-----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, QC0Ngq4JiWFPCq1Hfn7afuMRCnJSICLZQqRSWDsoeAhbnIWXwDi2tsqKh3rbfRks xhHeVHzKcSE/kFwPqUTQ7A== 0000912057-96-021927.txt : 19961007 0000912057-96-021927.hdr.sgml : 19961007 ACCESSION NUMBER: 0000912057-96-021927 CONFORMED SUBMISSION TYPE: S-1/A PUBLIC DOCUMENT COUNT: 4 FILED AS OF DATE: 19961004 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: ALLEGIANCE CORP CENTRAL INDEX KEY: 0001017799 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-SPECIALTY OUTPATIENT FACILITIES, NEC [8093] IRS NUMBER: 364095179 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: S-1/A SEC ACT: 1933 Act SEC FILE NUMBER: 333-12525 FILM NUMBER: 96639155 BUSINESS ADDRESS: STREET 1: ONE BARTER PARKWAY CITY: DEERFIELD STATE: IL ZIP: 60015 BUSINESS PHONE: 8479483781 MAIL ADDRESS: STREET 1: ONE BARTER PARKWAY CITY: DEERFIELD STATE: IL ZIP: 60015 S-1/A 1 S-1/A AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 4, 1996 REGISTRATION NO. 333-12525 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ---------------- AMENDMENT NO. 2 TO FORM S-1 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 ---------------- ALLEGIANCE CORPORATION (Exact name of registrant as specified in its charter) DELAWARE 5047 36-4095179 (State or other jurisdiction (Primary Standard Industrial (I.R.S. Employer of incorporation or organization) Classification Code Number) Identification No.)
1430 WAUKEGAN ROAD MCGAW PARK, ILLINOIS 60085 (847) 689-8410 (Address, including zip code, and telephone number, including area code, of registrant's principal executive offices) WILLIAM L. FEATHER SENIOR VICE PRESIDENT GENERAL COUNSEL AND SECRETARY ALLEGIANCE CORPORATION 1430 WAUKEGAN ROAD MCGAW PARK, ILLINOIS 60085 (847) 689-8410 (Name, address, including zip code, and telephone number, including area code, of agent for service) ---------------- COPIES TO: SCOTT N. GIERKE, P.C. ROBERT RISOLEO, ESQ. MCDERMOTT, WILL & EMERY SULLIVAN & CROMWELL 227 WEST MONROE STREET 125 BROAD STREET CHICAGO, ILLINOIS 60606-5096 NEW YORK, NEW YORK 10004 (312) 984-7521 (212) 558-4000 ---------------- APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: AS SOON AS PRACTICABLE AFTER THE EFFECTIVE DATE OF THIS REGISTRATION STATEMENT. ---------------- 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. ---------------- THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT 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 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION ACTING PURSUANT TO SAID SECTION 8(A), MAY DETERMINE. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SUBJECT TO COMPLETION, DATED OCTOBER 4, 1996 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 NOR MAY OFFERS TO BUY 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 NOR SHALL THERE 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. $500,000,000 [LOGO] ALLEGIANCE CORPORATION $200,000,000 % NOTES DUE , 2006 $150,000,000 % DEBENTURES DUE , 2016 $150,000,000 % DEBENTURES DUE , 2026 Interest on the % Notes due , 2006, the % Debentures due , 2016 and the % Debentures due , 2026 (the Notes and the Debentures collectively, the "Securities") is payable on and of each year, commencing , 1997. The holder of each 2026 Debenture may elect to have that 2026 Debenture, or any portion of the principal amount thereof that is a multiple of $1,000, repaid on , 2003 at 100% of the principal amount thereof, together with accrued interest to , 2003. Such election, which is irrevocable when made, must be made within the period commencing on , 2003 and ending at the close of business on , 2003. The Securities are not redeemable at the option of the Company prior to maturity and are not entitled to the benefit of any sinking fund. The Securities are unsecured obligations of the Company and will rank PARI PASSU with each other and with all other unsecured and unsubordinated indebtedness of the Company. Each series of the Securities will be represented by one or more global Securities registered in the name of the nominee of The Depository Trust Company ("DTC"). Beneficial interests in the global Securities will be shown on, and transfers thereof will be effected only through, records maintained by DTC and its participants. Except as described herein, Securities in definitive form will not be issued. The Securities will be issued only in registered form in denominations of $1,000 and integral multiples thereof. See "Description of Securities." SEE "RISK FACTORS" BEGINNING ON PAGE 8 FOR A DISCUSSION OF CERTAIN FACTORS THAT SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE SECURITIES OFFERED HEREBY. ------------- 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. --------------
INITIAL PUBLIC UNDERWRITING PROCEEDS TO OFFERING PRICE(1) DISCOUNT(2) COMPANY(1)(3) ------------------------ ------------------------ ------------------------ Per % Note due 2006....................... % % % Total........................................ $ $ $ Per % Debenture due 2016.................. % % % Total........................................ $ $ $ Per % Debenture due 2026.................. % % % Total........................................ $ $ $
- ------------ (1) Plus accrued interest, if any, from , 1996. (2) The Company has agreed to indemnify the Underwriters against certain liabilities, including liabilities under the Securities Act of 1933. (3) Before deducting estimated expenses of $650,000 payable by the Company. The Securities offered hereby are offered severally by the Underwriters, as specified herein, subject to receipt and acceptance by them and subject to their right to reject any order in whole or in part. It is expected that the Securities will be ready for delivery in book-entry form only through the facilities of DTC in New York, New York, on or about , 1996, against payment therefor in immediately available funds. GOLDMAN, SACHS & CO. J.P. MORGAN & CO. SMITH BARNEY INC. BA SECURITIES, INC. FIRST CHICAGO CAPITAL MARKETS, INC. NATIONSBANC CAPITAL MARKETS, INC. -------------- The date of this Prospectus is , 1996. AVAILABLE INFORMATION Allegiance has filed with the Securities and Exchange Commission (the "Commission") a Registration Statement on Form S-1 (together with all amendments, schedules and exhibits thereto, the "Registration Statement") under the Securities Act of 1933, as amended and the rules promulgated thereunder (the "Securities Act"), for the registration of the Securities offered hereby. This Prospectus, which constitutes a part of the Registration Statement, does not contain all of the information in the Registration Statement certain parts of which are omitted in accordance with the rules and regulations of the Commission. For further information with respect to the Company and the Securities offered hereby, reference is made to the Registration Statement. Statements made in this Prospectus as to the contents of any contract, agreement or other document are not necessarily complete; with respect to each such contract, agreement or other document filed as an exhibit to the Registration Statement, reference is made to the exhibit for a more complete description of the matter involved, and each such statement shall be deemed qualified in its entirety by such reference. The Registration Statement and the related exhibits and schedules filed by Allegiance with the Commission may be inspected and copied at the public reference facilities maintained by the Commission at Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549, as well as at the Regional Offices of the Commission at Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661 and 7 World Trade Center, 13th Floor, New York, New York 10048. Copies of such information may be obtained by mail from the Public Reference Branch of the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed rates. In addition, electronic copies of the Registration Statement and all related exhibits and schedules may be accessed on the world wide web via the Commission's EDGAR database at its website (http://www.sec.gov). In addition, the common stock of Allegiance is listed on the New York Stock Exchange and materials filed by Allegiance after September 30, 1996 can be inspected at the office of the New York Stock Exchange, 20 Broad Street, New York, New York 10005. Allegiance is subject to the informational and reporting requirements of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance therewith files reports, proxy statements and other information with the Commission. Such reports, proxy statements and other information can be inspected at the public reference facilities and website maintained by the Commission that are referenced in the above paragraph. -------------- IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF EACH SERIES OF THE SECURITIES OFFERED HEREBY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME. 2 PROSPECTUS SUMMARY REFERENCE IS MADE TO, AND THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY, THE MORE DETAILED INFORMATION APPEARING ELSEWHERE IN THIS PROSPECTUS. UNLESS THE CONTEXT REQUIRES OTHERWISE, (I) "ALLEGIANCE" OR THE "COMPANY" REFERS TO THE ALLEGIANCE BUSINESS (AS DEFINED BELOW) OF BAXTER INTERNATIONAL INC. ("BAXTER") FOR PERIODS PRIOR TO SEPTEMBER 30, 1996 (THE "DISTRIBUTION DATE") AND ALLEGIANCE CORPORATION AND ITS CONSOLIDATED SUBSIDIARIES FOR THE PERIODS ON AND AFTER THE DISTRIBUTION DATE, (II) ALL REFERENCES TO "BAXTER" INCLUDE BAXTER INTERNATIONAL INC. AND ITS CONSOLIDATED SUBSIDIARIES AS OF THE RELEVANT DATE, AND (III) "OFFERING" REFERS TO THE OFFERING OF $200,000,000 MILLION AGGREGATE PRINCIPAL AMOUNT OF THE COMPANY'S % NOTES DUE , 2006 (THE "NOTES"), $150,000,000 MILLION AGGREGATE PRINCIPAL AMOUNT OF THE COMPANY'S % DEBENTURES DUE , 2016 (THE "2016 DEBENTURES") AND $150,000,000 MILLION AGGREGATE PRINCIPAL AMOUNT OF THE COMPANY'S % DEBENTURES DUE , 2026 (THE "2026 DEBENTURES" AND TOGETHER WITH THE NOTES AND THE 2016 DEBENTURES, THE "SECURITIES"). SEE "COMPANY BACKGROUND." THE COMPANY Allegiance Corporation is America's largest provider of health-care products and cost-management services for hospitals and other health-care providers, with recorded total sales of approximately $4.5 billion in 1995. Allegiance offers more than 200,000 products -- the broadest range of medical and laboratory products in the industry. Allegiance's offering includes its own products as well as products manufactured by more than 2,000 independent suppliers. Allegiance operates more than 60 distribution centers across the country, delivering products often on a just-in-time basis. The economics of health care are undergoing rapid and fundamental change, particularly in the United States, which is Allegiance's largest current market. In the past, doctors and nurses were paid for their services with few cost constraints. Today, large employers, insurance companies and HMOs are negotiating set fees for the care of patients. For U.S. hospitals and health systems, Allegiance's main customers, the pressure to reduce costs has never been greater. At the same time, demand for health services is continuing to climb with the dramatic growth of elderly populations in the United States and abroad. This environment offers opportunities for Allegiance, which has invested in integrated product and service programs that help medical professionals cope with health care's new economics and demographic trends. Management believes Allegiance, with its size, breadth of product line, customer relationships, growing array of cost-management services and financial strength, is well-positioned competitively for the increasingly cost-conscious health-care marketplace. The health-care distribution market in the United States has experienced intense competition and a resultant erosion in its margins in recent years in response to the growth of managed care and increased consolidation among health-care providers. Allegiance has responded by integrating its market-leading distribution capabilities with a broad product offering, high levels of customer service and innovative cost-management services. Within a larger Baxter organization, Allegiance's cost structure was higher than industry standards. As an independent public company, Allegiance intends to realign its cost structure, and improve returns from its distribution operations. Allegiance's mission is to align its objectives with those of its customers - -- to help hospitals and others throughout the health-care field fulfill their mission of serving patients. Allegiance intends to achieve this goal by providing high-quality products, excellent service and new ways of managing costs. Allegiance's leading competitive position within the health-care marketplace is a function of several key advantages, including its size and breadth of products; an intense customer-service orientation; a growing portfolio of cost-management services and financial strength. Allegiance is the only health-care company that fully integrates distribution, products and services to bring greater efficiency to health care. Management believes its key competitive advantages and integrated product and service offerings provide a solid platform for growth. 3 Allegiance's strategy is designed to continue to improve efficiency and returns in its distribution operations, to increase market penetration for its self-manufactured and "best value" preferred distributed products, and to expand its ability to help health-care professionals manage costs. Allegiance was formed in June 1996 as a wholly owned subsidiary of Baxter consisting of Baxter's U.S. distribution, surgical and respiratory-therapy products, and health-care cost-management services operations (the "Allegiance Business"). These integrated businesses recorded total sales of approximately $4.5 billion in 1995. On September 30, 1996 (the "Distribution Date"), Baxter effected a spin-off of Allegiance through a distribution of all of the outstanding shares of common stock of Allegiance ("Allegiance Stock") to Baxter stockholders. Prior to the Distribution Date, Allegiance became the owner of all of the assets, liabilities and operations of the Allegiance Business. RISK FACTORS Prospective purchasers of the Securities offered hereby should consider carefully the information set forth under "Risk Factors," in addition to the other information set forth in this Prospectus, before purchasing any of the Securities. THE OFFERING
Securities Offered........................... $200,000,000 aggregate principal amount of Notes, $150,000,000 aggregate principal amount of 2016 Debentures and $150,000,000 aggregate principal amount 2026 Debentures. Interest..................................... Interest on the Notes, the 2016 Debentures and the 2026 Debentures is payable semiannually on and of each year, commencing , 1997, at an annual rate of % for the Notes, % for the 2016 Debentures and % for the 2026 Debentures. Repayment.................................... The holder of each 2026 Debenture may elect to have that 2026 Debenture, or any portion of the principal amount thereof that is a multiple of $1,000, repaid on ,2003 at 100% of the principal amount thereof, together with accrued interest to ,2003. Such election, which is irrevocable when made, must be made within the period commencing on ,2003 and ending at the close of business on , 2003. The Notes and the 2016 Debentures are not subject to repayment at the option of their holders. Redemption................................... The Securities are not subject to redemption at the option of the Company prior to maturity.
4 Ranking...................................... The Securities will be unsecured obligations of the Company and will rank PARI PASSU with each other and with all other unsecured and unsubordinated debt of the Company. As of September 30, 1996, the Company had no outstanding indebtedness that would in effect rank ahead of the Securities. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources." Certain Restrictive Covenants................ The Indenture under which each series of the Securities is to be issued contains a limited number of restrictive covenants regarding, among other things, the creation and existence of additional secured indebtedness; sale and leaseback transactions; subsidiary debt; and mergers, consolidation and certain sales of assets. See "Description of Securities." Use of Proceeds.............................. All of the net proceeds from the sale of the Securities will be used to reduce amounts outstanding under the Company's $1.2 billion credit facility. See "Use of Proceeds."
5 SUMMARY SELECTED HISTORICAL FINANCIAL DATA The following table sets forth selected financial information with respect to Allegiance. Selected unaudited historical financial information for the six months ended June 30, 1996 and 1995 includes all adjustments, consisting only of normal recurring accruals that are considered necessary for a fair presentation of combined operating results for such interim periods. Results for the interim periods are not necessarily indicative of results for the full year. Historical financial information may not be indicative of Allegiance's performance as an independent company. The information set forth below should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the "Combined Financial Statements" and related notes thereto found elsewhere in this Prospectus. Historical per share data for net income and dividends, and the ratio of earnings to fixed charges have not been presented because Allegiance was not incorporated until June 1996, and did not have significant interest expense for the periods presented below. Pro forma long term debt and net income per share data are presented elsewhere in this Prospectus. SUMMARY SELECTED HISTORICAL FINANCIAL DATA (A)
SIX MONTHS ENDED JUNE 30, YEARS ENDED DECEMBER 31, -------------------- ----------------------------------------------------- 1996 1995 1995 1994 1993 1992 1991 --------- --------- --------- --------- --------- --------- --------- (IN MILLIONS) INCOME STATEMENT DATA: Net sales................................ $ 2,201 $ 2,485 $ 4,922 $ 5,109 $ 5,019 $ 4,861 $ 4,402 Gross profit............................. 455 545 1,044 1,378 1,406 1,512 1,448 Restructuring charges (b)................ -- -- 76 -- 484 -- -- Income (loss) before income taxes........ 93 140 476 338 (154) 352 366 Net income (loss) (b) (c)................ $ 57 $ 85 $ 273 $ 215 $ (73) $ 243 $ 250 Ratio of earnings to fixed charges (d) BALANCE SHEET DATA: Total Assets............................. $ 3,293 $ 3,765 $ 3,444 $ 4,031 $ 4,590 $ 4,287 $ 4,089
- ------------ (a) See Note 1 to "Notes to the Combined Financial Statements" and "Management's Discussion and Analysis of Financial Condition and Results of Operations" for discussions of the impact of certain divestitures on Allegiance's revenues and expenses. (b) See Note 4 to "Notes to the Combined Financial Statements" and "Management's Discussion and Analysis of Financial Condition and Results of Operations" for additional information related to the restructuring charges of $76 million and $484 million that were recorded in 1995 and 1993, respectively. (c) Net loss for 1993 reflects the impact of a charge equal to $5 million, net of tax, resulting from the adoption of Statement of Financial Accounting Standards No. 112, "Employers Accounting for Postemployment Benefits." (d) Historical computation of ratio of earnings to fixed charges is not considered meaningful as no interest costs were allocated from Baxter to Allegiance for the historical periods presented. Pro forma ratio of earnings to fixed charges was 1.9, 2.1 and 2.0 for the periods June 30, 1996, June 30, 1995, and December 31, 1995, respectively. For the purpose of calculating pro forma ratio of earnings to fixed charges, "earnings" represents pro forma earnings before income taxes, plus fixed charges. "Fixed charges" consist of pro forma interest on all indebtedness and estimated interest on rentals. For further information, see the unaudited pro forma combined statements of income included in "Pro Forma Financial Information" in this Prospectus. 6 SUMMARY SUPPLEMENTARY FINANCIAL DATA Allegiance's historical results of operations include revenues and expenses related to certain divested businesses. The Industrial and Life Sciences division was sold in September 1995 and the diagnostics manufacturing businesses were sold in December 1994. See Notes 1 and 3 to "Notes to the Combined Financial Statements" for additional information related to these divestitures. The following table presents selected supplementary financial data for Allegiance excluding the revenue and expenses associated with these divested businesses.
SIX MONTHS ENDED JUNE 30, YEARS ENDED DECEMBER 31, -------------------- ------------------------------- 1996 1995 1995 1994 1993 --------- --------- --------- --------- --------- (IN MILLIONS) (UNAUDITED) Net sales..................................................... $ 2,201 $ 2,244 $ 4,575 $ 4,314 $ 4,249 Gross profit.................................................. 455 474 950 1,003 1,004 Restructuring charge.......................................... -- -- -- -- 304 Income (loss) before income taxes............................. 93 108 245 258 (39) Income (loss)(a).............................................. 57 66 151 157 (26)
- ------------ (a) Income (loss) for 1993 excludes the impact of a charge equal to $5 million, net of tax, resulting from the adoption of Statement of Financial Accounting Standards No. 112, "Employers Accounting for Postemployment Benefits." 7 RISK FACTORS Certain statements in this Prospectus constitute "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Such forward looking statements involve known and unknown risks, including, but not limited to, general economic and business conditions, competition, changing trends in customer profiles, changes in governmental regulations, and unfavorable foreign currency fluctuations. Although Allegiance believes that its expectations with respect to the forward-looking statements are based upon reasonable assumptions within the bounds of its knowledge of its business and operations, there can be no assurance that actual results, performance or achievements of Allegiance will not differ materially from any future results, performance or achievements expressed or implied by such forward looking statements. In addition to the other information contained in this Prospectus, the following factors should be considered carefully in evaluating an investment in the Securities offered hereby. UNITED STATES HEALTH-CARE ENVIRONMENT The United States health-care system continues to undergo fundamental change. Competition for patients among health-care providers continues to intensify. Increasingly, providers are looking for ways to better manage costs in areas such as materials handling, supply utilization, product standardization for specific procedures and capital expenditures. Accelerating cost pressures on hospitals in the United States are resulting in increased out-patient and alternate-site health-care service delivery and a focus on cost-effectiveness and quality. These forces increasingly shape the demand for, and supply of, medical care. Many private health-care payors are providing incentives for consumers to seek lower cost care outside the hospital. Many corporations' employee health plans have been restructured to provide financial incentives for patients to utilize the most cost-effective forms of treatment (managed care programs, such as health maintenance organizations, have become more common), and physicians have been encouraged to provide more cost- effective treatments. In the past, Allegiance's distribution network has been focused on traditional distribution to hospitals. The future financial success of health-care product and service companies, such as Allegiance, will depend on their ability to work with health-care providers to help them enhance their competitiveness and to distribute products to alternate sites as treatment moves outside the hospital. Management believes it can help its customers achieve savings in the total health-care system by automating supply-ordering procedures, optimizing distribution networks, improving utilization and materials management and achieving economies through product and procedure standardization, and performing certain non-clinical services on an outsourced basis. Management further believes that its strategy of providing unmatched service to its health-care customers and achieving the best overall cost in its delivery of health-care products and services is compatible with any anticipated realignment of the United States health-care system that may ultimately occur. If customers do not respond favorably to the Allegiance strategy, these changes could have a material effect on Allegiance's business, results of operations and financial condition. UNITED STATES COMPETITION The changing health-care environment in recent years has led to increasingly intense competition among health-care suppliers. Competition is focused on price, service and product performance. Pressure in these areas is expected to continue. There has been substantial consolidation in Allegiance's customer base and among its competitors. In recent years, Allegiance's overall price increases have been lower than increases in the Consumer Price Index. Industry trends and competition may inhibit Allegiance's ability to increase prices, and may continue to depress Allegiance's margins in the future. In part through its previously announced and ongoing restructuring program, Allegiance plans to continue to increase its efforts to minimize costs and better meet accelerating price competition. Allegiance believes that its cost position will continue to benefit from improvements in manufacturing 8 technology and increased economies of scale. Allegiance continues to improve the quality of its products and services. If Allegiance is unsuccessful in maintaining its service and quality levels while decreasing costs, the competitive environment may have a material adverse effect on Allegiance's business, results of operations and financial condition. See "Allegiance Business -- Competition." REVENUES FROM CUSTOMERS PURCHASING THROUGH BUYING GROUPS For the last three years, as a percentage of total revenue, sales to customers which are members of two large hospital buying groups, Premier and VHA, comprised 27% and 16% respectively in 1995, 23% and 13% respectively in 1994 and 23% and 13% respectively in 1993. Loss of the contracts with either or both of these buying groups, or renegotiation of these contracts on unfavorable terms, could have a material adverse effect on the business, results of operations and financial condition of Allegiance. However, some member hospitals in each group are free to purchase from the vendors of their choice. Management believes that its relationships with its larger customers are excellent. No other buying group or single customer currently accounts for more than 10% of Allegiance's revenue. See "Allegiance Business -- Contractual Arrangements; Buying Groups." FINANCIAL LEVERAGE As of September 30, Allegiance had outstanding indebtedness in the amount of approximately $1.2 billion. Such indebtedness may limit Allegiance's future financial flexibility. See "Pro-Forma Financial Information" and "Management's Discussion and Analysis of Financial Condition -- Liquidity and Capital Resources." MUTUAL DISTRIBUTION ARRANGEMENTS Allegiance and Baxter are parties to various agency and distribution arrangements pursuant to which Allegiance will distribute certain Baxter products in the United States and Baxter will distribute certain Allegiance products in the United States and internationally. The compensation received by Allegiance under the domestic distribution arrangements generally is based upon the internal business unit revenue and expense allocations that were in effect between the Baxter business units and the Allegiance Business prior to the date of the Distribution, which management believes will not be materially different than those that could be negotiated with independent third parties. The initial terms of these agreements range from three to five years. Although the present intention of Allegiance and Baxter is that these distribution arrangements continue as long as the relationship between the parties is mutually beneficial, no assurance can be given that these arrangements will be extended beyond their original expiration dates or will not be terminated prior to their original terms. See "Relationship with Baxter." DEPENDENCE ON ADMINISTRATIVE SERVICES Allegiance and Baxter rely on each other for the provision of certain administrative services. Such services are provided, pursuant to contractual arrangements that can be terminated by either party upon no more than 12 months notice, at rates intended to approximate the cost of providing such services. No assurance can be given that such arrangements will continue in the future, that the cost of arranging substitute service either internally or from a third party would not increase the cost to the service recipient, or that a service provider will not be forced to absorb a greater share of its fixed overhead costs in the event of a termination of these arrangements. See "Relationship with Baxter." NO OPERATING HISTORY AS AN INDEPENDENT COMPANY Allegiance does not have an operating history as an independent public company. While Allegiance has been profitable as part of Baxter, there is no assurance that as a stand-alone company profits will continue at the same level. See "Combined Financial Statements." PRODUCTS LIABILITY On the Distribution Date, Allegiance assumed the defense of litigation involving claims related to the Allegiance Business, including certain claims of alleged personal injuries as a result of exposure to natural rubber latex gloves described below. Allegiance has not been named as a defendant in this 9 litigation but will be defending and indemnifying Baxter Healthcare Corporation ("BHC"), as contemplated by the Reorganization Agreement between Baxter and Allegiance (the "Reorganization Agreement"), for all expenses and potential liabilities associated with claims pertaining to this litigation. It is expected that Allegiance will be named as a defendant in future litigation, and may be added as a defendant in existing litigation. Allegiance believes that a substantial portion of any liability and the defense costs related to natural rubber latex gloves cases and claims will be covered by insurance, subject to self-insurance retentions, exclusions, conditions, coverage gaps, policy limits and insurer solvency. BHC has notified its insurance companies that it believes that these cases and claims are covered by BHC's insurance. Most of BHC's insurers have reserved their rights (I.E., neither admitted nor denied coverage), and may attempt to reserve in the future, the right to deny coverage, in whole or in part, due to differing theories regarding, among other things, the applicability of coverage and when coverage may attach. Management does not expect that the outcome of these matters will have a material adverse effect on Allegiance's business, results of operations or financial condition. ENVIRONMENTAL CONTINGENCIES Under the United States Superfund statute and many state laws, generators of hazardous waste which is sent to a disposal or recycling site are liable for cleanup of the site if contaminants from that property later leak into the environment. The law provides that potentially responsible parties may be held jointly and severally liable for the costs of investigating and remediating a site. This liability applies to the generator even if the waste was handled by a contractor in full compliance with the law. As of June 30, 1996, BHC has been named as a potentially responsible party for cleanup costs at ten hazardous waste sites for which Allegiance has assumed responsibility. Allegiance's largest exposure is at the Thermo-Chem site in Muskegon, Michigan. Allegiance expects that the total cleanup costs for this site will be between $44 million and $65 million, of which Allegiance's share will be approximately $5 million. This amount, net of payments of approximately $1 million, has been accrued and is reflected in Allegiance's combined financial statements. The estimated exposure for the remaining nine sites is approximately $4 million, which has been accrued and reflected in Allegiance's combined financial statements. Management does not expect that the outcome of these matters will have a material adverse effect on Allegiance's business, results of operations or financial condition. GOVERNMENT REGULATION Significant aspects of Allegiance's businesses are subject to state and federal statutes and regulations governing, among other things, reimbursement under federal and state medical assistance programs, medical waste disposal, dispensing of controlled substances, and workplace health and safety. In addition, most of the products manufactured or sold by Allegiance in the United States are subject to regulation by the Food and Drug Administration ("FDA"), as well as by other federal and state agencies. The FDA has the power to seize adulterated or misbranded drugs and devices or to require the manufacturer to remove them from the market and the power to publicize relevant facts. In the past, Baxter has removed products from the United States market that were found not to meet acceptable standards. This may occur with respect to Allegiance in the future. Product regulatory laws exist in most other countries where Allegiance will do business. There can be no assurance that federal or state governments will not impose additional restrictions or adopt interpretations of existing laws that could materially adversely affect Allegiance's business, results of operations or financial condition. See "Allegiance Business -- Government Regulation." INTERNATIONAL EXPANSION Allegiance currently has international sales of self-manufactured surgical products primarily in Canada, France and Germany. Allegiance management expects to increase its sales efforts internationally, which could expose it to greater risks associated with government regulations and fluctuations in foreign currency. There can be no assurance that Allegiance will be successful in expanding its sales efforts internationally or employ a risk management strategy that will completely eliminate its exposure to adverse movements in foreign currency rates. See "-- Government Regulation." 10 ABSENCE OF PUBLIC MARKET FOR THE SECURITIES The Securities are new issues of securities for which there is currently no market. If the Securities are traded after their initial issuance, they may trade at a discount from their initial offering price, depending upon prevailing interest rates, the market for similar securities and other factors. The Underwriters have informed the Company that, subject to applicable laws and regulations, they currently intend to make a market in the Securities. However, the Underwriters are not obligated to do so, and any such market making may be discontinued at any time without notice. Therefore, no assurance can be given as to whether an active trading market will develop for the Securities or, if such market develops, whether it will continue. The Company does not intend to apply for listing of the Securities on any securities exchange or on the National Association of Securities Dealers, Inc. automated quotation system. See "Underwriting." USE OF PROCEEDS The net proceeds to the Company from the sale of the Securities offered hereby are estimated to be approximately $ million, after deducting underwriting discounts and estimated expenses of the Offering payable by the Company. All of the net proceeds of the Offering will be used to reduce the amounts outstanding under the Company's $1.2 billion credit facility. At September 30, 1996, approximately $1.1 billion was outstanding under the Company's $1.2 billion credit facility bearing interest at a weighted average rate of 5.8% per annum and maturing on various dates from October 7, 1996 to November 29, 1996. Allegiance has borrowed under this credit facility to fund distributions to Baxter and for working capital requirements. Affiliates of certain of the Underwriters are lenders under the credit facility and will receive a portion of the proceeds from the sale of the Securities offered hereby. See "Underwriting." COMPANY BACKGROUND Allegiance Corporation ("Allegiance" or the "Company") was incorporated in Delaware in June 1996. Prior to September 30, 1996 (the "Distribution Date"), Allegiance acquired the United States health-care distribution, surgical and respiratory therapy products and health-care cost management businesses (the "Allegiance Business") of Baxter International Inc. ("Baxter") in connection with a spin-off by Baxter of the Allegiance Business. The spin-off was effected on the Distribution Date through a distribution of common stock of Allegiance ("Allegiance Stock") to Baxter stockholders (the "Distribution"). Unless the context otherwise indicates, as used in this Prospectus the terms "Allegiance" and the "Company" mean the Allegiance Business of Baxter for periods prior to the Distribution Date and Allegiance Corporation and its consolidated subsidiaries for the periods following the Distribution Date, and all references to "Baxter" include Baxter International Inc. and its consolidated subsidiaries as of the relevant date. Allegiance's principal executive offices are located at 1430 Waukegan Road, MPA-1, McGaw Park, Illinois 60085 and its telephone number is (847) 689-8410. 11 PRO FORMA CAPITALIZATION The following table sets forth, as of June 30, 1996, the capitalization of Allegiance and the pro forma capitalization after giving effect to the Distribution and certain other transactions described in the Notes below, as well as the application of the estimated net proceeds from the sale of the Securities. This information should be read in conjunction with the historical and pro forma combined financial statements and the related notes thereto of Allegiance included elsewhere herein. The pro forma information set forth below may not reflect the capitalization of Allegiance in the future or as it would have been had Allegiance been a separate, independent company at June 30, 1996.
JUNE 30, 1996 --------------------------------------- PRO FORMA HISTORICAL ADJUSTMENTS PRO FORMA ----------- ------------- ----------- (IN MILLIONS, EXCEPT SHARES) Long-term debt............................................................ $ -- $ 1,200(a) $ 1,200 Equity Divisional retained earnings............................................ 1,750 (350)(a) -- (1,400)(b) Equity investment by parent............................................. 810 (810)(a) -- Stockholders' equity Common stock, par value $1.00, authorized 200,000,000 shares, outstanding 54,472,353 shares.......................................... -- 54(b) 54 Retained earnings....................................................... -- 1,346(b) 1,346 ----------- ------------- ----------- Total capitalization.................................................. $ 2,560 $ 40 $ 2,600 ----------- ------------- ----------- ----------- ------------- -----------
PRO FORMA ADJUSTMENTS (a) To record the incurrence of approximately $1.2 billion of debt to fund distributions to Baxter and initial working capital requirements. (b) To reflect the Distribution of 54,472,353 shares of Allegiance Stock at $1.00 par value per share (at a distribution ratio of one share of Allegiance Stock for every five shares of Baxter Stock held on September 26, 1996) and the elimination of divisional retained earnings and Baxter's equity investment effected by the distribution of all outstanding shares of Allegiance Stock to Baxter stockholders. 12 SELECTED HISTORICAL FINANCIAL DATA The following table sets forth selected financial information with respect to Allegiance. Selected unaudited historical financial information for the six months ended June 30, 1996 and 1995 includes all adjustments, consisting only of normal recurring accruals that are considered necessary for a fair presentation of combined operating results for such interim periods. Results for the interim periods are not necessarily indicative of results for the full year. Historical financial information may not be indicative of Allegiance's performance as an independent company. The information set forth below should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the "Combined Financial Statements" and related notes thereto found elsewhere in this Prospectus. Historical per share data for net income and dividends, and the ratio of earnings to fixed charges have not been presented because Allegiance was not incorporated until June 1996, and did not have significant interest expense for the periods presented below. Pro forma long term debt and net income per share data are presented elsewhere in this Prospectus. See "Pro Forma Financial Information." SELECTED HISTORICAL FINANCIAL DATA (A)
SIX MONTHS ENDED JUNE 30, YEARS ENDED DECEMBER 31, -------------------- ----------------------------------------------------- 1996 1995 1995 1994 1993 1992 1991 --------- --------- --------- --------- --------- --------- --------- (IN MILLIONS) INCOME STATEMENT DATA: Net sales................................ $ 2,201 $ 2,485 $ 4,922 $ 5,109 $ 5,019 $ 4,861 $ 4,402 Gross profit............................. 455 545 1,044 1,378 1,406 1,512 1,448 Restructuring charges (b)................ -- -- 76 -- 484 -- -- Income (loss) before income taxes........ 93 140 476 338 (154) 352 366 Net income (loss) (b) (c)................ $ 57 $ 85 $ 273 $ 215 $ (73) $ 243 $ 250 Ratio of earnings to fixed charges (d)... BALANCE SHEET DATA: Total Assets............................. $ 3,293 $ 3,765 $ 3,444 $ 4,031 $ 4,590 $ 4,287 $ 4,089
- ------------ (a) See Note 1 to "Notes to the Combined Financial Statements" and "Management's Discussion and Analysis of Financial Condition and Results of Operations" for discussions of the impact of certain divestitures on Allegiance's revenues and expenses. (b) See Note 4 to "Notes to the Combined Financial Statements" and "Management's Discussion and Analysis of Financial Condition and Results of Operations" for additional information related to the restructuring charges of $76 million and $484 million that were recorded in 1995 and 1993, respectively. (c) Net loss for 1993 reflects the impact of a charge equal to $5 million, net of tax, resulting from the adoption of Statement of Financial Accounting Standards No. 112, "Employers Accounting for Postemployment Benefits." (d) Historical computation of ratio of earnings to fixed charges is not considered meaningful as no interest costs were allocated from Baxter to Allegiance for the historical periods presented. Pro forma ratio of earnings to fixed charges was 1.9, 2.1 and 2.0 for the periods June 30, 1996, June 30, 1995, and December 31, 1995, respectively. For the purpose of calculating pro forma ratio of earnings to fixed charges, "earnings" represent pro forma earnings before income taxes, plus fixed charges. "Fixed charges" consist of pro forma interest on all indebtedness and estimated interest on rentals. For further information, see the unaudited pro forma combined statements of income included in "Pro Forma Financial Information" in this Prospectus. 13 SUPPLEMENTARY FINANCIAL DATA Allegiance's historical results of operations include revenues and expenses related to certain divested businesses. The Industrial and Life Sciences division was sold in September 1995 and the diagnostics manufacturing businesses were sold in December 1994. See Notes 1 and 3 to "Notes to the Combined Financial Statements" for additional information related to these divestitures. The following table presents selected supplementary financial data for Allegiance excluding the revenue and expenses associated with these divested businesses.
