantor, do any one or
more of the following: (i) change the manner, place or terms of payment or
extend the time of payment of, or renew or alter, any Senior Guarantee of such
Subsidiary Guarantor, or otherwise amend or supplement in any manner any Senior
Guarantee of such Subsidiary Guarantor or any instrument evidencing the same or
any agreement under which any Senior Guarantee of such Subsidiary Guarantor is
outstanding; (ii) sell, exchange, release or otherwise deal with any property
pledged, mortgaged or otherwise securing any Senior Guarantee of such Subsidiary
Guarantor; (iii) release any Person liable in any manner for the collection
-100-
<PAGE>
or payment of any Senior Guarantee of such Subsidiary Guarantor; and (iv)
exercise or refrain from exercising any rights against such Subsidiary
Guarantor and any other Person.
SECTION 1409. Notice to Trustee.
Each Subsidiary Guarantor shall give prompt written notice to the
Trustee of any fact known to such Subsidiary Guarantor which would prohibit the
making of any payment to or by the Trustee in respect of its Subsidiary
Guarantee. Notwithstanding the provisions of this Article or any other provision
of this Indenture, the Trustee shall not be charged with knowledge of the
existence of any facts which would prohibit the making of any payment to or by
the Trustee in respect of any Subsidiary Guarantee, unless and until the Trustee
shall have received written notice thereof from a Subsidiary Guarantor or a
holder of such Senior Guarantee of a Subsidiary Guarantor or from any trustee or
agent therefor; and, prior to the receipt of any such written notice, the
Trustee, subject to the provisions of Section 601, shall be entitled in all
respects to assume that no such facts exist; provided, however, that if the
Trustee shall not have received the notice provided for in this Section at least
two Business Days prior to the date upon which by the terms hereof any money may
become payable for any purpose (including, without limitation, the payment of
the principal of (and premium, if any) or interest on any Security), then,
anything herein contained to the contrary notwithstanding, the Trustee shall
have full power and authority to receive such money and to apply the same to the
purpose for which such money was received and shall not be affected by any
notice to the contrary which may be received by it within two Business Days
prior to such date.
Subject to the provisions of Section 601, the Trustee shall be entitled
to rely on the delivery to it of a written notice by a Person representing
himself to be a holder of a Senior Guarantee of a Subsidiary Guarantor (or a
trustee or agent therefor) to establish that such notice has been given by a
holder of a Senior Guarantee of such Subsidiary Guarantor (or a trustee or agent
therefor). In the event that the Trustee determines in good faith that further
evidence is required with respect to the right of any Person as a holder of a
Senior Guarantee of a Subsidiary Guarantor to participate in any payment or
distribution pursuant to this Article, the Trustee may request such Person to
furnish evidence to the reasonable satisfaction of the Trustee as to the amount
of the Senior Guarantees of such Subsidiary Guarantor held by such Person, the
extent to which such Person is entitled to participate in such payment or
distribution and any other facts pertinent to the rights of such Person under
this Article, and if such evidence is not furnished, the Trustee may defer any
payment to such Person pending judicial determination as to the right of such
Person to receive such payment. A certificate of the Administrative Agent
delivered to the Trustee shall be sufficient evidence with respect to the amount
of Senior Guarantees under the Credit Facility.
SECTION 1410. Reliance on Judicial Order or Certificate of Liquidating Agent.
Upon any payment or distribution of assets of any Subsidiary Guarantor
referred to in this Article, the Trustee, subject to the provisions of Section
601, and the Holders of the Securities shall be entitled to rely upon any order
or decree entered by any court of competent
-101-
<PAGE>
jurisdiction in which such Subsidiary Guarantor Proceeding is pending, or a
certificate of the trustee in bankruptcy, receiver, liquidating trustee,
custodian, assignee for the benefit of creditors, agent or other Person making
such payment or distribution, delivered to the Trustee or to the Holders, for
the purpose of ascertaining the Persons entitled to participate in such payment
or distribution, the holders of the Senior Guarantees of a Subsidiary Guarantor
and other indebtedness of such Subsidiary Guarantor, the amount thereof or
payable thereon, the amount or amounts paid or distributed thereon and all
other facts pertinent thereto or to this Article.
SECTION 1411. Trustee Not Fiduciary for Holders of Senior Guarantees of the
Subsidiary Guarantors.
The Trustee shall not be deemed to owe any fiduciary duty to the
holders of any Senior Guarantee of any Subsidiary Guarantor and shall not be
liable to any such holders if it shall in good faith (and absent gross
negligence) mistakenly pay over or distribute to Holders or to any Subsidiary
Guarantor or to any other Person cash, property or securities to which any
holders of Senior Guarantees of such Subsidiary Guarantor shall be entitled by
virtue of this Article or otherwise. With respect to the holders of any Senior
Guarantee of any Subsidiary Guarantor, the Trustee undertakes to perform or to
observe only such of its covenants or obligations as are specifically set forth
in this Article Fourteen and no implied covenants or obligations with respect to
holders of any Senior Guarantee of any Subsidiary Guarantor shall be read into
this Indenture against the Trustee.
SECTION 1412. Rights of Trustee as Holder of Senior Guarantees of the
Subsidiary Guarantors; Preservation of Trustee's Rights.
The Trustee in its individual capacity shall be entitled to all the
rights set forth in this Article with respect to any Senior Guarantee of any
Subsidiary Guarantor which may at any time be held by it, to the same extent as
any other holder of any Senior Guarantee of such Subsidiary Guarantor, and
nothing in this Indenture shall deprive the Trustee of any of its rights as such
holder.
Nothing in this Article shall apply to claims of, or payments to, the
Trustee under or pursuant to Section 607.
SECTION 1413. Article Applicable to Paying Agents.
In case at any time any Paying Agent other than the Trustee shall have
been appointed by the Company and be then acting hereunder, the term "Trustee"
as used in this Article shall in such case (unless the context otherwise
requires) be construed as extending to and including such Paying Agent within
its meaning as fully for all intents and purposes as if such Paying Agent were
named in this Article in addition to or in place of the Trustee; provided,
however, that Section 1412 shall not apply to the Company, any Subsidiary
Guarantor or any Affiliate
-102-
<PAGE>
of the Company or any Subsidiary Guarantor if it, such Subsidiary Guarantor or
such Affiliate acts as Paying Agent.
SECTION 1414. Defeasance of this Article Fourteen.
The subordination of the Subsidiary Guarantees provided by this Article
Fourteen is expressly made subject to the provisions for defeasance or covenant
defeasance in Article Fifteen hereof and, anything herein to the contrary
notwithstanding, upon the effectiveness of any such defeasance or covenant
defeasance that is consummated at a time when a Subsidiary Guarantor Payment
would not be prohibited by Section 1402 or 1403, the Subsidiary Guarantees then
outstanding shall thereupon cease to be subordinated pursuant to this Article
Fourteen.
ARTICLE FIFTEEN
Defeasance and Covenant Defeasance
SECTION 1501. Company's Option to Effect Defeasance or Covenant Defeasance.
