-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Apb78VJ5rUNVXqj8a3bk20J+xBhuQB4uW4OkZ4LGkrkiXPIEVVhZt/PvWvUxbbf6 BZsUI6ktslHrySMFVufCZg== 0000950146-96-002240.txt : 19961212 0000950146-96-002240.hdr.sgml : 19961212 ACCESSION NUMBER: 0000950146-96-002240 CONFORMED SUBMISSION TYPE: S-1/A PUBLIC DOCUMENT COUNT: 11 FILED AS OF DATE: 19961211 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: CORNING CLINICAL LABORATORIES INC CENTRAL INDEX KEY: 0001022079 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-COMMERCIAL PHYSICAL & BIOLOGICAL RESEARCH [8731] IRS NUMBER: 161387862 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: S-1/A SEC ACT: 1933 Act SEC FILE NUMBER: 333-15867 FILM NUMBER: 96678879 BUSINESS ADDRESS: STREET 1: ONE MALCLOM AVE CITY: TETERBORO STATE: NJ ZIP: 07601 BUSINESS PHONE: 2013935143 MAIL ADDRESS: STREET 1: ONE MALCOLM AVE CITY: TETERBORO STATE: NJ ZIP: 07601 FILER: COMPANY DATA: COMPANY CONFORMED NAME: DPD HOLDINGS INC CENTRAL INDEX KEY: 0000835472 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-MEDICAL LABORATORIES [8071] IRS NUMBER: 954415490 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: S-1/A SEC ACT: 1933 Act SEC FILE NUMBER: 333-15867-01 FILM NUMBER: 96678880 BUSINESS ADDRESS: STREET 1: ONE MALCOM AVE CITY: TETERBORO STATE: NJ ZIP: 07608 BUSINESS PHONE: 2013935000 FORMER COMPANY: FORMER CONFORMED NAME: UNILAB CORP DATE OF NAME CHANGE: 19920703 FORMER COMPANY: FORMER CONFORMED NAME: DMC INTERNATIONAL INC DATE OF NAME CHANGE: 19881121 FILER: COMPANY DATA: COMPANY CONFORMED NAME: NICHOLS INSTITUTE DIAGNOSTICS CENTRAL INDEX KEY: 0000921948 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-MEDICAL LABORATORIES [8071] IRS NUMBER: 952955451 FILING VALUES: FORM TYPE: S-1/A SEC ACT: 1933 Act SEC FILE NUMBER: 333-15867-02 FILM NUMBER: 96678881 BUSINESS ADDRESS: STREET 1: 33608 ORTEGA HIWAY CITY: SAN JUAN CAPISTRANO STATE: CA ZIP: 92690 BUSINESS PHONE: 7147284000 MAIL ADDRESS: STREET 1: 33608 ORTEGA HWY CITY: SAN JUAN CAPISTRANO STATE: CA ZIP: 92690-6130 FILER: COMPANY DATA: COMPANY CONFORMED NAME: CORNING CLINICAL LABORATORIES INC /CT/ CENTRAL INDEX KEY: 0001026673 STANDARD INDUSTRIAL CLASSIFICATION: [] FILING VALUES: FORM TYPE: S-1/A SEC ACT: 1933 Act SEC FILE NUMBER: 333-15867-03 FILM NUMBER: 96678882 BUSINESS ADDRESS: STREET 1: PO BOX ONE MALCOLM AVENUE CITY: TELEBORO STATE: NJ ZIP: 07608 BUSINESS PHONE: 2013935143 MAIL ADDRESS: STREET 1: 3 STERLING DRIVE CITY: WALLINGFORD STATE: CT ZIP: 06492 FILER: COMPANY DATA: COMPANY CONFORMED NAME: CORNING CLINICAL LABORATORIES INC /MA/ CENTRAL INDEX KEY: 0001026674 STANDARD INDUSTRIAL CLASSIFICATION: [] FILING VALUES: FORM TYPE: S-1/A SEC ACT: 1933 Act SEC FILE NUMBER: 333-15867-04 FILM NUMBER: 96678883 BUSINESS ADDRESS: STREET 1: PO BOX ONE MALCOLM AVENUE CITY: TELEBORO STATE: NJ ZIP: 07608 BUSINESS PHONE: 2013935143 MAIL ADDRESS: STREET 1: 415 MASSACHUSETTS AVE CITY: CAMBRIDGED STATE: MA ZIP: 02139 FILER: COMPANY DATA: COMPANY CONFORMED NAME: CORNING CLINICAL LABORATORIES INC /MD/ CENTRAL INDEX KEY: 0001026675 STANDARD INDUSTRIAL CLASSIFICATION: [] FILING VALUES: FORM TYPE: S-1/A SEC ACT: 1933 Act SEC FILE NUMBER: 333-15867-05 FILM NUMBER: 96678884 BUSINESS ADDRESS: STREET 1: PO BOX ONE MALCOLM AVENUE CITY: TELEBORO STATE: NJ ZIP: 07608 BUSINESS PHONE: 2013935143 MAIL ADDRESS: STREET 1: 1901 SULPHUR SPRINGS RD CITY: BALTIMORE STATE: MD ZIP: 21227 FILER: COMPANY DATA: COMPANY CONFORMED NAME: CORNING CLINICAL LABORATORIES INC /MI/ CENTRAL INDEX KEY: 0001026676 STANDARD INDUSTRIAL CLASSIFICATION: [] FILING VALUES: FORM TYPE: S-1/A SEC ACT: 1933 Act SEC FILE NUMBER: 333-15867-06 FILM NUMBER: 96678885 BUSINESS ADDRESS: STREET 1: PO BOX ONE MALCOLM AVENUE CITY: TELEBORO STATE: NJ ZIP: 07608 BUSINESS PHONE: 2013935143 MAIL ADDRESS: STREET 1: 4444 GIDDINGS RD CITY: AUBURN HILLS STATE: MI ZIP: 48326 FILER: COMPANY DATA: COMPANY CONFORMED NAME: CORNING CLINICAL LABORATORIES OF PENNSYLVANIA INC /DE/ CENTRAL INDEX KEY: 0001026677 STANDARD INDUSTRIAL CLASSIFICATION: [] FILING VALUES: FORM TYPE: S-1/A SEC ACT: 1933 Act SEC FILE NUMBER: 333-15867-07 FILM NUMBER: 96678886 BUSINESS ADDRESS: STREET 1: PO BOX ONE MALCOLM AVENUE CITY: TELEBORO STATE: NJ ZIP: 07608 BUSINESS PHONE: 2013935143 MAIL ADDRESS: STREET 1: 875 GREENTREE RD STREET 2: 4 PARKWAY CENTER CITY: PITTSBURGHLS STATE: PA ZIP: 15220 FILER: COMPANY DATA: COMPANY CONFORMED NAME: CORNING MRL INC CENTRAL INDEX KEY: 0001026678 STANDARD INDUSTRIAL CLASSIFICATION: [] FILING VALUES: FORM TYPE: S-1/A SEC ACT: 1933 Act SEC FILE NUMBER: 333-15867-08 FILM NUMBER: 96678887 BUSINESS ADDRESS: STREET 1: PO BOX ONE MALCOLM AVENUE CITY: TELEBORO STATE: NJ ZIP: 07608 BUSINESS PHONE: 2013935143 FILER: COMPANY DATA: COMPANY CONFORMED NAME: CORNING NICHOLS INSTITUTE INC CENTRAL INDEX KEY: 0001026679 STANDARD INDUSTRIAL CLASSIFICATION: [] FILING VALUES: FORM TYPE: S-1/A SEC ACT: 1933 Act SEC FILE NUMBER: 333-15867-09 FILM NUMBER: 96678888 BUSINESS ADDRESS: STREET 1: PO BOX ONE MALCOLM AVENUE CITY: TELEBORO STATE: NJ ZIP: 07608 BUSINESS PHONE: 2013935143 MAIL ADDRESS: STREET 1: 33608 ORTEGA HWY CITY: SAN JUAN CAPISTRANO STATE: CA ZIP: 926690-613 FILER: COMPANY DATA: COMPANY CONFORMED NAME: DAMON CLINCAL LABORATORIES INC /MA/ CENTRAL INDEX KEY: 0001026680 STANDARD INDUSTRIAL CLASSIFICATION: [] FILING VALUES: FORM TYPE: S-1/A SEC ACT: 1933 Act SEC FILE NUMBER: 333-15867-10 FILM NUMBER: 96678889 BUSINESS ADDRESS: STREET 1: PO BOX ONE MALCOLM AVENUE CITY: TELEBORO STATE: NJ ZIP: 07608 BUSINESS PHONE: 2013935143 FILER: COMPANY DATA: COMPANY CONFORMED NAME: DEYOR CPF METPATH INC CENTRAL INDEX KEY: 0001026681 STANDARD INDUSTRIAL CLASSIFICATION: [] FILING VALUES: FORM TYPE: S-1/A SEC ACT: 1933 Act SEC FILE NUMBER: 333-15867-11 FILM NUMBER: 96678890 BUSINESS ADDRESS: STREET 1: PO BOX ONE MALCOLM AVENUE CITY: TELEBORO STATE: NJ ZIP: 07608 BUSINESS PHONE: 2013935143 MAIL ADDRESS: STREET 1: 875 GREENTREE CENTER STREET 2: 4 PARKWAY CENTER CITY: PITTSBURGH STATE: PA ZIP: 15220 FILER: COMPANY DATA: COMPANY CONFORMED NAME: NOMAD MASSACHUSSETTS INC CENTRAL INDEX KEY: 0001026683 STANDARD INDUSTRIAL CLASSIFICATION: [] FILING VALUES: FORM TYPE: S-1/A SEC ACT: 1933 Act SEC FILE NUMBER: 333-15867-12 FILM NUMBER: 96678891 BUSINESS ADDRESS: STREET 1: PO BOX ONE MALCOLM AVENUE CITY: TELEBORO STATE: NJ ZIP: 07608 BUSINESS PHONE: 2013935143 FILER: COMPANY DATA: COMPANY CONFORMED NAME: DIAGNOSTIC REFERENCE SERVICE INC CENTRAL INDEX KEY: 0001026684 STANDARD INDUSTRIAL CLASSIFICATION: [] FILING VALUES: FORM TYPE: S-1/A SEC ACT: 1933 Act SEC FILE NUMBER: 333-15867-13 FILM NUMBER: 96678892 BUSINESS ADDRESS: STREET 1: PO BOX ONE MALCOLM AVENUE CITY: TELEBORO STATE: NJ ZIP: 07608 BUSINESS PHONE: 2013935143 MAIL ADDRESS: STREET 1: 1901 SULPHUR SPRING RD CITY: BALTIMORE STATE: MD ZIP: 21227 FILER: COMPANY DATA: COMPANY CONFORMED NAME: METWEST INC CENTRAL INDEX KEY: 0001026685 STANDARD INDUSTRIAL CLASSIFICATION: [] FILING VALUES: FORM TYPE: S-1/A SEC ACT: 1933 Act SEC FILE NUMBER: 333-15867-14 FILM NUMBER: 96678893 BUSINESS ADDRESS: STREET 1: PO BOX ONE MALCOLM AVENUE CITY: TELEBORO STATE: NJ ZIP: 07608 BUSINESS PHONE: 2013935143 MAIL ADDRESS: STREET 1: 4771 REGENT BOULEVARD CITY: IRVING STATE: TX ZIP: 75063 FILER: COMPANY DATA: COMPANY CONFORMED NAME: SOUTHGATE MEDICAL SERVICES INC CENTRAL INDEX KEY: 0001026686 STANDARD INDUSTRIAL CLASSIFICATION: [] FILING VALUES: FORM TYPE: S-1/A SEC ACT: 1933 Act SEC FILE NUMBER: 333-15867-15 FILM NUMBER: 96678894 BUSINESS ADDRESS: STREET 1: PO BOX ONE MALCOLM AVENUE CITY: TELEBORO STATE: NJ ZIP: 07608 BUSINESS PHONE: 2013935143 MAIL ADDRESS: STREET 1: 875 GREENTREE RD STREET 2: 4 PARKWAY CENTER CITY: PITTSBURGH STATE: PA ZIP: 15220 FILER: COMPANY DATA: COMPANY CONFORMED NAME: QUEST DIAGNOSTICS INC /MA/ CENTRAL INDEX KEY: 0001027504 STANDARD INDUSTRIAL CLASSIFICATION: [] IRS NUMBER: 223471687 STATE OF INCORPORATION: MA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: S-1/A SEC ACT: 1933 Act SEC FILE NUMBER: 333-15867-16 FILM NUMBER: 96678895 BUSINESS ADDRESS: STREET 1: ONE MALCOM AVENUE CITY: TETERBORO STATE: NJ ZIP: 07608 BUSINESS PHONE: 2013935143 MAIL ADDRESS: STREET 1: ONE MALCOLM AVENUE CITY: TEARBORO STATE: NJ ZIP: 07608 FILER: COMPANY DATA: COMPANY CONFORMED NAME: QUEST DIAGNOSTICS INC /MI/ CENTRAL INDEX KEY: 0001027505 STANDARD INDUSTRIAL CLASSIFICATION: [] IRS NUMBER: 223471689 STATE OF INCORPORATION: MI FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: S-1/A SEC ACT: 1933 Act SEC FILE NUMBER: 333-15867-17 FILM NUMBER: 96678896 BUSINESS ADDRESS: STREET 1: ONE MALCOM AVENUE CITY: TETERBORO STATE: NJ ZIP: 07608 BUSINESS PHONE: 2013935143 MAIL ADDRESS: STREET 1: ONE MALCOLM AVENUE CITY: TEARBORO STATE: NJ ZIP: 07608 FILER: COMPANY DATA: COMPANY CONFORMED NAME: CLMP INC CENTRAL INDEX KEY: 0001027506 STANDARD INDUSTRIAL CLASSIFICATION: [] IRS NUMBER: 510314231 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: S-1/A SEC ACT: 1933 Act SEC FILE NUMBER: 333-15867-18 FILM NUMBER: 96678897 BUSINESS ADDRESS: STREET 1: ONE MALCOM AVENUE CITY: TETERBORO STATE: NJ ZIP: 07608 BUSINESS PHONE: 2013935143 MAIL ADDRESS: STREET 1: ONE MALCOLM AVENUE CITY: TEARBORO STATE: NJ ZIP: 07608 FILER: COMPANY DATA: COMPANY CONFORMED NAME: PATHOLOGY BUILDING PARTNERSHIP CENTRAL INDEX KEY: 0001027507 STANDARD INDUSTRIAL CLASSIFICATION: [] STATE OF INCORPORATION: MD FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: S-1/A SEC ACT: 1933 Act SEC FILE NUMBER: 333-15867-19 FILM NUMBER: 96678898 BUSINESS ADDRESS: STREET 1: ONE MALCOM AVENUE CITY: TETERBORO STATE: NJ ZIP: 07608 BUSINESS PHONE: 2013935143 MAIL ADDRESS: STREET 1: ONE MALCOLM AVENUE CITY: TEARBORO STATE: NJ ZIP: 07608 S-1/A 1 FORM S-1/A 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)
Delaware 8071 16-1387862 (State of other jurisdiction (Primary Standard Industrial (I.R.S. Employer of Incorporation or organization) Classification Code Number) Identification Number)
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
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
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: [ ] If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box: [ ] CALCULATION OF REGISTRATION FEE
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 --------------------------------------- --------------- ---------------- ---------------- ----------------- % Senior Subordinated Notes due 2006(1) $150,000,000 100% $150,000,000 $45,455(3)