SIX MONTHS ENDED JUNE 30, YEARS ENDED DECEMBER 31, -------------------- ------------------------------- 1996 1995 1995 1994 1993 --------- --------- --------- --------- --------- (IN MILLIONS) (UNAUDITED) Net sales..................................................... $ 2,201 $ 2,244 $ 4,575 $ 4,314 $ 4,249 Gross profit.................................................. 455 474 950 1,003 1,004 Restructuring charge.......................................... -- -- -- -- 304 Income (loss) before income taxes............................. 93 108 245 258 (39) Income (loss)(a).............................................. 57 66 151 157 (26)
- ------------ (a) Income (loss) for 1993 excludes the impact of a charge equal to $5 million, net of tax, resulting from the adoption of Statement of Financial Accounting Standards No. 112, "Employers Accounting for Postemployment Benefits." 14 PRO FORMA FINANCIAL INFORMATION The following unaudited pro forma combined statements of income and unaudited combined condensed balance sheet present the combined results of Allegiance and its financial position assuming that the transactions contemplated by the Distribution and certain significant divestitures described below had been completed as of January 1, 1995. The unaudited pro forma information has been prepared utilizing the historical combined financial statements of Allegiance. This information should be read in conjunction with the historical combined financial statements and notes thereto, included elsewhere in this Prospectus. The unaudited pro forma financial data has been included as required by the rules and regulations of the Commission and is provided for comparative purposes only. The unaudited pro forma financial data does not purport to be indicative of the results of Allegiance in the future or what the financial position and results of operations would have been had Allegiance been a separate, stand-alone entity during the periods shown. See, for example, "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Adoption of New Accounting Standards and Policies." UNAUDITED PRO FORMA COMBINED STATEMENT OF INCOME
SIX MONTHS ENDED JUNE 30, 1996 ---------------------------------------------------------------------- ADJUSTMENTS FOR DIVESTED ADJUSTED PRO FORMA HISTORICAL BUSINESSES (A) HISTORICAL ADJUSTMENTS PRO FORMA ----------- --------------- ----------- ------------ ------------- (IN MILLIONS, EXCEPT SHARES AND PER SHARE INFORMATION) Net sales.................................. $ 2,201 -- $ 2,201 $ 1(b) $2,202 Costs and expenses Cost of goods sold....................... 1,746 -- 1,746 2(b) 1,748 Selling, general and administrative expenses................................ 345 -- 345 4(b) 349 Interest, net............................ -- -- -- 45(d) 45 Goodwill amortization.................... 18 -- 18 -- 18 Other (income) expense................... (1) -- (1) -- (1) ----------- ------- ----------- ------------ ------------- Total costs and expenses............... 2,108 -- 2,108 51 2,159 ----------- ------- ----------- ------------ ------------- Income before income taxes................. 93 -- 93 (50) 43 Income tax expense (benefit)............... 36 -- 36 (20)(f) 16 ----------- ------- ----------- ------------ ------------- Net income............................. $ 57 -- $ 57 $ (30) $ 27 ----------- ------- ----------- ------------ ------------- ----------- ------- ----------- ------------ ------------- Share information Shares to be issued (g).................. 54,472,353 ------------- ------------- Net income per share (g)................. $ 0.50 ------------- ------------- Ratio of earnings to fixed charges (h)..... 1.9 ------------- -------------
15 UNAUDITED PRO FORMA COMBINED STATEMENT OF INCOME
SIX MONTHS ENDED JUNE 30, 1995 ------------------------------------------------------------------------ ADJUSTMENTS FOR DIVESTED ADJUSTED PRO FORMA HISTORICAL BUSINESSES (A) HISTORICAL ADJUSTMENTS PRO FORMA ----------- --------------- ----------- -------------- ------------- (IN MILLIONS, EXCEPT SHARES AND PER SHARE) Net sales.................................. $ 2,485 $(241) $ 2,244 $ (7)(b) $2,237 Costs and expenses Cost of good sold........................ 1,940 (170) 1,770 (3)(b) 1,767 Selling, general and administrative expenses................................ 384 (39) 345 2(b) 351 4(c) Interest, net............................ -- -- -- 45(d) 45 Goodwill amortization.................... 19 -- 19 -- 19 Other (income) expense................... 2 -- 2 -- 2 ----------- --------------- ----------- --- ------------- Total costs and expenses............... 2,345 (209) 2,136 48 2,184 ----------- --------------- ----------- --- ------------- Income (loss) before income taxes.......... 140 (32) 108 (55) 53 Income tax expense (benefit)............... 55 (13) 42 (22)(f) 20 ----------- --------------- ----------- --- ------------- Net income............................. $ 85 $ (19) $ 66 $ (33) $ 33 ----------- --------------- ----------- --- ------------- ----------- --------------- ----------- --- ------------- Share information Shares to be issued (g).................. 54,472,353 ------------- ------------- Net income per share (g)................. $ 0.61 ------------- ------------- Ratio of earnings to fixed charges (h)..... 2.1 ------------- -------------
16 UNAUDITED PRO FORMA COMBINED STATEMENT OF INCOME
YEAR ENDED DECEMBER 31, 1995 ---------------------------------------------------------------------- ADJUSTMENTS FOR DIVESTED ADJUSTED PRO FORMA HISTORICAL BUSINESSES (A) HISTORICAL ADJUSTMENTS PRO FORMA ----------- --------------- ----------- ------------ ------------- (IN MILLIONS, EXCEPT SHARES AND PER SHARE INFORMATION) Net sales.................................. $ 4,922 $(347) $ 4,575 $ (4)(b) $4,571 Costs and expenses Cost of goods sold....................... 3,878 (253) 3,625 3,625 Selling, general and administrative expenses................................ 756 (55) 701 3 (b) 714 10 (c) Interest, net............................ -- -- -- 90 (d) 90 Restructuring............................ 76 (76) -- -- -- Goodwill amortization.................... 38 (1) 37 -- 37 Other (income) expense................... (302) 269 (33) 37 (e) 4 ----------- --------------- ----------- ------------ ------------- Total costs and expenses............... 4,446 (116) 4,330 140 4,470 ----------- --------------- ----------- ------------ ------------- Income before income taxes................. 476 (231) 245 (144) 101 Income tax expense (benefit)............... 203 (109) 94 (56)(f) 38 ----------- --------------- ----------- ------------ ------------- Net income............................. $ 273 $(122) $ 151 $ (88) $ 63 ----------- --------------- ----------- ------------ ------------- ----------- --------------- ----------- ------------ ------------- Share information Shares to be issued (g).................. 54,472,353 ------------- ------------- Net income per share (g)................. $ 1.16 ------------- ------------- Ratio of earnings to fixed charges (h)..... 2.0 ------------- -------------
PRO FORMA ADJUSTMENTS (a) To adjust the historical financial statements for the impact of the divestitures of the diagnostics manufacturing business and the Industrial and Life Sciences division for the periods presented, to reflect only those ongoing business operations to be included in the Distribution. See Notes 1 and 3 to "Notes to the Combined Financial Statements" for additional information related to these divestitures. (b) To reflect the impact of various business arrangements between Allegiance and Baxter effective on the Distribution Date for (i) product distribution and distribution services under agency, services and distribution agreements in the U.S. with terms from three to five years, (ii) contract manufacturing agreements under which both Allegiance and Baxter agree to produce certain products and components for each other for one to three years, and (iii) agreements with terms of one to five years under which Baxter will distribute Allegiance products in various countries around the world and provide export services. See "Relationship with Baxter." (c) To reflect (i) the estimated incremental costs associated with being an independent, public company, including costs associated with corporate administrative services such as tax, treasury, risk management and insurance, legal, stockholder relations and human resources and (ii) the estimated reduction in expenses related to changes in Allegiance's benefit plans. (d) To record the estimated interest expense which would have been incurred by Allegiance based on the incurrence of approximately $1.2 billion of debt, including the Securities offered hereby, at a weighted average interest rate of 7.5%. An increase or decrease of 0.125% in the weighted average interest rate would result in an increase or decrease in interest expense of $1.5 million. (e) To adjust the historical financial statements for a non-recurring payment related to the transfer of rights under various service agreements with Alliant Foodservices, Inc., to reflect only those ongoing business operations included in the Distribution. (f) To reflect the estimated tax impact, at statutory rates, for pro forma adjustments (b) through (e). (g) Pro forma net income per share is computed as if the 54,472,353 shares of Allegiance stock, issued in the Distribution, had been outstanding for the periods presented. (h) For the purposes of calculating the ratio of earnings to fixed charges, "earnings" represent pro forma earnings before income taxes, plus fixed charges. "Fixed charges" consist of pro forma interest on all indebtedness and estimated interest on rentals. 17 PRO FORMA COMBINED CONDENSED BALANCE SHEET
JUNE 30, 1996 ----------------------------------------------------------------------- ADJUSTMENTS FOR DIVESTED ADJUSTED PRO FORMA HISTORICAL BUSINESSES (A) HISTORICAL ADJUSTMENTS PRO FORMA ----------- ----------------- ----------- ------------- ----------- (IN MILLIONS, EXCEPT SHARES) Current assets Cash and equivalents.......................... $ 5 -- $ 5 $ 40 (a) $ 45 Accounts receivable, net...................... 450 -- 450 450 Notes and other current receivables........... 26 -- 26 -- 26 Inventories................................... 656 -- 656 656 Short-term deferred income taxes.............. 119 -- 119 -- 119 Prepaid expenses.............................. 16 -- 16 -- 16 ----------- ------ ----------- ------------- ----------- Total current assets........................ 1,272 -- 1,272 40 1,312 ----------- ------ ----------- ------------- ----------- Property, plant and equipment Property, plant and equipment................. 1,523 -- 1,523 -- 1,523 Accumulated depreciation and amortization..... 663 -- 663 -- 663 ----------- ------ ----------- ------------- ----------- Net property, plant and equipment........... 860 -- 860 -- 860 ----------- ------ ----------- ------------- ----------- Other assets Goodwill and other intangibles................ 1,096 -- 1,096 -- 1,096 Other......................................... 65 -- 65 -- 65 ----------- ------ ----------- ------------- ----------- Total other assets.......................... 1,161 -- 1,161 -- 1,161 ----------- ------ ----------- ------------- ----------- Total assets.............................. $ 3,293 -- $ 3,293 $ 40 $ 3,333 ----------- ------ ----------- ------------- ----------- ----------- ------ ----------- ------------- ----------- Current liabilities Accounts payable and accrued liabilities...... $ 550 -- $ 550 $ 550 ----------- ------ ----------- ------------- ----------- Long-term debt.................................. -- -- -- 1,200 (a) 1,200 ----------- ------ ----------- ------------- ----------- Long-term deferred income taxes................. 115 -- 115 -- 115 ----------- ------ ----------- ------------- ----------- Other non-current liabilities................... 68 -- 68 -- 68 ----------- ------ ----------- ------------- ----------- Stockholders' equity Divisional retained earnings.................. 1,750 -- 1,750 (350)(a) -- (1,400)(b) Equity investment by parent................... 810 -- 810 (810)(a) -- Common stock, $1 par value, authorized 200,000,000 shares, outstanding 54,472,353 shares....................................... -- -- -- 54 (b) 54 Retained earnings............................. -- -- -- 1,346 (b) 1,346 ----------- ------ ----------- ------------- ----------- Total liabilities and stockholders' equity................................... $ 3,293 -- $ 3,293 $ 40 $ 3,333 ----------- ------ ----------- ------------- ----------- ----------- ------ ----------- ------------- -----------
PRO FORMA ADJUSTMENTS (a) To record the incurrence of approximately $1.2 billion of debt to fund distributions to Baxter and initial working capital requirements. (b) To reflect the distribution of 54,472,353 shares of common stock of Allegiance to stockholders of Baxter and the elimination of divisional retained earnings and Baxter's equity investment effected by the Distribution. 18 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion and analysis present the factors that had a material effect on the results of operations of Allegiance during the three years ended December 31, 1995, and for the six-month periods ended June 30, 1996 and 1995. Also discussed is Allegiance's financial position as of December 31, 1995 and 1994, and June 30, 1996. This discussion should be read in conjunction with the historical and pro forma combined financial statements and related notes thereto included elsewhere in this Prospectus. OVERVIEW Allegiance operates in a single industry segment as a leading provider of health-care products and services that help its health-care customers manage and reduce the total cost of providing patient care. Through its nationwide distribution network, Allegiance distributes to hospital and alternate-care customers a broad offering of medical, surgical and laboratory supplies, including its own self-manufactured surgical and respiratory-therapy products. Allegiance also provides cost management services to its health-care customers, including inventory management programs, customized packaging, and procedure and process consulting. The delivery of such a broad array of product and service offerings requires focused investments in cost management services, information systems and manufacturing efficiencies. Accelerating cost pressures on U.S. hospitals are resulting in increased out-patient and alternate-site health-care service delivery and an increased focus on cost-effectiveness and quality. At the same time, the elderly segment of the population in the U.S. and abroad is growing. These forces increasingly shape the demand for, and supply of, medical care. Many private health-care payors are providing incentives for consumers to seek lower cost care outside the hospital. Many corporations' employee health plans have been restructured to provide financial incentives for patients to utilize the most cost-effective forms of treatment (managed care programs, such as health maintenance organizations, have become more common), and physicians have been encouraged to provide more cost-effective treatments. In response to these pressures, the U.S. health-care system has undergone fundamental changes over the past several years, and such changes and cost-containment efforts are expected to continue throughout the foreseeable future. While the high cost of health care is forcing hospitals and other providers to increase their efficiency, reduce excess capacity and lower costs, management believes that it is well-positioned to work with health-care providers to help them enhance their competitiveness and to distribute products to alternate sites as treatment moves outside the hospital. Management believes that it can help its customers achieve savings in the total health-care system by automating supply-ordering procedures, optimizing distribution networks, improving utilization and materials management and achieving economies through product and procedure standardization, and performing certain non-clinical services on an outsourced basis. Management further believes that its strategy of providing unmatched service to its health-care customers and its seeking to achieve the lowest overall cost in its delivery of health-care products and services is compatible with any anticipated realignment of the U.S. health-care system that may ultimately occur. RESULTS OF OPERATIONS Allegiance's historical results of operations in 1995, 1994 and 1993 include revenues and expenses related to certain divested businesses. The Industrial and Life Sciences division of the Allegiance Business was sold in September 1995 and the diagnostics manufacturing businesses were sold in 19 December 1994. See Notes 1 and 3 to "Notes to Combined Financial Statements" for additional information related to these divestitures. The following table presents selected financial data for Allegiance excluding the revenue and expenses associated with these divested businesses:
SIX MONTHS ENDED JUNE 30, YEARS ENDED DECEMBER 31, -------------------- ------------------------------- 1996 1995 1995 1994 1993 --------- --------- --------- --------- --------- (UNAUDITED) (IN MILLIONS) Net sales........................................... $ 2,201 $ 2,244 $ 4,575 $ 4,314 $ 4,249 Costs and expenses Cost of goods sold................................ 1,746 1,770 3,625 3,311 3,245 Selling, general and administrative expenses...... 345 346 701 711 746 Restructuring charge.............................. -- -- -- -- 304 Goodwill amortization............................. 18 18 37 37 37 Other (income) expense............................ (1) 2 (33) (3) (44) --------- --------- --------- --------- --------- Total costs and expenses........................ 2,108 2,136 4,330 4,056 4,288 --------- --------- --------- --------- --------- Pretax income (loss)................................ 93 108 245 258 (39) Income tax expense (benefit)........................ 36 42 94 101 (13) --------- --------- --------- --------- --------- Income (loss)....................................... $ 57 $ 66 $ 151 $ 157 $ (26) --------- --------- --------- --------- --------- --------- --------- --------- --------- ---------
SALES The following table summarizes net sales, excluding the divested businesses discussed previously, by major geographic region:
SIX MONTHS ENDED JUNE 30, YEARS ENDED DECEMBER 31, ---------------------- ----------------------------------- 1996 1995 1995 1994 1993 ----------- --------- ----------- ----------- --------- (UNAUDITED) (IN MILLIONS) Geographic region United States.............................. $ 2,052 $ 2,103 $ 4,284 $ 4,043 $ 4,001 Percent increase (decrease).............. (2)% 6% 1% International.............................. 149 141 291 271 248 Percent increase......................... 6% 7% 9% ----------- --------- ----------- ----------- --------- Total net sales.............................. $ 2,201 $ 2,244 $ 4,575 $ 4,314 $ 4,249 Percent increase (decrease).............. (2)% 6% 2% ----------- --------- ----------- ----------- --------- ----------- --------- ----------- ----------- ---------
The decline in Allegiance's domestic net sales for the six months ended June 30, 1996 as compared to the same period in the prior year, is the result of planned attempts to reduce sales growth and improve profitability in lower margin, distributed products in the U.S. Additionally, domestic sales of self-manufactured surgical products continue to be unfavorably impacted by the loss of a contract with Columbia/ HCA in February 1994. Columbia began shifting to other vendors its purchases of surgical supplies for certain product lines in early 1994 and for other product lines throughout 1995 and 1996. International sales increased by 6% in the first half of 1996 as compared to 1995 as a result of continued focus on the penetration of surgical products into international markets. Domestic net sales growth of 6% in 1995 is primarily due to increased sales volume in lower margin, distributed products, resulting from an increase in ValueLink-Registered Trademark- distribution agreements and the large supply and service contract signed with the VHA in 1994. Domestic net sales in 1994 were adversely affected by pricing pressures experienced in the domestic market place and the loss of the Columbia/ HCA supply contract. 20 Allegiance currently has international sales of self-manufactured surgical products primarily in Canada, France and Germany. International sales growth of 7% in 1995 and 9% in 1994 was the result of continued focus on the penetration of surgical products into these international markets. International sales growth in local currency was approximately 5% in 1995 and 13% in 1994. Allegiance expects to increase its sales efforts internationally. COSTS AND EXPENSES The following table summarizes Allegiance's gross margin and expense ratios, excluding the divested businesses discussed previously:
SIX MONTHS ENDED JUNE 30, YEARS ENDED DECEMBER 31, ------------------------ ------------------------------------- 1996 1995 1995 1994 1993 ----------- ----------- ----------- ----------- ----------- (UNAUDITED) (IN MILLIONS) Gross margin........................................... 20.7% 21.1% 20.8% 23.2% 23.6% Selling, general and administrative expenses........... 15.7% 15.4% 15.3% 16.5% 17.6%
The gross margin declined for the six-month period ended June 30, 1996 as compared with the same period in 1995, due to pricing pressure in the U.S. combined with lower sales in Allegiance's higher margin surgical products as a result of the loss of the Columbia/HCA contract. Allegiance's gross margin decline of 2.8% between 1993 and 1995 resulted from general market conditions, growth in lower margin sales of third party products and the loss of the Columbia/HCA surgical supply contract. Allegiance plans to stabilize its gross margins by offsetting pricing pressures with manufacturing cost efficiencies, managing its product mix more effectively, and instituting price increases. Total selling, general and administrative expenses remained flat between the first half of 1996 and 1995. However, such costs as a percent of sales for the period ended June 30, 1996 increased .3% from the comparable period in 1995. The increase in the ratio for the six months ended June 30, 1996 is the result of the decline in sales discussed above, as the timing of expense reduction initiatives lag the planned reduction in lower-margin product sales. Selling, general and administrative expenses in 1993 were adversely affected by a downsizing program. Excluding the impact of the downsizing program, selling, general and administrative expenses as a percent of sales in 1993 would have been approximately 16.7%. The remaining 1.4% decline in selling, general and administrative expenses that occurred between 1993 and 1995 was the result of initiatives taken in connection with the 1993 restructuring program and leverage on the growth in distributed products that occurred in 1994. Management plans to continue to leverage this ratio. RESTRUCTURING PROGRAM In November 1993, Baxter initiated a restructuring program to improve shareholder value and reduce costs. The strategic actions of the program were designed in part to make the Allegiance Business more efficient and responsive in addressing the changes occurring in the U.S. health-care system. See Note 4 to "Notes to the Combined Financial Statements" for discussions related to the initial charge for the program, components of the charge, any resulting changes in estimates, and cash and non-cash utilization of the related reserves. Since the announcement of the 1993 restructuring program, Allegiance management has implemented, or is in the process of implementing, all of the major strategic actions associated therewith and is satisfied that the program is progressing on schedule and will meet established financial targets. During the first half of 1996, Allegiance utilized $55 million of restructuring reserves, including $34 million in cash payments. In 1995, Allegiance utilized $171 million of restructuring reserves, including $105 million in cash payments. Cash outflows pertain primarily to employee-related costs for severance, outplacement assistance, relocation, implementation teams and facility consolidation. As of June 30, 1996, Allegiance had eliminated approximately 1,920 positions of the approximately 2,860 positions that were originally expected to be affected by the program. As process changes were implemented in connection with the restructuring program, it became apparent that, as certain management level positions were 21 eliminated, other lower cost positions were added. While this has generated savings levels consistent with expectations, management has revised its targeted head count reduction to 2,230 net positions. The majority of the remaining reductions will occur in 1996 and 1997, as facility closures and consolidations are completed as planned. In addition to improvements in the effectiveness of its sales force and the management of customer relations, Allegiance realized direct savings in manufacturing and administrative costs from this program of approximately $95 million in 1995 and $40 million in 1994. These savings have mitigated the effect of declines in gross margin and have been invested in cost management initiatives. Management is targeting direct savings of approximately $125 million in 1996, $155 million in 1997 and in excess of $155 million in 1998. Management anticipates that these savings will continue to offset potential future gross margin erosion and investments into cost-management initiatives. Management further believes that its remaining restructuring reserves are adequate to complete the actions contemplated by the restructuring program and that future cash expenditures related to the program will be funded from cash generated from operations. OTHER INCOME AND EXPENSE Other income and expense, excluding the divested businesses discussed previously, is principally comprised of net gains associated with the disposal or discontinuance of minor, non-strategic businesses. PRETAX INCOME The following table compares pretax income, excluding divested businesses and restructuring charges discussed previously:
SIX MONTHS ENDED JUNE 30, YEARS ENDED DECEMBER 31, ---------------------- ----------------------------------- 1996 1995 1995 1994 1993 ----------- --------- ----------- ----------- --------- (UNAUDITED) (IN MILLIONS) Pretax income excluding divested businesses and restructuring charges............................... $ 93 $ 108 $ 245 $ 258 $ 265 Percent decrease................................... (14)% (5)% (3)%
Pretax income in the first six months of 1996 decreased primarily due to the decline in net sales and gross margins discussed above. Pretax income decreased in 1995 primarily as a result of gross margin declines, partially offset by a higher level of net gains associated with the disposal or discontinuance of minor, non-strategic businesses. Excluding net gains associated with the disposal or discontinuance of minor, non-strategic businesses, 1995 pretax income would have declined 16%. The decrease in 1994 is primarily the result of gross margin declines, partially offset by net gains associated with the disposal or discontinuance of minor, non-strategic businesses. Excluding these net gains, 1994 pretax income would have declined 7%. INCOME TAXES Allegiance's effective tax rate, excluding divested businesses discussed previously, was 39% for the six months ended June 30, 1996 and 1995. Allegiance's effective tax rate, excluding divested businesses discussed previously, was 38% in 1995, 39% in 1994 and 33% in 1993. The decline in the effective tax rate in 1995 was a result of a larger proportion of earnings generated in lower tax jurisdictions. The effective tax rate in 1993 was impacted by the restructuring charge. Excluding this charge, the effective tax rate in 1993 would have been 41%; the decrease in the 1994 effective tax rate was the result of a larger proportion of earnings generated in lower tax jurisdictions. NET INCOME Net income, excluding divested businesses discussed previously, decreased 14% for the six months ended June 30, 1996 as compared to the same period in 1995. This decrease is consistent with the decrease in pretax income discussed above. Net income for 1995, excluding divested businesses and net gains associated with the disposal or discontinuance of minor, non-strategic businesses, decreased 14% as a result of gross margin declines, partially offset by a decline in the effective tax rate. 22 After adjusting for the restructuring charge recorded in 1993 and net gains associated with the disposal or discontinuance of minor, non-strategic businesses, net income excluding divested businesses decreased by approximately 4% in 1994 as a result of gross margin declines, partially offset by the decline in Allegiance's effective income tax rate discussed above. ADOPTION OF NEW ACCOUNTING STANDARDS AND POLICIES In March 1995, the Financial Accounting Standards Board ("FASB") issued Statement No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of," which is effective for fiscal years beginning after December 31, 1995. Adoption of FASB No. 121 in fiscal year 1996 did not have a material impact on Allegiance. In October 1995, the FASB issued Statement No. 123, "Accounting for Stock-Based Compensation," which is effective for fiscal years beginning after December 15, 1995. The statement provides management with a choice of accounting methods for stock-based transactions with employees. Management has decided to adopt FASB No. 123 through disclosure only and, accordingly, the required pro forma information on net income and earnings per share will be included in Allegiance's fiscal year 1996 financial statements. As a subsidiary of Baxter, Allegiance followed the accounting policies established by Baxter for its consolidated group. Management believes that the market value of Allegiance, as a stand-alone company, could be substantially below its stockholders' equity. While Allegiance cannot forecast its market value, management is currently evaluating the accounting policy for assessing impairment of goodwill to ensure that its present policy remains appropriate for Allegiance as a separate, publicly-traded company. As of June 30, 1996, actual goodwill was approximately $1.1 billion and pro-forma stockholders' equity was $1.4 billion. Management is considering a change from Baxter's current undiscounted cash flow methodology to one based upon fair value. A change to a fair value methodology could result in a material, noncash charge to Allegiance's results of operations which would be approximately equal to the excess of Allegiance's pro-forma stockholders' equity value over its market value and could have a substantial effect on its financial position. If Allegiance were to adopt such a change in accounting policy, the current annual amortization expense pertaining to goodwill would be reduced in future periods by 3.4% of any resulting reduction in the value of goodwill, and would produce a potentially significant increase in net income. Such a change in accounting policy would be subject to the review and approval by Allegiance's board of directors. IMPACT OF INFLATION In recent years, Allegiance has experienced increases in its labor and material cost base influenced, in part, by general inflationary trends. While not directly related to inflationary trends, Allegiance's revenue base over recent years has been adversely affected by lower average selling prices on certain products as a result of changes in Medicare reimbursement regulations, economic pressures in the U.S. hospital marketplace and increased competition in certain product lines. There is little correlation between general inflation rates directly affecting costs and expenses and Allegiance's pricing levels for products sold to health-care customers. Management expects that these trends will continue. LIQUIDITY AND CAPITAL RESOURCES Management assesses Allegiance's liquidity in terms of its overall ability to mobilize cash to support ongoing business levels and to fund its growth. Management believes that it has sufficient cash flow from operations and financial flexibility to attract long-term capital to support normal operating activities and fund short-term and long-term growth objectives. Allegiance's current assets exceeded current liabilities by $722 million at June 30, 1996 versus an excess of $680 million and $1,055 million at December 31, 1995 and 1994, respectively. Current assets at June 30, 1996 included accounts and notes receivable of $476 million and inventories of $656 million. These sources of liquidity are convertible into cash over a relatively short period of time and thus, will help Allegiance satisfy normal operating cash requirements. 23 DEBT AND FINANCIAL INSTRUMENTS In connection with the Distribution, Allegiance entered into two revolving unsecured credit facilities providing for up to $1.2 billion and $300 million respectively (the "Credit Facilities"). The $1.2 billion credit facility expires in September 2001 and the $300 million credit facility expires in September 1997. As of September 30, 1996, approximately $1.1 billion was outstanding under the $1.2 billion credit facility, which bears interest at an average weighted rate of 5.8% and matures on various dates from October 7, 1996 to November 29, 1996, and no amounts were outstanding under the $300 million credit facility. Allegiance has borrowed under the $1.2 billion credit facility to fund distributions to Baxter and for ongoing working capital requirements. As of September 30, 1996, approximately $100 million was available for borrowing under the $1.2 billion credit facility and $300 million was available for borrowing under the $300 million credit facility. See "Description of Credit Facilities." Assuming a debt level of $1.2 billion, Allegiance's long-term debt as a percent of its total capitalization (the sum of long-term debt plus stockholder's equity) would have been 46.2% at June 30, 1996. Net- debt-to-net-capital (after consideration of cash equivalents including working capital) would have been 44.4% at June 30, 1996. Allegiance expects to maintain a net-debt-to-net-capital ratio between 40% and 45% over the next several years. Allegiance intends to fund its short-term and long-term obligations as they mature through cash flow from operations or by issuing additional debt. Allegiance believes it will have lines of credit adequate to support ongoing operational, capital and restructuring requirements. Beyond that, Allegiance believes it has sufficient financial flexibility to attract long-term capital on acceptable terms as may be needed to support its growth objectives. CASH FLOW FROM OPERATIONS Cash flow provided by operations (which includes working capital components) was $136 million and $139 million for the six months ended June 30, 1996 and 1995, respectively. Cash flow provided by operations for 1995, 1994 and 1993, was $253 million, $422 million and $336 million, respectively. The decrease in cash flow provided by operations for the first six months of 1996 was the result of a decline in earnings (resulting principally from the divestiture of the Industrial and Life Sciences division), partially offset by improved balance sheet management. The decline in cash flow provided by operations in 1995 was primarily the result of a decline in earnings, resulting principally from the divestitures of the Industrial and Life Sciences division and the diagnostics manufacturing businesses. The increase in 1994 was the result of lower cash flow from operations in 1993. The lower cash flow provided by operations in 1993 was the result of changes in working capital components (principally inventory and accrued liabilities). To facilitate an emphasis on cash flow provided by operations, management monitors an internal performance measure called "operational cash flow." "Operational cash flow" is defined as cash flow provided by operations per Allegiance's combined statement of cash flows, less capital expenditures and plus the tax effect of divestiture gains (losses). This measure evaluates each operating unit on all aspects of cash flow under its direct control. In addition, the incentive compensation programs for Allegiance's senior management in each operating unit include significant emphasis on the attainment of both "operational cash flow" as well as earnings objectives. 24 The following table reconciles cash flow provided by operations, as determined by generally accepted accounting principles, to Allegiance's internal measure of "operational cash flow" (brackets denote cash outflows):
SIX MONTHS ENDED JUNE 30, YEARS ENDED DECEMBER 31, -------------------- ------------------------------- 1996 1995 1995 1994 1993 --------- --------- --------- --------- --------- (UNAUDITED) (IN MILLIONS) Cash flow provided by operations per Allegiance's combined statements of cash flows................. $ 136 $ 139 $ 253 $ 422 $ 336 Capital expenditures............................... (33) (48) (112) (122) (273) Other.............................................. -- (2) 41 3 15 --------- --------- --------- --------- --------- Total "operational cash flow".................. $ 103 $ 89 $ 182 $ 303 $ 78 --------- --------- --------- --------- --------- --------- --------- --------- --------- ---------
The increase in "operational cash flow" in the first six months of 1996 as compared to the same period in 1995 is primarily the result of reduced capital expenditures, partially offset by the decline in cash flow provided by operations discussed above. The decline in "operational cash flow" in 1995 was primarily the result of the decline in cash flow provided by operations discussed above. The increase in 1994 was the result of lower "operational cash flow" in 1993. The lower "operational cash flow" in 1993 was the result of cash flow provided by operations as discussed above and higher capital expenditures resulting from the diagnostics manufacturing businesses. INVESTMENT TRANSACTIONS Net investment transactions for Allegiance are comprised of the following:
SIX MONTHS ENDED YEARS ENDED DECEMBER 31, JUNE 30, -------------------- ------------------------------- 1996 1995 1995 1994 1993 --------- --------- --------- --------- --------- (UNAUDITED) (IN MILLIONS) Capital expenditures........................................ $ (33) $ (48) $ (112) $ (122) $ (273) Acquisitions................................................ (14) -- (5) (2) (14) Proceeds from asset dispositions............................ (10) 178 626 107 68 --- --------- --------- --------- --------- Total investment transactions, net...................... $ (57) $ 130 $ 509 $ (17) $ (219) --- --------- --------- --------- --------- --- --------- --------- --------- ---------