The Company may at its option by Board Resolution, at any time, elect
to have either Section 1502 or Section 1503 applied to the Outstanding
Securities upon compliance with the conditions set forth below in this Article
Fifteen.
SECTION 1502. Defeasance and Discharge.
Upon the Company's exercise of the option provided in Section 1501
applicable to this Section, the Company shall be deemed to have been discharged
from its obligations with respect to the Outstanding Securities, each Subsidiary
Guarantor shall have been deemed to have been discharged from its obligations
with respect to its Subsidiary Guarantee and the provisions of Article Twelve
and Article Fourteen hereof shall cease to be effective, on the date the
conditions set forth below are satisfied (hereinafter, "defeasance"). For this
purpose, such defeasance means that (i) the Company shall be deemed to have paid
and discharged the entire indebtedness represented by the Outstanding Securities
and to have satisfied all its other obligations under such Securities and this
Indenture insofar as such Securities are concerned (and the Trustee, at the
expense of the Company, shall execute proper instruments acknowledging the
same), and (ii) the Subsidiary Guarantors shall each be released from their
respective Subsidiary Guarantees, except for the following which shall survive
until otherwise terminated or discharged hereunder: (A) the rights of Holders of
such Securities to receive, solely from the trust fund described in Section 1504
and as more fully set forth in such Section, payments in respect of the
principal of (and premium, if any) and interest on such Securities when such
payments are due, (B) the Company's and each Subsidiary Guarantor's obligations
with respect to such Securities under Sections 304, 305, 306, 1002 and 1003, (C)
the rights, powers, trusts, duties and immunities of the Trustee hereunder and
(D) this Article Fifteen. Subject to compliance with this Article Fifteen, the
Company may exercise its option under this Section 1502 notwithstanding the
prior exercise of its option under Section 1503.
-103-
<PAGE>
SECTION 1503. Covenant Defeasance.
Upon the Company's exercise of the option provided in Section 1501
applicable to this Section, (i) the Company shall be released from its
obligations under Sections 1005 through 1019, inclusive, and Clauses (iii), (iv)
and (v) of Section 801, (ii) the occurrence of an event specified in Sections
501(3) (in the case of Section 801, with respect to Clauses (iii), (iv) or (v)
of Section 801), 501(4) (with respect to any of Sections 1005 through 1019
inclusive), 501(5) and 501(6) shall not be deemed to be an Event of Default and
(iii) the provisions of Article Twelve and Article Fourteen hereof shall cease
to be effective on and after the date the conditions set forth below are
satisfied (hereinafter, "covenant defeasance"). For this purpose, such covenant
defeasance means that (a) the Company may omit to comply with and shall have no
liability in respect of any term, condition or limitation set forth in any such
Section, Clause or Article, whether directly or indirectly by reason of any
reference elsewhere herein to any such Section, Clause or Article or by reason
of any reference in any such Section, Clause or Article to any other provision
herein or in any other document, but the remainder of this Indenture and such
Securities and Subsidiary Guarantees shall be unaffected thereby.
SECTION 1504. Conditions to Defeasance or Covenant Defeasance.
The following shall be the conditions to application of either Section
1502 or Section 1503 to the then Outstanding Securities:
(1) The Company shall irrevocably have deposited or caused to
be deposited with the Trustee (or another trustee satisfying the
requirements of Section 609 who shall agree to comply with the
provisions of this Article Fifteen applicable to it) as trust funds in
trust for the purpose of making the following payments, specifically
pledged as security for, and dedicated solely to, the benefit of the
Holders of such Securities, (A) money in an amount, or (B) U.S.
Government Obligations which through the scheduled payment of principal
and interest in respect thereof in accordance with their terms will
provide, not later than one day before the due date of any payment,
money in an amount, or (C) a combination thereof, sufficient, in the
opinion of a nationally recognized firm of independent public
accountants expressed in a written certification thereof delivered to
the Trustee, to pay and discharge, and which shall be applied by the
Trustee (or other qualifying trustee) to pay and discharge, the
principal of (premium, if any) and each instalment of interest on the
Securities on the Stated Maturity of such principal or instalment of
interest in accordance with the terms of this Indenture and of such
Securities.
(2) In the case of an election under Section 1502, the Company
shall have delivered to the Trustee an Opinion of Counsel stating that
(x) the Company has received from, or there has been published by, the
Internal Revenue Service a ruling, or (y) since the date of this
Indenture there has been a change in the applicable Federal income tax
law, in either case to the
-104-
<PAGE>
effect that, and based thereon such Opinion shall confirm that, the
Holders of the Outstanding Securities will not recognize gain or loss
for Federal income tax purposes as a result of such deposit,
defeasance and discharge and will be subject to Federal income tax on
the same amount, in the same manner and at the same times as would
have been the case if such deposit, defeasance and discharge had not
occurred.
(3) In the case of an election under Section 1503, the Company
shall have delivered to the Trustee an Opinion of Counsel to the effect
that the Holders of the Outstanding Securities will not recognize gain
or loss for Federal income tax purposes as a result of such deposit and
covenant defeasance and will be subject to Federal income tax on the
same amount, in the same manner and at the same times as would have
been the case if such deposit and covenant defeasance had not occurred.
(4) The Company shall have delivered to the Trustee an
Officers' Certificate to the effect that the Securities, if then listed
on any securities exchange, will not be delisted as a result of such
deposit.
(5) Such defeasance or covenant defeasance shall not cause the
Trustee to have a conflicting interest as defined in Section 608 and
for purposes of the Trust Indenture Act with respect to any securities
of the Company.
(6) At the time of such deposit: (A) no default in the payment
of all or a portion of principal of (or premium, if any) or interest on
any Senior Debt shall have occurred and be continuing, and no event of
default with respect to any Senior Debt shall have occurred and be
continuing and shall have resulted in such Senior Debt becoming or
being declared due and payable prior to the date on which it would
otherwise have become due and payable and (B) no other event of default
with respect to any Senior Debt shall have occurred and be continuing
permitting (after notice or the lapse of time, or both) the holders of
such Senior Debt (or a trustee on behalf of the holders thereof) to
declare such Senior Debt due and payable prior to the date on which it
would otherwise have become due and payable, or, in the case of either
Clause (A) or Clause (B) above, each such default or event of default
shall have been cured or waived or shall have ceased to exist.
(7) No Event of Default or event which with notice or lapse of
time or both would become an Event of Default shall have occurred and
be continuing on the date of such deposit or, insofar as subsections
501(7) and (8) are concerned, at any time during the period ending on
the 121st day after the date of such deposit (it being understood that
this condition shall not be deemed satisfied until the expiration of
such period).
-105-
<PAGE>
(8) Such defeasance or covenant defeasance shall not result in
a breach or violation of, or constitute a default under, any other
agreement or instrument to which the Company is a party or by which it
is bound.
(9) The Company shall have delivered to the Trustee an Opinion
of Counsel to the effect that such deposit shall not cause either the
Trustee or the trust so created to be subject to the Investment Company
Act of 1940.
(10) The Company shall have delivered to the Trustee an
Officers' Certificate and an Opinion of Counsel, each stating that all
conditions precedent provided for relating to either the defeasance
under Section 1502 or the covenant defeasance under Section 1503 (as
the case may be) have been complied with.