(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. TABLE OF ADDITIONAL REGISTRANTS
Primary Standard State or Other Industrial Jurisdiction of Classification I.R.S. Employer Incorporation Code Identification Name or Organization Number Number - ------------------------------------------------------------- ---------------- ---------------- -------------------- 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
The principal executive office and telephone number of each of the above registrants is One Malcolm Avenue, Teterboro, New Jersey 07608, (201) 393-5000. 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.
Underwriting Discount and Proceeds to Price to Public (1) Commissions (2) Company (1)(3) Per Note % % % Total $ $ $
(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. 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. 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
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
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 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 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 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 (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 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 The Offering
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 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.
10 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
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) 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
(Footnotes on page 14) 12
Year Ended December 31, ----------------------------------------------------------- Pro Forma Historical ------------------------------------------- 1995(a) 1995 1994(b) 1993 --------------- --------------- ------------- ------------- (in thousands, except share, per share and percentage data) 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
(Footnotes on page 14) 13 (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):
Three Months Ended September 30, Nine Months Ended September 30, Year Ended December 31, ----------------------------------- --------------------------------- -------------------------- Pro Forma Historical Pro Forma Historical Pro Forma Historical ------------ -------------------- ---------- --------------------- ----------- ------------- 1996 1996 1995 1996 1996 1995 1995 1995 $152,656 $162,989 $56,405 $171,231 $202,149 $41,666 $15,675 $57,568
(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 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 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 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 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 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 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 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 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 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 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 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 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."
Pro Forma Historical Adjustments Pro Forma ------------- --------------- -------------- (in thousands) 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 ============= =============== ==============
(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 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
Three Months Ended Nine Months Ended September 30, September 30, ------------------------------- ------------------------------ 1996 1995 1996 1995 ---------------- -------------- --------------- -------------- (in thousands, except percentage data) 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%
(Footnotes on page 30) 28
Year Ended December 31, -------------------------------------------------------------------- 1995 1994(a) 1993 1992 1991 -------------- ------------- -------------------------- ----------- (in thousands, except percentage data) 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%
(Footnotes on page 30) 29 (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):
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
(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 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 Quest Diagnostics Incorporated Unaudited Pro Forma Combined Statement of Operations Three Months Ended September 30, 1996
Pro Forma Historical Adjustments Pro Forma ------------------- ------------------- ------------------- (in thousands, except share and per share data) 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) ===================
The accompanying notes to unaudited pro forma combined financial information are an integral part hereof. 32 Quest Diagnostics Incorporated Unaudited Pro Forma Combined Statement of Operations Nine Months Ended September 30, 1996
Pro Forma Historical Adjustments Pro Forma ------------------- ------------------- ------------------- (in thousands, except share and per share data) 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) ===================