The reductions in capital expenditures in 1995 and 1994 are primarily the result of Allegiance's divestitures of the Industrial and Life Sciences division and the diagnostics manufacturing businesses. Management expects to invest in capital expenditures at levels consistent with 1995 and 1994, principally for improvements of its existing facilities, construction of new facilities and system upgrades. The acquisitions summarized in the above table involved no significant change to Allegiance's strategic direction, and were made for the purpose of acquiring technologies, broadening product lines and service offerings, or expanding market coverage. Proceeds from asset dispositions in the first half of 1995 primarily related to cash received from the collection of notes receivable related to Allegiance's divestiture of the diagnostics manufacturing businesses in December 1994. The proceeds received from asset dispositions for the year ended December 31, 1995, primarily related to cash received in connection with Allegiance's divestiture of its Industrial and Life Sciences division in September 1995 and the collection of notes receivable related to the divestiture of Allegiance's diagnostics manufacturing businesses. See Notes 1 and 3 to "Notes to Combined Financial Statements" for additional information related to these divestitures. 25 LITIGATION See Note 12 to "Notes to Combined Financial Statements" for a detailed description of the status of Allegiance's litigation. Under the U.S. Superfund statute and many state laws, generators of hazardous waste which is sent to a disposal or recycling site are liable for cleanup of the site if contaminants from that property later leak into the environment. The law provides that potentially responsible parties may be held jointly and severally liable for the costs of investigating and remediating a site. This liability applies to the generator even if the waste was handled by a contractor in full compliance with the law. As of June 30, 1996, Baxter has been named as a potentially responsible party for cleanup costs at ten hazardous waste sites, for which Allegiance has assumed responsibility. The largest assumed exposure is at the Thermo-Chem site in Muskegon, Michigan. Allegiance expects that the total cleanup costs for this site will be between $44 million and $65 million, of which Allegiance's share will be approximately $5 million. This amount, net of payments of approximately $1 million, has been accrued and is reflected in Allegiance's combined financial statements. The estimated exposure for the remaining nine sites is approximately $4 million, which has been accrued and reflected in Allegiance's combined financial statements. Upon resolution of any of the uncertainties described in Note 12 to "Notes to Combined Financial Statements," Allegiance may incur charges in excess of available reserves. Management does not believe that such charges will have a material impact on Allegiance's results of operations, cash flow or financial position. 26 BUSINESS OVERVIEW Allegiance is America's largest provider of health-care products and cost-management services for hospitals and other health-care providers. Allegiance was formed in June 1996 as a wholly owned subsidiary of Baxter consisting of Baxter's U.S. distribution, surgical and respiratory-therapy products, and health-care cost-management services operations. These integrated businesses recorded total sales of approximately $4.5 billion in 1995. The economics of health care are undergoing rapid and fundamental change, particularly in the United States, which is Allegiance's largest current market. In the past, doctors and nurses were paid for their services with few cost constraints. Today, large employers, insurance companies and HMOs are negotiating set fees for the care of patients. For U.S. hospitals and health systems, Allegiance's main customers, the pressure to reduce costs has never been greater. At the same time, demand for health services is continuing to climb with the dramatic growth of elderly populations in the United States and abroad. This environment offers opportunities for Allegiance, which has invested in integrated product and service programs that help medical professionals cope with health care's new economics and demographic trends. Management believes Allegiance, with its size, breadth of product line, customer relationships, growing array of cost-management services, and financial strength, is well-positioned competitively for the increasingly cost-conscious health-care marketplace. The health-care distribution market in the United States has experienced intense competition and a resultant erosion in its margins in recent years in response to the growth of managed care and increased consolidation among health-care providers. Allegiance has responded by integrating its market-leading distribution capabilities with a broad product offering, high levels of customer service and innovative cost-management services. Within a larger Baxter organization, Allegiance's cost structure was higher than industry standards. As an independent public company, Allegiance intends to realign its cost structure in order to improve returns from its distribution operations. STRATEGIC PROFILE Allegiance's mission is to align its objectives with those of its customers - -- to help hospitals and others throughout the health-care field fulfill their mission of serving patients. Allegiance intends to achieve this goal by providing high-quality products, excellent service and new ways of managing costs. Allegiance's leading competitive position within the health-care marketplace is a function of several key advantages, including its size and breadth of products; an intense customer-service orientation; a growing portfolio of cost-management services, and financial strength. Allegiance is the only health-care company that fully integrates distribution, products and services to bring greater efficiency to health care. Management believes its key competitive advantages and integrated product and service offerings provide a solid platform for growth. SIZE AND BREADTH Allegiance is the largest provider of health-care products and cost-management services in the United States. Total net sales in 1995 were approximately $4.5 billion. Allegiance offers more than 200,000 products -- the broadest range of medical and laboratory products in the industry. Allegiance's offering includes its own products as well as products manufactured by more than 2,000 independent suppliers. Allegiance operates more than 60 distribution centers across the country, delivering products often on a just-in-time basis. Management believes the size and scope of the Company are key competitive advantages in the evolving health-care environment. CUSTOMER SERVICE Allegiance is recognized throughout the industry for its service to customers. Allegiance develops relationships based on collaboration, quality management processes and common goals. Its sales and 27 service personnel are rewarded for achieving goals that are established jointly with customers. Allegiance sets service standards in an industry where the time from customer order to delivery can be critical. Management believes its focus on customer service and satisfaction will continue to distinguish Allegiance from competitors. COST-MANAGEMENT SERVICES Allegiance has pioneered a broad range of cost-management services, such as shared-risk/shared-savings agreements that align Allegiance's goals with those of its customers. Allegiance and its customers work together to reduce costs and improve the quality of care. Allegiance assigns clinician consultants to these cost-management customers. Allegiance's consultants use a proprietary "best demonstrated practices" database of more than 500 procedures to help health-care professionals use fewer supplies and improve outcomes. In addition to clinical consulting, Allegiance offers a range of cost-management services, including just-in-time delivery, procedure-based product packaging and outsourcing of certain non-clinical functions. Management believes this portfolio of cost-management services is a key competitive advantage in the increasingly cost-conscious health-care market. FINANCIAL STRENGTH As America's leading provider of health-care products and cost-management services, Allegiance has unparalleled opportunity to provide its services to health-care providers. In 1995, on a pro forma basis, Allegiance achieved approximately $4.5 billion of net sales, $950 million of gross profit and $350 million of earnings before interest, taxes, depreciation and amortization, or EBITDA. Management believes that Allegiance's size and flexibility are important competitive advantages in the rapidly changing health-care industry. In addition, Allegiance has established an incentive compensation program for senior managers that is linked to achieving certain cash-flow and earnings objectives. STRATEGIC PRIORITIES Allegiance's strategy is to continue to improve the efficiency of and returns from its distribution operations, to increase market penetration for its self-manufactured and "best value" preferred distributed products, and to expand its ability to help health-care professionals manage costs. DISTRIBUTION SERVICES Distribution services are the basis for Allegiance's relationships with hospitals and laboratories and the starting point for strategic relationships that align Allegiance's objectives with those of its customers. Strategic priorities include improving the total economics of distribution; segmenting customers based on their service needs; and increasing sales of "best value" products, which result in better service for customers and higher returns for Allegiance. PRODUCT OFFERING Allegiance's products -- from latex gloves to customized surgical-procedure kits -- hold leadership positions in sales to U.S. hospitals. Allegiance's strategic priorities include: (i) increasing sales through cost-management agreements; (ii) increasing sales to non-hospital (alternate-site) health-care providers in the United States and to customers in selected international marketplaces; (iii) developing new integrated offerings of products and cost-management services; (iv) selectively expanding the Allegiance product portfolio; and (v) maintaining manufacturing operations at the highest levels of quality and efficiency. COST-MANAGEMENT SERVICES Allegiance can bring to its customers more resources to control costs than are offered by any competitor. Allegiance's strategy is to work in partnership with hospitals and others in health care to help them become more efficient, decrease costs and eliminate many of the logistical burdens that detract from their primary business -- providing health care. Strategic priorities include signing more shared-risk/shared-savings agreements and investing in new cost-management services -- beyond supplies and logistics -- that help customers reduce costs across a greater portion of their total operating budget. 28 DISTRIBUTION SERVICES Allegiance is the leading distributor of medical and laboratory products in the United States. Allegiance can supply any of more than 200,000 different products to its customers. Most items are available for shipment the same day the customer requests them. Allegiance has more than 60 U.S. distribution centers that deliver products to locations across the United States every day. Each order can be tracked electronically. Allegiance has made substantial investments in information systems to enhance its operations and improve service to customers. In addition to its own surgical and respiratory-therapy products, Allegiance distributes an array of products from more than 2,000 manufacturers to a wide variety of health-care settings. Products range from full lines of laboratory equipment and operating-room supplies to children's gift packs with coloring books and crayons. Allegiance divides its distributed products into two categories: medical/surgical products ("med/ surg") and laboratory products. It is the industry leader in both product categories. Allegiance's med/ surg portfolio comprises a broad array of products, including sutures, endoscopy instruments, needles and syringes, wound-care products, electrodes, face masks, bed pans, wash basins, blood-pressure cuffs, stethoscopes, waste-disposal bags and others. Increasingly, these products are being delivered just-in-time in ready-to-use quantities. In some cases, Allegiance delivers the products directly to patient floors. Allegiance distributes products not only to hospitals, but increasingly to surgery centers, physician clinics, long-term and sub-acute care facilities, home-care companies and other health-care providers. Laboratory products -- used primarily to perform diagnostic tests -- are sold primarily to hospitals and reference labs. These products include supplies such as test tubes, pipettes and slides and equipment such as microscopes, centrifuges and scales. THE VALUELINK-REGISTERED TRADEMARK- SERVICE Allegiance's ValueLink-Registered Trademark- "stockless" inventory service provides just-in-time deliveries of products in small, ready-to-use quantities to hospitals and health-care networks primarily in metropolitan areas. Allegiance was the first to bring just-in-time distribution to the health-care industry and it remains the leader. The ValueLink-Registered Trademark- service helps hospitals reduce inventory levels and operating expenses. Orders from hospitals are transmitted electronically and products are delivered several times a day, sometimes directly to patient floors. In some ValueLink-Registered Trademark- accounts, Allegiance personnel work at the hospital 24 hours a day, stocking shelves as needed. Demand for this service has been strong. Allegiance ended 1995 with 130 ValueLink-Registered Trademark- accounts, compared with 114 in 1994 and 53 at the end of 1993. The ValueLink-Registered Trademark- service also serves as a channel through which Allegiance delivers labor-saving, made-to-order packages containing virtually every sterile and non-sterile product needed to perform dozens of medical procedures, from open-heart bypass surgery to a hernia repair. STRATEGIC SUPPLIER RELATIONSHIPS In 1995, Allegiance began a process of consolidating its distribution service around a carefully selected group of preferred suppliers, not relinquishing product breadth, but seeking to reduce the number of suppliers that furnish redundant items. This "best value" products strategy is designed to strengthen Allegiance's relationships with fewer preferred suppliers, resulting in savings to Allegiance and better service to its customers. At the same time, Allegiance is continuing to streamline its distribution network to reduce costs, improve service and strengthen the growing number of cost-management relationships it is establishing with health-care providers and systems. SUPPLY CHAIN MANAGEMENT Supply-chain management requires precise knowledge and planning of customer demand. Given Allegiance's size and scope, advanced information systems, and balance of internally manufactured and externally supplied products, Allegiance is well-positioned to maximize service to customers and minimize inventory levels and variability. To accelerate this process, Allegiance has made major investments in information technology that uses EDI, or electronic data interchange, to exchange purchasing 29 and inventory data with many of its suppliers and largest customers. Management believes this integrated distribution and product offering strengthens Allegiance's financial and competitive position. In 1995, Allegiance opened a National Drop Ship Center in McGaw Park, Illinois, from which it distributes less-frequently ordered items. By aggregating such products in one facility, the amount of regional inventory variability has decreased and Allegiance has achieved lower system-wide inventory levels. SERVING HEALTH CARE OUTSIDE HOSPITALS Health care increasingly is being delivered outside hospitals as health-care providers re-evaluate their cost position and integrate into regional networks. Many procedures previously performed in hospital operating rooms are now performed in surgery centers, and some procedures that had been performed in surgery centers are now taking place in physician clinics. To reach these alternate-site customers -- surgery centers, physician clinics, subacute and long-term care facilities, and home-care providers -- Allegiance has developed a capability to make more frequent deliveries of smaller orders. Allegiance also is entering into relationships with dealers that specialize in serving these fast-growing markets. For some very small, or geographically remote customers, Allegiance provides service through its Network Sales organization. This sales and customer-service unit conducts business via the telephone, distributing in some cases by commercial carrier. PRODUCT OFFERING Allegiance has differentiated itself by integrating its product offering with its distribution and cost-management services. Allegiance offers the industry's broadest range of medical and laboratory products, representing more than 2,000 suppliers in addition to its own line of surgical and respiratory- therapy products. Increasingly, Allegiance is working with health professionals to reduce the variety and number of products they buy under agreements that provide incentives for Allegiance to help customers save money. In return, customers purchase a greater portion of their supplies from Allegiance. Allegiance's manufacturing units custom-assemble purchased products into procedure-based modules. Allegiance's distribution system -- the largest and most technologically advanced of the industry -- delivers the customized packages as they are needed. No other single company provides such a comprehensive offering. Allegiance operates 28 manufacturing plants, producing products used in surgery and other medical procedures. All Allegiance plants are ISO 9000 certified. Most of Allegiance's self-manufactured products hold leading sales positions, and investing further in these product lines is a strategic priority. Allegiance has several major product lines, most of which enjoy leading sales positions: CUSTOM-STERILE-TM- PRODUCTS AND THE PBDS-TM- SERVICE Allegiance's leading Custom-Sterile-TM- products and Procedure Based Delivery System-TM- (PBDS-TM-) service help health-care providers save time and money by assembling customer-designated supplies into single packages for specific procedures. Custom-Sterile-TM- packs contain sterile, disposable supplies made by Allegiance and other manufacturers. They are used to perform dozens of procedures, from open-heart surgery and childbirth to treating cuts and bruises. Customers also can select items for these packs from a data base of approximately 30,000 products from nearly 800 manufacturers. PBDS-TM- modules contain Custom-Sterile-TM- packs along with non-sterile supplies. PBDS-TM- is one of Allegiance's fastest-growing product-based cost-management services. Introduced in 1993, the service was in place in 175 hospitals by the end of 1995 and is expected to be in place in 400 hospitals by the end of 1996. PBDS-TM- modules often are delivered to operating rooms and other hospital departments on a just-in-time basis through Allegiance's ValueLink-Registered Trademark- distribution service. 30 CONVERTORS-REGISTERED TRADEMARK- PRODUCTS The Convertors-Registered Trademark- product line is a leading brand of single-use surgical drapes, gowns and apparel. These products provide barrier protection for patients, doctors and clinical staff during surgery, childbirth and other procedures. Many of Allegiance's Convertors-Registered Trademark- products are included in Custom Sterile-TM- packs. Convertors-Registered Trademark- also provides clean-room apparel and equipment covers for industrial manufacturers. GLOVES Allegiance is the world's largest manufacturer and marketer of medical gloves. Allegiance produces latex surgical and exam gloves in Malaysia, the world's biggest source of natural latex, as well as in the United States. Allegiance also manufactures vinyl exam gloves in the United States. MEDI-VAC-REGISTERED TRADEMARK- PRODUCTS Allegiance is the world's leading producer of fluid suction and collection systems. The Medi-Vac-Registered Trademark- line consists of disposable suction canisters and liners, suction tubing, and supporting hardware and accessories. These products are used in the operating room to remove fluids and debris from the body during surgery. Outside the operating room, the products are used when fluid must be removed from a patient. The Medi-Vac-Registered Trademark- product line also includes wound-drainage tubing and reservoirs used to remove fluid from closed wounds, preventing infection and promoting healing. Medi-Vac-Registered Trademark- autotransfusion systems collect blood for reinfusion to the patient after filtration, allowing patients to receive their own blood instead of transfusions from donors. RESPIRATORY THERAPY PRODUCTS Allegiance is a leading manufacturer of respiratory-therapy products, which are used primarily to deliver oxygen to patients suffering from respiratory distress. This product line includes ventilator circuits (tubing used to connect patients to ventilator machines), oxygen masks, cannulae, and suction catheters used to clear the trachea. V. MUELLER Allegiance's V. Mueller product line consists of a broad range of stainless-steel surgical instruments and related products and services. The business was established in 1895 and is known worldwide for the quality of its instruments. Allegiance's V. Mueller division manufactures about a third of its product line; other products are sourced from contract manufacturers. V. Mueller products include clamps, needle-holders, retractors, specialty scissors and forceps. The business unit also manufactures and markets the cost-saving Genesis-TM- container system -- complete instrument sets, assembled to order, sterilized and ready for use in reusable metal containers. SPECIAL PROCEDURE PRODUCTS Allegiance provides specialty biopsy needles for extracting samples of bone marrow and soft tissue, and a variety of specialty procedure trays. These include lumbar puncture trays, for measuring pressure and taking samples of cerebrospinal fluid; thoracentesis trays, for withdrawing fluid from chest or abdominal cavities, or from joints or cysts; amniocentesis trays, for obtaining amniotic fluid to assess the condition of fetuses; and other diagnostic trays and products used by obstetricians and gynecologists. OTHER PRODUCTS Allegiance is a manufacturer and a marketer of a range of other leading products. It is the world's largest producer of latex urinary drainage catheters, and it manufactures endotracheal tubes for respiration, anesthesia and other therapies. Allegiance produces a broad line of hot and cold packs used to provide localized temperature therapy for orthopedic injuries and for patients recovering from childbirth and surgical procedures. It also manufactures and markets a broad line of patient-preparation, hair-removal and skin-care products such as clippers, razors, and basins, as well as special soaps, sponges and scrub brushes for surgeons and other operating-room personnel. 31 COST-MANAGEMENT SERVICES Reducing costs while improving quality of care is the most significant challenge facing health-care providers today. Allegiance offers the broadest range of cost-management services in the health-care industry and is investing significantly to expand its offering further. Through its shared-risk/shared-savings programs, Allegiance aligns its goals with those of its customers. Under these agreements, which Allegiance introduced to the health-care industry in late 1994, the Company and its customers agree to share the savings if supply and related costs fall below an agreed-upon target, or share the overage if these costs exceed the target. As of June 1, 1996, Allegiance had shared-risk/shared-savings agreements covering 16 hospitals. In shared-risk/shared-savings accounts, Allegiance assigns a clinical project manager to work with a hospital's clinical staff to identify patterns of supply usage, reduce variation by standardizing procedures and products, and eliminate unnecessary supplies. Product standardization involves the selection and use of one preferred brand from many options. Savings are realized from selecting the best-value product, cost efficiencies from increased volume for the selected brand and dealing with fewer vendors. Procedure standardization involves helping clinical staff reach consensus on what supplies should be used in a given procedure, then packaging and distributing the products. A typical assignment for a clinical project manager lasts 24 months. Hospitals ultimately buy fewer supplies, but a greater total portion of their supplies from Allegiance. Sales of Allegiance's surgical products, for example, have grown more than 40% in these accounts, while the hospitals' total supply costs have decreased. To the extent that savings do not materialize from these efforts, Allegiance will be obligated to reimburse the customer for a portion of the shortfall. Much of the savings generated in these cost-management accounts come from the implementation of PBDS-TM- modules, which contain Allegiance's self-manufactured products, "best value" products from preferred suppliers, and other third-party distributed products. These modules reduce hospital labor, purchasing and other product and product-management costs. Rather than ordering products separately for a procedure, customers can order a single catalog number. Rather than nurses having to locate and assemble individual products for a procedure, the products arrive in one package. Additional savings are achieved when PBDS-TM- modules are delivered just-in-time, direct to the point of use through Allegiance's ValueLink-Registered Trademark- service. Only Allegiance can offer such a unique combination of products and cost management services. In addition, Allegiance offers customers professional consulting services, including modules derived from Allegiance's proprietary database of "best-demonstrated practices," to help hospitals improve their clinical operations, reduce lengths of stay and improve clinical outcomes. Allegiance also offers, through its ACCESS-TM- program, the expertise and services of leaders in other industries such as waste management, food service and property management. Each of Allegiance's manufacturing units also offers programs to help customers control costs. There are programs to help health-care providers standardize and select the most cost-effective drapes, gowns, gloves and other products for various procedures; identify the most cost-effective mix of products to include in custom procedure kits; sterilize, repair and refurbish surgical instruments; and process reusable laundry, linen and textiles. The Right Choice-TM- glove-management program, for example, helps health-care providers select the most cost-effective glove for various procedures while ensuring appropriate patient care and worker safety. CONTRACTUAL ARRANGEMENTS; BUYING GROUPS A substantial portion of Allegiance's products are sold through contracts with purchasers. Some of these contracts are for terms of more than one year and include limits on price increases. In the case of hospitals, clinical laboratories and other facilities, these contracts may provide the customer incentives to purchase particular products or categories of products. Some of these contracts are entered into with hospital buying groups which seek to achieve economies of scale in aggregating multiple hospitals' purchases from Allegiance. 32 For the last three years, as a percentage of Allegiance's total revenue, sales to customers which are members of two of the largest hospital buying groups, Premier Purchasing Partners, LP ("Premier," which is an affiliate of Premier, Inc.) and VHA, Inc. ("VHA"), comprised 27% and 16% respectively in 1995, 23% and 13% respectively in 1994, and 23% and 13% respectively in 1993. Some member hospitals in each group are free to purchase from the vendors of their choice. The loss of the relationship with either group would not necessarily mean the loss of sales attributable to all members of such group. In addition, management of Allegiance believes that its relationships with its larger customers are excellent. No other buying group or single customer currently accounts for more than 10% of Allegiance's revenue. SALES AND MARKETING Allegiance conducts its selling efforts through its subsidiaries. These subsidiaries have their own sales forces and direct their own sales efforts. In the United States, Allegiance has implemented a "team selling" approach with many of its hospitals, health systems and multi-hospital group customers. This approach relies on an account manager to coordinate the various Allegiance businesses' sales efforts. The account manager assumes responsibility for all sales and service contacts with a given customer, acting as a focal point, and assembles cross-functional teams as needed to meet that customer's requirements. Allegiance manages its field sales and service organization on a regional basis. The regional sales organization is designed to develop strong strategic relationships with customers. In addition, sales are made to independent distributors, dealers and sales agents. Outside of the U.S., Allegiance products are distributed through Baxter. See "Relationship with Baxter." RAW MATERIALS SUPPLIERS Raw materials essential to Allegiance's business are purchased worldwide in the ordinary course of business from numerous suppliers. The vast majority of these materials are generally available, and no serious shortages or delays have been encountered. Certain raw materials used in producing some of Allegiance's products, including its latex products, are available only from a small number of suppliers. In some of these situations, Allegiance has long-term supply contracts with its suppliers, although it does not consider its obligations under such contracts to be material. Allegiance does not always recover cost increases through customer pricing due to contractual limits and market pressure on such price increases. See "-- Contractual Arrangements; Buying Groups" and "Relationship with Baxter." PATENTS AND TRADEMARKS Allegiance does not consider any one or more of the patents and trademarks it holds, or the licenses granted to or by it with respect to any patent or trademark to be essential to its businesses. COMPETITION Allegiance is faced with substantial competition in all of its markets. The changing health-care environment in recent years has led to increasingly intense competition among health-care suppliers. Competition is focused on price, service and product performance. Pressure in these areas is expected to continue. See "Risk Factors -- United States Competition." The future financial success of health-care product and service companies, such as Allegiance, will depend on their ability to work with health-care customers to help them enhance their competitiveness through cost management initiatives. Management believes it can help its customers achieve savings in the total health-care system by automating supply-ordering procedures, optimizing distribution networks, improving utilization and materials management and achieving economies through product and procedure standardization, and performing certain non-clinical services on an outsourced basis. Management further believes that its strategy of providing high levels of service to its health-care customers and achieving the best overall cost in its delivery of health-care products and services is compatible with any anticipated realignment of the U.S. health-care system that may ultimately occur. 33 QUALITY CONTROL Allegiance places great emphasis on providing quality products and services to its customers. An integrated network of quality systems, including control procedures that are developed and implemented by technically trained professionals, result in rigid specifications for raw materials, packaging materials, labels, sterilization procedures and overall process control. The quality systems integrate the efforts of raw material and finished goods suppliers to provide the highest value to customers. On a statistical sampling basis, a quality assurance organization tests components and finished goods at different stages in the manufacturing process to assure that exacting standards are met. GOVERNMENT REGULATION Most of the products manufactured or sold by Allegiance in the United States are subject to regulation by the Food and Drug Administration ("FDA"), as well as by other federal and state agencies. The FDA regulates the introduction and advertising of new drugs and devices as well as manufacturing procedures, labeling and record keeping with respect to drugs and devices. The FDA has the power to seize adulterated or misbranded drugs and devices or to require the manufacturer to remove them from the market and the power to publicize relevant facts. From time to time, Baxter has removed products from the market that were found not to meet acceptable standards. This may occur with respect to Allegiance in the future. Product regulatory laws exist in most other countries where Allegiance will do business. Environmental policies of Allegiance mandate compliance with all applicable regulatory requirements concerning environmental quality and contemplate, among other things, appropriate capital expenditures for environmental protection. Various non-material capital expenditures for environmental protection were made by Baxter related to the Allegiance Business during 1995 and similar expenditures are planned for 1996. See "-- Legal Proceedings." EMPLOYEES As of August 1, 1996, Allegiance employed approximately 22,000 people. LEGAL PROCEEDINGS As of the Distribution Date, Allegiance assumed the defense of litigation involving claims related to the Allegiance Business, including certain claims of alleged personal injuries as a result of exposure to natural rubber latex gloves described below. Allegiance has not been named as a defendant in this litigation but will be defending and indemnifying Baxter Healthcare Corporation ("BHC"), as contemplated by the Reorganization Agreement, for all expenses and potential liabilities associated with claims pertaining to this litigation. It is expected that Allegiance will be named as a defendant in future litigation, and may be added as a defendant in existing litigation. BHC was one of ten defendants named in a purported class action filed in August 1993, on behalf of all medical and dental personnel in the state of California who allegedly suffered allergic reactions to natural rubber latex gloves and other protective equipment or who allegedly have been exposed to natural rubber latex products. (KENNEDY, ET AL., V. BAXTER HEALTHCARE CORPORATION, ET AL., Sup. Ct., Sacramento Co., Cal., #535632). The case alleges that users of various natural rubber latex products, including medical gloves made and sold by BHC and other manufacturers, suffered allergic reactions to the products ranging from skin irritation to systemic anaphylaxis. The Court granted defendants' demurrer to the class action allegations. On February 29, 1996, the California Appellate Court upheld the trial court's ruling. In April 1994, a similar purported class action, GREEN, ET AL. V. BAXTER HEALTHCARE CORPORATION, ET AL., (Cir. Ct., Milwaukee Co., WI, 94CV004977) was filed against Baxter and three other defendants. The class action allegations have been withdrawn, but additional plaintiffs added individual claims. On July 1, 1996, the Company was served with a similar purported class action, WOLF V. BAXTER HEALTHCARE CORP. ET AL., Circuit Court, Wayne County, MI, 96-617844NP. The Company is the only named defendant in that suit. As of August 19, 1996, 36 additional lawsuits have been served on BHC containing similar allegations of sensitization to natural rubber latex products. Allegiance intends to vigorously defend against these actions. Since none of these cases has proceeded to a hearing on the merits, Allegiance is unable to evaluate the extent of any potential liability, and unable to estimate any potential loss. 34 Allegiance believes that a substantial portion of the liability and defense costs related to natural rubber latex gloves cases and claims will be covered by insurance, subject to self-insurance retentions, exclusions, conditions, coverage gaps, policy limits and insurer solvency. BHC has notified its insurance companies that it believes that these cases and claims are covered by BHC's insurance. Most of BHC's insurers have reserved their rights (i.e., neither admitted nor denied coverage), and may attempt to reserve in the future, the right to deny coverage, in whole or in part, due to differing theories regarding, among other things, the applicability of coverage and when coverage may attach. It is not expected that the outcome of these matters will have a material adverse effect on Allegiance's business, results of operations or financial condition. Under the United States Superfund statute and many state laws, generators of hazardous waste which is sent to a disposal or recycling site are liable for cleanup of the site if contaminants from that property later leak into the environment. The law provides that potentially responsible parties may be held jointly and severally liable for the costs of investigating and remediating a site. This liability applies to the generator even if the waste was handled by a contractor in full compliance with the law. As of June 30, 1996, BHC has been named as a potentially responsible party for cleanup costs at ten hazardous waste sites for which Allegiance has assumed responsibility. Allegiance's largest exposure is at the Thermo-Chem site in Muskegon, Michigan. Allegiance expects that the total cleanup costs for this site will be between $44 million and $65 million, of which Allegiance's share will be approximately $5 million. This amount, net of payments of approximately $1 million, has been accrued and is reflected in Allegiance's combined financial statements. The estimated exposure for the remaining nine sites is approximately $4 million, which has been accrued and reflected in Allegiance's combined financial statements. It is not expected that the outcome of these matters will have a material adverse effect on Allegiance's business, results of operations or financial condition. BHC is a defendant in a number of other claims, investigations and lawsuits for which Allegiance has assumed responsibility. Based on the advice of counsel, management does not believe that the other claims, investigations and lawsuits individually or in the aggregate, will have a material adverse effect on Allegiance's business, results of operations or financial condition. PROPERTIES Allegiance owns or has long-term leases on substantially all of its major manufacturing facilities. Allegiance maintains 28 manufacturing facilities in the United States, and also operates manufacturing facilities in France, Malaysia, Malta and Mexico. Allegiance owns or leases 60 distribution centers in the United States. Allegiance maintains a continuing program for improving its properties, including the retirement or improvement of older facilities and the construction of new facilities. This program includes improvement of manufacturing facilities to enable production and quality control programs to conform with the current state of technology and government regulations. 35 MANAGEMENT EXECUTIVE OFFICERS AND DIRECTORS The Company's directors and executive officers and their ages as of June 30, 1996 are as follows:
NAME AGE POSITION - -------------------------------- --- ---------------------------------------------------------------- Lester B. Knight................ 38 Chairman of the Board and Chief Executive Officer Joseph F. Damico................ 42 President and Chief Operating Officer Peter B. McKee.................. 58 Senior Vice President and Chief Financial Officer Kathy Brittain White............ 46 Senior Vice President and Chief Information Officer Robert B. DeBaun................ 46 Corporate Vice President Mark J. Ehlert.................. 42 Corporate Vice President Gail Gaumer..................... 44 Corporate Vice President of Allegiance Healthcare Corporation Robert J. Zollars............... 39 Group Vice President of Allegiance Healthcare Corporation Richard C. Adloff............... 38 Corporate Vice President and Controller William L. Feather.............. 49 Senior Vice President, General Counsel and Secretary Leonard G. Kuhr................. 38 Corporate Vice President and Treasurer Silas S. Cathcart............... 70 Director David W. Grainger............... 68 Director Arthur F. Golden................ 50 Director Michael D. O'Halleran........... 46 Director Kenneth D. Bloem................ 50 Director Connie Curran, Ed.D............. 49 Director Roger L. Sisterman.............. 52 Corporate Vice President of Allegiance Healthcare Corporation
LESTER B. KNIGHT has been chairman of the board and chief executive officer of Allegiance, since June 1996. From 1992 to June 1996, Mr. Knight was executive vice president of Baxter, responsible for its U.S. Healthcare business. Mr. Knight joined Baxter in 1981 and served in several manufacturing, research-and-development and management positions before being named general manager of Baxter's renal business in 1987. He was named president of the renal business in 1988 and president of the I.V. Systems business the following year. He was elected a corporate vice president of Baxter in 1990, and was named executive vice president in 1992. JOSEPH F. DAMICO has been president and chief operating officer of Allegiance, since June 1996. From 1993 to June 1996, Mr. Damico was group vice president, responsible for Baxter's Field Sales, Health Systems, and Distribution organizations in the U.S. Healthcare business. Mr. Damico joined Baxter in 1979 as a sales representative and served in a variety of management positions before being 36 named vice president and general manager of the company's Custom Sterile division in 1987. He was named president of the Convertors/Custom Sterile business in 1989 and also assumed responsibility for Baxter's Pharmaseal division in 1992. He was elected a corporate vice president the same year. PETER B. MCKEE has been senior vice president and chief financial officer of Allegiance since September 1996. From May 1996 to June 1996, Mr. McKee worked at Baxter. Prior to that date, he had been senior vice president and chief financial officer at FoxMeyer Health Corporation, a leading pharmaceutical distributor, since 1993. Mr. McKee's career as a financial executive spans more than 35 years. Before joining Dallas-based FoxMeyer, he worked in financial consulting and held CFO positions at Metro Airlines and Swift Independent Packing. He also has held senior financial positions at Ford Motor Company and Cooper Industries Inc. KATHY BRITTAIN WHITE has been senior vice president and chief information officer of Allegiance since September 1996. Prior to that date, Ms. White served as corporate vice president and chief information officer of Baxter, since 1995. She came to Baxter from AlliedSignal Corporation, where she had served as vice president, information systems and services since 1993. Prior to that, she was vice president, corporate services, for Guilford Mills, Inc. ROBERT B. DEBAUN has been a corporate vice president of Allegiance, responsible for human resources, since September 1996. Prior to that date, Mr. DeBaun served as vice president of human resources for the U.S. Distribution organization of Baxter, since 1991. Mr. DeBaun joined Baxter in 1981 as manager of college relations. In 1986, after a series of increasingly responsible positions, he was named vice president, human resources, for Baxter's I.V. Systems group. MARK J. EHLERT has been a corporate vice president of Allegiance, responsible for quality assurance and regulatory affairs, since September 1996. Prior to that date, Mr. Ehlert served as vice president, quality and regulatory affairs, for Baxter's U.S. Sales and Distribution organization, since 1994. Mr. Ehlert joined Baxter in 1975. In 1990, after a series of increasingly responsible positions, he was promoted to general manager of Baxter's Singapore manufacturing operations. GAIL GAUMER has been a corporate vice president of a subsidiary of Allegiance, responsible for strategy and business development as well as cost management services, since September 1996. Prior to that date, Ms. Gaumer served as president of marketing, strategy and business development for Baxter's U.S. Healthcare business, since 1995. Ms. Gaumer joined Baxter in 1980 and held a number of positions in its subsidiary's Renal business. Most recently, she was president of Renal-Europe. Before that, she was vice president of global marketing, planning and new business development, and then vice president and general manager for the Renal business. Before joining Baxter, she worked for ALZA Corporation, a drug-delivery company. Ms. Gaumer is a director of FemRx, Inc. ROBERT J. ZOLLARS has been a group vice president of a subsidiary of Allegiance since September 1996. He leads the regional companies and health systems organizations of Allegiance. Prior to that date Mr. Zollars served as president of Baxter's U.S. Distribution, responsible for its Hospital Supply/ Scientific Products, Life Sciences, Hospitex, Dietary Products, and ValueLink distribution businesses, since 1994. Mr. Zollars joined Baxter in 1979 as a sales representative for the Scientific Products division and rose to vice president and general manager of the division in 1983. In 1986, he was named president of the Dietary Products division, and in 1990, became president of the I.V. Therapy business. He was named president of the Hospital Supply division in 1992, and assumed additional responsibility for Scientific Products in 1993. RICHARD C. ADLOFF has been a corporate vice president and controller of Allegiance, since September 1996. Prior to that date, Mr. Adloff served as vice president of finance for Baxter's U.S. Healthcare business, since 1994. Mr. Adloff joined Baxter in 1980 with the Hospital Supply division. In 1990, after a series of increasingly responsible positions in distribution and manufacturing, he was promoted to vice president -- finance of IV Systems. WILLIAM L. FEATHER has been senior vice president, general counsel and secretary of Allegiance since June 1996 and will head its law function. Prior to that date, Mr. Feather served as associate general 37 counsel for Baxter's U.S. Healthcare business since January 1996. Mr. Feather joined Baxter in 1986 as corporate counsel. He was promoted to senior counsel in 1990 and assistant general counsel in January 1994. LEONARD G. KUHR has been a corporate vice president and treasurer of Allegiance since September 1996. He will also supervise its tax function. Prior to June 1996, Mr. Kuhr served as vice president, capital markets, in a Baxter subsidiary's Treasury group since 1995. From 1992 to 1995, Mr. Kuhr was vice president, finance, for Baxter's Surgical business. Mr. Kuhr joined Baxter in 1979 and served in a variety of management positions in the Corporate Tax department, in both domestic and international functions. He was named vice president and controller of the Specialty Business group in Baxter's U.S. Distribution business in 1992. SILAS S. CATHCART has been a director of Allegiance since September 1996. Mr. Cathcart is a director of General Electric Company and The Quaker Oats Company. Mr. Cathcart is also a trustee of Northern Funds Mutual Fund. From 1985 to 1987, and from 1990 to the present, Mr. Cathcart served as a director of Baxter. From 1970 to 1985 he served as a director of American Hospital Supply Corporation. Mr. Cathcart served as chairman of the board and chief executive officer of Kidder, Peabody Group Inc., an investment banking firm, from 1988 to 1989, and as president and chief executive officer from 1987 to 1988. From 1972 to 1986, he was chairman of Illinois Tool Works, Inc. DAVID W. GRAINGER has been a director of Allegiance since September 1996. Since 1968, Mr. Grainger has been chairman of the board of W. W. Grainger, Inc., a nationwide distributor of equipment, components and supplies. He joined W. W. Grainger, Inc. in 1952. From 1990 to the present, Mr. Grainger has served as a director of Baxter. ARTHUR F. GOLDEN has been a director of Allegiance since September 1996. Since 1978, Mr. Golden has been a partner of Davis, Polk & Wardwell, a general practice law firm. He is a director of Esco Electronics Corporation and Borg Warner Security Corporation. MICHAEL D. O'HALLERAN has been a director of Allegiance since September 1996. Since 1995, Mr. O'Halleran has been president of Aon Group, Inc., an insurance holding company, and since 1988, he has been the chairman of the board of Aon Risk Services, Inc., a subsidiary of that company. KENNETH D. BLOEM has been a director of Allegiance since September 1996. Since 1994, Mr. Bloem has been the chief executive officer of The Advisory Board Company, a privately held research and publishing company. From 1989 to 1994, he was the president of Stanford University Hospital. CONNIE CURRAN has been a director of Allegiance since September 1996. Since 1995, Ms. Curran has been president of CurranCare, Inc., a nation-wide hospital based home care management company. From 1990 to 1995, she was the vice chairman/national director of patient services of APM, Inc. ROGER L. SISTERMAN has been a corporate vice president of a subsidiary of Allegiance, responsible for manufacturing worldwide, since September 1996. Prior to that date, Mr. Sisterman served as vice president of manufacturing and operations for the U.S. Healthcare business of Baxter since 1994. Mr. Sisterman joined Baxter in 1977 and held a number of positions. In 1985, Mr. Sisterman became director of materials management for Baxter's Pharmaseal division. In 1987, he was promoted to vice president of manufacturing for Baxter Custom Sterile, and in 1991, for Baxter Convertors/Custom Sterile. CLASSIFIED BOARD OF DIRECTORS The Certificate of Incorporation of Allegiance provides that the Allegiance directors (other than those who may be elected by the holders of any series of Preferred Stock of Allegiance under specified circumstances), will be divided into three classes of directors, with the classes to be as nearly equal in number as possible. The Certificate of Incorporation provides that the term of office of the first class will expire at the 1997 annual meeting of stockholders ("Class I"), the term of office of the second class will expire at the 1998 annual meeting of stockholders ("Class II") and the term of office of the third class will 38 expire at the 1999 annual meeting of stockholders ("Class III"). Messrs. Cathcart and O'Halleran serve as Class I directors, Messrs. Damico and Golden and Ms. Curran serve as Class II directors and Messrs. Knight, Grainger and Bloem serve as Class III directors. COMMITTEES OF THE BOARD OF DIRECTORS The Board of Directors of Allegiance has established two Committees, the Audit and Public Policy Committee and the Compensation and Nominating Committee. The Audit and Public Policy Committee reviews the scope of the audit by the independent auditors, inquires into the effectiveness of Allegiance's accounting and internal control functions, and recommends to the Allegiance Board any changes in the appointment of independent auditors which the committee may deem to be in the best interests of the corporation and its stockholders. The committee also assists the Board in establishing and monitoring compliance with the ethical standards of Allegiance. The Audit and Public Policy Committee also reviews the policies of Allegiance to assure they are consistent with its social responsibility to employees, customers and to society, including policies relating to health and safety and ethics. The committee consists solely of directors who are independent of management. Members of this committee consist of Mr. O'Halleran (Chairman), Mr. Cathcart, Mr. Grainger, Mr. Golden, Mr. Bloem and Ms. Curran. The Compensation and Nominating Committee determines the compensation of officers, other than the chairman of the board and chief executive officer, exercises the authority of the Board concerning employee benefit plans, administers Allegiance's stock option plans, and advises the Board on other compensation and employee benefit matters. In addition, the committee makes recommendations to the Board regarding candidates for election as directors of Allegiance. The committee also advises the Board on board committee structure and membership. The committee consists solely of directors who are independent of management. Members of this committee consist of Mr. Cathcart (Chairman), Mr. Golden, Mr. O'Halleran, Mr. Bloem and Ms. Curran. COMPENSATION OF DIRECTORS Cash compensation of non-employee directors consists of a $1,000 fee for each board and each committee meeting attended. Chairpersons of committees receive an additional annual retainer of $3,000. Employee directors are not compensated separately for their board or committee activities. In addition, to align the directors' interests more closely with the interest of all of the Company's stockholders, each non-employee director receives options to purchase (at fair market value on the date of grant) 10,000 shares of Allegiance common stock under the Allegiance Corporation 1996 Outside Director Incentive Compensation Plan. Such options vest one year after date of grant. An aggregate of 350,000 shares of common stock are reserved for issuance under such plan. 39 EXECUTIVE COMPENSATION The following table shows the 1995 compensation for services rendered by the chairman of the board and chief executive officer of Allegiance and the individuals who are expected to be the next four most highly compensated executive officers of Allegiance (collectively, the "named executive officers") based on their 1995 Baxter compensation. The compensation shown in this table was paid by Baxter (or its subsidiaries) for all of their services to Baxter and its subsidiaries. References to "restricted stock" and "stock options" mean restricted shares of common stock of Baxter ('Baxter Stock') and options to purchase Baxter Stock. Amounts shown are for each individual in their last position with Baxter, and do not necessarily reflect the compensation which these five individuals will earn in their new capacities as executive officers of Allegiance. SUMMARY COMPENSATION TABLE