SECTION 1505. Deposited Money and U.S. Government Obligations to be Held
in Trust; Other Miscellaneous Provisions.
Subject to the provisions of the last paragraph of Section 1003, all
money and U.S. Government Obligations (including the proceeds thereof) deposited
with the Trustee (or other qualifying trustee--collectively, for purposes of
this Section 1505 and Section 1506, the "Trustee") pursuant to Section 1504 in
respect of the Securities shall be held in trust and applied by the Trustee, in
accordance with the provisions of such Securities and this Indenture, to the
payment, either directly or through any Paying Agent (including the Company
acting as its own Paying Agent) as the Trustee may determine, to the Holders of
such Securities, of all sums due and to become due thereon in respect of
principal (and premium, if any) and interest, but such money need not be
segregated from other funds except to the extent required by law. Money so held
in trust shall not be subject to the provisions of Article Twelve or Article
Fourteen.
The Company and each Subsidiary Guarantor shall pay and indemnify the
Trustee against any tax, fee or other charge imposed on or assessed against the
U.S. Government Obligations deposited pursuant to Section 1504 or the principal
and interest received in respect thereof other than any such tax, fee or other
charge which by law is for the account of the Holders of the Outstanding
Securities.
Anything in this Article Fifteen to the contrary notwithstanding, the
Trustee shall deliver or pay to the Company from time to time upon Company
Request any money or U.S. Government Obligations held by it as provided in
Section 1504 which, in the opinion of a nationally recognized firm of
independent public accountants expressed in a written certification thereof
delivered to the Trustee, are in excess of the amount thereof which would then
be required to be deposited to effect an equivalent defeasance or covenant
defeasance.
-106-
<PAGE>
SECTION 1506. Reinstatement.
If the Trustee or the Paying Agent is unable to apply any money in
accordance with Section 1502 or 1503 by reason of any order or judgment of any
court or governmental authority enjoining, restraining or otherwise prohibiting
such application, then the Company's and the Subsidiary Guarantors' obligations
under this Indenture, the Securities and the Subsidiary Guarantees shall be
revived and reinstated as though no deposit had occurred pursuant to this
Article Fifteen until such time as the Trustee or Paying Agent is permitted to
apply all such money in accordance with Section 1502 or 1503; provided, however,
that if the Company or any Subsidiary Guarantor makes any payment of principal
of (and premium, if any) or interest on any Security following the reinstatement
of its obligations, the Company or such Subsidiary Guarantor shall be subrogated
to the rights of the Holders of such Securities to receive such payment from the
money held by the Trustee or the Paying Agent.
--------------------
-107-
<PAGE>
This instrument may be executed in any number of counterparts, each of
which so executed shall be deemed to be an original, but all such counterparts
shall together constitute but one and the same instrument.
IN WITNESS WHEREOF, the parties hereto have caused this Indenture to be
duly executed, and their respective corporate seals to be hereunto affixed and
attested, all as of the day and year first above written.
CORNING CLINICAL LABORATORIES INC. (DE)
By______________________________________
Attest:
__________________________________
THE BANK OF NEW YORK,
as TRUSTEE
By______________________________________
Attest:
_________________________________
CLMP INC.
By______________________________________
Attest:
_________________________________
-108-
<PAGE>
CORNING CLINICAL LABORATORIES INC. (CT)
By_____________________________________
Attest:
_________________________________
CORNING CLINICAL LABORATORIES INC. (MA)
By_____________________________________
Attest:
_________________________________
CORNING CLINICAL LABORATORIES INC. (MD)
By_____________________________________
Attest:
_________________________________
-109-
<PAGE>
CORNING CLINICAL LABORATORIES INC. (MI)
By_____________________________________
Attest:
_________________________________
CORNING CLINICAL LABORATORIES OF
PENNSYLVANIA INC.
By_____________________________________
Attest:
_________________________________
CORNING MRL INC.
By_____________________________________
Attest:
_________________________________
CORNING NICHOLS INSTITUTE INC.
By_____________________________________
Attest:
_________________________________
-110-
<PAGE>
DAMON CLINICAL LABORATORIES INC.
By_____________________________________
Attest:
_________________________________
DEYOR CPF/METPATH, INC.
By_____________________________________
Attest:
_________________________________
DIAGNOSTIC REFERENCE SERVICES, INC.
By_____________________________________
Attest:
_________________________________
DPD HOLDINGS INC.
By_____________________________________
Attest:
_________________________________
-111-
<PAGE>
METWEST INC.
By_____________________________________
Attest:
_________________________________
NICHOLS INSTITUTE DIAGNOSTICS
By_____________________________________
Attest:
_________________________________
PATHOLOGY BUILDING PARTNERSHIP
By_____________________________________
Attest:
_________________________________
-112-
<PAGE>
QUEST DIAGNOSTICS INCORPORATED (MD)
By_____________________________________
Attest:
_________________________________
QUEST DIAGNOSTICS INCORPORATED (MI)
By_____________________________________
Attest:
_________________________________
SOUTHGATE MEDICAL SERVICES, INC.
By_____________________________________
Attest:
_________________________________
-112-
Exhibit 5.1
[S&S Letterhead]
December 11, 1996
Corning Clinical Laboratories Inc.
(to be renamed Quest Diagnostics Incorporated)
One Malcolm Avenue
Teterboro, N.J. 07608
Ladies and Gentlemen:
We have acted as counsel to Corning Clinical Laboratories Inc., a
Delaware corporation (to be renamed Quest Diagnostics Incorporated) (the
"Company"), Corning Clinical Laboratories of Pennsylvania Inc., Corning MRL
Inc., DPD Holdings Inc., Metwest Inc., and CLMP Inc., each a Delaware
corporation (collectively, the "Delaware Guarantors"). We have also acted as
special New York counsel to Corning Clinical Laboratories Inc. (MI), a Michigan
corporation, Corning Nichols Institute Inc., a California corporation, Damon
Clinical Laboratories Inc., a Massachusetts corporation, Corning Clinical
Laboratories Inc. (CT), a Connecticut corporation, Corning Clinical Laboratories
Inc. (MA), a Massachusetts corporation, Deyor CPF/Metpath, Inc., an Ohio
corporation, Southgate Medical Services, Inc., an Ohio corporation, Corning
Clinical Laboratories Inc. (MD), a Maryland corporation, Nichols Institute
Diagnostics, a California corporation, Nomad-Massachusetts, Inc., a
Massachusetts corporation, Quest Diagnostics Incorporated (MI), a Michigan
corporation, Quest Diagnostics Incorporated (MD), a Maryland corporation,
Diagnostic Reference Services, Inc., a Maryland corporation and Pathology
Building Partnership, a Maryland partnership (collectively, the "Non-Delaware
Guarantors" and, together with the Delaware Guarantors, the "Guarantors"), in
connection with the filing by the Company and the Guarantors with the Securities
and Exchange Commission (the "Commission") of a Registration Statement on Form
S-1 (No. 333-15867) (the "Registration Statement") and the prospectus contained
in the Registration Statement (the "Prospectus"), covering the registration
under the Securities Act of 1933, as amended (the "Act"), of $150,000,000
aggregate principal amount of the Company's Senior Subordinated Notes Due 2006
(the "Notes"). The Notes are to be guaranteed on a senior subordinated basis
(the
<PAGE>
2
"Guarantees") by the Guarantors. The Notes are to be issued pursuant to the
terms of an indenture (the "Indenture") between the Company, the Guarantors and
The Bank of New York, as trustee (the "Trustee"). The form of the Indenture and
the form of the Underwriting Agreement (the "Underwriting Agreement") among the
Company, Corning Incorporated and the underwriters are each filed as an exhibit
to the Registration Statement.