The accompanying notes to unaudited pro forma combined financial information are an integral part hereof. 33 Quest Diagnostics Incorporated Unaudited Pro Forma Combined Statement of Operations Year Ended December 31, 1995
Pro Forma Historical Adjustments Pro Forma --------------- -------------- ---------------- (in thousands, except share and per share data) 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) ================
The accompanying notes to unaudited pro forma combined financial information are an integral part hereof. 34 Quest Diagnostics Incorporated Unaudited Pro Forma Combined Balance Sheet September 30, 1996
Pro Forma Historical Adjustments Pro Forma ------------- --------------- ------------- (in thousands) 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 ============= =============== =============
The accompanying notes to unaudited pro forma combined financial information are an integral part hereof. 35 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 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 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 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 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 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 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 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 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 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 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 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 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 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 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 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:
Requisition Volume as % of Total Revenue Per Requisition --------------------- ------------------------- 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
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 [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 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 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 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 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 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 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 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 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 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 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 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 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:
Location Type of Laboratory Leased or Owned - -------- ------------------ --------------- 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 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
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 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 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 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
Annual Compensation -------------------------------------- Name and Other Annual Principal Position Year Salary(1) Bonus(2) Compensation(3) - ------------------------- --------- ---------- --------- ---------------- 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
Long-Term Compensation ------------------------------------ Awards Payouts ------------------------- ----------- Restricted Securities Incentive Name and Stock Underlying Plan All Other Principal Position Awards(4) Options Payouts Compensation(5) - ------------------------- ------------ ------------ ----------- --------------- 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
(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 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)
Individual Grants ---------------------------------------------------- Number of % of Total Securities Options Underlying Granted Options to Employees Exercise Expiration Name Granted(2) in Fiscal Year Price Date ------------------------------ --------------------------- --------- ------------ 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
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% ------------------------------ --------------------- ------------- 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
(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 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)
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 - ------------------------ --------------- ----------- -------------- ---------------- -------------- ---------------- 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
(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
Number Number Number Grant of Shares Performance of Shares of Shares Vesting Date of Name Year Date Granted Period Forfeited Earned Earned Shares - ------------------------ ------ ------------------ ------------- ------------ ----------- --------------- 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 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
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 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 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.