LONG TERM COMPENSATION ----------------------------------------- AWARDS ANNUAL COMPENSATION -------------------------- ------------------------------------------------ RESTRICTED SECURITIES PAYOUTS OTHER ANNUAL STOCK UNDERLYING ------------- ALL OTHER NAME AND PRINCIPAL SALARY BONUS COMPENSATION AWARD(S) OPTIONS LTIP PAYOUTS COMPENSATION POSITION YEAR ($)(1) ($)(1) ($) ($)(2) (#) ($) ($)(3) - ---------------------- --------- --------- --------- --------------- ----------- ------------- ------------- --------------- Lester B. Knight 1995 $ 367,000 $ 350,000 $ 12,134 $ 23,139 44,800 -0- $ 23,241 Chairman of the Board & Chief Executive Officer Joseph F. Damico 1995 $ 285,000 $ 170,000 $ 2,432 -0- 22,900 -0- $ 13,866 Chief Operating Officer Kathy B. White 1995 $ 182,692 $ 142,500 $ 929 $ 319,600 41,000 -0- $ 0 Corporate Vice President Robert J. Zollars 1995 $ 230,000 $ 43,200 -- -0- 10,000 -0- $ 9,346 Corporate Vice President Gail Gaumer 1995 $ 200,000 $ 43,200 -- -0- 8,500 -0- $ 8,446 Corporate Vice President
- --------------- (1) Amounts shown include cash compensation earned by the named executive officers during the year indicated, including amounts deferred at the election of those officers. Bonuses are paid in the year following the year during which they are earned. (2) Amounts shown represent the market value at the date of grant, without giving effect to the diminution in value attributable to the restrictions on such stock. The amounts shown in this column include grants to the specified named executive officers under Baxter's 1989 Long-Term Incentive Plan. The restricted shares granted to Mr. Knight and Ms. White under that Plan could be earned based on 1996 performance and, if so, they would ordinarily vest on December 31, 1997. As of December 31, 1995, the number and value of the aggregate Baxter restricted stock holdings of the named executive officers are as follows: Mr. Knight -- 22,000 shares ($921,250); Mr. Damico -- 11,508 shares ($481,898); Ms. White -- 9,400 shares ($393,625); Mr. Zollars -- 6,931 shares ($290,236); Ms. Gaumer -- 4,408 shares ($184,585). Dividends are payable on all outstanding shares of Baxter restricted stock held by all executives at the same rate and time and in the same form in which dividends are payable on all outstanding shares of Baxter Stock, as required by Baxter's 1987 Incentive Compensation Program. (3) Amounts shown represent Baxter matching contributions in Baxter's Incentive Investment Plan, a qualified section 401(k) profit sharing plan, additional matching contributions in Baxter's deferred compensation plan and the dollar value of Baxter split-dollar life insurance benefits. Those three amounts for 1995, expressed in the same order as identified above, for the named executive officers are as follows: Mr. Knight -- $4,500, $18,510, and $231; Mr. Damico -- $4,500, $9,300, and $66; Ms. White -- (none); Mr. Zollars -- $4,500, $4,762, and $84; Ms. Gaumer -- $4,500, $3,852, and $94. 40 Of the five named executive officers, Mr. Zollars and Ms. Gaumer are eligible to receive a special incentive payment equal to one times annual base salary. The payment will be made on December 31, 1996 as long as they have not voluntarily resigned, been terminated for cause, or have accepted a position outside of the Allegiance organization. STOCK OPTION GRANTS The following table contains information relating to the Baxter stock option grants made in 1995 under Baxter's 1994 Incentive Compensation Program to the named executive officers. BAXTER OPTION GRANTS IN LAST FISCAL YEAR (1)(2)(3)
INDIVIDUAL GRANTS ---------------------------------------- PERCENT OF NUMBER OF TOTAL OPTIONS POTENTIAL REALIZABLE VALUE AT ASSUMED SECURITIES GRANTED TO ANNUAL RATES OF STOCK UNDERLYING EMPLOYEES IN EXERCISE OR PRICE APPRECIATION FOR OPTION TERM OPTIONS FISCAL BASE PRICE EXPIRATION -------------------------------------------- NAME GRANTED (#) YEAR (4) ($/SH)(5) DATE 0% ($) 5% ($)(6) 10% ($)(6) - -------------------------- ------------ ------------- ----------- ----------- ----------- -------------- --------------- Mr. Knight................ 44,800 0.9% $ 37.25 7/29/05 $ -0- $ 1,049,498 $ 2,659,637 Mr. Damico................ 22,900 0.4% $ 37.25 7/29/05 $ -0- $ 536,462 $ 1,359,502 21,000 0.4% $ 37.25 7/29/05 $ -0- $ 491,952 $ 1,246,705 Ms. White (7)............. 20,000 0.4% $ 34.00 4/24/05 $ -0- $ 427,648 $ 1,083,744 Mr. Zollars............... 10,000 0.2% $ 37.25 7/29/05 $ -0- $ 234,263 $ 593,669 Ms. Gaumer................ 8,500 0.2% $ 37.25 7/29/05 $ -0- $ 199,124 $ 504,619
- --------------- (1) No SARs were granted by Baxter in 1995. (2) All options shown in this table except for the 20,000 share grant to Ms. White, become exercisable five years from the date of grant, subject to accelerated vesting as follows. One hundred percent of the option will become exercisable on the first business day after the ninetieth consecutive calendar day during which the average fair market value of Baxter Stock equals or exceeds $50 per share. Ms. White's 20,000 share grant becomes exercisable five years from the date of grant, subject to accelerated vesting as follows. Fifty percent of the option became exercisable on December 27, 1995; fifty percent of the option will become exercisable on the first business day after the ninetieth consecutive calendar day during which the average fair market value of Baxter Stock equals or exceeds $50 per share. The exercise price may be paid in cash or shares of Baxter Stock. Baxter's 1994 Program provides that if specified corporate control changes occur, all outstanding options will become exercisable immediately. (3) The Compensation Committee of the Board of Directors of Baxter adopted an equitable adjustment formula applicable to all options to purchase Baxter Stock which are outstanding as of the Distribution Date. The formula, which is consistent with tax and accounting rules, is intended to preserve the value of the options after the Distribution Date. (4) In 1995, Baxter granted options on approximately 5.2 million shares of Baxter Stock to approximately 6,400 employees. (5) The exercise price shown is the closing price of Baxter Stock on the date of grant, which was July 31, 1995 for all options except the option granted to Ms. White for 20,000 shares. The exercise price shown for the 20,000 shares granted to Ms. White is the closing price of Baxter Stock on the date of grant which was April 24, 1995. (6) The amounts shown in these two columns represent the potential realizable values using the options granted and the exercise price. The assumed rates of stock price appreciation are set by the Commission's executive compensation disclosure rules and are not intended to forecast the future appreciation of Baxter Stock. (7) The 20,000 share grant to Ms. White was an element of the compensation package provided to her upon joining Baxter in her current role. The 21,000 share grant she received was part of Baxter's normal option grant process. 41 STOCK OPTION EXERCISES The following table contains information relating to the exercise of Baxter stock options by the named executive officers in 1995 as well as the number and value of their unexercised Baxter options as of December 31, 1995. AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION VALUES
NUMBER OF SECURITIES UNDERLYING UNEXERCISED VALUE OF UNEXERCISED OPTIONS AT IN-THE-MONEY OPTIONS SHARES FISCAL YEAR-END (#)(1) AT FISCAL YEAR END ($)(2) ACQUIRED ON VALUE ---------------------------- ---------------------------- NAME EXERCISE (#) REALIZED ($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE - ------------------------- ------------ ------------ ------------ -------------- ------------ -------------- Mr. Knight............... -0- N/A 46,757 53,800 $ 619,426 $ 350,075 Mr. Damico............... -0- N/A 32,140 27,733 $ 486,278 $ 182,652 Ms. White................ -0- N/A 10,000 31,000 $ 78,750 $ 175,875 Mr. Zollars.............. -0- N/A 27,784 12,534 $ 429,462 $ 82,722 Ms. Gaumer............... -0- N/A 20,320 9,867 $ 310,449 $ 61,014
- ------------ (1) The sum of the numbers under the Exercisable and Unexercisable columns of this heading represents each named executive officer's total outstanding Baxter options. (2) The dollar amounts shown under the Exercisable and Unexercisable columns represent the number of exercisable and unexercisable Baxter options, respectively, which were "In-the-Money" on December 31, 1995, multiplied by the difference between the closing price of Baxter Stock on December 31, 1995, which was $41.875 per share, and the exercise price of the Baxter options. For purposes of these calculations, In-the-Money options are those with an exercise price below $41.875 per share. BAXTER PENSION PLAN The Baxter International Inc. and Subsidiaries Pension Plan's (the "Baxter Pension Plan") normal retirement benefit equals 1.75% of the average of an employee's five highest consecutive calendar years of earnings out of his or her last ten calendar years of earnings ("Final Average Pay"), multiplied by the employee's years of benefit service, as determined by the Baxter Pension Plan. In general, the earnings covered by the Baxter Pension Plan include salary, annual cash bonuses and other regular pay. The figures shown include benefits payable under the Baxter Pension Plan and Baxter's related defined benefit excess pension plan. The estimates assume that benefit payments begin at age 65 under a single life annuity form. The figures are net of the Social Security offset specified by the Baxter Pension Plan's benefit formula and therefore do not include Social Security benefits payable from the federal government. The primary Social Security amount used in the calculations is that payable for an individual attaining age 65 in 1995. Eligible Allegiance employees (transferring employees) will continue to participate for purposes of benefit accruals in the Baxter Pension Plan through the Distribution Date. All benefit accruals for Allegiance employees in the Baxter Pension Plan cease as of the Distribution Date and all Allegiance employees will be fully vested in their accrued benefits under the Baxter Pension Plan as of such date. The terms of the Baxter Pension Plan will be amended with respect to Allegiance employees to impute certain compensation paid by Allegiance during 1996 in order to provide for a full year's earnings for 1996 to be included in determining the Final Average Pay of transferring employees. Allegiance employees with vested accrued benefits in the Baxter Pension Plan will have those benefits maintained by the Baxter Pension Plan until they are eligible or required to receive them. 42 PENSION PLAN TABLE Estimated Annual Retirement Benefits Years of Pension Plan Participation (1)
FINAL AVERAGE PAY (1) 15 20 25 30 35 - -------------- ----------- ----------- ----------- ----------- ----------- $ 100,000 $ 22,300 $ 29,800 $ 37,200 $ 44,700 $ 52,300 200,000 48,600 64,800 81,000 97,200 113,500 300,000 74,800 99,800 124,700 149,700 174,800 400,000 101,100 134,800 168,500 202,200 236,000 500,000 127,300 169,800 212,200 254,700 297,300 600,000 153,600 204,800 256,000 307,200 358,500 700,000 179,800 239,800 299,700 359,700 419,800
- ------------ (1) As of January 1, 1996, the named executive officers' years of Baxter Pension Plan participation and Final Average Pay for purposes of calculating annual retirement benefits payable under the Baxter Pension Plan are as follows: Mr. Knight -- 13 years and $538,702; Mr. Damico -- 16 years and $370,048; Ms. White -- 0 years and $0; Mr. Zollars -- 16 years and $254,798; Ms. Gaumer -- 16 years and $216,743. Although age 65 is the normal retirement age under the Baxter Pension Plan, the Baxter Pension Plan has early retirement provisions based on a "point" system. Under the point system, each participant is awarded one point for each year of benefit service as determined by the Baxter Pension Plan and one point for each year of age. Participants who terminate employment after accumulating 65 points, and who wait to begin receiving their Baxter Pension Plan benefits until they have 85 points, receive the same Baxter Pension Plan benefits they would otherwise receive at age 65, regardless of their actual age when they begin receiving their Baxter Pension Plan benefits. BAXTER STOCK HELD BY ALLEGIANCE EMPLOYEES Baxter restricted stock held by Allegiance employees will continue to be earned, based upon performance through December 31, 1996, and vested, in accordance with the terms and conditions of those grants, as if the employee's service with Allegiance were service with Baxter. Allegiance employees holding Baxter Stock Options will, as of the Distribution Date, be considered terminated and, as such, vesting and exercise will be in accordance with the terms and conditions of the outstanding grants. COMPENSATION OF EXECUTIVE OFFICERS The compensation of Allegiance's executive officers for periods beginning on and after the Distribution Date will be determined by the Board of Directors or its Compensation and Nominations Committee. COMPENSATION PHILOSOPHY. Allegiance's philosophy is to provide compensation opportunities supporting Allegiance's values. Forms and levels of total compensation will be structured to be competitive when compared to other companies of similar focus and size. These companies are reported in surveys whose participants include many companies in the Fortune 500 as well as other companies with which Allegiance and its subsidiaries compete for executive talent ("comparable companies"). This philosophy is intended to assist Allegiance in attracting, retaining and motivating executives with superior leadership and management abilities. Consistent with this philosophy, a total compensation structure has been determined for each officer, including Mr. Knight, consisting primarily of salary, cash bonus, stock options and benefits. The proportions of these elements of compensation will vary among the officers depending upon their levels of responsibility. The senior executive officers will receive a larger portion of their total compensation through performance-based incentive plans, which place a greater percentage of their compensation at risk while more closely aligning their interests with the interests of Allegiance's stockholders. Allegiance's philosophy with respect to the cap on the tax-deductibility of executive compensation will be to maximize the benefit of tax laws for Allegiance's stockholders by seeking performance-based 43 exemptions where consistent with Allegiance's compensation policies and practices. Allegiance will adopt performance goals for the officer cash bonus plan which are expected to satisfy the deductibility requirements with respect to any payments under those plans. COMPENSATION ELEMENTS. Salaries will be established each year at a level primarily intended to be competitive at the 50th percentile with salaries of executive officers in comparable companies. In addition, officer salaries will be based on the officer's individual performance. Bonuses are intended to provide executive officers with an opportunity to receive additional cash compensation but only if they earn it through Allegiance's achievement of strong performance results as measured by key financial indicators. Each year, a bonus target will be established for each executive officer at the 50th percentile of the market data of comparable companies. After year-end results are calculated, each officer's bonus will be determined based on Allegiance's performance against the key financial indicators established for the year. Achievement of the performance objective will determine an officer's opportunity to earn bonus compensation either significantly above or below the 50th percentile of opportunity within comparable companies. Stock options will be granted under the Allegiance Corporation's 1996 Incentive Compensation Program. They represent a vehicle for more closely aligning management's and stockholders' interests, specifically motivating executives to remain focused on the market value of Allegiance Stock. The number of stock options granted to executive officers is expected to be formula-driven. The formula is designed to provide an opportunity to earn stock-based compensation at a third-quartile level compared to executives in comparable companies. 1996 INCENTIVE COMPENSATION PROGRAM The Company's 1996 Incentive Compensation Program (the "Program") is designed to promote success and enhance the value of Allegiance by linking participants' interests more closely to those of Allegiance stockholders and by providing participants with an incentive for excellence. The Program is administered by the Compensation Committee of Allegiance ("Committee"). Incentives may consist of the following: (a) stock options; (b) restricted stock; (c) stock awards; (d) performance shares; and (e) other incentives, including cash. Incentives may be granted to any employee of Allegiance (including directors of Allegiance who are also employees of Allegiance) selected from time to time by the Committee. The Company has authorized 9,683,000 shares for issuance under the Program. Under the Program, the Committee may grant non-qualified and incentive stock options to eligible employees to purchase shares of Allegiance Stock from Allegiance. The Program gives the Committee discretion, with respect to any such stock option, to determine the number and purchase price of the shares subject to the option, the term of each option and the time or times during its term when the option becomes exercisable, subject to the following limitations. No stock option may be granted with a purchase price less than the fair market value of the shares subject to the option on the date of grant and the term may not exceed 10 years and one day from the date of grant. Except to the extent that the Committee determines that another value is more appropriate given the circumstances, the fair market value of shares on the date of a grant shall mean the closing sale price of Allegiance Stock as reported on the New York Exchange composite reporting tape. The initial option grant to the named executive officers will be as follows: Mr. Knight, 514,000 shares; Mr. Damico, 330,000 shares; Ms. White, 124,000 shares; Mr. Zollars, 106,000; and Ms. Gaumer, 80,000 shares. These grants are intended to cover a two-year period. SARs may be granted by the Committee pursuant to the Program in such number and on such terms as the Committee may decide, provided that the term of an SAR may not exceed 10 years and one day from the date of grant. SARs may be granted together with or independently of any stock option. SARs may be paid in Allegiance Stock or cash, as determined by the Committee. Restricted stock consists of the sale or transfer by Allegiance to an eligible employee of one or more shares of Allegiance Stock which are subject to restrictions on their sale or other transfer by the 44 employee. The price, if any, at which restricted stock will be sold will be determined by the Committee, and it may vary from time to time and among employees and may require no payment or be less than the fair market value of the shares at the date of sale. Stock awards consist of the transfer by Allegiance to an eligible employee of shares of Allegiance Stock, without payment, as additional compensation for his or her services to Allegiance or a subsidiary of Allegiance. Performance shares consist of the grant by Allegiance to an eligible employee of a contingent right to receive payment of shares of Allegiance Stock. The performance shares will be paid in shares of Allegiance Stock, or cash equivalents at the Committee's discretion, to the extent performance goals set forth in the grant are achieved. CHANGE IN CONTROL PLAN Under Allegiance's Change of Control Plan ("Change in Control Plan"), the Company entered into agreements with certain employees of the Company selected to participate (including each of the named executive officers) which entitles such employees to separation pay and benefits following a change of control in Allegiance and the employee's subsequent termination of employment unless such termination is voluntary and unprovoked or results from death, disability, retirement or cause. The eligible termination must occur within 24 months of the change of control or the agreement is void. Each agreement continues for three years from the Distribution Date and automatically renews every three years from that date unless the participants receive written notice of termination at least ninety days prior to the renewal date. The separation pay provided will equal the employee's one years' annualized base salary and target cash bonus plus the value of all deferred or unvested awards under all incentive compensation plans per the terms of the Program. For Messrs. Knight, Damico and McKee, the separation pay provided will equal three years' annualized base salary and target cash bonus plus the value of all deferred or unvested awards under all incentive compensation plans per the terms of the Program. In addition, in the event that any payments would be subject to an excise tax under the Code, the Company will pay Messrs. Knight, Damico and McKee an additional gross-up amount for any excise tax and federal, state and local income taxes, such that the net amount of the payments would be equal to the net payments after income taxes had the excise tax and resulting gross-up not been imposed. ALLEGIANCE RETIREMENT PLAN Allegiance's qualified defined contribution retirement plan (the "Allegiance Retirement Plan") for its United States employees includes a section 401(k) deferred compensation account ("401(k) account"), a company matching contribution account, a fixed account, a performance account, and a transition account for each eligible employee as described below. The defined contribution accounts for transferring employees under the Baxter International Inc. and Subsidiaries Incentive Investment Plan (the "Baxter Incentive Investment Plan"), Baxter's qualified section 401(k) profit sharing plan, were transferred to the Allegiance Retirement Plan. The Allegiance Retirement Plan has established a fund to hold the Baxter stock currently held on behalf of Allegiance employees in the Baxter Incentive Investment Plan. The Allegiance Retirement Plan allows participants to redirect the balances of their Allegiance Retirement Plan accounts that are invested in the Baxter stock fund but will not allow participants to direct that their plan accounts make new investments in Baxter stock within the Allegiance Retirement Plan. 401(k) ACCOUNT AND COMPANY MATCHING CONTRIBUTION ACCOUNT Employees of Allegiance are eligible to contribute to the Allegiance 401(k) account. Participants may elect to contribute, on a before-tax basis, up to twelve percent of their annual base compensation into their 401(k) accounts. Allegiance will match the first three percent of the participant's annual base compensation contributed to the plan on a dollar for dollar basis. 45 FIXED ACCOUNT Subject to the terms of the Allegiance Retirement Plan, employees of Allegiance are eligible to receive contributions to their fixed accounts under such plan. Allegiance will make annual contributions to each fixed account equal to three percent of a participant's annual base compensation. PERFORMANCE ACCOUNT Subject to the terms of the Allegiance Retirement Plan, Allegiance may make additional performance account contributions on a discretionary basis as certain performance measures are achieved. The additional contributions will be allocated to each eligible participant's account in proportion to each participant's annual base compensation. These additional discretionary contributions may be made more frequently or less frequently than the annual three percent contribution to the fixed accounts. TRANSITION ACCOUNT Allegiance recognizes that certain longer service employees need additional benefits to assist in transitioning from Baxter's United States Pension Plan to Allegiance's Retirement Plan. Contributions to a transition account within the Allegiance Retirement Plan are provided by the Company to two groups of Allegiance employees. Employees with at least 55 "points" and 10 years of "benefit service" (as determined under the terms of the Baxter Pension Plan explained under "-- Baxter Pension Plan") as of the Distribution Date will have transition profit sharing contributions made annually over an eight year period, and each of these contributions will be equal to not less than 3% and not more than 8% of the participant's annual base compensation, depending on the participant's points under the Baxter Pension Plan as of the Distribution Date. The named executive officers eligible to receive contributions to the transition account are as follows: Mr. Knight -- 0%; Mr. Damico -- 3%; Ms. White -- 0%; Mr. Zollars -- 3%; and Ms. Gaumer -- 3%. Allegiance employees who have at least 15 years of "benefit service" but less than 55 "points" (as determined under the terms of the Baxter Pension Plan explained on page 49) as of the Distribution Date will receive transition profit sharing contributions made annually over an eight year period, and each of these contributions will be equal to 2% of the participant's annual base compensation. ALLEGIANCE EXCESS PLAN Federal income tax laws limit the amount which may be contributed to the accounts of all participants, including certain highly compensated participants under the Allegiance Retirement Plan. Allegiance will adopt an unfunded non-qualified excess plan (the "Allegiance Excess Plan") that will credit certain participants affected by the limits with the amount of contributions that the participants would have contributed or that Allegiance would have contributed on their behalf to the Allegiance Retirement Plan but for such limits. EMPLOYEE STOCK PURCHASE PLAN Allegiance will adopt an employee stock purchase plan for its United States employees, as described in Section 423 of the Code. All active employees of Allegiance and its United States subsidiaries will be eligible to participate in the Company's Employee Stock Purchase Plan. The Employee Stock Purchase Plan makes available shares of Allegiance Stock for purchase by eligible employees through payroll deductions at a maximum rate to be determined by the Committee. The purchase price per share will be equal to 85% of the lesser of the fair market value of Allegiance Stock on the effective date of subscription or the fair market value of Allegiance Stock on the date of exercise. 2,000,000 shares will be reserved for issuance under this plan. COMPENSATION COMMITTEE INTERLOCKS DISCLOSURE AND INSIDER PARTICIPATION There are no compensation committee interlocks. 46 RELATIONSHIP WITH BAXTER Allegiance and Baxter have entered into various agreements for the purpose of governing certain of the ongoing relationships between Baxter and Allegiance after the Distribution, and to provide mechanisms for an orderly transfer of the Allegiance Business from Baxter to Allegiance and facilitate an orderly transition to the status of two separate, publicly traded companies. Allegiance has significant continuing relationships with Baxter as an agent, distributor, customer and supplier for a wide array of health-care products and services, and for certain administrative support services. Allegiance is Baxter's primary agent in distributing Baxter's intravenous solutions, cardiovascular devices and other products in the United States and provides Baxter with certain administrative services including credit and collection, accounts payable, information technology and telecommunications. Baxter distributes Allegiance's products in many countries around the world and provides various administrative services to Allegiance. Baxter does not have any ownership interest in Allegiance. REORGANIZATION AGREEMENT Subject to certain exceptions, the Reorganization Agreement provides for certain cross-indemnities (including an indemnity of Baxter by Allegiance with respect to certain guarantees by Baxter in connection with certain Allegiance agreements and certain financial guarantees) principally designed to place financial responsibility for the liabilities of the Allegiance Business with Allegiance and financial responsibility for the obligations and liabilities of Baxter's retained businesses and its other subsidiaries with Baxter. Specifically, Allegiance has agreed to assume liability for, and to indemnify Baxter against, any and all liabilities associated with the Allegiance Business, including any litigation, proceedings or claims relating to the products and operations thereof whether or not the underlying basis for such litigation, proceeding or claim arose prior to or after the Distribution Date. Baxter has agreed to indemnify Allegiance against any and all liabilities associated with Baxter's retained businesses. Specifically, Baxter has retained liability for, and agreed to indemnify Allegiance against, proceedings or claims relating to allegations of disease transmission through blood products and silicon-gel mammary implants. See "Business -- Legal Proceedings." Pursuant to the Reorganization Agreement, Allegiance assumed all environmental liabilities that arise from or are attributable to the operations of the Allegiance Business, including, but not limited to, off-site waste disposal liabilities. Allegiance also has agreed to indemnify Baxter against any and all such environmental liabilities. Baxter has agreed to indemnify Allegiance against any and all environmental liabilities associated with the retained Baxter businesses. In addition, the Reorganization Agreement provides that each of Baxter and Allegiance will indemnify the other in the event of certain liabilities arising under the Exchange Act. The Reorganization Agreement provides, among other things, that, in order to avoid potentially adverse tax consequences relating to the Distribution, for a period of two years after the Distribution Allegiance will not: (i) cease to engage in an active trade or business within the meaning of the Internal Revenue Code of 1966, as amended (the "Code"); (ii) issue or redeem any share of stock of Allegiance, except for certain issuances and redemptions for the benefit of Allegiance's employees or to effect acquisitions by Allegiance in the ordinary course of business or in connection with the issuance of any convertible debt by Allegiance or in accordance with the requirements for permitted purchases of Allegiance Stock as set forth in section 4.05(1)(b) of Revenue Procedure 96-30 issued by the IRS; or (iii) liquidate or merge with any other corporation, unless, with respect to (i), (ii) or (iii) above, either (a) an opinion is obtained from counsel to Baxter, or (b) a ruling is obtained from the IRS, in either case to the effect that such act or event will not adversely affect the federal income tax consequences of the Distribution to Baxter, its stockholders who receive Allegiance Stock or Allegiance. Allegiance expects that these limitations will not significantly constrain its activities or its ability to respond to unanticipated developments. The Reorganization Agreement also provides that if, as a result of certain transactions occurring after the Distribution Date involving either the stock or assets of either Allegiance or any of its subsidiaries, or any combination thereof, the Distribution fails to qualify as tax-free under the provisions of Section 47 355 of the Code, then Allegiance shall indemnify Baxter for all taxes, liabilities, and associated expenses, including penalties and interest, incurred as a result of such failure of the Distribution to qualify under Section 355 of the Code. The Reorganization Agreement further provides that if the Distribution fails to qualify as tax-free under the provisions of Section 355 of the Code, other than as a result of a transaction occurring after the Distribution Date involving either the stock or assets of Allegiance or any of its subsidiaries, or any combination thereof, then Allegiance shall not be liable for such taxes, liabilities, or expenses. The Reorganization Agreement also provides for the allocation of benefits between Baxter and Allegiance under existing insurance policies after the Distribution Date for claims made or occurrences prior to the Distribution Date and sets forth procedures for the administration of insured claims. In addition, the Reorganization Agreement provides that Baxter will use its reasonable efforts to maintain directors' and officers' insurance at substantially the level of Baxter's current directors' and officers' insurance policy for a period of six years with respect to the directors and officers of Baxter who will become directors and officers of Allegiance as of the Distribution Date for acts relating to periods prior to the Distribution Date. The Reorganization Agreement also addresses the treatment of employee benefit matters and other compensation arrangements for certain former and current Allegiance employees and their beneficiaries and dependents, as well as certain former employees of certain former Allegiance businesses and their beneficiaries and dependents (collectively, the "Allegiance Participants"). The Reorganization Agreement provides that the account balances (including outstanding loans) of all Allegiance Participants in the Baxter International Inc. and Subsidiaries Incentive Investment Plan (the "IIP"), and the plan assets related to such liabilities will be transferred to Allegiance's new retirement savings plan. The Reorganization Agreement also generally provides that Allegiance will assume all liabilities for benefits under any welfare plans related to Allegiance Participants, other than certain claims incurred on or before the Distribution Date. Moreover, the Reorganization Agreement provides that, effective as of the Distribution Date, Allegiance will become responsible for all other liabilities to Allegiance Participants (including unfunded supplemental retirement benefits), other than certain accruals under the Baxter Defined Benefit Excess Plan. TAX SHARING AGREEMENT Baxter and Allegiance have entered into a tax sharing agreement (the "Tax Sharing Agreement") which allocates tax liabilities and responsibility for tax audits for periods prior to, and subsequent to the Distribution Date. The Tax Sharing Agreement also allocates consolidated alternative minimum tax and other tax credit carry-forwards as of the Distribution Date between Baxter and Allegiance. AGENCY, SERVICES AND DISTRIBUTION AGREEMENTS Baxter's principal domestic operating subsidiary, Baxter Healthcare Corporation ("BHC"), and an Allegiance subsidiary have entered into an Agency, Services and Distribution Agreement (the "Domestic Distribution Agreements") for each of Baxter's four primary domestic business units, I.V. Systems, Renal, Cardiovascular, and Biotechnology, pursuant to which Baxter supplies products to Allegiance, and Allegiance, as agent or distributor for Baxter, provides physical distribution and various sales and sales support services to Baxter. The Domestic Distribution Agreements cover substantially all of the existing products of each of the foregoing business units. In most instances, Allegiance will act as Baxter's agent for the physical distribution of Baxter's products in return for a fee. In such situations, Baxter will maintain the contractual relationship with the customer, will manage sales, order-taking, and billing and collections, and will retain title to the products until shipment to the ultimate customer. In certain situations, Allegiance will act as a full-service, value-added distributor for Baxter products with a direct contractual relationship with the ultimate customer. In these situations, Allegiance will provide additional sales, sales support, and other customer and product-related services to the customer and will purchase the products from Baxter at specified prices. In addition, Baxter will pay to Allegiance the fee described above. Such additional services may include 48 aggregating Baxter's products with others to be sold as "kits" for a given medical procedure or other cost management services which assist the customer in reducing product consumption, improving utilization of assets, improving logistics, and reducing or eliminating operating costs. The initial term of the Domestic Distribution Agreements range from three years (Renal and Biotechnology) to five years (I.V. Systems and Cardiovascular). The agreements may be renewed upon expiration upon the mutual agreement of the parties. In the event of a Change In Control of one of the parties to the Domestic Distribution Agreements or certain of their affiliates, the other party to such agreement will have the right, subject to certain notice periods and other restrictions, to terminate all, or in certain cases only the affected portion, of such agreement prior to its normal expiration. In the case of a Change In Control involving a competitor of the non-affected party, the notice period required for termination may be shorter than if such a competitor was not involved. For purposes of these agreements, a "Change In Control" includes the acquisition of more than 30 per cent of the stock of either party or one of its affiliates, certain mergers or consolidations involving either party or one of its affiliates, the acquisition by either party of certain significant subsidiaries, and, in the case of an affiliate of either of the parties, the disposition of substantially all of its business and assets. Under the Domestic Distribution Agreements, Baxter is required within the Territory to distribute all covered I.V. Systems and Cardiovascular products (including any line extensions of such products) through Allegiance, subject to certain exceptions. In addition, Allegiance may not market, promote or solicit orders for any product that competes with any covered I.V. Systems or Cardiovascular product. Allegiance may however take orders for, stock and sell competing products in response to customer requests. For purposes of the Domestic Distribution Agreements, the "Territory" is defined as the 50 states comprising the United States of America and the District of Columbia. Allegiance's right to distribute the covered products is limited to the Territory. The compensation received by Allegiance under the Domestic Distribution Agreements generally approximates or is based upon the internal business unit revenue and expense allocations that were in effect between the Baxter business units and the Allegiance Business prior to the date of the Distribution. Similarly, the service levels and performance standards remain as they were prior to the date of the Distribution. In addition to the Domestic Distribution Agreements, Baxter and Allegiance have entered into agreements pursuant to which Baxter has agreed to distribute Allegiance's surgical and other products outside of the United States and to distribute certain surgical products to the long-term, sub-acute and home care markets within the United States. SERVICES AGREEMENTS Baxter and Allegiance have entered into several services agreements, to be effective from and after the Distribution Date, pursuant to which Baxter provides to Allegiance, and Allegiance provides to Baxter, certain administrative services necessary for the conduct of Baxter's and Allegiance's businesses. Services provided to Baxter by Allegiance include credit, collection and cash application, accounts payable, telecommunications, and information technology services. Services provided to Allegiance by Baxter include payroll, sales and use tax, human resources (including international expatriate services), research and development, travel, property management, and other services. These agreements have varying terms and, subject to certain exceptions, are generally terminable by either party upon 12 months or less notice. Under certain circumstances involving a Change In Control the agreements may be terminated earlier than normal. The agreements may be renewed upon expiration upon the mutual agreement of the parties. The prices at which such services will be provided generally will be equal to or based on the actual cost of rendering such services. In addition, Baxter leases from Allegiance, for a term of ten years, a 217,000 square foot office building at Allegiance's McGaw Park, Illinois headquarters site. The leased building will continue to be occupied by Baxter's Renal Division. Allegiance subleases from Baxter all or a substantial part of an 85,000 square foot office building located in Deerfield, Illinois. This building is part of a three building complex leased by Baxter, and Allegiance's sublease is for the remainder of the current term of Baxter's 49 lease. Baxter and Allegiance may also lease or sublease to each other miscellaneous office or other space for use in connection with various services performed for one another pursuant to the agreements described above. PRINCIPAL STOCKHOLDERS The following table sets forth certain information as of September 30, 1996 regarding the beneficial ownership of Allegiance Stock by (i) each director of the Company, (ii) each named executive officer and (iii) all directors and executive officers of the Company as a group. Except as otherwise indicated, the Company believes that the beneficial owners of the Allegiance Stock listed below, based on information provided by such owners, have sole investment and voting power with respect to such shares, subject to community property laws where applicable. The address of each of the stockholders named below is the Company's principal executive offices. The Company is not aware of any stockholders who beneficially own 5% or more of the Allegiance Stock.