In connection with the foregoing, we have examined originals, or copies
certified or otherwise identified to our satisfaction, of such documents and
corporate and partnership and public records as we have deemed necessary as a
basis for the opinions hereinafter expressed. In our examination, we have
assumed the genuineness of all signatures, the authenticity of all documents
presented to us as originals, the conformity to the originals of all documents
presented to us as copies, and the authenticity of the originals of such
documents. In rendering our opinion, we have relied as to factual matters, to
the extent we deem proper, upon certificates of public officials and
certificates and representations of officers of the Company and the Guarantors.
In rendering these opinions, we have assumed (i) that each of the
Guarantors is duly organized and validly existing in its jurisdiction of
incorporation and has all requisite corporate or partnership power, as the case
may be, and authority to execute, deliver and perform its obligations under the
Indenture and the Guarantees; (ii) that the execution, delivery and performance
of the Indenture and the Guarantees have been duly authorized by all necessary
corporate or partnership action, as the case may be, on the part of each of the
Guarantors; and (iii) that each of the Guarantors will duly execute and deliver
the Indenture and the Guarantees.
Our opinions expressed below are limited to the laws of the State of
New York, the General Corporation Law of Delaware and the federal law of the
United States, and we do not express any opinion herein concerning any other
law.
Based upon the foregoing and having regard for such legal
considerations as we deem relevant, we are of the opinion that, as of the date
hereof:
1. When the execution, delivery and performance of the Indenture and
the Notes have been duly authorized by all necessary corporate action on the
part of the Company, when the Indenture has been duly executed and delivered by
the parties thereto and when the Notes have been duly executed and issued by the
Company in accordance with the provisions of the Indenture, duly authenticated
by the Trustee in accordance with the Indenture and issued and sold by the
Company and paid for by the underwriters pursuant to the Underwriting Agreement,
the Notes will be valid and binding obligations of the Company enforceable
against the Company in accordance with their terms, except as enforcement
thereof may be limited by bankruptcy, insolvency (including, without limitation,
all laws relating to fraudulent transfers), reorganization or other similar laws
affecting enforcement of
<PAGE>
3
creditors' rights generally and except as enforcement thereof is subject to
general principles of equity (regardless of whether enforcement is considered in
a proceeding in equity or at law).
2. When the Indenture has been duly executed and delivered by the
parties thereto and when the Notes and the Guarantees endorsed thereon have been
duly executed and issued by the Company and the Guarantors in accordance with
the provisions of the Indenture, duly authenticated by the Trustee in accordance
with the Indenture and issued and sold by the Company and the Guarantors and
paid for by the underwriters pursuant to the Underwriting Agreement, the
Guarantees issued by each Guarantor will be valid and binding obligations of
such Guarantor enforceable against such Guarantor in accordance with their
terms, except as enforcement thereof may be limited by bankruptcy, insolvency
(including, without limitation, all laws relating to fraudulent transfers),
reorganization or other similar laws affecting enforcement of creditors' rights
generally and except as enforcement thereof is subject to general principles of
equity (regardless of whether enforcement is considered in a proceeding in
equity or at law).
This opinion is being furnished to you solely for your benefit, and is
not to be used, circulated, quoted or otherwise referred to, in whole or in
part, for any other purpose without our prior written consent. It may not be
relied upon by any other person or entity.
We hereby consent to the use of this opinion as Exhibit 5.1 to the
Registration Statement and to the use of our name under the caption "Validity of
the Notes and Guarantees" contained in the Prospectus which is included in the
Registration Statement. In giving this consent, we do not thereby concede that
we come within the category of persons whose consent is required by the Act or
the General Rules and Regulations promulgated thereunder.
Very truly yours,
/s/ Shearman & Sterling
STG/JMC/TJC/AGB/DEG
EXECUTION COPY
CREDIT AGREEMENT
dated as of
December 5, 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*
ARTICLE I
Definitions
Page
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
4.15 Federal Reserve Regulations........................... 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
<PAGE>
3
5.18 Leverage Ratio...................................... 78
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..............................
9.11 Confidentiality................................... 101
Exhibits:
Exhibit A -- Form of Term Note
Exhibit B-1 -- Form of Working Capital Note
Exhibit B-2 -- Form of Swingline 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-1 -- Form of opinion of Borrower's general counsel
Exhibit G-2 -- Form of opinion of Shearman & Sterling
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 December 5, 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 Documents,
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
2.08(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 specified 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) subsequent to the
Effective Date in the book value of any asset owned by the Borrower or a
Consolidated Subsidiary.
<PAGE>
6
"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 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.
<PAGE>
7
"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 to any of
the foregoing transactions) or any combination of the foregoing transactions.
<PAGE>
8
"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 all trades or businesses
(whether or not incorporated) under common control which, together with the
Borrower or any
<PAGE>
9
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.
"Excluded Subsidiary" means each Subsidiary
existing on the date of this Agreement identified on
<PAGE>
10
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.
"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.
"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
<PAGE>
11
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, polychlorinated biphenyls, radon gas,
infectious or medical wastes and any other toxic or hazardous waste or substance
as defined in any Environmental Law.
"HCFA" means the Health Care Financing Administration or any
successor thereto.
"Indemnity, Subrogation and Contribution Agreement" means an
Indemnity, Subrogation and Contribution
<PAGE>
12
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
Tranche A Maturity Date or Tranche B Maturity Date, as applicable (in
the case of Term Loans), or the Termination Date (in the case of
Working Capital Loans) shall end on the Tranche A Maturity Date, the
Tranche B Maturity Date or the Termination Date, as applicable.
"Internal Revenue Code" means the Internal Revenue Code of
1986, as amended, or any successor statute.
<PAGE>
13
"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 and delivered to
the Borrower on November 21, 1996.
"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.
"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
<PAGE>
14
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.
"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
<PAGE>
15
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
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.
<PAGE>
16
"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 (other than the Notes) 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) 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
<PAGE>
17
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, B-1 or B-2, evidencing the obligation of the Borrower
to repay Loans, and "Notes" means any or all of such promissory notes issued
hereunder.
"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.
<PAGE>
18
"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 mutual fund, 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 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.
<PAGE>
19
"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 ventures described in Schedule 1.01(d) and
(iii) one additional joint venture that the Borrower or any of its Subsidiaries
may enter into in accordance with clause (d) of Section 5.09.