Years of Service ---------------------------------------------------------------- Remuneration 15 20 25 30 35 40 - ------------ --------- --------- --------- --------- --------- ---------- $ 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
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 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 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 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.
Number of Shares Beneficially Number of Name Owned(1) Exercisable Options ---------------------------- -------------------- --------------------- 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
(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 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 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 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 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 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 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 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 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 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 (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 (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 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 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 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 "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 "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 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 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 "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 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 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 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 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:
Principal Amount Underwriter of Notes - ----------- --------- J.P. Morgan Securities Inc. $ Goldman, Sachs & Co. Lazard Freres & Co. LLC TOTAL $150,000,000 ==============
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 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 Index to Financial Statements
Page ---- 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
F-1 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 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 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 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 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)
1995 1994 ------------- ------------- 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 ============= =============
The accompanying notes are an integral part of these statements. F-6 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)
1995 1994 1993 ------------- ------------- ------------- 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 ============= ============= =============
The accompanying notes are an integral part of these statements. F-7 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)
1995 1994 1993 ------------- ------------ ------------ 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 ============= ============ ============
The accompanying notes are an integral part of these statements. F-8 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)
Cumulative Market Total Retained Translation Valuation Stockholder's Contributed Capital Earnings Adjustment Adjustment Equity ------------------- -------- ----------- ---------- ------------- 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 ================================ ============= ============= ===============
The accompanying notes are an integral part of these statements. F-9 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 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 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 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:
1995 1994 1993 --------- -------- --------- 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 =========== ======== =======
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:
1995 1994 1993 --------- --------- ---------- 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% ========= ========= ==========
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:
1995 1994 ---------------------- 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 ======================
F-13 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):
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 --------------- --------------- -------------- --------------- --------- -------------- 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 =============== =============== ============== =============== ========= ==============
F-14 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:
1995 1994 ----------- ----------- 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 =========== ===========
F-15 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:
1995 1994 ------------- ------------ 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 ============= ============
Current maturities on long-term debt totaled $12.1 million and $12.6 million at December 31, 1995 and 1994, respectively. Long-term debt, including capital leases, maturing in each of the years subsequent to December 31, 1996 is as follows:
Fiscal year ending December 31, 1997 $ 261,131 1998 10,493 1999 10,530 2000 10,576 2001 and thereafter 902,836 ------------ Total long-term debt $1,195,566 ============
Future minimum payments under capital leases and the present value thereof are as follows:
Fiscal year ending December 31, 1997 $ 4,061 1998 3,846 1999 3,840 2000 3,948 2001 and thereafter 116,102 ----------- Total future minimum payments under capital leases 131,797 Less amount representing interest (99,279) ----------- Present value of minimum payments under capital leases $ 32,518 ===========
F-16 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.