NAME NUMBER PERCENT - ------------------------------------------------------------------------------------------ --------- ----------------- Lester B. Knight.......................................................................... 56,348 * Joseph F. Damico.......................................................................... 39,083 * Silas Cathcart............................................................................ 1,466 * David W. Grainger......................................................................... 6,500 * Arthur F. Golden.......................................................................... -- * Michael D. O'Halleran..................................................................... -- * Kenneth D. Bloem.......................................................................... -- * Connie Curran, Ed.D....................................................................... -- * Kathy Brittain White...................................................................... 3,880 * Gail Gaumer............................................................................... 17,366 * Robert J. Zollars......................................................................... 18,142 * All directors and executive officers as a group (18 persons).............................. 188,252 *
- ------------ * less than 1% 50 DESCRIPTION OF CREDIT FACILITIES On September 23, 1996, the Company entered into two unsecured revolving credit agreements (the "Credit Facilities"), providing for up to an aggregate of $1.5 billion in borrowings, with the financial institutions listed therein (the "Banks"), the First National Bank of Chicago, as Syndication Agent, NationsBank of Texas, N.A., as Documentation Agent, Morgan Guaranty Trust Company of New York, as Co-Syndication Agent, and Bank of America National Trust and Savings Association, as Administrative Agent, and as arranged by BA Securities, Inc. The following summary of the Credit Facilities does not purport to be complete and is subject to the detailed provisions of the Credit Facilities, copies of which are exhibits to the Registration Statement of which this Prospectus is a part. One of the Credit Facilities provides for borrowings up to an aggregate of $1.2 billion and expires in September 2001. The other Credit Facility provides for borrowings up to an aggregate of $300 million and expires in September 1997. As of September 30, 1996, approximately $1.1 billion was outstanding under the $1.2 billion credit facility and no amounts were outstanding under the $300 million credit facility. Amounts borrowed under the Credit Facilities may be used only to repay indebtedness owing to Baxter at the time of the Distribution, for the payment of fees and expenses related to the Distribution and for general corporate purposes of Allegiance. As of September 30, 1996, approximately $400 million was available for borrowing under the Credit Facilities. Borrowings under the Credit Facilities are unsecured obligations of Allegiance and rank PARI PASSU with all other unsecured and unsubordinated indebtedness of Allegiance, including the Securities offered pursuant to this Prospectus. Borrowings under the Credit Facilities typically bear interest at either the "Base Rate" or the "Euro Dollar Rate," at the option of the Company, plus applicable interest margin. The Base Rate is the higher of (i) the reference rate of Bank of America National Trust and Savings Association or (ii) the sum of the latest Federal Funds Rate and 0.50%. In addition, same day, short term (seven days or less) borrowings under the Credit Facilities bear interest at the "IBOR Rate" plus 1%. The IBOR Rate is defined as a Bank's cost of funds in the interbank market for a same day borrowing of the type requested by Allegiance. Furthermore, at the request of Allegiance, any of the Banks may offer to loan to Allegiance amounts available for borrowing under the Credit Facilities at interest rates agreed upon by Allegiance through a competitive bid process initiated by Allegiance. The Credit Facilities contain a number of covenants that, among other things, restrict Allegiance's ability to dispose of its assets, incur additional indebtedness, create liens on assets, engage in mergers or consolidations or change the businesses conducted by Allegiance, and otherwise restrict certain corporate activities by Allegiance. In addition, under the Credit Facilities, Allegiance is required to comply with and maintain specified financial ratios and tests, including, without limitation, an interest expense coverage ratio, a leverage ratio and subsidiary debt levels thresholds. The Credit Facilities specify certain customary events of default, including, without limitation, non-payment of principal, interest or fees, violation of covenants, inaccuracy of representations and warranties in any material respect, cross default and cross-acceleration to certain other indebtedness and agreements, bankruptcy and insolvency events, material judgments and liabilities, changes of control and unenforceability of certain documents under the Credit Facilities. DESCRIPTION OF SECURITIES The Notes, the 2016 Debentures and the 2026 Debentures (together, the "Securities") will each constitute a series of senior debt securities of the Company, and will rank PARI PASSU with each other and with all other unsecured and unsubordinated indebtedness of the Company. The Securities of each series will be issued pursuant to an Indenture, to be dated as of October 1, 1996 between Allegiance and PNC Bank, Kentucky, Inc., as Trustee (the "Trustee"), a copy of which is filed as an exhibit to the 51 Registration Statement of which this Prospectus is a part. The Indenture provides for the issuance from time to time in one or more series of unsecured debentures, notes or other evidences of indebtedness and does not limit the aggregate principal amount of securities that may be issued thereunder. The following summaries of certain provisions of the Securities and the Indenture do not purport to be complete and are subject, and are qualified in their entirety by reference, to all the provisions of the Securities and the Indenture, including the definitions therein of certain terms. Wherever particular Sections or defined terms of the Indenture are referred to herein, such Sections or defined terms are incorporated by reference. NOTES The Notes will be unsecured obligations of the Company, will be limited to $200,000,000 aggregate principal amount and will mature on , 2006 . The Notes will bear interest at the rate per annum shown on the front cover of this Prospectus from , 1996 or from the most recent Interest Payment Date to which interest has been paid or provided for, payable semi-annually on and of each year, commencing , 1997, to the Persons in whose names the Notes (or any predecessor Notes) are registered at the close of business on the preceding or , as the case may be. The Notes will not be redeemable at the option of the Company prior to maturity and are not subject to any sinking fund. DEBENTURES The 2016 Debentures and the 2026 Debentures will each be unsecured obligations of the Company, will be limited to $150,000,000 aggregate principal amount and $150,000,000 aggregate principal amount, respectively, and will mature on , 2016 and , 2026, respectively. The 2016 Debentures and the 2026 Debentures will bear interest at the respective rates per annum shown on the front cover of this Prospectus from , 1996 or from the most recent Interest Payment Date to which interest has been paid or provided for, payable semi-annually on and of each year, commencing , 1997, to the Persons in whose names such Debentures (or any predecessor Debentures) are registered at the close of business on the preceding or , as the case may be. The 2016 Debentures and the 2026 Debentures will not be redeemable at the option of the Company. The 2026 Debentures may be repaid on , 2003, at the option of the registered holders of the 2026 Debentures, at 100% of their principal amount, together with accrued interest to , 2003. In order for a holder to exercise this option, the Company must receive at its office or agency in New York, New York, during the period beginning on , 2003 and ending at 5:00 p.m. (New York City time) on , 2003 (or, if , 2003 is not a Business Day, the next succeeding Business Day), the certificate representing the 2026 Debenture subject to repayment with the form "Option to Elect Repayment on , 2003" on such certificate duly completed. Any such notice received by the Company during the period beginning on , 2003 and ending at 5:00 p.m. (New York City time) on , 2003 shall be irrevocable. See "-- Book Entry, Delivery and Form". The repayment option may be exercised by the holder of a 2026 Debenture for less than the entire principal amount of the 2026 Debenture held by such holder, so long as the principal amount that is to be repaid is equal to $1,000 or an integral multiple of $1,000. All questions as to the validity, form, eligibility (including time of receipt) and acceptance of any 2026 Debenture for repayment will be determined by the Company, whose determination will be final and binding. Failure by the Company to repay the 2026 Debentures when required as described in the preceding paragraph will result in an Event of Default under the Indenture. As long as the 2026 Debentures are represented by a Global Debenture (as defined below), the Depositary or the Depositary's nominee will be the registered holder of the 2026 Debentures and therefore will be the only entity that can exercise a right to repayment. See "-- Book Entry, Delivery and Form." 52 No similar right of repayment is available to holders of the Notes or the 2016 Debentures. RESTRICTIVE COVENANTS LIMITATIONS ON LIENS The Company covenants that it will not issue, incur, create, assume or guarantee, and will not permit any Restricted Subsidiary (as defined below) to issue, incur, create, assume or guarantee, any debt for borrowed money secured by a mortgage, security interest, pledge, lien, charge or other encumbrance ("mortgages") upon any Principal Property (as defined below) of the Company or any Restricted Subsidiary or upon any shares of stock or indebtedness of any Restricted Subsidiary (whether such Principal Property, shares or indebtedness are now existing or owned or hereafter created or acquired) without in any such case effectively providing concurrently with the issuance, incurrence, creation, assumption or guarantee of any such secured debt, or the grant of a mortgage with respect to any such indebtedness, that the Securities (together with, if the Company shall so determine, any other indebtedness of or guarantee by the Company or such Restricted Subsidiary ranking equally with the Securities) shall be secured equally and ratably with (or, at the option of the Company, prior to) such secured debt. The foregoing restriction, however, will not apply to: (a) mortgages on property existing at the time of acquisition thereof by the Company or any Subsidiary, provided that such mortgages were in existence prior to the contemplation of such acquisition; (b) mortgages on property, shares of stock or indebtedness or other assets of any corporation existing at the time such corporation becomes a Restricted Subsidiary, provided that such mortgages are not incurred in anticipation of such corporation becoming a Restricted Subsidiary; (c) mortgages on property, shares of stock or indebtedness existing at the time of acquisition thereof by the Company or a Restricted Subsidiary or mortgages thereon to secure the payment of all or any part of the purchase price thereof, or mortgages on property, shares of stock or indebtedness to secure any indebtedness for borrowed money incurred prior to, at the time of, or within 270 days after, the latest of the acquisition thereof, or, in the case of property, the completion of construction, the completion of improvements, or the commencement of substantial commercial operation of such property for the purpose of financing all or any part of the purchase price thereof, such construction, or the making of such improvements; (d) mortgages to secure indebtedness owing to the Company or to a Restricted Subsidiary; (e) mortgages existing at the date of the Indenture; (f) mortgages on property of a corporation existing at the time such corporation is merged into or consolidated with the Company or a Restricted Subsidiary or at the time of a sale, lease or other disposition of the properties of a corporation as an entirety or substantially as an entirety to the Company or a Restricted Subsidiary, provided that such mortgage was not incurred in anticipation of such merger or consolidation or sale, lease or other disposition; (g) mortgages in favor of the United States or any State, territory or possession thereof (or the District of Columbia), or any department, agency, instrumentality or political subdivision of the United States or any State, territory or possession thereof (or the District of Columbia), to secure partial, progress, advance or other payments pursuant to any contract or statute or to secure any indebtedness incurred for the purpose of financing all or any part of the purchase price or the cost of constructing or improving the property subject to such mortgages; (h) mortgages created in connection with the acquisition of assets or a project financed with, and created to secure, a Nonrecourse Obligation (as defined below); and (i) extensions, renewals, refinancings or replacements of any mortgage referred to in the foregoing clauses (a), (b), (c) (e), (f), (g) and (h); provided, however, that any mortgages permitted by any of the foregoing clauses (a), (b), (c) (e), (f), (g) and (h) shall not extend to or cover any property of the Company or such Restricted Subsidiary, as the case may be, other than the property, if any, specified in such clauses and improvements thereto, and provided further that any refinancing or replacement of any mortgages permitted by the foregoing clauses (g) and (h) shall be of the type referred to in such clauses (g) or (h), as the case may be. Notwithstanding the restrictions described in the preceding paragraph, the Company or any Restricted Subsidiary will be permitted to issue, incur, create, assume or guarantee debt secured by a mortgage which would otherwise be subject to such restrictions, without equally and ratably securing the Securities, provided that after giving effect thereto, the aggregate amount of all debt so secured by 53 mortgages (not including mortgages permitted under clauses (a) through (i) above) does not exceed 10% of the Consolidated Net Tangible Assets (as defined below) of the Company as most recently determined on or prior to such date. LIMITATIONS ON SALE AND LEASE-BACK TRANSACTIONS The Company covenants that it will not, nor will it permit any Restricted Subsidiary to, enter into any Sale and Lease-Back Transaction (as defined below) with respect to any Principal Property, other than any such transaction involving a lease for a term of not more than three years or any such transaction between the Company and a Restricted Subsidiary or between Restricted Subsidiaries, unless: (a) the Company or such Restricted Subsidiary would be entitled to incur indebtedness secured by a mortgage on the Principal Property involved in such transaction at least equal in amount to the Attributable Debt (as defined below) with respect to such Sale and Lease-Back Transaction, without equally and ratably securing the Securities, pursuant to the limitation on liens in the Indenture; or (b) the Company shall apply an amount equal to the greater of the net proceeds of such sale or the Attributable Debt with respect to such Sale and Lease-Back Transaction within 180 days of such sale to either (or a combination of) the retirement (other than any mandatory retirement, mandatory prepayment or sinking fund payment or by payment at maturity) of debt for borrowed money of the Company or a Restricted Subsidiary that matures more than 12 months after the creation of such indebtedness or the purchase, construction or development of other comparable property. LIMITATIONS ON SUBSIDIARY DEBT The Company shall not permit any Subsidiary of the Company to Incur or suffer to exist any Debt, except: (1) Debt outstanding on the date of this Indenture; (2) Debt issued to and held by the Company or a Wholly Owned Subsidiary; (3) Debt Incurred by a Person prior to the time such Person became, merges into, or consolidates with a Subsidiary, or a Subsidiary merges into or consolidates with such Person and thereby such Person becomes a Subsidiary (which Debt was not Incurred in anticipation of such transaction and was outstanding prior to such transaction); (4) Debt which is exchanged for, or the proceeds of which are used to refinance or refund, any Debt permitted to be outstanding pursuant to clauses (1) through (3) above (or any extension or renewal thereof), in an aggregate principal amount not to exceed the principal amount of the Debt so exchanged, refinanced or refunded and provided such refinancing or refunding Debt by its terms, or by the terms of any agreement or instrument pursuant to which such Debt is issued (x) does not provide for payments of principal at the stated maturity of such Debt or by way of a sinking fund applicable to such Debt or by way of any mandatory redemption, defeasance, retirement or repurchase or such Debt 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 stated maturity of the Debt being refinanced or refunded and (y) does not permit redemption or other retirement (including pursuant to an offer to purchase made by the Company) of such Debt at the option of the holder thereof prior to the 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 (including pursuant to an offer to purchase made by the Company) which is conditioned upon the change of control of the Company; and (5) Debt having a principal amount and liquidation value not in excess of 20% of the Consolidated Net Tangible Assets of the Company in the aggregate. CERTAIN DEFINITIONS APPLICABLE TO COVENANTS The term "Attributable Debt" when used in connection with a Sale and Lease-Back Transaction involving a Principal Property shall mean, at the time of determination, the lesser of: (a) the fair value of such property (as determined in good faith by the Board of Directors of the Company); or (b) the present value of the total net amount of rent required to be paid under such lease during the remaining term thereof (including any renewal term or period for which such lease has been extended), discounted at the rate of interest set forth or implicit in the terms of such lease or, if not practicable to determine such rate, the weighted average interest rate per annum (in the case of Original Issue Discount Securities, the imputed interest rate) borne by the Securities of each series outstanding pursuant to the Indenture compounded semi-annually. For purposes of the foregoing definition, rent shall not include amounts 54 required to be paid by the lessee, whether or not designated as rent or additional rent, on account of or contingent upon maintenance and repairs, insurance, taxes, assessments, water rates and similar charges. In the case of any lease which is terminable by the lessee upon the payment of a penalty, such net amount shall be the lesser of the net amount determined assuming termination upon the first date such lease may be terminated (in which case the net amount shall also include the amount of the penalty, but 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) and the net amount determined assuming no such termination. The term "Consolidated Net Tangible Assets" shall mean, as of any particular time, total assets (excluding applicable reserves and other properly deductible items) less: (a) total current liabilities, except for (1) notes and loans payable, (2) current maturities of long-term debt, and (3) current maturities of obligations under capital leases; and (b) goodwill, patents and trademarks, to the extent included in total assets; all as set forth on the most recent consolidated balance sheet of the Company and its Restricted Subsidiaries and computed in accordance with generally accepted accounting principles. The term "Debt" shall mean (without duplication), with respect to any Person, whether recourse is to all or a portion of the assets of such Person and whether or not contingent, (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) the maximum fixed redemption or repurchase price of redeemable stock of such Person at the time of determination, (vi) every obligation to pay rent or other payment amounts of such Person with respect to any Sale and Lease-back Transaction to which such Person is a party and (vii) every obligation of the type referred to in Clauses (i) through (vi) of another Person and all dividends of another Person the payment of which, in either case, such Person has guaranteed or is responsible or liable, directly or indirectly, as obligor, guarantor or otherwise. The term "Incur" shall mean, with respect to any Debt 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 the 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. The term "Nonrecourse Obligation" means indebtedness or other obligations substantially related to (i) the acquisition of assets not previously owned by the Company or any Restricted Subsidiary or (ii) the financing of a project involving the development or expansion of properties of the Company or any Restricted Subsidiary, as to which the obligee with respect to such indebtedness or obligation has no recourse to the Company or any Restricted Subsidiary or any assets of the Company or any Restricted Subsidiary other than the assets which were acquired with the proceeds of such transaction or the project financed with the proceeds of such transaction (and the proceeds thereof). The term "Principal Property" shall mean the land, land improvements, buildings and fixtures (to the extent they constitute real property interests, including any leasehold interest therein) constituting the principal corporate office, any manufacturing facility or any distribution center (whether now owned or hereafter acquired) which: (a) is owned by the Company or any Subsidiary; (b) is located within any of the present 50 states of the United States (or the District of Columbia); (c) has not been determined in good faith by the Board of Directors of the Company not to be materially important to the total business 55 conducted by the Company and its Subsidiaries taken as a whole; and (d) has a market value on the date as of which the determination is being made in excess of 1.0% of Consolidated Net Tangible Assets of the Company as most recently determined on or prior to such date. The term "Restricted Subsidiary" shall mean any Subsidiary that owns any Principal Property. The term "Sale and Lease-Back Transaction" shall mean any arrangement with any person providing for the leasing by the Company or any Restricted Subsidiary of any Principal Property which property has been or is to be sold or transferred by the Company or such Restricted Subsidiary to such person. The term "Subsidiary" shall mean any corporation of which at least a majority of the outstanding voting stock having the power to elect a majority of the board of directors of such corporation is at the time owned, directly or indirectly, by the Company or by one or more other Subsidiaries, or by the Company and one or more other Subsidiaries. For the purposes of this definition, "voting stock" means stock which ordinarily has voting power for the election of directors, whether at all times or only so long as no senior class of stock has such voting power by reason of any contingency. The term "Wholly Owned Subsidiary" of any Person shall mean a Subsidiary of such Person all of the outstanding capital stock or other ownership interests of which (other than directors' qualifying shares) shall at the time be owned by such Person or by one or more Wholly Owned Subsidiaries of such Person or by such Person and one or more Wholly Owned Subsidiaries of such Person. CONSOLIDATION, MERGER AND SALE OF ASSETS The Company may not consolidate with or merge into, or convey, transfer or lease its properties and assets substantially as an entirety to, any Person (a "successor Person"), and may not permit any Person to consolidate with or merge into, or convey, transfer or lease its properties and assets substantially as an entirety to, the Company, unless (i) the successor Person (if any) is a corporation, partnership, trust or other entity organized and validly existing under the laws of any domestic jurisdiction and assumes the Company's obligations on the Securities and under the Company's obligations on the Securities and under the Indenture, (ii) immediately after giving effect to the transaction, no Event of Default, and no event which, after notice or lapse of time or both, would become an Event of Default, shall have occurred and be continuing, (iii) if, as a result of the transaction, property of the Company would become subject to a mortgage, pledge, lien, security interest or other encumbrance that would not be permitted under the limitation on mortgage, pledge, lien, security interest or other encumbrance described above under "Restrictive Covenants," the Company takes such steps as shall be necessary to secure the Securities equally and ratably with (or prior to) the indebtedness secured by such mortgage, pledge, lien, security interest or other encumbrance and (iv) certain other conditions are met. (Section 801) EVENTS OF DEFAULT Each of the following will constitute an Event of Default under the Indenture with respect to Securities of any series: (a) failure to pay principal of or any premium on any Security of that series at its Maturity; (b) failure to pay any interest on any Securities of that series when due, continued for 30 days; (c) failure to deposit any sinking fund payment, when due, in respect of any Security of that series; (d) failure to perform, or the breach of, any covenant or warranty of the Company in the Indenture (other than a covenant or warranty included in the Indenture solely for the benefit of a series of Securities other than that series), continued for 60 days after written notice has been given by the Trustee, or the Holders of at least 10% in principal amount of the Outstanding Securities of that series, as provided in the Indenture; (e) failure to pay when due (subject to any applicable grace period) the principal of, or acceleration of, any indebtedness for money borrowed by the Company (including a default with respect to Securities of any series other than that series) having an aggregate principal amount outstanding of at least $10,000,000, if, in the case of any such failure, such indebtedness has not been discharged or, in the case of any such acceleration, such indebtedness has not been discharged or such acceleration has not been rescinded or annulled, in each case within 10 days after written notice has been given by the 56 Trustee, or the Holders of at least 10% in principal amount of the Outstanding Securities of that series, as provided in the Indenture; and (f) certain events in bankruptcy, insolvency or reorganization of the Company or any Restricted Subsidiary. (Section 501) If an Event of Default (other than an Event of Default described in clause (f) above) with respect to the Securities of any series at the time Outstanding shall occur and be continuing, either the Trustee or the Holders of at least 25% in principal amount of the Outstanding Securities of that series by notice as provided in the Indenture may declare the principal amount of the Securities of that series (or, if any Securities of that series are Original Issue Discount Securities, such portion of the principal amount of such Securities, as may be specified in the terms of such Securities) to be due and payable immediately. If an Event of Default described in clause (f) above with respect to the Securities of any series at the time Outstanding occurs, the principal amount of all the Securities of that series (or, in the case of any such Original Issue Discount Security, such specified amount) will automatically, and without any action by the Trustee or any Holder, become immediately due and payable. After any such acceleration, but before a judgment or decree based on acceleration, the Holders of a majority in principal amount of the Outstanding Securities of that series may, under certain circumstances, rescind and annul such acceleration if all Events of Default, other that the non-payment of accelerated principal (or other specified amount), have been cured or waived as provided in the Indenture. (Section 502) For information as to waiver of defaults, see "Modification and Waiver." Subject to the provisions of the Indenture relating to the duties and responsibilities of the Trustee, 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 shall have offered to the Trustee reasonable indemnity. (Section 603) Subject to such provisions of the Indenture, the Holders of a majority in principal amount of the Outstanding Securities of any series 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 with respect to the Securities of that series. (Section 512) No Holder of a Security of any series will have any right to institute any proceeding with respect to the Indenture, or for the appointment of a receiver or a trustee, or for any other remedy thereunder, unless (i) such Holder has previously given to the Trustee written notice of a continuing Event of Default with respect to the Securities of that series, (ii) the Holders of at least 25% in principal amount of the Outstanding Securities of that series have made written request, and such Holder or Holders have offered reasonable indemnity, to the Trustee to institute such proceeding as trustee and (iii) the Trustee has failed to institute such proceeding, and has not received from the Holders of a majority in principal amount of the Outstanding Securities of that series a direction inconsistent with such request, within 60 days after such notice, request and offer. (Section 507) However, such limitations do not apply to a suit instituted by a Holder of a Security for the enforcement of payment of the principal of or any premium or interest on such Security on or after the applicable due date specified in such Security. (Section 508) The Company will be required to furnish to the Trustee annually a statement by certain of its officers as to whether or not the Company, to the best of their knowledge, is in default in the performance or observance of any of the terms, provisions and conditions of the Indenture and, if so, specifying all such known defaults. (Section 1004) 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 not less than 66 2/3% in principal amount of the Outstanding Securities of each series affected by such modification or amendment; PROVIDED, HOWEVER, that no such modification or amendment may, without the consent of the Holder of each Outstanding Security affected thereby, (a) change the Stated Maturity of the principal of, or any instalment of principal of or interest on, any Security, (b) reduce the principal amount of, or any premium or interest on, any Security, (c) reduce the amount of principal of an Original Issue Discount Security or any other Security payable upon acceleration of the Maturity thereof, (d) change the place or currency of payment of principal of, or any 57 premium or interest on, any Security, (e) impair the right to institute suit for the enforcement of any payment on or with respect to any Security, (f) reduce the percentage in principal amount of Outstanding Securities of any series, the consent of whose Holders is required for modification or amendment of the Indenture, (g) reduce the percentage in principal amount of Outstanding Securities of any series necessary for waiver of compliance with certain provisions of the Indenture or for waiver of certain defaults or (h) modify such provisions with respect to modification and waiver. (Section 902) The Holders of not less than 66 2/3% in principal amount of the Outstanding Securities of any series may waive compliance by the Company with certain restrictive provisions of the Indenture. (Section 1010) The Holders of not less than a majority in principal amount of the Outstanding Securities of any series may waive any past default under the Indenture, except a default in the payment of principal, premium or interest and certain covenants and provisions of the Indenture which cannot be amended without the consent of the Holder of each Outstanding Security of such series affected. (Section 513) The Indenture provides that in determining whether the Holders of the requisite principal amount of the Outstanding Securities have given or taken any direction, notice, consent, waiver or other action under the Indenture as of any date, (i) the principal amount of an Original Issue Discount Security that will be deemed to be Outstanding will be the amount of the principal thereof that would be due and payable as of such date upon acceleration of the Maturity thereof to such date, (ii) is, as of such date, the principal amount payable at the Stated Maturity of a Security is not determinable (for example, because it is based on an index), the principal amount of such Security deemed to be Outstanding as of such date will be an amount determined in the manner prescribed for such Security and (iii) the principal amount of a Security denominated in one or more foreign currencies or currency units that will be deemed to be Outstanding will be the U.S. dollar equivalent, determined as of such date in the manner of such Security (or, in the case of a Security described in clause (i) or (ii) above, of the amount described in such clause). Certain Securities, including those for whose payment or redemption money has been deposited or set aside in trust for the Holders and those that have been fully defeased pursuant to Section 1302, will not be deemed to be Outstanding. (Section 101) Except in certain limited circumstances, the Company will be entitled to set any day as a record date for the purpose of determining the Holders of Outstanding Securities of any series entitled to give or take any demand, authorization, direction, notice, consent, waiver or other action under the Indenture, in the manner and subject to the limitations provided in the Indenture. In certain limited circumstances, the Trustee will be entitled to set a record date for action by Holders. If a record date is set for any action to be taken by Holders of a particular series, such action may be taken only by persons who are Holders of Outstanding Securities of that series on the record date. To be effective, such action must be taken by Holders of the requisite principal amount of such Securities within a specified period following the record date. For any particular record date, this period will be 180 days or such shorter period as may be specified by the Company (or the Trustee, if it set the record date), and may be shortened or lengthened (but not beyond 180 days) from time to time. (Section 104) DEFEASANCE AND COVENANT DEFEASANCE The Company has elected, in the Board Resolution establishing the terms of each series of Securities, to have the provisions of Section 1302, relating to defeasance and discharge of indebtedness and Section 1303, relating to defeasance of certain restrictive covenants in the Indenture, applied to the Securities of each series, or to any specified part of a series at the option of the Company at any time. (Section 1301) DEFEASANCE AND DISCHARGE. Upon the Company's exercise of its option to have Section 1302 applied to any Securities or any series of Securities, the Company will be discharged from all its obligations with respect to such Securities (except for certain obligations to exchange or register the transfer of Securities, to replace stolen, lost or mutilated Securities, to maintain paying agencies and to hold moneys for payment in trust) upon the deposit in trust for the benefit of the Holders of such Securities of money or U.S. Government Obligations, or both, which, through the payment of principal and interest in respect thereof in accordance with their terms, the terms of the Indenture and such 58 Securities. Such defeasance or discharge may occur only if, among other things, the Company has delivered to the Trustee an Opinion of Counsel to the effect that the Company has received from, or there has been published by, the United States Internal Revenue Service a ruling, or there has been a change in tax law, in either case to the effect that Holders of such 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 were not to occur. (Sections 1302 and 1304) DEFEASANCE OF CERTAIN COVENANTS. Upon the Company's exercise of its option to have Section 1303 applied to any Securities or any series of Securities, the Company may omit to comply with certain restrictive covenants, including those described under "Restrictive Covenants" and in the last sentence under "Consolidation, Merger and Sale of Assets", and the occurrence of certain Events of Default, which are described above in clause (d) (with respect to such restrictive covenants) and clause (e) under "Events of Default," will be deemed not to be or result in an Event of Default, in each case with respect to such Securities. The Company, in order to exercise such option, will be required to deposit, in trust for the benefit of the Holders of such Securities, money or U.S. Government Obligations, or both, which, through the payment of principal and interest in respect thereof in accordance with their terms, will provide money in an amount sufficient to pay the principal of and any premium and interest on such Securities on the respective Stated Maturities in accordance with the terms of the Indenture and such Securities. The Company will also be required, among other things, to deliver to the Trustee an Opinion of Counsel to the effect that Holders of such Securities will not recognize gain or loss for federal income tax purposes as a result of such deposit and defeasance of certain obligations 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 were not to occur. In the event the Company exercised this option with respect to any Securities and such Securities were declared due and payable because of the occurrence of any Event of Default, the amount of money and U.S. Government Obligations so deposited in trust would be sufficient to pay amounts due on such Securities at the time of their respective Stated Maturities but may not be sufficient to pay amounts due on such Securities upon any acceleration resulting from such Event of Default. In such case, the Company would remain liable for such payments. (Sections 1303 and 1304) BOOK ENTRY, DELIVERY AND FORM The Notes and Debentures will each be issued in the form of one or more fully registered certificates registered in the name of Cede & Co., the nominee of The Depository Trust Company (the "Depository"). Except as provided below, owners of beneficial interests in the certificates for the Notes registered in the name of the Depository ("Global Notes") or in the certificates for the Debentures registered in the name of the Depository ("Global Debentures") will not be entitled to have either the Global Notes or the Global Debentures, as the case may be, registered in their names and will not receive or be entitled to receive physical delivery of either the Global Notes or the Global Debentures in definitive form. Unless and until definitive Notes or Debentures are issued to owners of beneficial interests in the Global Notes or the Global Debentures, such owners of beneficial interests will not be recognized as Holders of either the Notes or the Debentures, as the case may be, by the Trustee. Hence, until such time, owners of beneficial interests in either the Global Notes or the Global Debentures will only be able to exercise the rights of Holders indirectly through the Depository and its participating organizations. Except as set forth below, the certificates may not be transferred except as a whole by the Depository to a nominee of the Depository or by a nominee of the Depository to the Depository or another nominee of the Depository or by the Depository or any nominee to a successor or the Depository or a nominee of such successor. The Depository has advised the Company that it is a limited-purpose trust Company organized under the laws of the State of New York, a member of the Federal Reserve System, a "clearing corporation" within the meaning of the Uniform Commercial Code and a "clearing agency" registered pursuant to the provisions of Section 17A of the Securities Exchange Act of 1934, as amended. The Depository was created to hold securities for its participants and to facilitate the clearance and settlement of securities transaction among its participants in such securities through electronic book-entry 59 changes in accounts of the participants, thereby eliminating the need for physical movement of securities certificates. The Depository's participants include securities brokers and dealers (including the Underwriters), banks, trust companies, clearing corporations and certain other organizations, some of which (and/or their representatives) own the Depository. Access to the Depository's book-entry system is also available to others, such as banks, brokers, dealers and trust companies that clear through or maintain a custodial relationship with a participant, either directly or indirectly. Persons who are not participants may beneficially own securities held by the Depository only through participants. The Depository advises that pursuant to procedures established by it (i) upon the issuance of the Notes and the Debentures by the Company, the Depository will credit the accounts of participants designated by the Underwriters with the amount of the Global Notes and the Global Debentures purchased by the Underwriters, and (ii) ownership of beneficial interests in the certificates representing the Global Notes and the Global Debentures will be shown on, and the transfer of that ownership will be effected only through, records maintained by the Depository (with respect to participants' interests) and the participants and the indirect participants (with respect to beneficial owners' interests). The laws of some states require that certain persons take physical delivery in definitive form of securities which they own. Consequently, the ability to transfer beneficial interests in such certificates is limited to such extent. Neither the Company, the Trustee, any Payment Agent, nor the Security Registrar will have any responsibility or liability for any aspect of the records relating to or payments made on account of beneficial ownership interests in the certificates representing the Global Notes or the Global Debentures or for maintaining, supervising or reviewing any records relating to such beneficial ownership interests. Principal and interest payments on the Global Notes and the Global Debentures registered in the name of the Depository's nominee will be made by the Trustee to the Depository's nominee as the registered owner of the certificates relating to the Global Notes and the Global Debentures. The Senior Indenture provides that the Company and the Trustee will treat the persons in whose names either the Global Notes or the Global Debentures are registered (the Depository or its nominee) as the owners of the Global Notes or the Global Debentures, as the case may be, for the purpose of receiving payment of principal and interest on either the Global Notes or the Global Debentures and for all other purposes whatsoever. Therefore, neither the Company, the Trustee nor any Paying Agent has any direct responsibility or liability for the payment of principal or interest on the Global Notes or the Global Debentures to owners of beneficial interests in the certificates relating to the Global Notes or the Global Debentures. The Depository has advised the Company, and the Trustee that its present practice is, upon receipt of any payment of principal or interest, to immediately credit the accounts of the participants with such payment in amounts proportionate to their respective holdings in principal amount of beneficial interests in the certificates relating to the Global Notes the Global Debentures, as shown on the records of the Depository. Payments by participants and indirect participants to owners of beneficial interests in the certificates relating to the Global Notes and the Global Debentures will be governed by standing instructions and customary practices, as is now the case with securities held for the accounts of customers in bearer form or registered in "street name," and will be the responsibility of the participants or indirect participants. If the Depository is at any time unwilling or unable to continue as depository and a successor depository is not appointed by the Company, the Company will issue Notes and Debentures in definitive form in exchange for the total amount of the certificates representing the Global Notes and the Global Debentures. In addition, the Company may at any time determine not to have Notes or Debentures represented by Global Notes or Global Debentures, as the case may be, and, in such event, the Company will issue Notes or Debentures in definitive form in exchange for the total amount of the certificates representing the Global Notes or the Global Debentures. In addition, if any event shall have happened and be continuing that constitutes an Event of Default with respect to the Notes or the Debentures, the owners of beneficial interests in certificates for the Global Notes or the Global Debenture will be entitled to receive Notes or Debentures, as the case may be, in certificated form in exchange for the Book-Entry certificate or certificates representing the Global Notes or the Global Debentures, as 60 the case may be. In any such instance, an owner of a beneficial interest in such certificates will be entitled to physical delivery in definitive form of Notes or Debentures equal in amount to such beneficial interest and to have such Notes or Debentures registered in its name. EXCHANGE AND TRANSFER At the option of the Holder, subject to the terms of the Indenture and the limitations applicable to Global Securities, Securities of each series will be exchangeable for other Securities of the same series of any authorized denomination and of like tenor and aggregate principal amount. (Section 305) Subject to the terms of the Indenture and the limitations applicable to Global Securities, Securities may be presented for exchange as provided above or for registration of transfer (duly endorsed or with the form of transfer endorsed thereon duly executed) at the office of the Security Registrar or at the office of any transfer agent designated by the Company for such purpose. No service charge will 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 payable in connection therewith. Such transfer or exchange will be effected by the Security Registrar or such transfer agent, as the case may be, being satisfied with the documents of title and identity of the person making the request. The Company has appointed the Trustee as Security Registrar. The Company may at any time designate additional transfer agents or rescind the designation of any transfer agent or approve a change in the office through which any transfer agent acts, except that the Company will be required to maintain a transfer agent in each Place of Payment for the Securities of each series. (Sections 305 and 1002) If the Securities of any series (or of any series and specified terms) are to be redeemed in part, the Company will not be required to (i) issue, register the transfer of or exchange any Security of that series (or of that series and specified tenor, as the case may be) during a period beginning at the opening of business 15 days before the day of mailing of a notice of redemption of any such Security that may be selected for redemption and ending at the close of business on the day of such mailing or (ii) register the transfer of or exchange any Security so selected for redemption, in whole or in part, except the unredeemed portion of any such Security being redeemed in part. (Section 305) PAYMENT AND PAYING AGENTS Payment of interest on a Security on any Interest Payment Date will be made to the Person in whose name such Security (or one or more Predecessor Securities) is registered at the close of business on the Regular Record Date for such interest. (Section 307) Principal of and any premium and interest on the Securities of a particular series will be payable at the office or agency of such Paying Agent or Paying Agents as the Company may designate for such purpose from time to time. The corporate trust office of the Trustee will be designated as the Company's sole Paying Agent for payments with respect to Securities of each series. The Company may at any time designate additional Paying Agents or rescind the designation of any Paying Agent or approve a change in the office through which any Paying Agent acts, except that the Company will be required to maintain an office or agency in each Place of Payment for the Securities of any series. (Sections 1002 and 1003) All moneys paid by the Company to a Paying Agent for the payment of the principal of or any premium or interest on any Security which remain unclaimed at the end of two years after such principal, premium or interest has become due and payable will be repaid to the Company, and the Holder of such Security thereafter may look only to the Company for payment thereof as an unsecured general creditor. (Section 1003) NOTICES TO HOLDERS Notices to Holders of Securities will be given in writing and mailed, first-class postage prepaid, to the addresses of such Holders as they may appear in the Security Register. (Section 106) 61 TITLE Prior to due presentment of a Security for registration of transfer, the Company, the Trustee and any agent of the Company or the Trustee may treat the Person in whose name such Security is registered as the owner thereof, whether or not such Security may be overdue, for the purpose of making payment and for all other purposes. (Section 308) GOVERNING LAW The Indenture and the Securities will be governed by and construed in accordance with the law of the State of New York. (Section 112) REGARDING THE TRUSTEE The Company maintains a banking relationship with PNC Bank, Kentucky, Inc. 62 UNDERWRITING Subject to the terms and conditions set forth in the Underwriting Agreement dated the date hereof, the Company has agreed to sell to each of the Underwriters named below, and each of such Underwriters has severally agreed to purchase, the respective principal amount of each series of the Securities set forth opposite its name below:
PRINCIPAL PRINCIPAL PRINCIPAL AMOUNT OF AMOUNT OF 2016 AMOUNT OF 2026 UNDERWRITER NOTES DEBENTURES DEBENTURES - -------------------------------------------------- ---------------- ---------------- ---------------- Goldman, Sachs & Co............................... $ $ $ J.P. Morgan Securities Inc........................ Smith Barney Inc.................................. BA Securities, Inc................................ First Chicago Capital Markets, Inc................ NationsBanc Capital Markets, Inc.................. ---------------- ---------------- ---------------- Total......................................... $ $ $ ---------------- ---------------- ---------------- ---------------- ---------------- ----------------
Under the terms and conditions of the Underwriting Agreement, the Underwriters are committed to take and pay for all of each series of the Securities, if any are taken. The Underwriters propose to offer each series of the Securities in part directly to the public at the respective initial public offering price set forth on the cover page of this Prospectus and in part to certain securities dealers at such prices less a concession not to exceed 0. % of the principal amount of the Notes, not to exceed 0. % of the principal amount of the 2016 Debentures, and not to exceed 0. % of the principal amount of the 2026 Debentures. The Underwriters may allow, and such dealers may reallow, a concession not to exceed 0. % of the principal amount of the Notes, not to exceed 0. % of the principal amount of the 2016 Debentures, and not to exceed 0. % of the principal amount of the 2026 Debentures to certain brokers and dealers. After the Securities are released for sale to the public, the offering prices and other selling terms may from time to time be varied by the Underwriters. Each series of Securities is a new issue of securities with no established trading market. The Company has been advised by the Underwriters that the Underwriters intend to make a market in each series of the Securities but are not obligated to do so and may discontinue market making at any time without notice. No assurance can be given as to the liquidity of the trading market for each series of the Securities. From time to time in the ordinary course of their businesses, affiliates of certain of the Underwriters have engaged and may in the future engage in general financing and banking transactions with the Company and its affiliates. Furthermore, more than 10% of the proceeds of the offering, not including underwriting compensation, will be received by lenders to the Company under its $1.2 billion credit facility that are affiliated with certain members of the National Association of Securities Dealers, Inc. ("NASD") who are participating in the offering. As a result, the offering is being conducted in accordance with NASD Corporate Financing Rule 2710(c)(8) and Rule 2720(c)(3)(A). Certain of the Underwriters have provided from time to time, and expect to provide in the future, investment banking services to the Company and its affiliates, for which such Underwriters have received and will receive customary fees and commissions. The Company has agreed to indemnify the several Underwriters against certain liabilities, including liabilities under the Securities Act of 1933. 63 VALIDITY OF SECURITIES The validity of the Securities offered hereby will be passed upon for the Company by McDermott, Will & Emery, Chicago, Illinois and for the Underwriters by Sullivan & Cromwell, New York, New York. EXPERTS The financial statements as of December 31, 1995 and 1994 and for each of the three years in the period ended December 31, 1995 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. 64 ALLEGIANCE CORPORATION INDEX TO COMBINED FINANCIAL STATEMENTS
PAGE --------- Report of Independent Accountants.......................................................................... F-2 Combined Statements of Income.............................................................................. F-3 Combined Balance Sheets.................................................................................... F-4 Combined Statements of Cash Flows.......................................................................... F-5 Combined Statements of Equity.............................................................................. F-6 Notes to Combined Financial Statements..................................................................... F-7
F-1 REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Shareholders of Baxter International Inc. In our opinion, the accompanying combined balance sheets and the related combined statements of income, cash flows and equity present fairly, in all material respects, the financial position of Allegiance Corporation at December 31, 1995 and 1994, and the results of its operations and its 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 Baxter International Inc.'s management; our responsibility is to express an opinion on these financial statements based on our audits. 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 provide a reasonable basis for the opinion expressed above. Our audits of the combined financial statements of Allegiance also included an audit of Financial Statement Schedule II appearing on page F-19 of this Prospectus. In our opinion, this Financial Statement Schedule presents fairly, in all material respects, the information set forth therein when read in conjunction with the related combined financial statements. Price Waterhouse LLP Chicago, Illinois June 26, 1996 F-2 ALLEGIANCE CORPORATION COMBINED STATEMENTS OF INCOME (IN MILLIONS)
SIX MONTHS ENDED JUNE 30, YEARS ENDED DECEMBER 31, -------------------- ------------------------------- 1996 1995 1995 1994 1993 --------- --------- --------- --------- --------- (UNAUDITED) Net sales..................................................... $ 2,201 $ 2,485 $ 4,922 $ 5,109 $ 5,019 Costs and expenses Cost of goods sold.......................................... 1,746 1,940 3,878 3,731 3,613 Selling, general and administrative expenses................ 345 384 756 1,005 1,061 Restructuring charges....................................... -- -- 76 -- 484 Goodwill amortization....................................... 18 19 38 41 41 Other (income) expense...................................... (1) 2 (302) (6) (26) --------- --------- --------- --------- --------- Total costs and expenses.................................. 2,108 2,345 4,446 4,771 5,173 --------- --------- --------- --------- --------- Income (loss) before income taxes............................. 93 140 476 338 (154) Income tax expense (benefit).................................. 36 55 203 123 (86) --------- --------- --------- --------- --------- Income (loss) before cumulative effect of accounting change... 57 85 273 215 (68) Cumulative effect of change in accounting for other postemployment benefits, net of income tax benefit of $3..... -- -- -- -- (5) --------- --------- --------- --------- --------- Net income (loss)......................................... $ 57 $ 85 $ 273 $ 215 $ (73) --------- --------- --------- --------- --------- --------- --------- --------- --------- ---------
The accompanying notes are an integral part of these combined financial statements. F-3 ALLEGIANCE CORPORATION COMBINED BALANCE SHEETS (IN MILLIONS)
DECEMBER 31, -------------------- 1995 1994 JUNE 30, --------- --------- 1996 ------------ (UNAUDITED) Current assets Cash and equivalents......................................................... $ 5 $ 1 $ 3 Accounts receivable, net of allowance for doubtful accounts of $27 at June 30, 1996, and $18 and $17 at December 31, 1995 and 1994, respectively....... 450 487 635 Notes and other current receivables.......................................... 26 59 246 Inventories.................................................................. 656 684 721 Short-term deferred income taxes............................................. 119 129 145 Prepaid expenses............................................................. 16 12 25 ------------ --------- --------- Total current assets....................................................... 1,272 1,372 1,775 ------------ --------- --------- Property, plant and equipment Property, plant and equipment................................................ 1,523 1,307 1,330 Accumulated depreciation and amortization.................................... 663 429 410 ------------ --------- --------- Net property, plant and equipment............................................ 860 878 920 ------------ --------- --------- Other assets Goodwill and other intangibles............................................... 1,096 1,116 1,214 Other........................................................................ 65 78 122 ------------ --------- --------- Total other assets......................................................... 1,161 1,194 1,336 ------------ --------- --------- Total assets............................................................. $ 3,293 $ 3,444 $ 4,031 ------------ --------- --------- ------------ --------- --------- Current liabilities Accounts payable and accrued liabilities..................................... $ 550 $ 692 $ 720 Long-term deferred income taxes................................................ 115 110 54 Other noncurrent liabilities................................................... 68 64 188 Equity Divisional retained earnings................................................. 1,750 1,768 2,259 Equity investment by parent.................................................. 810 810 810 ------------ --------- --------- Total equity............................................................... 2,560 2,578 3,069 ------------ --------- --------- Total liabilities and equity............................................. $ 3,293 $ 3,444 $ 4,031 ------------ --------- --------- ------------ --------- ---------
The accompanying notes are an integral part of these combined financial statements. F-4 ALLEGIANCE CORPORATION COMBINED STATEMENTS OF CASH FLOWS (IN MILLIONS)
SIX MONTHS ENDED JUNE 30, YEARS ENDED DECEMBER 31, -------------------------- ------------------------------- 1996 1995 1995 1994 1993 --------------- --------- --------- --------- --------- (UNAUDITED) (BRACKETS DENOTE CASH OUTFLOWS) Cash flow provided by operations Income (loss) before cumulative effect of accounting change...................................................... $ 57 $ 85 $ 273 $ 215 $ (68) Adjustments Depreciation and amortization.............................. 73 83 165 223 221 Deferred income taxes...................................... 16 19 50 3 (199) Gain on asset dispositions, net............................ -- 4 (263) (11) (36) Restructuring charges...................................... -- -- 76 -- 484 Other...................................................... -- 2 5 2 11 Changes in balance sheet items Accounts receivable........................................ 69 31 73 8 (6) Inventories................................................ 24 (76) 29 86 (124) Accounts payable and other current liabilities............. (88) 14 (120) (43) 78 Restructuring program payments............................. (21) (29) (62) (54) (18) Other...................................................... 6 6 27 (7) (7) --- --------- --------- --------- --------- Cash flow provided by operations............................. 136 139 253 422 336 --- --------- --------- --------- --------- Investment transactions Capital expenditures......................................... (33) (48) (112) (122) (273) Acquisitions (net of cash received).......................... (14) -- (5) (2) (14) Proceeds from asset dispositions............................. (10) 178 626 107 68 --- --------- --------- --------- --------- Investment transactions, net................................. (57) 130 509 (17) (219) --- --------- --------- --------- --------- Financing transactions Payments to Baxter International Inc......................... (75) (268) (764) (402) (119) --- --------- --------- --------- --------- Financing transactions, net.................................. (75) (268) (764) (402) (119) --- --------- --------- --------- --------- Increase (decrease) in cash and equivalents.................... 4 1 (2) 3 (2) Cash and equivalents at beginning of period.................... 1 3 3 -- 2 --- --------- --------- --------- --------- Cash and equivalents at end of period.......................... $ 5 $ 4 $ 1 $ 3 $ -- --- --------- --------- --------- --------- --- --------- --------- --------- ---------
The accompanying notes are an integral part of these combined financial statements. F-5 ALLEGIANCE CORPORATION COMBINED STATEMENTS OF EQUITY (IN MILLIONS)
YEARS ENDED DECEMBER 31, ------------------------------- 1995 1994 1993 SIX MONTHS --------- --------- --------- ENDED JUNE 30, 1996 -------------- (UNAUDITED) Divisional retained earnings Beginning balance............................................... $ 1,768 $ 2,259 $ 2,446 $ 2,633 Net income (loss)............................................... 57 273 215 (68) Payments to Baxter International Inc............................ (75) (764) (402) (119) ------- --------- --------- --------- Ending balance.................................................. 1,750 1,768 2,259 2,446 ------- --------- --------- --------- Equity investment of parent....................................... 810 810 810 810 ------- --------- --------- --------- Total equity.................................................. $ 2,560 $ 2,578 $ 3,069 $ 3,256 ------- --------- --------- --------- ------- --------- --------- ---------
The accompanying notes are an integral part of these combined financial statements. F-6 ALLEGIANCE CORPORATION NOTES TO COMBINED FINANCIAL STATEMENTS 1. DESCRIPTION OF THE BUSINESS On November 27, 1995, the board of directors of Baxter International Inc. ("Baxter") approved in principle a plan to distribute to Baxter stockholders all of the outstanding stock of its health-care cost management business in a spin-off transaction (the "Distribution") which is expected to be tax-free. Allegiance Corporation ("Allegiance" or the "Company") operates in a single industry segment as a leading provider of medical products and services that help its health-care customers manage and reduce the total cost of providing patient care. Through its nationwide distribution network, Allegiance distributes a broad offering of medical, surgical and laboratory supplies, including its own self-manufactured surgical and respiratory-therapy products, to hospital and alternate-care customers. Allegiance also provides cost management services to its health-care customers through inventory management programs, customized packaging, and procedure and process consulting. The delivery of such a broad array of product and service offerings requires focused investments in cost management services, information systems and manufacturing efficiencies. The Distribution is expected to occur in late 1996 and will result in Allegiance operating as an independent entity with publicly traded common stock. Baxter will have no ownership interest in Allegiance after the spin-off but will continue to conduct business as described in the Reorganization and other agreements outlined in Note 8 to the Combined Financial Statements. However, Baxter will, unless released by third parties, remain liable for certain lease, guarantee and other obligations and liabilities that are transferred to and assumed by Allegiance. Allegiance will be obligated by the Reorganization agreement to indemnify Baxter against liabilities related to those transferred obligations and liabilities. Allegiance's historical results of operations in 1995, 1994 and 1993 include revenues and expenses related to certain divested businesses. The Industrial and Life Sciences division was sold in September 1995 and the diagnostics manufacturing businesses were sold in December 1994. See Note 3 to the Combined Financial Statements for additional information related to these divestitures. The following table presents selected financial data for Allegiance excluding the revenue and expenses associated with these divested businesses:
SIX MONTHS ENDED JUNE 30, YEARS ENDED DECEMBER 31, -------------------- ------------------------------- 1996 1995 1995 1994 1993 --------- --------- --------- --------- --------- (UNAUDITED) (IN MILLIONS) Net sales..................................................... $ 2,201 $ 2,244 $ 4,575 $ 4,314 $ 4,249 Costs and expenses Cost of goods sold.......................................... 1,746 1,770 3,625 3,311 3,245 Selling, general and administrative expenses................ 345 346 701 711 746 Restructuring charges....................................... -- -- -- -- 304 Goodwill amortization....................................... 18 18 37 37 37 Other (income) expense...................................... (1) 2 (33) (3) (44) --------- --------- --------- --------- --------- Total costs and expenses.................................. 2,108 2,136 4,330 4,056 4,288 --------- --------- --------- --------- --------- Pretax income (loss).......................................... 93 108 245 258 (39) Income tax expense (benefit).................................. 36 42 94 101 (13) --------- --------- --------- --------- --------- Income (loss)............................................. $ 57 $ 66 $ 151 $ 157 $ (26) --------- --------- --------- --------- --------- --------- --------- --------- --------- ---------
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES This summary of significant accounting policies is presented to assist the reader in understanding and evaluating the combined financial statements. These policies are in conformity with generally F-7 ALLEGIANCE CORPORATION NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED) 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) accepted accounting principles and have been applied consistently in all material respects. 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. BASIS OF PRESENTATION The accompanying combined financial statements include those assets, liabilities, revenues and expenses directly attributable to Allegiance's operations. These financial statements have been prepared as if Allegiance had operated as a free-standing entity for all periods presented. Operations outside the United States and Puerto Rico, which are not significant, are included in the combined financial statements on the basis of fiscal years ending November 30. The financial information included herein does not necessarily reflect what the financial position and results of operations of Allegiance would have been had it operated as a stand-alone entity during the periods covered, and may not be indicative of future operations or financial position. INTERIM FINANCIAL STATEMENTS In the opinion of management, the interim combined financial statements reflect all adjustments necessary for a fair presentation of the interim periods. All such adjustments are of a normal, recurring nature. The results of operations for the interim periods are not necessarily indicative of the results of operations to be expected for the full year. CASH AND EQUIVALENTS Cash and equivalents include cash, cash investments and marketable securities with original maturities of three months or less. Cash payments for income taxes related to Allegiance's operations were made by Baxter. INVENTORIES Inventories are stated at the lower of cost (first-in, first-out method) or market. Market for raw materials is based on replacement costs and for other inventory classifications on net realizable value. Appropriate consideration is given to deterioration, obsolescence and other factors in evaluating net realizable value. Inventories consisted of the following:
DECEMBER 31, -------------------- 1995 1994 --------- --------- JUNE 30, 1996 ------------- (UNAUDITED) (IN MILLIONS) Raw materials................................................... $ 63 $ 54 $ 64 Work in process................................................. 53 49 55 Finished products............................................... 540 581 602 ----- --------- --------- Total inventories........................................... $ 656 $ 684 $ 721 ----- --------- --------- ----- --------- ---------
PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment are stated at cost. Depreciation and amortization are provided for financial reporting purposes principally on the straight-line method over the following estimated useful lives: buildings and leasehold improvements, 20 to 44 years; machinery and other equipment, 3 to 20 F-8 ALLEGIANCE CORPORATION NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED) 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) years; equipment leased or rented to customers, 1 to 5 years. Leasehold improvements are depreciated over the life of the related facility leases or the asset whichever is shorter. Straight-line and accelerated methods of depreciation are used for income tax purposes. Property, plant and equipment consisted of the following:
DECEMBER 31, -------------------- 1995 1994 --------- --------- (IN MILLIONS) Land.................................................................. $ 102 $ 104 Buildings and leasehold improvements.................................. 396 386 Machinery and equipment............................................... 724 778 Equipment leased or rented to customers............................... 14 16 Construction in progress.............................................. 71 46 --------- --------- Total property, plant and equipment, at cost........................ 1,307 1,330 Accumulated depreciation and amortization............................. (429) (410) --------- --------- Net property, plant and equipment................................. $ 878 $ 920 --------- --------- --------- ---------
Depreciation expense was $106, $154 and $156 million in 1995, 1994 and 1993, respectively. Repairs and maintenance expense was $36 million in 1995, $30 million in 1994 and $33 million in 1993. GOODWILL AND OTHER INTANGIBLE ASSETS Goodwill represents the excess of cost over the fair value of net assets acquired and is amortized on a straight-line basis over estimated useful lives not exceeding 40 years. Based upon management's assessment of the future undiscounted operating cash flows of acquired businesses, the carrying value of goodwill at December 31, 1995, has not been impaired. As of December 31, 1995 and 1994, goodwill was $1,092 million and $1,170 million, respectively, net of accumulated amortization of $369 million and $345 million, respectively. Other intangible assets include purchased patents, trademarks, deferred charges and other identified rights which are amortized on a straight-line basis over their legal or estimated useful lives, whichever is shorter (generally not exceeding 17 years). As of December 31, 1995 and 1994, other intangibles were $24 million and $44 million, respectively, net of accumulated amortization of $46 million and $38 million, respectively. INCOME TAXES Allegiance's operations were historically included in Baxter's consolidated U.S. federal and state income tax returns and in the tax returns of certain Baxter foreign subsidiaries. The provision for income taxes has been determined as if Allegiance had filed separate tax returns under its existing structure for the periods presented. Accordingly, the effective tax rate of Allegiance in future years could vary from its historical effective rates depending on Allegiance's future legal structure and tax elections. All income taxes are settled with Baxter on a current basis through the "Divisional Retained Earnings" account. Provision has been made for income taxes in accordance with Financial Accounting Standards Board ("FASB") Statement No. 109, "Accounting for Income Taxes." DERIVATIVES Gains and losses on hedges of existing assets or liabilities are included in the carrying amounts of those assets or liabilities and are ultimately recognized in income as part of those carrying amounts. F-9 ALLEGIANCE CORPORATION NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED) 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Gains and losses relating to qualifying hedges of firm commitments or anticipated transactions also are deferred and are recognized in income or as adjustments of carrying amounts when the hedged transaction occurs. 3. ACQUISITIONS, INVESTMENTS IN AFFILIATES AND DIVESTITURES ACQUISITIONS Allegiance invested $5 million in 1995, $2 million in 1994 and $14 million in 1993 for acquisitions accounted for as purchase transactions and investments in affiliated companies. Had the acquisitions taken place on January 1, consolidated results in the year of acquisition would not have been materially different from reported results. These acquisitions involved no significant change in Allegiance's strategic direction and were made to acquire technologies, broaden product lines and expand market coverage. DIVESTITURES In 1995, Allegiance disposed of several businesses or product lines which resulted in a net gain of $141 million (net of $122 million in related income tax expense). The majority of the net gain for 1995 related to the divestiture of Allegiance's Industrial and Life Sciences Division ("Industrial") to VWR Corporation for approximately $400 million in cash and $25 million in deferred payments, resulting in a gain of $268 million. As part of the divestiture, Allegiance will continue to supply its self-manufactured products and supplies sold in non-health-care markets to VWR Corporation under a long-term distribution agreement. Allegiance disposed of or discontinued several minor non-strategic or unprofitable product lines or investments which resulted in a net gain of $8 million (net of $3 million in related income tax expense) in 1994 and $22 million (net of $14 million in related income tax expense) in 1993. The majority of these transactions resulted in the disposition of Allegiance's entire interest in such product lines and investments. Proceeds from divestitures were $626 million in 1995, $107 million in 1994 and $68 million in 1993. Proceeds in 1995 included approximately $400 million for the Industrial divestiture discussed earlier. The divestiture of the diagnostics manufacturing business discussed in Note 4 to the Combined Financial Statements included proceeds of approximately $200 million in 1995 and $44 million in 1994. 4. RESTRUCTURING CHARGES In November 1993, Baxter's board of directors approved a series of strategic actions to improve shareholder value and reduce costs. The strategic actions of the program were designed in part to make the Allegiance Business more efficient and responsive in addressing the changes occurring in the U.S. health-care system. In November 1993, a $484 million pretax provision was recorded to cover costs associated with these restructuring initiatives. Since the announcement of the 1993 restructuring program, Allegiance has implemented, or is in the process of implementing, all of the major strategic actions associated with the restructuring program, which is expected to be completed in 1997. Included in the 1993 restructuring plan was the intent to divest the diagnostics manufacturing businesses and a valuation allowance was established as a component of the 1993 restructuring charge. In December 1994, subject to certain settlement provisions, the divestiture of these businesses was completed and net proceeds were received of approximately $44 million in cash, $200 million in installment notes (which were collected in cash during January 1995) and $40 million in face value of preferred stock. In addition, accounts receivable were retained of approximately $85 million, which was collected from customers in the normal course of business. Allegiance has retained the rights to distribute all current diagnostics products in the U.S. F-10 ALLEGIANCE CORPORATION NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED) 4. RESTRUCTURING CHARGES (CONTINUED) Throughout 1995, active discussions took place with the buyer of the diagnostics businesses related to interpretations of and responsibility relative to the settlement provisions contained in the purchase and sale and related agreements. The divestiture was also significantly complicated by a dispute between the diagnostics manufacturing businesses and one of its major suppliers, which ultimately led to a lower than expected final valuation of the business. This dispute has been settled. In the third quarter of 1995, settlement negotiations were completed with the buyer of the diagnostics businesses and adjustments to the purchase price were finalized along with a revision of cost estimates to complete the divestiture. This resulted in an additional restructuring charge of approximately $76 million. Employee-related costs include provisions for severance, outplacement assistance, relocation and retention payments for employees in the affected operations worldwide. Since the inception of the restructuring program, approximately 1,920 of the 2,860 positions that were originally expected to be affected by the program have been eliminated. As process changes were implemented in connection with the restructuring program, it became apparent that, as certain management level positions were eliminated, other lower cost positions were added. While this has generated savings levels consistent with expectations, management has revised its targeted head count reduction to 2,230 net positions. The majority of the remaining reductions will occur in 1996 and 1997, as facility closures and consolidations are completed as planned. Noncash restructuring reserve utilization with respect to divestitures and asset write-downs of $160 million, $66 million and $21 million in 1994 and 1995, and for the six months ended June 30, 1996, respectively, included $118 million, $16 million and $3 million, respectively, relating to the divestiture of the diagnostics manufacturing businesses. Also included was $42 million in 1994, $50 million in 1995 and $16 million for the six months ended June 30, 1996, relating primarily to the closure of a manufacturing facility and consolidations or certain distribution facilities. The utilization relating to the diagnostics divestiture primarily represents the excess of the net assets of the businesses sold over the proceeds received. The utilization relating to the manufacturing facility closure and distribution facility consolidations primarily represents fixed asset and inventory write-downs. F-11 ALLEGIANCE CORPORATION NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED) 4. RESTRUCTURING CHARGES (CONTINUED) The following table summarizes the 1993 restructuring program for Allegiance businesses:
DIVESTITURES EMPLOYEE- AND ASSET OTHER RELATED COSTS WRITE- DOWNS COSTS TOTAL --------------- ------------- --------- --------- (IN MILLIONS) Initial restructuring charge................... $ 103 $ 278 $ 103 $ 484 Utilization: Cash......................................... (31) (22) (23) (76) Noncash...................................... -- (160) -- (160) ----- ------ --------- --------- December 31, 1994.............................. $ 72 $ 96 $ 80 $ 248 ----- ------ --------- --------- Utilization: Cash......................................... (29) (43) (33) (105) Noncash...................................... -- (66) -- (66) Adjustment to reserve.......................... -- 76 -- 76 ----- ------ --------- --------- December 31, 1995.............................. $ 43 $ 63 $ 47 $ 153 ----- ------ --------- --------- Utilization: Cash......................................... (11) (13) (10) (34) Noncash...................................... -- (21) -- (21) ----- ------ --------- --------- June 30, 1996.................................. $ 32 $ 29 $ 37 $ 98 ----- ------ --------- --------- ----- ------ --------- ---------
The 1995 restructuring reserve balance consisted of $89 million of current and $64 million noncurrent liabilities. The balance in the 1994 reserves consisted of $80 million of current and $168 million of non-current liabilities. 5. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES Accounts payable and accrued liabilities consisted of the following:
DECEMBER 31, 1995 1994 --------- --------------- (IN MILLIONS) Accounts payable, principally trade................................... $ 378 $ 390 Employee compensation and withholdings................................ 88 109 Restructuring......................................................... 89 80 Property, payroll and other taxes..................................... 40 37 Other................................................................. 97 104 --------- ----- Accounts payable and accrued liabilities.............................. $ 692 $ 720 --------- ----- --------- -----
6. LEASE OBLIGATIONS Certain facilities and equipment are leased under operating leases expiring at various dates. Most of the operating leases contain renewal options. Total expense for all operating leases was $26 million in 1995, $38 million in 1994 and $38 million in 1993. F-12 ALLEGIANCE CORPORATION NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED) 6. LEASE OBLIGATIONS (CONTINUED) Future minimum lease payments (including interest) under noncancelable operating leases at December 31, 1995 were as follows:
OPERATING LEASES --------------- (IN MILLIONS) 1996.................................................................. $ 20 1997.................................................................. 15 1998.................................................................. 11 1999.................................................................. 6 2000.................................................................. 4 Thereafter............................................................ 6 --- Total obligations and commitments..................................... $ 62 --- ---
7. FINANCIAL INSTRUMENTS AND RISK MANAGEMENT CONCENTRATIONS OF CREDIT RISK Allegiance provides credit, in the normal course of business, to hospitals, private and government institutions, health-care agencies, insurance agencies and doctors' offices. Allegiance performs ongoing credit evaluations of its customers and maintains reserves for potential credit losses which, when realized, have been within the range of management's allowance for doubtful accounts. FINANCIAL INSTRUMENT USE For all periods presented, Allegiance has been considered in Baxter's overall risk management strategy. As part of this strategy, Baxter uses certain financial instruments to reduce its exposure to adverse movements in foreign exchange rates. These financial instruments are not used for trading purposes. FOREIGN EXCHANGE RISK MANAGEMENT As part of implementing its strategy, Baxter has allocated to Allegiance the income and expense associated with certain option contracts used to hedge anticipated cost of production expected to be denominated in foreign currencies. The terms of these financial instruments were less than one year. Allocated net expense and the related notional amounts for these options were immaterial in all years presented. Subsequent to year-end 1995, Baxter entered into options to reduce its foreign exchange exposures. Baxter allocated to Allegiance options with a notional value of approximately $40 million to hedge anticipated costs of production expected to be denominated in foreign currency. FAIR VALUES OF FINANCIAL INSTRUMENTS
CARRYING AMOUNTS APPROXIMATE FAIR VALUES ------------------------ ------------------------ AS OF DECEMBER 31 (IN MILLIONS) 1995 1994 1995 1994 - ---------------------------------------------------------- ----- ----- ----- ----- Investment in affiliates.................................. $ 15 $ 9 $ 15 $ 9
The carrying values of cash and cash equivalents, accounts receivable and payable, and accrued liabilities, approximate fair value due to the short-term maturities of these assets and liabilities. Investments in affiliates are accounted for by both the cost and equity methods and pertain to several minor equity investments in companies for which fair values are determined by quoted market prices and others for which fair values are not readily available, but are believed to exceed carrying amounts. F-13 ALLEGIANCE CORPORATION NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED) 8. RELATED PARTY TRANSACTIONS Baxter has provided to Allegiance certain legal, treasury, insurance and administrative services. Charges for these services are based on actual costs incurred by Baxter. In addition, Allegiance is the primary distributor of Baxter's intravenous solutions, cardiovascular devices and other products in the United States and also provides other services to Baxter. Negotiated fees for these distribution services have generally been under the same terms and conditions granted to independent third parties. Additionally, these fees are not materially different than the terms of the Distribution Agreement subsequent to the Distribution. A summary of related party transactions, all of which are with Baxter or Baxter affiliates, is shown in the table below (in millions):
1995 1994 1993 --------- --------- --------- Allegiance provided: Distribution services to Baxter in the U.S......................... $ 214 $ 206 $ 201 Administrative services to Baxter.................................. $ 25 $ 24 $ 23 Allegiance received: Administrative services from Baxter................................ $ 48 $ 46 $ 44 International distribution services from Baxter.................... $ 26 $ 25 $ 23
Management believes that the basis used for allocating corporate services is reasonable. However, the terms of these transactions may differ from those that would result from transactions among unrelated parties. Allegiance participates in a centralized cash management program administered by Baxter. Short-term advances from Baxter or excess cash sent to Baxter has been treated as an adjustment to the "Divisional Retained Earnings" account through the Balance Sheet date. No interest is charged on this balance. Effective on the Distribution Date, Baxter and Allegiance will enter into a series of administrative services agreements pursuant to which Baxter and Allegiance will continue to provide, for a specified period of time, certain administrative services which each entity historically has provided to the other. These agreements require both parties to pay to each other a fee which approximates the actual costs of these services. Additionally, subsequent to the spin-off, Allegiance will have continuing significant relationships with Baxter as a distributor, customer and supplier for a wide array of health-care products and services, and for specified transitional administrative support services. See "Arrangements Between Baxter and Allegiance" included elsewhere in this Information Statement, for detailed descriptions of the related agreements. 9. RETIREMENT AND OTHER BENEFIT PROGRAMS Allegiance participated in Baxter-sponsored non-contributory, defined benefit pension plans covering substantially all employees in the U.S. and Puerto Rico. The benefits were based on years of service and the employee's compensation during 5 of the last 10 years of employment as defined by the plans. Plan assets, which are maintained in a trust administered by Baxter, consist primarily of equity and fixed income securities. Baxter and Allegiance have announced their intent to freeze benefits under these plans at the date of the spin-off for Allegiance employees. Allegiance has also announced that it will not have a defined benefit pension plan to replace the Baxter plan. The pension liability related to Allegiance employees' service prior to the spin-off date will remain with Baxter. Pension expense associated with the Baxter-sponsored plans prior to its being frozen was $17 million, $22 million and $28 million for 1995, 1994 and 1993, respectively. The assumed discount rate applied to benefit obligations to determine 1995 pension expense was 9% and the assumed long-term rate of return on assets was 9.5% for the U.S. and Puerto Rico plans. F-14 ALLEGIANCE CORPORATION NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED) 9. RETIREMENT AND OTHER BENEFIT PROGRAMS (CONTINUED) In addition to pension benefits, Allegiance participated in Baxter-sponsored contributory health-care and life insurance benefits for substantially all domestic retired employees. Baxter and Allegiance have announced that they will freeze benefits under these plans at the date of the spin-off for Allegiance employees. Expense associated with these benefits prior to the date of the spin-off were $9 million in 1995, $9 million in 1994 and $11 million in 1993. Allegiance has announced its intention not to establish new health-care and life insurance plans for employees retiring subsequent to the Distribution Date. Effective, January 1, 1993, Allegiance adopted FASB Statement No. 112, "Employers' Accounting for Postemployment Benefits" which requires accrual accounting for postemployment benefits such as disability related and workers-compensation payments. The company recorded the obligation as a cumulative effect of an accounting change for $5 million (net of $3 million in related income tax benefits). The effect of this change on 1993 operating income versus the prior method of accounting for these benefits was not material. The liability associated with these benefits was $14 million for 1995 and 1994. Most U.S. employees are eligible to participate in a qualified 401(k) plan. Participants may contribute up to 12% of their annual compensation (limited in 1995 to $9,240 per individual) to the plan and Allegiance matches participants' contributions, up to 3% of compensation. Matching contributions made by Allegiance were $11 million in 1995, $14 million in 1994 and $14 million in 1993. 10. OTHER (INCOME) EXPENSE Components of other (income) expense are as follows:
YEARS ENDED DECEMBER 31, ------------------------------- 1995 1994 1993 --------- --------- --------- (IN MILLIONS) Asset dispositions, net.............................................. $ (263) $ (11) $ (36) Foreign exchange..................................................... -- 5 -- Other................................................................ (39) -- 10 --------- --- --- Total other income................................................... $ (302) $ (6) $ (26) --------- --- --- --------- --- ---
11. INCOME TAXES Income (loss) before tax expense by category is as follows:
YEARS ENDED DECEMBER 31, ------------------------------- 1995 1994 1993 --------- --------- --------- (IN MILLIONS) U.S................................................................. $ 434 $ 292 $ (191) International....................................................... 42 46 37 --------- --------- --------- Income (loss) before income tax expense............................. $ 476 $ 338 $ (154) --------- --------- --------- --------- --------- ---------
F-15 ALLEGIANCE CORPORATION NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED) 11. INCOME TAXES (CONTINUED) Income tax expense before cumulative effect of accounting change by category and by income statement classification is as follows:
YEARS ENDED DECEMBER 31, ------------------------------- 1995 1994 1993 --------- --------- --------- (IN MILLIONS) Current U.S. Federal......................................................... $ 124 $ 91 $ 79 State and local, including Puerto Rico.......................... 34 26 29 International..................................................... (5) 3 5 --------- --------- --------- Current income tax expense........................................ 153 120 113 --------- --------- --------- Deferred U.S. Federal......................................................... 38 (5) (164) State and local, including Puerto Rico.......................... 8 4 (34) International..................................................... 4 4 (1) --------- --------- --------- Deferred income tax expense (benefit)............................. 50 3 (199) --------- --------- --------- Income tax expense (benefit)........................................ $ 203 $ 123 $ (86) --------- --------- --------- --------- --------- ---------
The income tax expense shown above was calculated as if Allegiance were a stand-alone entity. The components of deferred tax assets and liabilities are as follows:
DECEMBER 31, ------------------------------- 1995 1994 1993 --------- --------- --------- (IN MILLIONS) Deferred tax assets Accrued expenses................................................... $ 70 $ 60 $ 60 Restructuring costs................................................ 57 77 111 Other.............................................................. -- -- 1 --------- --------- --------- Total deferred tax assets........................................ 127 137 172 --------- --------- --------- Deferred tax liabilities Asset basis differences............................................ 107 46 70 Other.............................................................. 1 -- 8 --------- --------- --------- Total deferred tax liabilities................................... 108 46 78 --------- --------- --------- Net deferred tax assets.......................................... $ 19 $ 91 $ 94 --------- --------- --------- --------- --------- ---------
In 1995, $22 million of deferred tax assets were transferred to Baxter. The deferred tax assets related to the asset basis difference associated with preferred stock received in connection with the divestiture of the diagnostics manufacturing businesses. Since agreements entered into with the buyer of the diagnostics manufacturing businesses require that the preferred stock be retained by Baxter for a prescribed period of time, the related deferred tax assets were transferred to Baxter. F-16 ALLEGIANCE CORPORATION NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED) 11. INCOME TAXES (CONTINUED) Income tax expense differs from income tax expense calculated by using the U.S. federal income tax rate for the following reasons:
YEARS ENDED DECEMBER 31, ------------------------------- 1995 1994 1993 --------- --------- --------- (IN MILLIONS) Income tax expense (benefit) at statutory rate....................... $ 166 $ 118 $ (54) Tax-exempt operations................................................ (17) (23) (37) Non deductible goodwill.............................................. 28 14 14 State and local taxes................................................ 27 15 (12) Foreign tax (benefit)................................................ (1) (2) (2) Other................................................................ -- 1 5 --------- --------- --------- Income tax expense (benefit)....................................... $ 203 $ 123 $ (86) --------- --------- --------- --------- --------- ---------
Allegiance has manufacturing operations outside the U.S. that benefit from reductions in local tax rates under tax incentives that will continue at least through 1998. U.S. federal income taxes, net of available foreign tax credits, on unremitted earnings deemed permanently reinvested would not be material. 12. LEGAL PROCEEDINGS Upon the Distribution, Allegiance will assume the defense of litigation involving claims related to Allegiance Business, including certain claims of alleged personal injuries as a result of exposure to natural rubber latex gloves described below. Allegiance has not been named as a defendant in this litigation but will be defending and indemnifying Baxter Healthcare Corporation ("BHC"), as contemplated by the Reorganization Agreement, for all expenses and potential liabilities associated with claims pertaining to this litigation. It is expected that Allegiance will be named as a defendant in future litigation and may be added as a defendant in existing litigation. (Information subsequent to June 26, 1996 is unaudited). BHC was one of ten defendants named in a purported class action filed in August 1993, on behalf of all medical and dental personnel in the state of California who allegedly suffered allergic reactions to natural rubber latex gloves and other protective equipment or who allegedly have been exposed to natural rubber latex products. (KENNEDY, ET AL., V. BAXTER HEALTHCARE CORPORATION, ET AL., Sup. Ct., Sacramento Co., Cal., #535632). The case alleges that users of various natural rubber latex products, including medical gloves made and sold by BHC and other manufacturers, suffered allergic reactions to the products ranging from skin irritation to systemic anaphylaxis. The Court granted defendants' demurrer to the class action allegations. On February 29, 1996, the California Appellate Court upheld the trial court's ruling. In April 1994, a similar purported class action, GREEN, ET AL. V. BAXTER HEALTHCARE CORPORATION, ET AL., (Cir. Ct., Milwaukee Co., WI, 94CV004977) was filed against Baxter and three other defendants. The class action allegations have been withdrawn, but additional plaintiffs added individual claims. On July 1, 1996, the Company was served with a similar purported class action, WOLF V. BAXTER HEALTHCARE CORP. ET AL., Circuit Court, Wayne County, MI, 96-617844NP. The Company is the only named defendant in that suit. As of August 19, 1996, 36 additional lawsuits have been served on BHC containing similar allegations of senseitization to natural rubber latex products. Allegiance intends to vigorously defend against these actions. Since none of these cases has proceeded to a hearing on the merits, Allegiance is unable to evaluate the extent of any potential liability, and unable to estimate any potential loss. Allegiance believes that a substantial portion of the liability and defense costs related to natural rubber latex gloves cases and claims will be covered by insurance, subject to self-insurance retentions, exclusions, conditions, coverage gaps, policy limits and insurer solvency. BHC has notified its insurance F-17 ALLEGIANCE CORPORATION NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED) 12. LEGAL PROCEEDINGS (CONTINUED) companies that it believes that these cases and claims are covered by BHC's insurance. Most of BHC's insurers have reserved their rights (i.e., neither admitted nor denied coverage), and may attempt to reserve in the future, the right to deny coverage, in whole or in part, due to differing theories regarding, among other things, the applicability of coverage and when coverage may attach. It is not expected that the outcome of these matters will have a material adverse effect on Allegiance's business, cash flow, results of operations or financial condition. Under the U.S. Superfund statute and many state laws, generators of hazardous waste which is sent to a disposal or recycling site are liable for cleanup of the site if contaminants from that property later leak into the environment. The law provides that potentially responsible parties may be held jointly and severally liable for the costs of investigating and remediating a site. This liability applies to the generator even if the waste was handled by a contractor in full compliance with the law. As of June 30, 1996, BHC has been named as a potentially responsible party for cleanup costs at ten hazardous waste sites, for which Allegiance has assumed responsibility. Allegiance's largest assumed exposure is at the Thermo-Chem site in Muskegon, Michigan. Allegiance expects that the total cleanup costs for this site will be between $44 million and $65 million, of which Allegiance's share will be approximately $5 million. This amount, net of payments of approximately $1 million, has been accrued and is reflected in Allegiance's combined financial statements. The estimated exposure for the remaining nine sites is approximately $4 million, which has been accrued and reflected in Allegiance's combined financial statements. BHC is a defendant in a number of other claims, investigations and lawsuits for which Allegiance has assumed responsibility. Based on the advice of counsel, management does not believe that the other claims, investigations and lawsuits individually or in the aggregate, will have a material adverse effect on Allegiance's business, cash flow, results of operations or financial condition. 13. INDUSTRY INFORMATION Allegiance operates in a single industry segment as a leading provider of medical products and services that help its health-care customers manage and reduce the total cost of providing patient care. Through its nationwide distribution network, Allegiance distributes a broad offering of hospital supplies, including its own self-manufactured surgical and respiratory-therapy products, to hospital and alternate-care customers. Allegiance also provides cost management services to its health-care customers through inventory management programs, customized packaging, and procedure and process consulting. International sales from self-manufactured products are primarily in Canada, France and Germany. For surgical products, the majority of raw materials used for the manufacture of latex gloves are located in Malaysia. None of these geographic locations represent 10% or more of net sales or identifiable assets of Allegiance. For the last three years, sales to customers which are members of two large hospital buying groups, Premier and VHA, Inc. ("VHA"), as a percentage of total sales were 27% and 16%, respectively in 1995, 23% and 13%, respectively in 1994, and 23% and 13%, respectively in 1993. Premier and VHA each are comprised of a group of health-care organizations which benefit from the pricing and other benefits available to members of the group. However, some members are free to purchase from the vendors of their choice. The loss of the relationship with either group would not necessarily mean the loss of sales attributable to all members of such group. F-18 - ------------------------------------------- ------------------------------------------- - ------------------------------------------- ------------------------------------------- NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY ANY SECURITIES OTHER THAN THE SECURITIES DESCRIBED IN THIS PROSPECTUS OR AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY SUCH SECURITIES IN ANY CIRCUMSTANCES IN WHICH SUCH OFFER OR SOLICITATION IS UNLAWFUL. 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 OR THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO ITS DATE. -------------- TABLE OF CONTENTS
PAGE --------- Available Information.......................... 2 Prospectus Summary............................. 3 Risk Factors................................... 8 Use of Proceeds................................ 11 Company Background............................. 11 Capitalization................................. 12 Selected Historical Financial Data............. 13 Pro Forma Financial Information................ 15 Management's Discussion and Analysis of Financial Condition and Results of Operations.................................... 19 Business....................................... 27 Management..................................... 36 Relationship with Baxter....................... 47 Principal Stockholders......................... 50 Description of Credit Facilities............... 51 Description of Securities...................... 51 Underwriting................................... 63 Validity of Securities......................... 64 Experts........................................ 64 Index to Financial Statements.................. F-1
THROUGH AND INCLUDING (THE 40TH DAY AFTER THE DATE OF THIS PROSPECTUS), ALL DEALERS EFFECTING TRANSACTIONS IN THE SECURITIES, WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS DELIVERY REQUIREMENT IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS. $500,000,000 ALLEGIANCE CORPORATION $200,000,000 % NOTES DUE , 2006 $150,000,000 % DEBENTURES DUE , 2016 $150,000,000 % DEBENTURES DUE , 2026 -------------- [LOGO] -------------- GOLDMAN, SACHS & CO. J.P. MORGAN & CO. SMITH BARNEY INC. BA SECURITIES, INC. FIRST CHICAGO CAPITAL MARKETS, INC. NATIONSBANC CAPITAL MARKETS, INC. - ------------------------------------------- ------------------------------------------- - ------------------------------------------- ------------------------------------------- PART II INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION. The following are the estimated expenses (other than the SEC registration fee) of the issuance and distribution of the securities being registered, all of which will be paid by the Company. SEC registration fee........................................... $ 206,897 Printing expenses.............................................. 50,000 Fees and expenses of counsel................................... 75,000 Fees and expenses of accountants............................... 25,000 Trustee fees and expenses...................................... 15,000 Rating Agency Fees............................................. 250,000 Blue sky fees and expenses..................................... 18,000 Miscellaneous.................................................. 10,103 --------- Total.......................................................... $ 650,000 --------- ---------
- ------------ ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS. The Allegiance Certificate of Incorporation provides that a director of Allegiance will not be personally liable to Allegiance or its stockholders for monetary damages for breach of fiduciary duty as a director, except for liability (i) for any breach of the director's duty of loyalty to Allegiance or its stockholders, (ii) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, (iii) under Section 174 of the Delaware Law, which concerns unlawful payments of dividends, stock purchases or redemptions, or (iv) for any transaction from which the director derived an improper personal benefit. While the Certificate of Incorporation provides directors with protection from awards for monetary damages for breaches of their duty of care, it does not eliminate such duty. The provisions of the Certificate of Incorporation described above apply to an officer of Allegiance only if he or she is a director of Allegiance and is acting in his or her capacity as director, and do not apply to officers of Allegiance who are not directors. The Allegiance Certificate of Incorporation provides that each person who is or was or had agreed to become a director or officer of Allegiance, and each person who serves or may have served at the request of Allegiance as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, will be indemnified by Allegiance to the fullest extent permitted from time to time by Delaware law, as the same exists or may hereafter be amended, except with respect to an action commenced by such directors or officers against Allegiance or by such directors or officers as a derivative action. The Certificate of Incorporation provides that the right to indemnification and the payment of expenses conferred in the Certificate of Incorporation will not be exclusive of any other right which any person may have or may in the future acquire under any agreement, vote of stockholders or disinterested directors or otherwise. The Certificate of Incorporation permits Allegiance to maintain insurance on behalf of any person who is or was a director, officer, employee or agent of Allegiance, or is serving at the request of Allegiance as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise against any expense, liability or loss, whether or not Allegiance would have the power to indemnify such person against such liability under the Certificate of Incorporation or Delaware Law. Under Delaware law, a corporation may indemnify any person who was or is a party or is threatened to be made a party to an action (other than an action by or in the right of the corporation) by reason of his service as a director or officer of the corporation, or his service, at the corporation's request, as a II-1 director, officer, employee or agent of another corporation or other enterprise, against expenses (including attorneys' fees) that are actually and reasonably incurred by him ("Expenses"), and judgments, fines and amounts paid in settlement that are actually and reasonably incurred by him, in connection with the defense or settlement of such action, provided that he acted in good faith and in a manner he reasonably believed to be in or not opposed to the corporation's best interests and, with respect to any criminal action or proceeding, had no reasonable cause to believe that his conduct was unlawful. Although Delaware law permits a corporation to indemnify any person referred to above against Expenses in connection with the defense or settlement of an action by or in the right of the corporation, provided that he acted in good faith and in a manner he reasonably believed to be in or not opposed to the corporation's best interests, if such person has been judged liable to the corporation, indemnification is only permitted to the extent that the Court of Chancery (or the court in which the action was brought) determines that, despite the adjudication of liability, such person is entitled to indemnity for such Expenses as the court deems proper. The determination as to whether a person seeking indemnification has met the required standard of conduct is to be made (1) by a majority vote of a quorum of disinterested members of the board of directors, or (2) by independent legal counsel in a written opinion, if such a quorum does not exist or if the disinterested directors so direct, or (3) by the stockholders. The General Corporation Law of the State of Delaware also provides for mandatory indemnification of any director, officer, employee or agent against Expenses to the extent such person has been successful in any proceeding covered by the statute. In addition, the General Corporation Law of the State of Delaware provides the general authorization of advancement of a director's or officer's litigation expenses in lieu of requiring the authorization of such advancement by the board of directors in specific cases, and that indemnification and advancement of expenses provided by the statute shall not be deemed exclusive of any other rights to which those seeking indemnification or advancement of expenses may be entitled under any bylaw, agreement or otherwise. The Company intends to enter into agreements to indemnify its directors and certain officers, in addition to the indemnification provided for in the Company's Amended Certificate and Amended By-Laws. Under these agreements, the Company will, among other things, indemnify the Company's directors and officers for all direct and indirect expenses and costs (including, without limitation, all reasonable attorneys' fees and related disbursements, other out of pocket costs and reasonable compensation for time spent by such persons for which they are not otherwise compensated by the Company or any third person) and liabilities of any type whatsoever (including, but not limited to, judgments, fines and settlement fees) actually and reasonably incurred by such person in connection with either the investigation, defense, settlement or appeal of any threatened, pending or completed action, suit or other proceeding, including any action by or in the right of the corporation, arising out of such person's services as a director, officer, employee or other agent of the Company, any subsidiary of the Company or any other company or enterprise to which the person provides services at the request of the Company. The Company believes that these provisions and agreements are necessary to attract and retain talented and experienced directors and officers. The Company maintains liability insurance for the benefit of its directors and officers. Under the terms of the Underwriting Agreement, the Underwriters have agreed to indemnify, under certain conditions, the Company, its directors, certain of its officers and persons who control the Company within the meaning of the Securities Act of 1933, as amended (the "Securities Act") against certain liabilities. ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES. In June 1996, Allegiance issued shares of common stock to Baxter International, Inc. in consideration of the transfer of the assets of the Allegiance Business to Allegiance. Allegiance has not sold or issued any securities except for the shares of common stock issued to Baxter. II-2 ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES. (a) Exhibits:
EXHIBIT NUMBER DESCRIPTION - ----------- -------------------------------------------------------------------------------- +1.1 Form of Underwriting Agreement 2.1 Reorganization Agreement between Baxter International, Inc. and Allegiance Corporation +3.1 Certificate of Incorporation of Allegiance Corporation +3.2 By-Laws of Allegiance Corporation 4.1 Form of Indenture dated as of October 1, 1996 between Allegiance Corporation and PNC Bank, Kentucky, Inc. +4.2 Forms of Board Resolution creating the respective series of Securities +5.1 Opinion of McDermott, Will & Emery regarding legality +10.1 Allegiance Corporation 1996 Outside Director Incentive Compensation Plan +10.2 Allegiance Corporation 1996 Incentive Compensation Plan +10.3 Allegiance Change in Control Plan +10.4 Retention Agreement for Ms. Gaumer +10.5 Retention Agreement for Mr. Zollars +10.6* Form of Agency, Services and Distribution Agreement +10.7 $1.2 Billion Credit Agreement dated as of September 23, 1996 among Allegiance Corporation and the financial institution named therein. +10.8 $300 Million Credit Agreement dated as of September 23, 1996 among Allegiance Corporation and the financial institutions named therein. 10.9 Rights Agreement, by and between Allegiance Corporation and the rights agent named therein +11.1 Statement regarding Computation of Per Share Earnings +12.1 Statement regarding Computation of Ratios of Earnings to Fixed Charges +21.2 Subsidiaries of Allegiance Corporation +23.1 Consent of Price Waterhouse LLP +23.2 Consent of McDermott, Will & Emery (included in Exhibit 5.1) +24.1 Power of Attorney +25.1 Statement of eligibility and qualification of Trustee relating to the Securities. +27.1 Financial Data Schedule
- ------------ + Previously Filed. * Confidential treatment requested for certain portions of this document. (b) Financial Statement Schedules: Schedule II -- Valuation and Qualifying Accounts ITEM 17. UNDERTAKINGS. (a) Insofar as indemnification for liabilities arising under the Securities Act 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 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 such director, officer or controlling person in connection with the securities being registered hereunder, 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 whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue. II-3 (b) The undersigned Registrant hereby undertakes that for purposes of determining any liability under the Securities Act, (i) the information omitted from the form of prospectus filed as part of this Registration Statement in reliance upon Rule 430A and contained in a 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 and (ii) each post-effective amendment that contains a form of prospectus shall be deemed to 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-4 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, the registrant has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in McGaw Park, Illinois on October 3, 1996. ALLEGIANCE CORPORATION By /s/ LEONARD G. KUHR -------------------------------------------------------------- Leonard G. Kuhr Corporate Vice President and Treasurer Pursuant to the requirements of the Securities Act of 1933, this Registration Statement has been signed by the following persons in the capacities indicated and on October 3, 1996. SIGNATURE TITLE - ------------------------------ --------------------------------------------- * - ------------------------------ Chairman of the Board and Lester B. Chief Executive Officer Knight (Principal Executive Officer) * - ------------------------------ Senior Vice President and Chief Financial Peter B. Officer McKee (Principal Financial Officer) * - ------------------------------ Corporate Vice President and Controller Richard C. (Principal Accounting Officer) Adloff * - ------------------------------ Joseph F. Director Damico * - ------------------------------ Silas S. Director Cathcart * - ------------------------------ David W. Director Grainger * - ------------------------------ Arthur F. Director Golden * - ------------------------------ Michael D. Director O'Halleran * - ------------------------------ Kenneth D. Director Bloem * - ------------------------------ Connie Curran, Ed. Director D. *By Power of Attorney /s/ LEONARD G. KUHR - ------------------------------ Leonard G. Kuhr ATTORNEY-IN-FACT II-5 EX-2.1 2 EXHIBIT 2.1 EXECUTION COPY AGREEMENT AND PLAN OF REORGANIZATION DATED AS OF SEPTEMBER 15, 1996 BY AND BETWEEN BAXTER INTERNATIONAL INC. AND ALLEGIANCE CORPORATION TABLE OF CONTENTS ----------------- Page ---- ARTICLE I. DEFINITIONS AND INTERPRETATIONS.................................. 2 Section 1.1 Definitions................................................. 2 Section 1.2 Rules of Construction.......................................12 ARTICLE II. THE SPIN-OFF....................................................13 Section 2.1 Issuance and Delivery of Allegiance Shares....................................................13 Section 2.2 Spin-Off of Allegiance Shares...............................13 Section 2.3 Treatment of Fractional Shares..............................13 Section 2.4 Baxter Board Action.........................................14 Section 2.5 Additional Approvals........................................14 ARTICLE III. TRANSFERS TO AHII..............................................14 Section 3.1 General.....................................................14 Section 3.2 Malaysian Glove Factory.....................................14 Section 3.3 Euromedical.................................................15 Section 3.4 France......................................................16 Section 3.5 Germany.....................................................16 Section 3.6 Malta.......................................................16 Section 3.7 Mexico......................................................17 Section 3.8 Canada......................................................18 Section 3.9 Restrictions on Intercompany Debt...........................19 Section 3.10 Transfer of Assets.........................................20 Section 3.11 Transfer of Liabilities....................................20 ARTICLE IV. TRANSFERS TO AHC................................................20 Section 4.1 Organization of AHC.........................................20 Section 4.2 Transferred Assets..........................................20 Section 4.3 Assumed Liabilities.........................................26 ARTICLE V. ORGANIZATION OF ALLEGIANCE CORPORATION...........................28 Section 5.1 Organization of Allegiance..................................28 Section 5.2 Transfer of Certain Subsidiaries............................28 Section 5.3 Transfer of Assets..........................................29 Section 5.4 Transfer of Liabilities.....................................30 ARTICLE VI. OTHER CLOSING MATTERS...........................................31 Section 6.1 Instruments of Conveyance...................................31 Section 6.2 No Representations or Warranties............................31 Section 6.3 Non-Assignable Contracts....................................32 Section 6.4 Further Assurances..........................................33 Section 6.5 Excluded Assets.............................................34 Section 6.6 Excluded Liabilities........................................35 Section 6.7 Release of Baxter...........................................35 Section 6.8 Nominee Shares..............................................35 Page ---- ARTICLE VII. CERTAIN COVENANTS..............................................35 Section 7.1 Conduct of Allegiance Business Pending the Spin-Off Date.................................35 Section 7.2 Registration and Listing....................................35 Section 7.3 Funds Distributed to Baxter.................................36 Section 7.4 Post-Spin-Off Tax-Related Restrictions..............................................36 Section 7.5 Insurance Policies and Claims Administration............................................37 Section 7.6 Intercompany Receivables and Payables and Cash Management..............................41 Section 7.7 Intercompany Debt True-Up...................................43 Section 7.8 Agreements Relating to Baxter and Allegiance................................................45 Section 7.9 Certain Releases............................................45 Section 7.10 Litigation.................................................45 Section 7.11 Liability for Previously Delivered Products.................................................46 Section 7.12 Allegiance Bank Accounts...................................48 Section 7.13 Unassigned Indemnifiable Contracts.........................48 Section 7.14 Ad Now Program.............................................48 Section 7.15 Products at Cost to Dade...................................48 Section 7.16 Informal, Nondocumented Real Estate Leases...................................................49 Section 7.17 Rexam Payment..............................................49 Section 7.18 Clintec Receivables........................................49 ARTICLE VIII. INTELLECTUAL PROPERTY.........................................50 Section 8.1 License of Allegiance Intellectual Property to Baxter........................................50 Section 8.2 License of Baxter Intellectual Property to Allegiance....................................53 Section 8.3 Use of Baxter Trade Names and Trademarks................................................55 ARTICLE IX. EMPLOYEES AND EMPLOYEE BENEFITS.................................56 Section 9.1 Allegiance Employee.........................................56 Section 9.2 Employment of Allegiance Employees..........................56 Section 9.3 Terminations/Layoff/Severance...............................57 Section 9.4 International Allegiance Employees..........................57 Section 9.5 Employment Solicitation.....................................58 Section 9.6 WARN Act....................................................58 Section 9.7 Leave of Absence Policies...................................58 Section 9.8 Withdrawal From Participation in Baxter Plans and Establishment of Allegiance Plans.......................................59 Section 9.9 Transfer of Savings Plan Account Balances..................................................59 Section 9.10 Entitlement to Distributions Under -ii- Page ---- Pension Plan..............................................60 Section 9.11 Welfare Benefits Provided Under Allegiance Plans.........................................60 Section 9.12 Stock Purchase Plan........................................61 Section 9.13 Workers' Compensation......................................61 Section 9.14 Vacation Pay Policy........................................62 Section 9.15 Non-Qualified Deferred Compensation Plans....................................................62 Section 9.16 Information to Be Provided to Baxter...................................................62 Section 9.17 Corporate Action; Delegation of Authority................................................62 Section 9.18 Split-Dollar Life Insurance................................63 ARTICLE X. ACCESS TO INFORMATION............................................63 Section 10.1 Access to Information......................................63 Section 10.2 Production of Witnesses....................................65 Section 10.3 Provision of Corporate Records.............................65 Section 10.4 Confidentiality............................................65 Section 10.5 Privileged Matters.........................................66 ARTICLE XI. CONDITIONS PRECEDENT TO SPIN-OFF................................67 Section 11.1 Tax Ruling.................................................67 Section 11.2 No Actions.................................................67 Section 11.3 NYSE Listing...............................................68 Section 11.4 Opinions of Financial Advisor..............................68 Section 11.5 Consents...................................................68 Section 11.6 Registration Statement.....................................68 Section 11.7 New Credit Facility........................................68 Section 11.8 Pre-Spin-Off Transactions..................................68 Section 11.9 Ancillary Agreements.......................................68 Section 11.10 Resignations..............................................68 Section 11.11 Board Approval............................................68 Section 11.12 Election of Allegiance Board..............................68 Section 11.13 Satisfaction of Conditions................................68 ARTICLE XII. EXPENSES; TAXES................................................69 Section 12.1 Allocation of Expenses.....................................69 Section 12.2 Taxes......................................................70 Section 12.3 Directors' and Officers' Insurance.........................70 ARTICLE XIII. SURVIVAL, INDEMNIFICATION,CLAIMS AND OTHER MATTERS............71 Section 13.1 Survival...................................................71 Section 13.2 Indemnification............................................71 Section 13.3 Procedure for Indemnification..............................74 Section 13.4 Direct Claims..............................................76 Section 13.5 Adjustment of Indemnifiable Losses.........................76 Section 13.6 Contribution...............................................78 -iii- Page ---- Section 13.7 No Third Party Beneficiaries...............................78 Section 13.8 Release of Pre-Divestiture Liabilities..............................................78 ARTICLE XIV. DISPUTE RESOLUTION.............................................79 Section 14.1 Escalation.................................................79 Section 14.2 Arbitration................................................80 Section 14.3 Injunctive Relief..........................................80 ARTICLE XV. MISCELLANEOUS PROVISIONS........................................80 Section 15.1 Entire Agreement...........................................80 Section 15.2 Choice of Law..............................................80 Section 15.3 Amendment; Waiver..........................................81 Section 15.4 Severability...............................................81 Section 15.5 Counterparts...............................................81 Section 15.6 Records Retention..........................................81 Section 15.7 Beneficiaries..............................................81 Section 15.8 Notices....................................................82 Section 15.9 Termination................................................82 Section 15.10 Performance...............................................82 List of Exhibits - ---------------- Exhibit A - The Transferred Business Exhibit B - The Transferred Services Exhibit C - Transferred Subsidiaries Exhibit D - Operating Agreements Exhibit E - Tax Sharing Agreement Exhibit F - June 30, 1996 Balance Sheet Exhibit G - Certificate of Incorporation of Allegiance Exhibit H - By-Laws of Allegiance Exhibit I - Allegiance Preferred Share Purchase Rights Plan Exhibit J - Allegiance Board of Directors -iv- AGREEMENT AND PLAN OF REORGANIZATION AGREEMENT AND PLAN OF REORGANIZATION (this "Agreement"), dated as of September 15, 1996, by and between Baxter International Inc., a Delaware corporation ("Baxter"), and Allegiance Corporation, a Delaware corporation ("Allegiance"), and, prior to the Spin-Off (as hereinafter defined), a wholly- owned Subsidiary (as hereinafter defined) of Baxter. W I T N E S S E T H - - - - - - - - - - WHEREAS, Baxter through its Subsidiaries is engaged, INTER ALIA, in the health care distribution, surgical and respiratory therapy products and health care cost management business (as more fully described in EXHIBIT A hereto, the "Transferred Business"); WHEREAS, the Board of Directors of Baxter has determined that it would be advisable and in the best interests of Baxter and its stockholders for Baxter (i) to transfer to Allegiance and/or one or more of its Subsidiaries the business, operations, assets and liabilities related to the Transferred Business, and (ii) to transfer to Allegiance or one or more of its Subsidiaries, the employees and certain liabilities related to the provision of the administrative services and functions set forth in EXHIBIT B hereto (the "Transferred Services") (the Transferred Business and the Transferred Services are hereinafter referred to together as the "Allegiance Business"); WHEREAS, Baxter has agreed to transfer and assign, or cause to be transferred and assigned, to Allegiance or one or more of its Subsidiaries (i) substantially all of the assets and properties of the Allegiance Business held by Baxter, Baxter Healthcare Corporation, a Delaware corporation ("BHC"), and certain other Subsidiaries of Baxter, and (ii) all of the issued and outstanding shares owned by Baxter and its Subsidiaries of certain of its Subsidiaries as set forth in EXHIBIT C hereto (the "Transferred Subsidiaries"), and Allegiance has agreed to assume, or cause to be assumed by one or more of its Subsidiaries, certain liabilities and obligations arising out of or relating to the Allegiance Business; WHEREAS, the Board of Directors of Baxter has determined that it would be advisable and in the best interests of Baxter and its stockholders for Baxter to distribute all of the outstanding shares of Allegiance common stock, par value $1.00 per share (together with the preferred share purchase rights associated therewith, the "Allegiance Common Stock"), on a pro rata basis to the holders of Baxter's common stock, par value $1.00 per share ("Baxter Common Stock"); and WHEREAS, on the Spin-Off Date (as hereinafter defined), Baxter will cause the Agent (as hereinafter defined) to distribute in the manner described herein to all holders of record of Baxter Common Stock as of the Record Date (as hereinafter defined), without any consideration being paid by such holders, outstanding shares of Allegiance Common Stock. NOW, THEREFORE, in consideration of the mutual undertakings contained herein, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, Baxter and Allegiance agree as follows: ARTICLE I. DEFINITIONS AND INTERPRETATIONS Section 1.1 DEFINITIONS. As used in this Agreement, the following terms shall have the meanings set forth below. "Actions" means any action, claim, suit, arbitration, inquiry, subpoena, discovery request, proceeding or investigation by or before any court or grand jury, any governmental or other regulatory or administrative entity, agency or commission or any arbitration tribunal. "Active Allegiance Employee" means any regular full-time or part-time employee of Baxter or one of its Subsidiaries who commences employment with Allegiance or one of its Subsidiaries on the Spin-Off Date. "Affiliate" shall mean any Person controlling, controlled by, or under direct or indirect common control with a party hereto. For the purpose of this definition, the term "control" means the power to direct the management of an entity, 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. After the Spin-Off Date, Allegiance and Baxter shall not be deemed to be under common control for purposes hereof due solely to the fact that Allegiance and Baxter have common shareholders. "Agent" means First Chicago Trust Company of New York, the distribution agent appointed by Baxter to distribute shares of Allegiance Common Stock pursuant to the Spin-Off. "AHC" has the meaning set forth in SECTION 4.1. "AHC Contracts" has the meaning set forth in SECTION 4.2(viii). "AHFI" has the meaning set forth in SECTION 3.3. - 2 - "AHII" has the meaning set forth in SECTION 3.1. "AHSB" has the meaning set forth in SECTION 3.2(i). "Allegiance Assigned Intellectual Property" has the meaning set forth in SECTION 5.3(i). "Allegiance Business" has the meaning set forth in the recitals of this Agreement. "Allegiance Canada" has the meaning set forth in SECTION 3.8(iv). "Allegiance Common Stock" has the meaning set forth in the recitals of this Agreement. "Allegiance Credit Facility" has the meaning set forth in SECTION 7.3. "Allegiance Distributable Share" means 0.20 Allegiance Shares. "Allegiance Employee" has the meaning set forth in SECTION 9.1. "Allegiance Foreign Entity" means any Subsidiary of Baxter that is located or incorporated in a jurisdiction outside of the United States and will, upon consummation of the transactions contemplated by this Agreement, become a Subsidiary of Allegiance. "Allegiance France" has the meaning set forth in SECTION 3.4(i). "Allegiance Germany" has the meaning set forth in SECTION 3.5(i). "Allegiance Indemnified Parties" has the meaning set forth in SECTION 13.2(a). "Allegiance Party" has the meaning set forth in SECTION 13.6. "Allegiance Products" means those products manufactured by Allegiance or its Subsidiaries (as they would exist immediately following the Spin-Off Date) (except for products manufactured for Baxter or its Subsidiaries by Allegiance or its Subsidiaries pursuant to the Manufacturing Contracts but including those products manufactured for Allegiance and its Subsidiaries by Baxter or its Subsidiaries pursuant to the Manufacturing Contracts). - 3 - "Allegiance Retirement Plan" means the defined contribution plan which shall be established by Allegiance after the Spin-Off Date for the benefit of certain eligible employees. "Allegiance Share" means one share of Allegiance Common Stock. "Allegiance Welfare Plans" means the welfare benefit plans established by Allegiance following the Spin-Off, which provide benefits that correspond to benefits provided under the Baxter Welfare Plans. "Assumed Actions" has the meaning set forth in SECTION 7.10(a). "Assumed BHC Liabilities" has the meaning set forth in SECTION 4.3. "Assumed Liabilities" means any liability or obligation assumed by Allegiance or its Subsidiaries as contemplated by ARTICLES III, IV