<PAGE>
20
"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, defeasance 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 Morgan Guaranty Trust Company of New
York 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 Agent, substantially in the form of Exhibit F hereto, as the
same may be amended from time to time.
<PAGE>
21
"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 Information Statement dated November 26,
1996, 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 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
<PAGE>
22
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.
"Swingline Loan" means a loan made by the Swingline Bank
pursuant to Section 2.04.
<PAGE>
23
"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.
"Tranche A Maturity Date" means December 5, 2002.
<PAGE>
24
"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 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 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 December 5, 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 22, 1996, among Corning, Corning Clinical Laboratories Inc., a
Michigan corporation, 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 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
<PAGE>
25
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 and Swingline Loans 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 December 5, 2002.
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
<PAGE>
26
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 (e.g.,
a "Euro-Dollar Working Capital Borrowing" is a Borrowing comprised of Working
Capital Loans that are Euro- Dollar Loans).
<PAGE>
27
ARTICLE II
The Credits
SECTION 2.01. Commitments to Lend. (a) Term Loans. Each
Tranche A Bank severally and not jointly agrees, on the terms and conditions set
forth in this Agreement, to make a Tranche A Term Loan to the Borrower on the
Effective Date in an aggregate principal amount not exceeding its Tranche A
Commitment. Each Tranche B Bank severally and not jointly agrees, on the terms
and conditions set forth in this Agreement, to make 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 and not jointly
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
its Applicable Percentage 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 after a Swingline Loan has been advanced, 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 pro rata 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.
<PAGE>
32
(b) Each Bank may, by notice to the Borrower and the Agent,
request that its Loans of a particular Type and Class be evidenced by a separate
Note. Each such Note shall be in substantially the form of Exhibit A, B-1 or B-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
<PAGE>
33
Section 2.13 in the case of any such conversion or continuation
effective on any day other than the last 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 (in the case of
Euro-Dollar Loans) or $5,000,000 (in the case of Base Rate Loans) 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
<PAGE>
34
(iv) if such Loans are to be continued as Euro- Dollar Loans
for an additional Interest Period, the duration of such additional
Interest Period.
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
<PAGE>
35
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%;
(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%;
<PAGE>
36
(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
(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
<PAGE>
37
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.
(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%;
<PAGE>
38
(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 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
immediately repaid in full (and the full amount available for drawing under all
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 all applicable laws and the Spin-Off Information.
<PAGE>
39
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.
(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
</TABLE>
Tranche B Term Loans:
<TABLE>
<CAPTION>
Payment Date Amount Payment Date Amount
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
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
<PAGE>
40
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>
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
<PAGE>
41
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.
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
<PAGE>
42
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 any 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 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
<PAGE>
43
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 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
<PAGE>
44
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 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
<PAGE>
45
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.
(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
<PAGE>
46
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, 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. Upon
written request by any Bank, the Issuing Bank will give to such Bank any such
information referred to in the immediately precedent sentence that has been
requested by such Bank.
(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
<PAGE>
47
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 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,
<PAGE>
48
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 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;
<PAGE>
49
(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
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
<PAGE>
50
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 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
<PAGE>
51
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 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
<PAGE>
52
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 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
<PAGE>
53
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 (with one copy for each Bank) 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 (with one copy for each
Bank) of counterparts of the Guarantee Agreement, duly
executed by the Initial Guarantors;
(d) receipt by the Agent (with one copy for each Bank) of
counterparts of the Indemnity, Subrogation and Contribution Agreement,
duly executed by the Initial Guarantors;
(e) receipt by the Security Agent of (i) counterparts of the
Pledge Agreement (with one copy for each Bank), 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 not owned by a Joint
Venture Holding Company), accompanied by stock powers endorsed in
blank;
<PAGE>
54
(f) receipt by the Security Agent (with one copy for each
Bank) 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 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 set forth in Article IV hereof and
in the Guarantee Agreement, 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 in accordance with applicable
law and the Spin-Off Information and are not subject to any action by
any governmental body, agency or official;
(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
<PAGE>
55
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;
(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
<PAGE>
56
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;
(s) the Banks shall be reasonably satisfied with their review
of (i) the tax aspects of the Spin-Off Transactions and the Transaction
Documents and (ii) the capital and ownership structure of the Borrower
and its Subsidiaries after the Spin-Off; and
(t) receipt by the Agent of all documents and certificates it
may reasonably request relating to the existence of the Borrower and
the Initial Guarantors (including certificates of incorporation and
bylaws),
<PAGE>
57
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
(d) the fact that the representations and warranties of the
Borrower contained in this Agreement
<PAGE>
58
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 (including any material licenses required by HCFA,
Medicare, Medicaid or other third party payors), franchises, authorizations,
consents and approvals required to carry on its business as now conducted and is
qualified to do business in, and is in good standing in, every jurisdiction
where such qualification is required, except where the failure to do so,
individually or in the aggregate, could not reasonably be expected to result in
a Material Adverse Effect.
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 or consent 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
<PAGE>
59
with respect to substantially all licenses and accreditations, in each case in
connection with the Spin-Off Transactions, (iii) the registration of the Senior
Subordinated Notes under the Securities Act of 1933 and the qualification of the
related indenture under the Trust Indenture Act of 1939, (iv) the filing of an
amendment to the certificate of incorporation of the Company in substantially
the form furnished to the Banks and (v) 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 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 has been duly
executed and delivered and 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
<PAGE>
60
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 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, any other Loan Document,
<PAGE>
61
the Spin-Off Distribution, the Spin-Off Transactions or the Transactions.
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 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
<PAGE>
62
(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.
(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, any other Loan Document, any Transaction
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 and
none of the information contains any material misstatement of fact or, taken as
a whole, omits to state any material fact necessary to make the statements
therein, in the light of the circumstances under which they were made, not
misleading. 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
<PAGE>
63
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 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), (ii), (iii) and (iv) 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
<PAGE>
64
business is now conducted and is proposed to be conducted following the
Effective Date and the consummation of the Spin-Off Distributions.
SECTION 4.15. Federal Reserve Regulations. (a) The Borrower is
not engaged principally, or as one of its important activities, in the business
of extending credit for the purpose of purchasing or carrying Margin Stock.
(b) No part of the proceeds of the Loans has been or will be
used, whether directly or indirectly, and whether immediately, incidentally or
ultimately, for any purpose which entails a violation of the provisions of the
Regulations of the Board, including, without limitation, Regulation G, U or X
thereof. Not more than 25% of the assets subject to the restrictions of Section
5.10 will at any time consist of Margin Stock.
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 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
<PAGE>
65
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 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
<PAGE>
66
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 such 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
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, if such withdrawal, reorganization, insolvency or
termination has resulted or could reasonably be expected to result in a
current payment obligation of
<PAGE>
67
any member of the ERISA Group in excess of $5,000,000; (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; 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 reasonably be expected to 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 $10,000,000.