December 31, ----------------------- 1995 1994 ----------- ----------- 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
For the Year Ended December 31, ----------------------------------- 1995 1994 1993 ----------- ---------- ----------- 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
10. EMPLOYEE RETIREMENT PLANS Defined Benefit Plans An acquired entity had a defined benefit pension plan which in 1990 was frozen as to the further accrual of benefits. At December 31, 1995 the present value of the projected benefit obligation using a discount rate of 7.5% was $22.6 million and the fair value of the plan assets (publicly traded corporate debt and equity securities, government obligations and money market funds) was $17.4 million. The difference between the projected benefit obligation and the fair value of plan assets is included in other long-term liabilities in the accompanying combined balance sheet. Defined Contribution Plans The Company has several defined contribution plans covering substantially all of its full-time employees. Company contributions to these plans aggregated $18.5 million, $15.9 million and $7.3 million for 1995, 1994 and 1993, respectively. 11. RELATED PARTY TRANSACTIONS The Company, in the ordinary course of business, conducts a number of transactions with Corning and its affiliates. The significant transactions occurring during the years ended December 31, 1995, 1994 and 1993 are as follows:
1995 1994 1993 --------- -------- ---------- Interest expense on borrowings $78,930 $55,835 $28,400 Purchase of laboratory supplies 11,261 11,607 7,338 Corporate fees 2,800 2,800 2,450
F-17 CORNING CLINICAL LABORATORIES INC. (to be renamed Quest Diagnostics Incorporated) (a wholly-owned business of Corning Incorporated) NOTES TO COMBINED FINANCIAL STATEMENTS (Continued) (dollars in thousands, unless otherwise indicated) Certain executives of the Company are included in various stock compensation programs of Corning. Expenses related to these programs have been included in the Company's combined financial statements. In 1994, Corning contributed capital of $25.2 million through the reduction of revolving credit notes and former S-Corporation shareholders contributed capital of a building approximating $4.4 million. 12. COMMITMENTS AND CONTINGENCIES Minimum rental commitments under noncancellable operating leases, primarily real estate, in effect at December 31, 1995 are as follows:
Year ending December 31, 1996 $ 40,459 1997 30,481 1998 20,527 1999 14,877 2000 12,532 2001 and thereafter 65,920 ---------- Net minimum lease payments $184,796 ==========
Operating lease rental expense for 1995, 1994 and 1993 aggregated $46.9 million, $49.4 million and $46.9 million, respectively. The Company is self-insured for substantially all casualty losses and maintains supplemental coverage on a claims made basis. The basis for the insurance reserve at December 31, 1995 and 1994 is the actuarially determined projected losses for each program (within the self-insured retention) based upon the Company's loss experience. The Company has entered into several settlement agreements with various governmental and private payors during recent years. At present, government investigations of certain practices by clinical laboratories acquired in recent years are ongoing. In addition, certain payors are reviewing their reimbursement practices for laboratory tests. The results of these investigations and reviews may result in additional settlement payments or reductions in reimbursements for certain tests. The recorded reserves of approximately $37.0 million are included in accrued liabilities and represent management's best estimate at December 31, 1995. Based on information then available to CCL, management did not believe that the exposure to claims in excess of recorded reserves would be material (see Note 13). 13. SUBSEQUENT EVENTS As disclosed in Note 12, federal government investigations of certain practices by clinical laboratories acquired in recent years are ongoing. In the second quarter of 1996, the DOJ notified the Company that it has taken issue with certain payments received by Damon from federally funded healthcare programs prior to its acquisition by the Company. 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 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 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 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 Quarterly Operating Results (unaudited)
First Second Third Fourth Total Quarter Quarter Quarter Quarter Year ------------- --------------- --------------- --------------- ------------- 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
(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 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)
September 30, December 31, 1996 1995 --------------- -------------- (unaudited) 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 =============== ==============
The accompanying notes are an integral part of these statements. F-23 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)
Three Months Ended Nine Months Ended September 30, September 30, September 30, September 30, 1996 1995 1996 1995 --------------- --------------- --------------- --------------- 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) =============== =============== =============== ===============
The accompanying notes are an integral part of these statements. F-24 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)
1996 1995 ------------- ------------ 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 ============= ============
The accompanying notes are an integral part of these statements. F-25 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 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 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 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 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.
September 30, December 31, 1996 1995 --------------- --------------- 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)
F-30 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. OUTSIDE BACK COVER [LOGO] QUEST DIAGNOSTICS 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 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 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.
Signature Title --------- ----- /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
II-3 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.
Signature Title --------- ----- * - ---------------------------------- Vice President and Director Douglas M. VanOort * - ---------------------------------- Director Alister W. Reynolds *By: /s/ Leo C. Farrenkopf, Jr. ----------------------------- Leo C. Farrenkopf, Jr. Attorney-in-fact
II-4 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.
Signature Title --------- ----- * - --------------------------------- 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
II-5 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.
Signature Title --------- ----- * - ------------------------------------ Vice President and Director Douglas M. VanOort * - ------------------------------------- Director Alister W. Reynolds *By: /s/ Leo C. Farrenkopf, Jr. -------------------------------- Leo C. Farrenkopf, Jr. Attorney-in-fact
II-6 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.
Signature Title --------- ----- * - ------------------------------------- Vice President and Director Douglas M. VanOort * - ------------------------------------- Director Alister W. Reynolds *By: /s/ Leo C. Farrenkopf, Jr. ----------------------------- Leo C. Farrenkopf, Jr. Attorney-in-fact
II-7 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.
Signature Title --------- ----- * - ----------------------------------- Vice President and Director Douglas M. VanOort * - ----------------------------------- Director Alister W. Reynolds *By: /s/ Leo C. Farrenkopf, Jr. -------------------------- Leo C. Farrenkopf, Jr. Attorney-in-fact
II-8 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.
Signature Title --------- ----- * - ------------------------------------ Vice President and Director Douglas M. VanOort * - ------------------------------------ Director Alister W. Reynolds *By: /s/ Leo C. Farrenkopf, Jr. -------------------------------- Leo C. Farrenkopf, Jr. Attorney-in-fact
II-9 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.
Signature Title --------- ----- * - ----------------------------------- Vice President and Director Douglas M. VanOort * - ----------------------------------- Director Alister W. Reynolds *By: /s/ Leo C. Farrenkopf, Jr. -------------------------- Leo C. Farrenkopf, Jr. Attorney-in-fact
II-10 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.
Signature Title --------- ----- * ---------------------------------- Vice President and Director Douglas M. VanOort * ---------------------------------- Director Alister W. Reynolds *By: /s/ Leo C. Farrenkopf, Jr. ------------------------- Leo C. Farrenkopf, Jr. Attorney-in-fact
II-11 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.
Signature Title --------- ----- * ---------------------------------- Vice President and Director Douglas M. VanOort * ----------------------------------- Director Alister W. Reynolds *By: /s/ Leo C. Farrenkopf, Jr. --------------------------- Leo C. Farrenkopf, Jr. Attorney-in-fact
II-12 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.
Signature Title --------- ----- * - ------------------------------------ Vice President and Director Douglas M. VanOort * - ------------------------------------- Director Alister W. Reynolds *By: /s/ Leo C. Farrenkopf, Jr. -------------------------- Leo C. Farrenkopf, Jr. Attorney-in-fact
II-13 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.
Signature Title --------- ----- * - ------------------------------------ Vice President and Director Douglas M. VanOort * - ------------------------------------ Director Alister W. Reynolds *By: /s/ Leo C. Farrenkopf, Jr. --------------------------- Leo C. Farrenkopf, Jr. Attorney-in-fact
II-14 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.
Signature Title --------- ----- * - ---------------------------------- Vice President and Director Douglas M. VanOort * - ---------------------------------- Director Alister W. Reynolds *By:/s/ Leo C. Farrenkopf, Jr. -------------------------- Leo C. Farrenkopf, Jr. Attorney-in-fact
II-15 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.
Signature Title --------- ----- * - ---------------------------------- Vice President and Director Douglas M. VanOort * - ---------------------------------- Director Alister W. Reynolds *By:/s/ Leo C. Farrenkopf, Jr. ------------------------- Leo C. Farrenkopf, Jr. Attorney-in-fact
II-16 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.
Signature Title --------- ----- * - ----------------------------------- Vice President and Director Douglas M. VanOort * - ------------------------------------ Director Alister W. Reynolds *By:/s/ Leo C. Farrenkopf, Jr. ------------------------ Leo C. Farrenkopf, Jr. Attorney-in-fact
II-17 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.
Signature Title --------- ----- * ---------------------------- Vice President and Director Douglas M. VanOort * ---------------------------- Director Alister W. Reynolds *By: /s/ Leo C. Farrenkopf, Jr. ---------------------------- Leo C. Farrenkopf, Jr. Attorney-in-fact
II-18 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.
Signature Title --------- ----- * ---------------------------- Vice President and Director Douglas M. VanOort * ---------------------------- Director Alister W. Reynolds *By: /s/ Leo C. Farrenkopf, Jr. ---------------------------- Leo C. Farrenkopf, Jr. Attorney-in-fact
II-19 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.
Signature Title --------- ----- /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
II-20 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.