(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
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
<PAGE>
68
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;
(j) promptly after obtaining knowledge thereof, the filing or
commencement of any action, suit or proceeding by or before any
arbitrator or governmental body, agency or official against or
affecting the Borrower or any Affiliate thereof that, if adversely
determined, could reasonably be expected to result in a Material
Adverse Effect;
(k) within 30 days upon receipt, copies of all management
letters issued by the Borrower's independent public accounts,
accompanied by management's response, if any; and
(l) 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,
<PAGE>
69
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 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, HCFA regulations, Medicare
and Medicaid reimbursement regulations 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
<PAGE>
70
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 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 not owned by a Joint Venture Holding Company)
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.
<PAGE>
71
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 (other
than the termination of services by the Borrower under the service agreements
contemplated by the Transaction Agreement). 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 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 (which approval shall not be
unreasonably withheld).
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
<PAGE>
72
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(d) 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;
(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 $4,500,000 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 (including any capital stock of any
Subsidiary) 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;
<PAGE>
73
(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, (ii)
such Lien does not attach to any other assets and (iii) 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;
(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;
<PAGE>
74
(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) 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
<PAGE>
75
$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 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-
<PAGE>
76
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 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.
<PAGE>
77
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 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
<PAGE>
78
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.
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; provided, that (A) the Senior
Subordinated Notes shall be permitted only if issued (1) on terms and
conditions no less favorable to the Borrower and the Banks than those
disclosed to the Banks prior to the execution and delivery of this
Agreement and (2) pursuant to
<PAGE>
79
documentation reasonably satisfactory to the Agent and (B) the Senior
Subordinated Bridge Loans shall be permitted only if incurred on terms
and conditions, and 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
(other than any portion thereof to be paid pursuant 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; provided that
such Debt shall be subordinated to the Obligations of the Borrower on
terms no less favorable than the Senior Subordinated Notes are, or are
to be, so subordinated.
(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;
<PAGE>
80
(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 in a transaction permitted by the terms of the
Permitted Subordinated Debt;
(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
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
<PAGE>
81
(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
(other than any portion thereof to be paid pursuant 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
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
<PAGE>
82
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 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.
<PAGE>
83
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
(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 expressly contemplated by Schedule
1.01(b).
<PAGE>
84
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 Section 2.02 of the Pledge Agreement or Section 4.01 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);
(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
<PAGE>
85
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 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
<PAGE>
86
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 either of which
the PBGC would be entitled to obtain a decree adjudicating that any
Material Plan must be terminated and 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 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, together
with other individuals whose nominations have been approved by the
majority of the board of directors of the Borrower prior to such
nomination, shall cease to constitute a majority of the board of
directors of the Borrower; or any "Change of
<PAGE>
87
Control", as defined in any Subordinated Debt Document,
occurs; 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 first
priority security interest in respect of the collateral; or
(m) except as provided therein, any Security Document or the
Guarantee Agreement shall cease to be in full force or effect or the
obligor thereunder shall disaffirm its liability in respect thereof;
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,
automatically without any notice to the Borrower or any other act by
the Agent or the Banks, the Commitments shall thereupon terminate and
automatically 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.
<PAGE>
88
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
<PAGE>
89
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
<PAGE>
90
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)
<PAGE>
91
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
<PAGE>
92
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 on an after-tax basis (taking into account any
deductions or other tax benefits attributable to items giving rise to payments
hereunder) for such increased cost or reduction.
<PAGE>
93
(b) If any Bank shall have determined that, after the date
hereof, the adoption of any applicable law, rule or 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) on an after-tax basis (taking into account any deductions or other tax
benefits attributable to items giving rise to payments hereunder) 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.
<PAGE>
94
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 thereto,
excluding (i) in the case of each Bank, each Issuing Bank and the
Agent, income and franchise taxes imposed on or measured by its net
income, and 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
<PAGE>
95
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 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.
<PAGE>
96
(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;
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
<PAGE>
97
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 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
<PAGE>
98
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, 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
<PAGE>
99
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 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
<PAGE>
100
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 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 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
<PAGE>
101
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 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,
mutual funds 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
<PAGE>
102
agreement, be entitled to the benefits of subsection (a) of Section 2.13,
Article VIII and subsection (b) of Section 9.03 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).
(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), 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,
(ii) the Borrower's consent shall not be required if an Event of Default has
occurred and is continuing and (iii) 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
<PAGE>
103
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 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,
funding losses, if any (pursuant to subsection (a) of Section 2.13), resulting
from such payment, 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
<PAGE>
104
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.
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. Each of the parties hereto irrevocably
consents to service of process in the manner provided for notices in Section
9.01 (except that process may not be served by telex or by facsimile). Nothing
in this Agreement will affect the right of any party to this Agreement to serve
process in any other manner permitted by law.
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,
<PAGE>
105
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 RELATING TO THIS AGREEMENT, THE OTHER LOAN DOCUMENTS OR THE TRANSACTIONS
CONTEMPLATED HEREBY.
SECTION 9.11. Confidentiality. Each of the Agent, the Issuing
Bank, the Swingline Bank and each Bank agrees to maintain the confidentiality of
the Information (as defined below), except that Information may be disclosed (a)
to it and its Affiliates, directors, officers, employees and agents, including
accountants, legal counsel and other advisors (it being understood that the
Persons to whom such disclosure is made will be informed of the confidential
nature of such Information and instructed to keep such Information
confidential), (b) to the extent requested by any regulatory authority, (c) to
the extent required by applicable laws or regulations or by any subpoena or
similar legal process, (d) to any other party to this Agreement, (e) in
connection with the exercise of any remedies hereunder or any suit, action or
proceeding relating to this Agreement or any other Loan Document or the
enforcement of rights hereunder or thereunder, (f) subject to an agreement
containing provisions substantially the same as those of this Section, to any
assignee of or Participant in, or any prospective assignee of or Participant in,
any of its rights or obligations under this Agreement, (g) with the consent of
the Borrower or (h) to the extent such Information (i) becomes publicly
available other than as a result of a breach of this Section or (ii) becomes
available to the Agent, the Issuing Bank, the Swingline Bank or any Bank on a
nonconfidential basis from a source other than the Borrower. For the purposes of
this Section, "Information" means all information received from the Borrower
relating to the Borrower or its business, other than any such information that
is available to the Agent, the Issuing Bank, the Swingline Bank or any Bank on a
nonconfidential basis prior to disclosure by the Borrower; provided that, in the
case of information received from the Borrower after the date hereof, such
information is clearly identified at the time of delivery as confidential. Any
Person required to maintain the confidentiality of Information as provided in
this Section shall be considered to have complied with its obligation to do so
if such Person has exercised the same
<PAGE>
106
degree of care to maintain the confidentiality of such Information as such
Person would accord to its own confidential information.