Signature Title --------- ----- * - ---------------------------------- Douglas M. VanOort Vice President and Director * - ---------------------------------- Alister W. Reynolds Director *By: /s/ Leo C. Farrenkopf, Jr. - ----------------------------------- Leo C. Farrenkopf, Jr. Attorney-in-fact
II-21 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 Exhibit Index
Exhibit Number Description Page - ----------- ----------------------------------------------------------------------------------------------------------------- 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 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
**Previously filed. EX-1 2 UNDERWRITING AGREEMENT 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 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- 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- 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- 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- 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- 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- 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- (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- 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- (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- 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- 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- 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- 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- (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- 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- 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- (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- 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- (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- 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- 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- 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- 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- 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- 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- 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- 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- 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- 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- original, but all such respective counterparts shall together constitute one and the same instrument. -32- 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- 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- 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 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 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 accounting records of the Company and its subsidiaries and have found them to be in agreement. 4 EX-3.24 3 EXHIBIT 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 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 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 (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 (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 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 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 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 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 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 EX-4.2 4 INDENTURE DATED AS OF DECEMBER __, 1996 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 - ------------------------------------------------------------------------------- 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- 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- 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 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 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 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 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 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 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 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- 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: (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- 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- 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- "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- "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- "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- "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- "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- 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- (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- 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- 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- 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- 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- "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- "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- "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- 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- "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- "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- (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- 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- 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- 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- 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- 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- 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- 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- 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- 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- 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- 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- 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- 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- 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- 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- 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- 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- 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- 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- 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- 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- (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- 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- 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- 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- 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- 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- 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- 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- 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- 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- 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- 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- 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- (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- 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- 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- 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- 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- 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- 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- 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- (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- (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- 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- 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- 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- 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- 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- 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- (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- 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- 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- 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- 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- 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- 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- 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- (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- 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- 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- 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- (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- 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- 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- 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- 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- 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- (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- 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- 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- 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- 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- 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- 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- 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- 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- 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- 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- 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- 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- 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- 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- (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- 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- 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- CORNING CLINICAL LABORATORIES INC. (CT) By_____________________________________ Attest: _________________________________ CORNING CLINICAL LABORATORIES INC. (MA) By_____________________________________ Attest: _________________________________ CORNING CLINICAL LABORATORIES INC. (MD) By_____________________________________ Attest: _________________________________ -109- 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- DAMON CLINICAL LABORATORIES INC. By_____________________________________ Attest: _________________________________ DEYOR CPF/METPATH, INC. By_____________________________________ Attest: _________________________________ DIAGNOSTIC REFERENCE SERVICES, INC. By_____________________________________ Attest: _________________________________ DPD HOLDINGS INC. By_____________________________________ Attest: _________________________________ -111- METWEST INC. By_____________________________________ Attest: _________________________________ NICHOLS INSTITUTE DIAGNOSTICS By_____________________________________ Attest: _________________________________ PATHOLOGY BUILDING PARTNERSHIP By_____________________________________ Attest: _________________________________ -112- QUEST DIAGNOSTICS INCORPORATED (MD) By_____________________________________ Attest: _________________________________ QUEST DIAGNOSTICS INCORPORATED (MI) By_____________________________________ Attest: _________________________________ SOUTHGATE MEDICAL SERVICES, INC. By_____________________________________ Attest: _________________________________ -112- EX-5.1 5 OPINION 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 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 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 EX-10.11 6 CORNING CREDIT AGREEMENT 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] 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. 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 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 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 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. 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 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 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). 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. 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. 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. 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 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 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 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 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. 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 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 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. 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 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. 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. 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. 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. 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 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. 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. 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 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 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). 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 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 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 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. 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. 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 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 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 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%; 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 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%; 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. 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:
Payment Date Amount Payment Date Amount - ----------------------------------------------------------------------------------------------------- March 31, 1998 $7,500,000 September 30, 2000 $17,500,000 June 30, 1998 $7,500,000 December 31, 2000 $17,500,000 September 30, 1998 $7,500,000 March 31, 2001 $18,750,000 December 31, 1998 $7,500,000 June 30, 2001 $18,750,000 March 31, 1999 $12,500,000 September 30, 2001 $18,750,000 June 30, 1999 $12,500,000 December 31, 2001 $18,750,000 September 30, 1999 $12,500,000 March 31, 2002 $18,750,000 December 31, 1999 $12,500,000 June 30, 2002 $18,750,000 March 31, 2000 $17,500,000 September 30, 2002 $18,750,000 June 30, 2000 $17,500,000 Tranche A Maturity Date $18,750,000
Tranche B Term Loans:
Payment Date Amount Payment Date Amount - --------------------------------------------------------------------------------------------------- March 31, 1998 $250,000 March 31, 2001 $250,000 June 30, 1998 $250,000 June 30, 2001 $250,000 September 30, 1998 $250,000 September 30, 2001 $250,000 December 31, 1998 $250,000 December 31, 2001 $250,000 March 31, 1999 $250,000 March 31, 2002 $250,000 June 30, 1999 $250,000 June 30, 2002 $250,000 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
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 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 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 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 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 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 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 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, 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; 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 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 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 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 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; 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 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 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), 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 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 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 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, 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 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 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 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 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 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 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 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, 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 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. 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 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; 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; 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 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- 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. 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 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 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; 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 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 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. 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). 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 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 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 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. 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 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 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) 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 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. 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. 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 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. 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 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 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 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 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 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 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 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 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, 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 106 degree of care to maintain the confidentiality of such Information as such Person would accord to its own confidential information. 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: ------------------------------------------ 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: ------------------------------------------ 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: ------------------------------------------ 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 EX-23.2 7 CONSENTS OF EXPERTS AND COUNSEL 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 EX-23.3 8 CONSENTS OF EXPERTS AND COUNSEL 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 EX-23.4 9 CONSENTS OF EXPERTS AND COUNSEL 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 EX-23.5 10 CONSENTS OF EXPERTS AND COUNSEL 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 EX-25.1 11 EXHIBIT 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. 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- 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- 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- 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- 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 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. 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