<PAGE>
107
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: General Counsel
Telecopy Number: (201) 393-5289
MORGAN GUARANTY TRUST COMPANY OF NEW YORK,
by
---------------------------------------------
Title:
------------------------------------------
NATIONSBANK, N.A.,
by
---------------------------------------------
Title:
------------------------------------------
WACHOVIA BANK OF GEORGIA, N.A.,
by
---------------------------------------------
Title:
------------------------------------------
BANK OF AMERICA ILLINOIS,
by
---------------------------------------------
Title:
------------------------------------------
<PAGE>
108
BANK OF MONTREAL,
by
---------------------------------------------
Title:
------------------------------------------
THE BANK OF NEW YORK,
by
---------------------------------------------
Title:
------------------------------------------
BANQUE PARIBAS,
by
---------------------------------------------
Title:
------------------------------------------
CHL HIGH YIELD LOAN PORTFOLIO (A
UNIT OF THE CHASE MANHATTAN BANK),
by
---------------------------------------------
Title:
------------------------------------------
CREDIT LYONNAIS NEW YORK BRANCH,
by
---------------------------------------------
Title:
------------------------------------------
FLEET NATIONAL BANK,
by
---------------------------------------------
Title:
------------------------------------------
<PAGE>
109
THE FUJI BANK, LIMITED, NEW YORK BRANCH,
by
---------------------------------------------
Title:
------------------------------------------
THE NIPPON CREDIT BANK, LTD.,
by
---------------------------------------------
Title:
------------------------------------------
PROTECTIVE LIFE INSURANCE COMPANY,
by
---------------------------------------------
Title:
------------------------------------------
THE SANWA BANK, LIMITED, NEW YORK BRANCH,
by
---------------------------------------------
Title:
------------------------------------------
UNION BANK OF CALIFORNIA, N.A.,
by
---------------------------------------------
Title:
------------------------------------------
VAN KAMPEN AMERICAN CAPITAL PRIME
RATE INCOME TRUST,
by
---------------------------------------------
Title:
------------------------------------------
<PAGE>
110
NATIONSBANK, N.A., as Issuing Bank,
by
---------------------------------------------
Title:
------------------------------------------
101 North Tryon Street
Charlotte, NC 28255
Attention of: Jacquetta
T. Banks
Telecopy No.: (704) 386-8694
WACHOVIA BANK OF GEORGIA, N.A., as
Swingline Bank,
by
---------------------------------------------
Title:
------------------------------------------
191 Peachtree Street, N.E.
Atlanta, GA 30303
Attention of: Linda Brown
Telecopy No.: (404) 332-6898
MORGAN GUARANTY TRUST COMPANY OF
NEW YORK, as Administrative Agent
by
---------------------------------------------
Title:
------------------------------------------
60 Wall Street
New York, NY 10260
Attention of: Penelope J.B. Cox
Telecopy No.: (212) 648-5018
Exhibit 23.2
Consent of Price Waterhouse LLP, Independent Accountants
We hereby consent to the use in the Prospectus constituting part of this
Registration Statement on Form S-1 of our report dated September 20, 1996,
except for Note 13 as to which the date is November 4, 1996, relating to the
combined financial statements of Corning Clinical Laboratories Inc., which
appears in such Prospectus. We also consent to the application of such report
to the Financial Statement Schedule for the three years ended December 31,
1995 listed under Item 16b of this Registration Statement when such schedule
is read in conjunction with the financial statements referred to in our
report. We also consent to the reference to us under the heading "Experts" in
such Prospectus.
/s/ Price Waterhouse LLP
Price Waterhouse LLP
New York, New York
December 10, 1996
E-3
Exhibit 23.3
Consent of Leverone & Company, Independent Accountants
We hereby consent to the use in the Prospectus constituting part of this
Registration Statement on Form S-1 of Corning Clinical Laboratories Inc. of
our report dated November 10, 1994 relating to the financial statements of
Moran Research Labs (not presented separately herein) as of and for the year
ended December 31, 1993. We also consent to the reference to us under the
heading "Experts" in such Registration Statement.
/s/ Leverone & Company
Leverone & Company
Billerica, Massachusetts
December 10, 1996
E-4
Exhibit 23.4
Consent of Deloitte & Touche LLP, Independent Auditors
We consent to the use in this Amendment No. 3 to the Registration
Statement of Corning Clinical Laboratories Inc. on Form S-1 of our report
dated February 28, 1994 relating to the consolidated statements of
operations, stockholders' equity and cash flows for the year ended December
31, 1993 of Nichols Institute (not presented separately herein) which report
includes explanatory paragraphs related to uncertainties as to an
investigation by the Office of the Inspector General of the Department of
Health and Human Services and substantial doubt as to the Company's ability
to continue as a going concern. We also consent to the reference to us under
the heading "Experts" in such Registration Statement.
/s/Deloitte & Touche LLP
Deloitte & Touche LLP
Costa Mesa, California
December 10, 1996
E-5
Exhibit 23.5
Consent of Ernst & Young LLP, Independent Auditors
We consent to the reference to our firm under the caption "Experts" and to
the use of our report dated May 19, 1994, relating to the combined financial
statements of Maryland Medical Laboratory, Inc. and affiliates (not presented
separately herein) in Amendment No. 3 to the Registration Statement on Form S-1
and related Prospectus of Corning Clinical Laboratories Inc. dated December 11,
1996.
/s/ Ernst & Young LLP
Ernst & Young LLP
Baltimore, Maryland
December 6, 1996
E-6
CONFORMED COPY
================================================================================
FORM T-1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
STATEMENT OF ELIGIBILITY
UNDER THE TRUST INDENTURE ACT OF 1939 OF A
CORPORATION DESIGNATED TO ACT AS TRUSTEE
CHECK IF AN APPLICATION TO DETERMINE
ELIGIBILITY OF A TRUSTEE PURSUANT TO
SECTION 305(b)(2) |__|
----------
THE BANK OF NEW YORK
(Exact name of trustee as specified in its charter)
New York 13-5160382
(State of incorporation (I.R.S. employer
if not a U.S. national bank) identification no.)
48 Wall Street, New York, N.Y. 10286
(Address of principal executive offices) (Zip code)
----------
CORNING CLINICAL LABORATORIES INC.
(Exact name of obligor as specified in its charter)
Delaware 16-1387862
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification no.)
One Malcolm Avenue
Teterboro, New Jersey 07608
(Address of principal executive offices) (Zip code)
----------
TABLE OF ADDITIONAL REGISTRANTS
State or Other I.R.S.
Jurisdiction of Employer
Incorporation Identification
Name or Organization Number
---- --------------- ------
Corning Clinical Laboratories Michigan 38-1882750
Inc. (MI)
Corning Nichols Institute Inc. California 95-2701802
Damon Clinical Laboratories Massachusetts 04-2449994
Inc.
<PAGE>
Corning Clinical Laboratories Connecticut 06-1460613
Inc. (CT)
Corning Clinical Laboratories Massachusetts 04-3248020
Inc. (MA)
Corning Clinical Laboratories Delaware 22-3137283
of Pennsylvania Inc.
Deyor CPF/Metpath, Inc. Ohio 34-1464777
Southgate Medical Services, Ohio 34-0944454
Inc.
Corning MRL Inc. Delaware 81-0496712
DPD Holdings Inc. Delaware 93-0988106
Metwest Inc. Delaware 33-0363316
Corning Clinical Laboratories Maryland 52-0890739
Inc. (MD)
Nichols Institute Diagnostics California 95-2955451
Nomad-Massachusetts, Inc. Massachusetts 04-2704542
Quest Diagnostics Incorporated Michigan 22-3471689
(MI)
Quest Diagnostics Incorporated Maryland 22-3471687
(MD)
CLMP Inc. Delaware 51-031423
Diagnostic Reference Services, Maryland Application pending
Inc.
Pathology Building Partnership Maryland Application pending
The principal executive office and telephone number of each of the above
registrants is One Malcolm Avenue, Teterboro, New Jersey 07608, (201)393-5000.
----------
% Senior Subordinated Notes due 2006
(Title of the indenture securities)
================================================================================
-2-
<PAGE>
1. General information. Furnish the following information as to the Trustee:
(a) Name and address of each examining or supervising authority to which it
is subject.
- --------------------------------------------------------------------------------
Name Address
- --------------------------------------------------------------------------------
Superintendent of Banks of the State of 2 Rector Street, New York,
New York N.Y. 10006, and Albany, N.Y. 12203
Federal Reserve Bank of New York 33 Liberty Plaza, New York,
N.Y. 10045
Federal Deposit Insurance Corporation Washington, D.C. 20429
New York Clearing House Association New York, New York 10004
(b) Whether it is authorized to exercise corporate trust powers.
Yes.
2. Affiliations with Obligor.
If the obligor is an affiliate of the trustee, describe each such
affiliation.
None. (See Note on page 4.)
16. List of Exhibits.
Exhibits identified in parentheses below, on file with the Commission,
are incorporated herein by reference as an exhibit hereto, pursuant to
Rule 7a-29 under the Trust Indenture Act of 1939 (the "Act") and Rule
24 of the Commission's Rules of Practice.
1. A copy of the Organization Certificate of The Bank of New York
(formerly Irving Trust Company) as now in effect, which contains the
authority to commence business and a grant of powers to exercise
corporate trust powers. (Exhibit 1 to Amendment No. 1 to Form T-1 filed
with Registration Statement No. 33-6215, Exhibits 1a and 1b to Form T-1
filed with Registration Statement No. 33-21672 and Exhibit 1 to Form
T-1 filed with Registration Statement No. 33-29637.)
4. A copy of the existing By-laws of the Trustee. (Exhibit 4 to Form T-1
filed with Registration Statement No. 33-31019.)
6. The consent of the Trustee required by Section 321(b) of the Act.
(Exhibit 6 to Form T-1 filed with Registration Statement No. 33-44051.)
7. A copy of the latest report of condition of the Trustee published
pursuant to law or to the requirements of its supervising or examining
authority.
-3-
<PAGE>
NOTE
Inasmuch as this Form T-1 is filed prior to the ascertainment by the
Trustee of all facts on which to base a responsive answer to Item 2, the answer
to said Item is based on incomplete information.
Item 2 may, however, be considered as correct unless amended by an
amendment to this Form T-1.
-4-
<PAGE>
SIGNATURE
Pursuant to the requirements of the Act, the Trustee, The Bank of New
York, a corporation organized and existing under the laws of the State of New
York, has duly caused this statement of eligibility to be signed on its behalf
by the undersigned, thereunto duly authorized, all in The City of New York, and
State of New York, on the 5th day of December, 1996.
THE BANK OF NEW YORK
By: /s/ STEPHEN J. GIURLANDO
--------------------------------
Name: STEPHEN J. GIURLANDO
Title: ASSISTANT VICE PRESIDENT
-5-
<PAGE>
Exhibit 7
- --------------------------------------------------------------------------------
Consolidated Report of Condition of
THE BANK OF NEW YORK
of 48 Wall Street, New York, N.Y. 10286
And Foreign and Domestic Subsidiaries,
a member of the Federal Reserve System, at the close of business June 30, 1996,
published in accordance with a call made by the Federal Reserve Bank of this
District pursuant to the provisions of the Federal Reserve Act.
Dollar Amounts
ASSETS in Thousands
Cash and balances due from depos-
itory institutions:
Noninterest-bearing balances and
currency and coin .................. $ 3,650,068
Interest-bearing balances .......... 738,260
Securities:
Held-to-maturity securities ........ 784,969
Available-for-sale securities ...... 2,033,407
Federal funds sold and securities
purchased under agreements to resell
in domestic offices of the bank:
Federal funds sold ................... 3,699,232
Securities purchased under
agreements to resell ................. 20,000
Loans and lease financing
receivables:
Loans and leases, net of unearned
income ................. 28,109,045
LESS: Allowance for loan and
lease losses .............. 586,658
LESS: Allocated transfer risk
reserve........................ 429
Loans and leases, net of unearned
income, allowance, and reserve 27,521,958
Assets held in trading accounts ...... 678,844
Premises and fixed assets (including
capitalized leases) ................ 608,217
Other real estate owned .............. 50,599
Investments in unconsolidated
subsidiaries and associated
companies .......................... 235,670
Customers' liability to this bank on
acceptances outstanding ............ 904,948
Intangible assets .................... 450,230
Other assets ......................... 1,299,464
-----------
Total assets ......................... $42,675,866
===========
LIABILITIES
Deposits:
In domestic offices ................ $19,223,050
Noninterest-bearing ....... 7,675,758
Interest-bearing ......... 11,547,292
In foreign offices, Edge and
Agreement subsidiaries, and IBFs ... 11,527,685
Noninterest-bearing .......... 48,502
<PAGE>
Interest-bearing ......... 11,479,183
Federal funds purchased and secu-
rities sold under agreements to re-
purchase in domestic offices of
the bank and of its Edge and
Agreement subsidiaries, and in
IBFs:
Federal funds purchased ............ 1,498,351
Securities sold under agreements
to repurchase .................... 126,974
Demand notes issued to the U.S.
Treasury ........................... 231,865
Trading liabilities .................. 479,390
Other borrowed money:
With original maturity of one year
or less .......................... 2,521,578
With original maturity of more than
one year ......................... 20,780
Bank's liability on acceptances exe-
cuted and outstanding .............. 905,850
Subordinated notes and debentures .... 1,020,400
Other liabilities .................... 1,543,657
-----------
Total liabilities .................... 39,099,580
-----------
EQUITY CAPITAL
Common stock ........................ 942,284
Surplus ............................. 525,666
Undivided profits and capital
reserves .......................... 2,124,231
Net unrealized holding gains
(losses) on available-for-sale
securities ........................ (8,063)
Cumulative foreign currency transla-
tion adjustments .................. (7,832)
-----------
Total equity capital ................ 3,576,286
-----------
Total liabilities and equity
capital ........................... $42,675,866
===========
I, Robert E. Keilman, Senior Vice President and Comptroller of the
above-named bank do hereby declare that this Report of Condition has been
prepared in conformance with the instructions issued by the Board of Governors
of the Federal Reserve System and is true to the best of my knowledge and
belief.
Robert E. Keilman
We, the undersigned directors, attest to the correctness of this Report of
Condition and declare that it has been examined by us and to the best of our
knowledge and belief has been prepared in conformance with the instructions
issued by the Board of Governors of the Federal Reserve System and is true and
correct.
-
J. Carter Bacot |
Alan R. Griffith | Directors
Thomas A. Renyi |
-
- --------------------------------------------------------------------------------