or V hereof. "Balance Sheet" has the meaning set forth in SECTION 4.2(i). "Baxter Belgium" has the meaning set forth in SECTION 3.6. "Baxter Cafeteria Plans" means the Baxter Healthcare and Dependent Day Care Reimbursement Accounts. "Baxter Canada" has the meaning set forth in SECTION 3.8. "Baxter Common Stock" has the meaning set forth in the recitals of this Agreement. "Baxter Deutschland" has the meaning set forth in SECTION 3.5. "Baxter France" has the meaning set forth in SECTION 3.4. "Baxter Group" means Baxter and (a) any corporation which is a member of the same controlled group of corporations (within the meaning of Section 414(b) of the Code) as Baxter, (b) a trade or business (whether or not incorporated) under common control (within the meaning of Section 414(c) of the Code) with Baxter, (c) any organization (whether or not incorporated) which is a member of an affiliated service group (within the meaning of Section 414(m) of the Code) which includes Baxter, a corporation - 4 - described in clause (a) of this definition or a trade or business described in clause (b) of this definition, or (d) any other entity which is required to be aggregated with Baxter pursuant to regulations promulgated under Section 414(o) of the Code. "Baxter Indemnified Parties" has the meaning set forth in SECTION 13.2(b). "Baxter Marks" has the meaning set forth in SECTION 8.3(a). "Baxter Panama" has the meaning set forth in SECTION 3.2. "Baxter Party" has the meaning set forth in SECTION 13.6. "Baxter Pension Plan" means the Baxter International Inc. and Subsidiaries Pension Plan. "Baxter Plan" means any employee benefit plan or program maintained by Baxter. "Baxter Policy" and "Baxter Policies" have the meanings set forth in SECTION 7.5(a). "Baxter Products" means those products manufactured by Baxter or its Subsidiaries (as they would exist immediately following the Spin-Off Date) (except for products manufactured for Allegiance or its Subsidiaries by Baxter or its Subsidiaries pursuant to the Manufacturing Contracts but including those products manufactured for Baxter and its Subsidiaries by Allegiance or its Subsidiaries pursuant to the Manufacturing Contracts). "Baxter Retiree Welfare Plan" means the post-retirement medical portion of the Baxter International Inc. and Subsidiaries Medical Plan and the post-retirement life insurance portion of the Baxter Employee Group Term Life Insurance Plan. "Baxter Savings Plan" means the Baxter International Inc. and Subsidiaries Incentive Investment Plan. "Baxter Welfare Plans" means the Baxter Medical Plan, the Baxter Long- Term Disability Insurance Plan, the Baxter Personal Accident Insurance Plan, the Baxter Business Travel Accident Insurance Plan, the Group Universal Life Insurance Plan and the Wellness Reimbursement Account. "BHC" has the meaning set forth in the recitals of this Agreement. - 5 - "Biologics" has the meaning set forth in SECTION 8.3(a)(iii). "Board of Directors" means the board of directors of the referenced corporation or any duly authorized committee thereof. "BPS" has the meaning set forth in SECTION 3.6(iv). "BWT" has the meaning set forth in SECTION 3.1. "BWTSA" has the meaning set forth in SECTION 3.4(ii). "CERCLA" means the Comprehensive Environmental Response, Compensation and Liability Act, as amended. "Chateaubriant Plant" has the meaning set forth in SECTION 3.4. "Cirpro" has the meaning set forth in SECTION 3.7(ii). "Claims or Losses" means all losses, liabilities, claims, demands, settlements, penalties, fines, damages, costs and expenses of whatever kind or nature, known or unknown, contingent or otherwise (including reasonable attorneys' fees and expenses, reasonable consultants' fees and expenses, court costs, any and all expenses reasonably incurred in investigating, preparing for or responding to or defending against any litigation or claim), commenced, made or threatened, and any environmental clean-up or remediation claims and expenses, including any requirements or obligations under CERCLA and any other federal, state or local laws relating to cleanup of hazardous materials. "COBRA" means the Consolidated Omnibus Budget Reconciliation Act of 1985, as amended, and any applicable state law requiring continuation coverage under a medical plan. "Code" means the Internal Revenue Code of 1986, as amended, and except where the context otherwise requires, the regulations promulgated thereunder. "Commonly Used Business Information" has the meaning set forth in SECTION 4.2(vii)(B). "Contracts" has the meaning set forth in SECTION 4.2(viii). "Convertors" has the meaning set forth in SECTION 3.7(ii). - 6 - "Conveyancing Instruments" has the meaning set forth in SECTION 6.1. "Cost Management Business" has the meaning set forth in Exhibit A. "CUBI" has the meaning set forth in SECTION 4.2(vii)(B). "Dade" has the meaning set forth in SECTION 7.14. "Dade Distribution Agreement" has the meaning set forth in SECTION 7.14. "Disabled Employee" means each employee who would have been a Domestic Allegiance Employee had he or she not been on a long-term disability leave of absence on the Spin-Off Date. "Distribution Business" has the meaning set forth in EXHIBIT A. "Divested Businesses" means the businesses previously divested by Baxter or any of its Subsidiaries pursuant to any of the agreements listed on SCHEDULE 4.2(viii)(A) as "Divestitures." "ERISA" means the Employee Retirement Income Security Act of 1974, as amended. "Euromedical" has the meaning set forth in SECTION 3.3. "Euromedical Loan" has the meaning set forth in SECTION 3.2(iii). "Eurovac" has the meaning set forth in SECTION 3.6. "Exchange Act" has the meaning set forth in SECTION 7.2(i). "Excluded Assets" has the meaning set forth in SECTION 6.5. "Excluded Liabilities" has the meaning set forth in SECTION 6.6. "First Party" has the meaning set forth in SECTION 10.4(b). "Foreign Exchange Rate" means, with respect to any currency other than United States dollars, as of any date of determination, the average of the opening bid and asked rates on such date at which such currency may be exchanged for United States dollars as quoted by Bank of America, N.A. - 7 - "German Business" has the meaning set forth in SECTION 3.5. "Inactive Employee" means any employee of Baxter or one of its Subsidiaries who immediately prior to the Spin-Off Date is on an approved medical leave of absence or short-term disability leave or is absent from active employment due to occupational illness or injury covered by workers' compensation, but excluding any employee who is classified by Baxter or any of its Subsidiaries as totally and permanently disabled on the Spin-Off Date who is not on workers' compensation. "Indemnified Party" means any party who is entitled to receive payment from an Indemnifying Party pursuant to ARTICLE XIII hereof. "Indemnifying Party" means any party who is required to pay any other person pursuant to ARTICLE XIII hereof. "Indemnity Payment" means the amount an Indemnifying Party is required to pay an Indemnified Party pursuant to ARTICLE XIII hereof. "Information" has the meaning set forth in SECTION 10.1(a). "Information Statement" has the meaning set forth in SECTION 7.2(i). "Insurance Amount" has the meaning set forth in SECTION 12.3. "Insurance Charges" has the meaning set forth in SECTION 7.5(d)(i). "Insured Claims" means those liabilities that, individually or in the aggregate, are covered within the terms and conditions of any of the Policies, whether or not subject to deductibles, co-insurance, uncollectability, premium adjustments (including reserves), retrospectively-rated premium adjustments or retentions, but only to the extent that such liabilities are within applicable Policy limits, including aggregates and deductibles. "Intellectual Property Rights" means any and all United States and foreign copyrights, copyright applications and registrations; nonpatented inventions; discoveries; processes; formulations; trade secrets; know-how; technical data; all patent - 8 - applications and issued patents, including continuations, continuations-in-part, divisionals, reissues, and extensions thereof; and trade names, trademarks, service marks and service names, whether or not registered. "Intercompany Receivables or Payables" means any intercompany receivables or payables (other than Loans) arising in the ordinary course of business. "IRS" means the Internal Revenue Service. "Kit" means an aggregation by Allegiance or Baxter of Baxter, Allegiance and/or third-party products packaged together or repackaged for specific uses and procedures. "Lag Adjustment" has the meaning set forth in SECTION 7.7(a). "Liability" has the meaning set forth in SECTION 13.8. "Licensed Allegiance Intellectual Property" has the meaning set forth in SECTION 8.1(a). "Loan" means any intercompany indebtedness for borrowed money. "Malaysian Glove Branch" has the meaning set forth in SECTION 3.2. "Managed Capital" has the meaning set forth in SECTION 7.7(b). "Manufacturing Contracts" means the agreements set forth in EXHIBIT D under the caption "Contract Manufacturing Agreements." "Mexicali" has the meaning set forth in SECTION 3.7(i). "Mexican BHC Subsidiaries" has the meaning set forth in SECTION 3.7(ii). "MTR" has the meaning set forth in SECTION 10.1(b). "New Sub" has the meaning set forth in SECTION 3.8(i). "NYSE" means the New York Stock Exchange, Inc. "Operating Agreements" means the agreements listed on EXHIBIT D hereto regarding the ongoing business and service relationships between Baxter and Allegiance and their respective Affiliates following the Spin-Off. - 9 - "Party" means Baxter or Allegiance. "Person" shall mean an individual, corporation, partnership, limited liability company, unincorporated syndicate, unincorporated organization, trust, trustee, executor, administrator or other legal representative, governmental authority or agency, or any group of Persons acting in concert. "Policies" has the meaning set forth in SECTION 7.5. "Pre Spin-Off Claims Administration" has the meaning set forth in SECTION 7.5(e). "Privilege" and "Privileges" have the meanings set forth in SECTION 10.5(a). "Privileged Information" has the meaning set forth in SECTION 10.5(a). "Products" has the meaning set forth in SECTION 7.11. "Quiroproductos" has the meaning set forth in SECTION 3.7(ii). "Real Estate Leases" has the meaning set forth in SECTION 4.2(v). "Receivables" has the meaning set forth in SECTION 4.2(ii)(A). "Record Date" means the date determined by the Board of Directors of Baxter as the record date for the Spin-Off. "Registration Statement" has the meaning set forth in SECTION 7.2(i). "Repair or Replacement Period" has the meaning set forth in SECTION 7.11(i). "Retained Business" means those portions of the business of Baxter and its current Subsidiaries which are not part of the Allegiance Business. "Rexam" has the meaning set forth in SECTION 7.17. "SEC" means the United States Securities and Exchange Commission. "Shared Agreements" has the meaning set forth in SECTION 7.8(a). - 10 - "Spin-Off" means the distribution of Allegiance Common Stock as a dividend to holders of Baxter Common Stock on the basis provided for in ARTICLE II hereof, which shall be effective as of the Spin-Off Date. "Spin-Off Date" means the date determined by the Board of Directors of Baxter as the date on which the Allegiance Shares are payable to holders of Baxter Common Stock as of the Record Date. "Subsidiary" means, when used with reference to any entity, any corporation a majority of the outstanding voting securities of which are owned directly or indirectly by such entity. "Surgical Business" has the meaning set forth in EXHIBIT A. "Tax Sharing Agreement" means the Tax Sharing Agreement in substantially the form attached as EXHIBIT E hereto. "Taxes" means any federal, state, local or foreign net income, gross income, gross receipts, windfall profit, severance, property, production, sales, use, license, excise, franchise, employment, payroll, withholding, alternative or add-on minimum, ad valorem, value-added, transfer, stamp, or environmental tax, or any other tax, custom, duty, governmental fee or other like assessment or charge of any kind. "Transferred Accounts" has the meaning set forth in SECTION 9.9. "Transferred Actions" has the meaning set forth in SECTION 7.10(b). "Transferred Assets" means any of the assets transferred to Allegiance, AHC, AHII or any of their Subsidiaries as contemplated by ARTICLES III, IV and V hereof. "Transferred BHC Assets" has the meaning set forth in SECTION 4.2. "Transferred Business" has the meaning set forth in the recitals of this Agreement and in EXHIBIT A. "Transferred Services" has the meaning set forth in the recitals of this Agreement. "Transferred Subsidiaries" has the meaning set forth in the recitals of this Agreement. - 11 - "Unassigned Indemnifiable Contracts" has the meaning set forth in SECTION 7.13(a). "Unbudgeted Transfer Adjustment" has the meaning set forth in SECTION 7.7(a). "WARN Act" has the meaning set forth in SECTION 9.6. Section 1.2 RULES OF CONSTRUCTION. (a) In This Agreement, unless a clear contrary intention appears: (i) the singular number includes the plural number and vice versa; (ii) reference to any Person includes such Person's successors and assigns but, if applicable, only if such successors and assigns are permitted by This Agreement; (iii) reference to any gender includes the other gender; (iv) reference to any Section or Exhibit or Schedule means such Section of this Agreement or such Exhibit or Schedule to this Agreement, as the case may be, and references in any Section or definition to any clause means such clause of such Section or definition; (v) "herein", "hereunder", "hereof", "hereto", and words of similar import shall be deemed references to this Agreement as a whole and not to any particular Section or other provision hereof or thereof; (vi) "including" (and with correlative meaning "include") means including without limiting the generality of any description preceding such term; (vii) relative to the determination of any period of time, "from" means "from and including", "to" means "to but excluding" and "through" means "through and including"; (viii) accounting terms used herein shall have the meanings historically attributed to them by Baxter and its Subsidiaries prior to the Spin-Off; (ix) in the event of any conflict between the provisions of the body of this Agreement and the Exhibits (other than Exhibit E) or Schedules hereto, the provisions of the body of this Agreement shall control; and - 12 - (x) the headings contained in this Agreement have been inserted for convenience of reference only and are not to be used in construing this Agreement. (b) This Agreement was negotiated by the Parties with the benefit of legal representation, and any rule of construction or interpretation otherwise requiring this Agreement to be construed or interpreted against either Party shall not apply to any construction or interpretation hereof. ARTICLE II. THE SPIN-OFF On the Spin-Off Date, the Allegiance Shares shall be distributed as follows: Section 2.1 ISSUANCE AND DELIVERY OF ALLEGIANCE SHARES. Allegiance shall issue to Baxter the number of Allegiance Shares required so that the total number of Allegiance Shares held by Baxter on the Spin-Off Date is equal to the total number of Allegiance Shares distributable pursuant to SECTION 2.2. Baxter shall deliver to the Agent one or more stock certificates representing all of the Allegiance Shares then issued and outstanding, together with one or more stock power(s) duly endorsed in blank. In its capacity as Allegiance's transfer agent, the Agent will transfer and distribute such shares in the manner described in SECTION 2.2 below. Section 2.2 SPIN-OFF OF ALLEGIANCE SHARES. Allegiance shall provide to the Agent sufficient certificates in such denominations as the Agent may request in order to effect the Spin-Off. Baxter shall instruct the Agent (i) to distribute to all holders of record of Baxter Common Stock as of the Record Date the Allegiance Distributable Share for each share of Baxter Common Stock outstanding and held of record by such holder as of the Record Date, and (ii) to deliver to Allegiance, as a contribution to Allegiance, all of the remaining Allegiance Shares, if any, then held by the Agent. Any such returned Allegiance Shares shall be canceled immediately by Allegiance, and the Board of Directors of Allegiance shall take appropriate action so that such returned shares shall not constitute treasury shares. All of the distributed Allegiance Shares shall be validly issued, fully paid and nonassessable and shall be free of any preemptive rights. Section 2.3 TREATMENT OF FRACTIONAL SHARES. No certificates or scrip representing fractional Allegiance Shares shall be issued in the Spin-Off. In lieu of receiving fractional shares, each holder of Baxter Common Stock who would otherwise be entitled to receive a fractional Allegiance Share pursuant to the Spin-Off will receive cash for such fractional share. Baxter and - 13 - Allegiance shall instruct the Agent to determine the number of whole Allegiance Shares and fractional Allegiance Shares allocable to each holder of record of Baxter Common Stock as of the Record Date, to aggregate all such fractional shares into whole shares and sell the whole shares obtained thereby in the open market at the then prevailing prices on behalf of holders who would otherwise be entitled to receive fractional share interests, and the Agent shall distribute to each such holder such holder's ratable share of the total proceeds of such sale after making appropriate deductions of any amounts required for Federal tax withholding purposes and after deducting any taxes attributable to the sale of such fractional share interests. Baxter shall bear the costs of commissions incurred in connection with such sales. Section 2.4 BAXTER BOARD ACTION. The Board of Directors of Baxter shall, in its discretion, determine the Record Date and the Spin-Off Date and all appropriate procedures in connection with the Spin-Off. The Board of Directors of Baxter shall also have the right to adjust at any time prior to the Spin-Off Date the Allegiance Distributable Share. The consummation of the transactions provided for in this ARTICLE II shall only be effected after the Spin-Off has been declared by the Board of Directors of Baxter and after all of the conditions set forth in ARTICLE XI hereof shall have been satisfied or waived by Baxter. Section 2.5 ADDITIONAL APPROVALS. Baxter shall cooperate with Allegiance in effecting, and if so requested by Allegiance, Baxter shall, as the sole stockholder of Allegiance prior to the Spin-Off, ratify any actions which are reasonably necessary or desirable to be taken by Allegiance to effectuate, the transactions referenced in or contemplated by this Agreement in a manner consistent with the terms of this Agreement. ARTICLE III. TRANSFERS TO AHII Section 3.1 GENERAL. Prior to or promptly following the execution of this Agreement, Baxter shall cause to be incorporated, under the General Corporation Law of Delaware, Allegiance Healthcare International Inc. ("AHII") as a wholly owned Subsidiary of Baxter World Trade Corporation, a Delaware corporation ("BWT") and a wholly-owned Subsidiary of Baxter. AHII shall be qualified as a foreign corporation under the Business Corporation Act of Illinois. Subject to the terms and conditions of this Agreement, Baxter and Allegiance hereby agree to take or cause to be taken any and all actions necessary to effect the transactions described in this ARTICLE III, with each transaction occurring at the approximate times and in the order described in SCHEDULE 3.1. - 14 - Section 3.2 MALAYSIAN GLOVE FACTORY. Baxter and Allegiance hereby agree to take any and all actions necessary to effect the transfer to AHII of all of the right, title and interest of Panama Healthcare S.A. (Panama), a Panamanian corporation and a wholly-owned Subsidiary of BWT ("Baxter Panama"), in the Baxter Panama branch in Malaysia that produces gloves and all of the assets and liabilities related thereto (the "Malaysian Glove Branch"), as follows: (i) Allegiance Healthcare Sdn. Bhd. ("AHSB") shall be incorporated as a Subsidiary of Baxter Panama; (ii) Baxter Panama shall declare a U.S.$100,000,000 dividend, U.S.$50,000,000 of which shall be payable on the Spin-Off Date and the remainder of which shall be payable to BWT on or before January 31, 1997; (iii) AHSB shall borrow 10 million Malaysian ringgits (the "Euromedical Loan") from Euromedical Industries Senderihan Berhad, a Malaysia corporation ("Euromedical"); (iv) Baxter Panama shall transfer to AHSB all of its right, title and interest in and to the Malaysian Glove Branch in return for AHSB stock and the agreement by AHSB to pay to Baxter Panama on the Spin-Off Date U.S.$90,000,000; (v) AHII shall borrow U.S.$1,000 from BWT; (vi) Baxter Panama shall transfer to BWT all of its right, title and interest in and to the capital stock of AHSB; (vii) BWT shall transfer to AHII all of its right, title and interest in and to the capital stock of AHSB in exchange for 84 shares of AHII voting common stock and 84 shares of AHII non-voting preferred stock and U.S.$1,000 in cash; and (viii) Contemporaneously with or immediately before the Spin-Off (1) AHII shall repay U.S.$1,000 to BWT, and (2) AHSB shall borrow from Allegiance U.S.$90,000,000 and use the proceeds of such indebtedness towards the repayment of all debt owed to Baxter Panama. Section 3.3 EUROMEDICAL. Baxter and Allegiance hereby agree to take any and all actions necessary to effect the transfer to AHII of all the right, title and interest in - 15 - Euromedical Industries Senderihan Berhad, a Malaysian corporation ("Euromedical"), held by AHFI/Netherlands B.V., a Dutch corporation and a wholly-owned Subsidiary of BWT ("AHFI"), as follows: (i) AHFI shall be liquidated into BWT; (ii) Baxter World Trade, S.A., a Belgium corporation ("BWTSA"), shall pay 10,123,410.96 ringgits to Euromedical in satisfaction of existing intercompany debt; (iii) BWT shall transfer to AHII all of BWT's right, title and interest in and to the capital stock of Euromedical in exchange for four shares of AHII voting common stock and four shares of AHII nonvoting preferred stock; and (iv) Euromedical makes the Euromedical Loan. Section 3.4 FRANCE. Baxter and Allegiance hereby agree to take any and all actions necessary to effect the transfer to AHII of all of the right, title and interest of Baxter S.A. (France) ("Baxter France") in the Chateaubriant manufacturing facility and all of the assets and liabilities related thereto (the "Chateaubriant Plant") as follows: (i) AHII shall form Allegiance Sante S.A. ("Allegiance France") as a French corporation and a wholly-owned Subsidiary of AHII; (ii) BWT shall contribute U.S.$3,912,828.13 to AHII as equity; (iii) AHII shall contribute 19,750,000 FF to Allegiance France as equity; and (iv) Allegiance France shall pay 17,710,000 FF to Baxter France to purchase the Chateaubriant Plant. Section 3.5 GERMANY. Baxter and Allegiance hereby agree to take any and all actions necessary to effect the transfer to AHII of all of the right, title and interest of Baxter Deutschland GmbH ("Baxter Deutschland") in certain German assets and liabilities related to the Allegiance Business (the "German Business") as follows: (i) AHII shall incorporate Allegiance Healthcare Deutschland GmbH ("Allegiance Germany") with 56,000 DM as equity; - 16 - (ii) BWT shall contribute U.S.$83,919.73 to AHII as equity; (iii) AHII shall contribute 123,790 DM to Allegiance Germany as equity; and (iv) Allegiance Germany shall acquire from Baxter Deutschland the German Business and 100,000 DM in cash. Section 3.6 MALTA. Baxter and Allegiance hereby agree to take any and all actions necessary to effect the transfer to AHII of all of the right, title and interest in Eurovac Ltd., a Malta corporation ("Eurovac") held by Baxter S.A., a Belgium corporation ("Baxter Belgium"), as follows: (i) BWT shall loan U.S.$3,691,258.76 to AHII, which shall be due on the Spin-Off Date; (ii) AHII shall loan 17,147,331.67 FF to Eurovac; (iii) Eurovac shall pay 17,147,331.67 FF to Baxter Limited, a Malta corporation, in satisfaction of an existing loan; (iv) Baxter Belgium shall distribute as a dividend all of the capital stock of Eurovac to its two stockholders (BWT and Baxter Pharmacy Services, a Delaware corporation and a wholly owned Subsidiary of BWT ("BPS")); (v) BPS shall distribute as a dividend to BWT all of the capital stock of Eurovac held by it; (vi) BWT shall transfer to AHII all of its right, title and interest in and to the capital stock of Eurovac in exchange for one share of AHII voting common stock and one share of AHII non-voting preferred stock and U.S.$1,000 in cash; and (vii) AHII shall repay U.S.$3,691,258.76, plus accrued interest of U.S.$17,225, to Baxter. Section 3.7 MEXICO. Baxter and Allegiance hereby agree to take any and all actions necessary to effect the transfer to AHII of all of the right, title and interest in certain Mexican corporations held by BHC and BWT as follows: (i) BWT shall transfer all of its right, title and interest in the capital stock in Productos Urologos de Mexico S.A. de C.V., a Mexico corporation and a - 17 - wholly-owned Subsidiary of BWT ("Mexicali"), to AHII in exchange for four shares of AHII voting common stock, four shares of AHII non-voting preferred stock and $1,000 in cash (and for Mexican tax purposes the value of the stock of Mexicali shall be considered equal to its Mexican tax basis); (ii) BHC shall distribute all of its rights, title and interest in the capital stock in Cirpro de Delicias S.A. de C.V., a Mexico corporation and a wholly owned Subsidiary of BHC ("Cirpro"), Quiroproductos de Cuauhtemoc, S.A. de C.V., a Mexico corporation and a wholly owned Subsidiary of BHC ("Quiroproductos"), Convertors de Mexico S.A. de C.V., a Mexico corporation and a wholly owned Subsidiary of BHC ("Convertors"), and Cirmex de Chihuahua S.A. de C.V., a Mexico corporation and a wholly owned Subsidiary of BHC (together with Cirpro, Quiroproductos and Convertors, the "Mexican BHC Subsidiaries"), to Baxter (and for Mexican tax purposes the value of the stock of the Mexican BHC Subsidiaries shall be considered equal to their Mexican tax bases); (iii) Baxter shall transfer all of its right, title and interest in the capital stock of the Mexican BHC Subsidiaries to AHII in exchange for four shares of AHII voting common stock, four shares of AHII non-voting preferred stock and U.S.$4,000 in cash (and for Mexican tax purposes the value of the stock of the Mexican BHC Subsidiaries shall be considered equal to their Mexican tax bases); and (iv) The documentation with respect to the stock transfers contemplated by this SECTION 3.7 provide or will provide that requests to exempt such transfers from certain Mexican taxes are pending and that in the event that confirmation of such exemption is not received that such initial transfer will be deemed null and void. In such event, such transfers will be redocumented in the most appropriate manner to accomplish the purposes of this SECTION 3.7 and Baxter and Allegiance shall take or cause to be taken any and all actions necessary to provide to Allegiance all of the benefits of beneficial ownership of the stock referred to in this SECTION 3.7 from the intended date of transfer through the date upon which such transfer is finally consummated. Section 3.8 CANADA. Baxter and Allegiance hereby agree to take any and all actions necessary to effect the transfer to AHII of all of the right, title and interest in the Allegiance Business held by Baxter Corporation, a Canada - 18 - corporation and a wholly owned Subsidiary of BWT ("Baxter Canada"), as follows: (i) Baxter Canada shall form Allegiance Healthcare Canada Inc. ("New Sub") under the laws of Canada and shall contribute to it all of the right, title and interest of Baxter Canada in the Allegiance Business plus Can $38,000,000 of intercompany indebtedness owed by Baxter Canada to BWTSA in exchange for 1,000 Common Shares of New Sub and the assumption of certain liabilities; (ii) Baxter Canada shall adopt a new charter pursuant to which Baxter Canada will exchange all of its outstanding capital stock held by BWT for 1,000 Class A Shares and 10,000 Class B Shares; (iii) BWT shall transfer to AHII all of BWT's holdings of Class B Shares in exchange for four shares of AHII voting common stock and four shares of AHII non-voting preferred stock; (iv) AHII shall form 3289559 Canada Inc. under the laws of Canada ("Allegiance Canada") and shall transfer to Allegiance Canada all of the Class B Shares in exchange for 1,000 shares of Allegiance Canada common stock; (v) Baxter Canada shall transfer to Allegiance Canada all of the outstanding capital stock of New Sub in exchange for 10,000 Preference Shares of Allegiance Canada; (vi) Allegiance Canada shall redeem all of its outstanding Preference Shares in exchange for its promissory note in the principal amount of Can$19,000,000; (vii) Baxter Canada shall redeem all of its outstanding Class B Shares from Allegiance Canada in exchange for its promissory note in the principal amount of Can$19,000,000; (viii) Baxter Canada and Allegiance Canada shall exchange each other's promissory notes, and such promissory notes shall be canceled; (ix) New Sub shall amalgamate with Allegiance Canada; - 19 - (x) AHII shall borrow the U.S. dollar equivalent of Can$38,000,000 from Baxter; (xi) Allegiance Canada shall borrow Can$38,000,000 from AHII and use the proceeds of such indebtedness to repay the intercompany indebtedness of New Sub to BWTSA assumed by Allegiance Canada pursuant to the amalgamation; and (xii) AHII shall repay to Baxter the U.S. dollar equivalent of Can$38,000,000. Section 3.9 RESTRICTIONS ON INTERCOMPANY DEBT. Neither Baxter nor any Affiliate of Baxter shall make any Loan, other than in the ordinary course of business, to any Allegiance Foreign Entity from August 26, 1996 through the Spin-Off Date, except as specifically contemplated by this Agreement. Section 3.10 TRANSFER OF ASSETS. Subject to the terms and conditions of this Agreement, Baxter hereby agrees to convey, assign, transfer, contribute and set over, or cause to be conveyed, assigned, transferred, contributed and set over, to AHII on or prior to the Spin-Off Date, all of BWT's right, title and interest in and to all assets, tangible or intangible, including all goodwill, which are exclusive to the operations of the Allegiance Business. Section 3.11 TRANSFER OF LIABILITIES. Subject to the terms and conditions of this Agreement, Allegiance shall cause AHII to assume, effective as of the Spin-Off Date, and pay, comply with and discharge all contractual and other obligations of BWT arising out of or relating to the Allegiance Business or any Divested Business and/or any past or present facilities used primarily in connection with the Allegiance Business or any Divested Business, whether accrued, absolute, contingent or otherwise, and whether due or to become due, whether existing on the date hereof or arising at any time or from time to time after the date hereof, and whether based on circumstances, events or actions arising heretofore or hereafter, whether or not such obligations shall have been disclosed herein, and whether or not reflected on the books and records or Balance Sheet of Allegiance. ARTICLE IV. TRANSFERS TO AHC Section 4.1 ORGANIZATION OF AHC. Prior to or promptly following the execution of this Agreement, Baxter shall cause to be incorporated, under the General Corporation Law of Delaware, Allegiance Healthcare Corporation ("AHC") as a wholly owned Subsidiary of BHC. AHC shall be qualified as a foreign - 20 - corporation under the corporation laws of each state where the ownership of its assets or conduct of its business makes such qualification necessary. Section 4.2 TRANSFERRED ASSETS. Subject to the terms and conditions of this Agreement, Baxter shall cause to be conveyed, assigned, transferred, contributed and set over to AHC on or prior to the Spin-Off Date, and Allegiance shall cause AHC to accept and receive on or prior to the Spin-Off Date all right, title and interest (except as noted in SECTION 4.2(vii)(B) below) of BHC in and to the tangible and intangible assets, properties, rights and interests of the Allegiance Business (all of such assets being hereinafter referred to as the "Transferred BHC Assets"), including the following: (i) BALANCE SHEET ASSETS. All assets reflected or disclosed on the unaudited balance sheet of the Allegiance Business as of June 30, 1996 attached as EXHIBIT F hereto, (the "Balance Sheet"), including all machinery, equipment, furniture and other tangible personal property, whether owned or leased, used primarily in the operation of the Allegiance Business, subject to acquisitions, dispositions and adjustments in the ordinary course of the Allegiance Business, consistent with past practice, after such date; (ii) RECEIVABLES. (A) All accounts receivable, notes receivable, lease receivables, prepayments (other than prepaid insurance), advances and other receivables arising out of or produced by the Allegiance Business and owing by any persons (the "Receivables"); (B) all cash payments received after the Spin-Off Date on account of the Receivables; (C) all manufacturers' warranties or guarantees related to the Transferred BHC Assets or related to any of the Assumed BHC Liabilities; and (D) any and all manufacturers' or third party service replacement programs relating to the Transferred BHC Assets; - 21 - (iii) INVENTORIES. (A) All work-in-process, finished goods and spare parts inventory of Allegiance Products, other than (x) Allegiance Products transferred to BWT or one of its Subsidiaries for distribution outside the United States and (y) Allegiance Products manufactured by Baxter or one of its Subsidiaries pursuant to the Manufacturing Contracts and with respect to which title has not yet passed to Allegiance pursuant to the terms of the Manufacturing Contracts; (B) all raw materials inventory related to Allegiance Products other than Allegiance Products manufactured by Baxter or one of its Subsidiaries pursuant to the Manufacturing Contracts; and (C) all supplies, packaging and other inventories related to the Allegiance Business but excluding any such items in the possession of Baxter or its Subsidiaries that relate to Allegiance Products manufactured by Baxter or one of its Subsidiaries pursuant to the Manufacturing Contracts. (iv) OWNED REAL PROPERTY. Those certain parcels of land set forth on SCHEDULE 4.2(iv) hereto, together with any and all buildings, plants and other structures and improvements thereon, any and all rights and privileges pertaining thereto or to any of such buildings, plants or other structures or improvements, including, without limitation, ownership interests, easements, permits, licenses, rights of way, leases, purchase and option agreements with respect to real property, and, to the extent constituting real property, any and all fixtures, machinery, equipment and other property attached thereto or located thereon (other than equipment and furniture located in property to be retained by Baxter or its Subsidiaries hereunder) and all other rights and interests of any nature in and to any other real estate of the Allegiance Business; (v) REAL PROPERTY LEASES. Those certain real estate leases set forth on SCHEDULE 4.2(v) hereto (the "Real Estate Leases") and any and all improvements, fixtures, machinery, equipment and other property located on the premises demised under such Real Estate Leases (other than equipment and furniture located in property to be retained by Baxter or its Subsidiaries hereunder); (vi) VEHICLES. All vehicles used primarily in connection with the Allegiance Business, including those set forth on SCHEDULE 4.2(vi) hereto, whether owned or leased; - 22 - (vii) TRADE SECRETS AND KNOW-HOW. (A) All business and technical information, nonpatented inventions, copyrights, discoveries, processes, formulations, trade secrets, know-how and technical data to the extent used exclusively in connection with the Allegiance Business including those set forth on SCHEDULE 4.2(vii) hereto and the trade secrets and technical documentation listed in SCHEDULE 8.1(a), and all rights which are associated with the foregoing, including, without limitation: (1) the right to sue, recover and retain such recoveries for infringement of the foregoing prior to the Spin-Off Date; (2) the right to continue in the name of Baxter and its Subsidiaries any pending actions relating to the foregoing, and to recover and retain any damages therefrom, provided, however, that to the extent that such recoveries relate to infringements of both Baxter Products and Allegiance Products, such recoveries shall be apportioned between Baxter and Allegiance on a pro-rata basis based on the relative damages suffered by each, after reimbursement of each Parties' costs and expenses incurred in obtaining such recoveries; (3) the assignment of all business and technical information, nonpatented inventions, discoveries, processes, formulations, trade secrets, know-how and technical data made or conceived by employees, consultants or contractors of Baxter or its Subsidiaries as to which BHC or its Subsidiaries have rights under any agreement or otherwise relating to the foregoing; (4) the assignment of all business and technical information, nonpatented inventions, discoveries, processes, formulations, trade secrets, know-how and technical data made or conceived by third parties as to which BHC or its Subsidiaries have rights pursuant to executory agreements with said third parties relating to the foregoing; and (5) all permits, grants, contracts, agreements and licenses running to or from BHC or its Subsidiaries relating to the foregoing. As of the Spin-Off Date, and except as permitted pursuant to the terms and conditions of SECTION 8.1 herein, Baxter and its Subsidiaries shall cease all use of the foregoing, and Baxter agrees to terminate any license granted to its Subsidiaries with respect to the foregoing. (B) An undivided joint ownership interest, without a right of accounting, in all business and technical information, nonpatented inventions, copyrights, discoveries, processes, formulations, trade secrets, know-how and technical data to the extent used in connection with the Allegiance Business, with the - 23 - exception of the Licensed Allegiance Intellectual Property and the Licensed Baxter Intellectual Property (hereinafter, the "Commonly Used Business Information" or "CUBI"), including those set forth on Schedule 4.2(vii) hereto (with the exception of those intellectual property rights subject to SECTION 4.2(vii)(A)), and all rights which are associated with the foregoing, including, without limitation: (1) the right to sue, recover and retain such recoveries for infringement in respect of the Allegiance Business of the foregoing prior to the Spin-Off Date; (2) the right to continue in the name of Baxter and its Subsidiaries any pending actions relating to the foregoing, and to recover and retain any damages therefrom in respect of the Allegiance Business, provided, however, that to the extent that such recoveries relate to infringements of both Baxter Products and Allegiance Products, such recoveries shall be apportioned between Baxter and Allegiance on a pro-rata basis based on the relative damages suffered by each, after reimbursement of each Parties' costs and expenses incurred in obtaining such recoveries; (3) the assignment of an undivided joint ownership interest, without a right of accounting, in inventions and all business and technical information, nonpatented inventions, discoveries, processes, formulations, trade secrets, know- how and technical data made or conceived by employees, consultants or contractors of Baxter or its Subsidiaries as to which BHC or its Subsidiaries have rights under any agreement or otherwise relating to the foregoing; (4) the assignment of an undivided joint ownership interest, without a right of accounting, in all business and technical information, nonpatented inventions, discoveries, processes, formulations, trade secrets, know-how and technical data made or conceived by third parties in connection with the Allegiance Business as to which BHC or its Subsidiaries have rights pursuant to executory agreements with said third parties; and (5) all permits, grants, contracts, agreements and licenses running to or from BHC or its Subsidiaries in connection with the Allegiance Business relating to the foregoing. Because the CUBI is also used by Baxter or its Subsidiaries in connection with businesses other than the Allegiance Business, Allegiance acknowledges that Baxter retains an undivided joint ownership interest, without a right of accounting, in the CUBI to the extent such CUBI relates to businesses other than the Allegiance Business. (viii) CONTRACTS. All of the following contracts, agreements, arrangements, leases (other than Real Estate - 24 - Leases), manufacturers' warranties, memoranda, understandings and offers open for acceptance of any nature, whether written or oral (the "Contracts") (such Contracts being referred to as the "AHC Contracts"): (A) all Contracts related to acquisitions or divestitures of assets or stock related primarily to the Allegiance Business, including Contracts related to the transactions set forth on SCHEDULE 4.2(viii)(A) hereto, except to the extent any such Contracts relate to the Retained Business and except to the extent indicated on SCHEDULE 4.2(viii)(A); (B) all Contracts with customers exclusive to the Allegiance Business and all Contracts with customers in the categories set forth on SCHEDULE 4.2(viii)(B) hereto; (C) all customer leases under which the underlying equipment is the primary marketing responsibility of Allegiance, including those equipment categories set forth on SCHEDULE 4.2(viii)(C) hereto; (D) all government Contracts exclusive to the Allegiance Business, including those set forth on SCHEDULE 4.2(viii)(D) hereto; (E) all supplier Contracts exclusive to the Allegiance Business relating either to raw materials or distributed products, including those in the categories set forth on SCHEDULE 4.2(viii)(E) hereto; (F) all joint development and confidentiality Contracts exclusive to the Allegiance Business, including those set forth on SCHEDULE 4.2(viii)(F) hereto; (G) all consulting Contracts exclusive to the Allegiance Business; (H) all dealer management Contracts and alternate distribution Contracts, including those set forth on SCHEDULE 4.2(viii)(H); (I) all manufacturing Contracts exclusive to the Allegiance Business; - 25 - (J) the telecommunications Contracts exclusive to the Allegiance Business, including those set forth on SCHEDULE 4.2(viii)(J) hereto; (K) the Shared Contracts set forth on SCHEDULE 7.8 hereto that are designated as being assigned to Allegiance; and (L) all other Contracts exclusive to the Allegiance Business. (ix) PERMITS AND LICENSES. All permits, approvals, licenses, franchises, authorizations or other rights granted by any federal, state, local or foreign governmental authority held or applied for by Baxter and its Subsidiaries and which are exclusively used in the Allegiance Business or which relate exclusively to the Transferred BHC Assets or any of the Transferred Subsidiaries, and all other consents, grants, and other rights that are used exclusively, for the lawful ownership of the Transferred BHC Assets or the operation of the Allegiance Business and that are legally transferable to AHC; (x) CLAIMS AND INDEMNITIES. All rights, claims, demands, causes of action, judgments, decrees and rights to indemnity or contribution, whether contractual or otherwise, in favor of BHC arising out of the Allegiance Business, including those set forth on SCHEDULE 4.2(x) hereto; (xi) SUBSIDIARIES, JOINT VENTURES AND MINORITY INTERESTS. All shares of capital stock or equity or debt or other interests owned by Baxter or its Subsidiaries in the Subsidiaries, joint ventures and minority investments set forth on SCHEDULE 4.2(xi) hereto; (xii) BOOKS AND RECORDS. All books and records (including all records pertaining to customers, suppliers and personnel) wherever located, that relate primarily to the operation of the Allegiance Business; (xiii) SUPPLIES. All office supplies, production supplies, spare parts, purchase orders, forms, labels, shipping material, art work, catalogues, sales brochures, operating manuals and advertising and promotional material and all other printed or written material that relate primarily to the operation of the Allegiance Business; (xiv) SOFTWARE. All (A) software installed on the mainframe computer located in Building G at McGaw Park, Illinois, except for the software set forth on SCHEDULE 4.2(xiv) hereto, (B) software based on AS400 and other mid- - 26 - range hardware included in the Transferred BHC Assets, (C) PC-based software located on hardware included in the Transferred BHC Assets, (D) Restrac software and the scanning equipment related thereto, (E) Compliance Systems Software, and (F) any Contracts related to the aforementioned software; and (xv) OTHER ASSETS. All other assets, tangible or intangible, including all goodwill, which are exclusive to the operations of, or otherwise relate exclusively to, the Allegiance Business. Section 4.3 ASSUMED LIABILITIES. Except as expressly limited in this ARTICLE IV, Allegiance shall cause AHC to assume, effective as of the Spin-Off Date, and pay, comply with and discharge all contractual and other obligations and liabilities of BHC arising out of or relating to the Allegiance Business or any Divested Business and/or any of the past or present facilities of BHC used primarily in connection with the Allegiance Business or any Divested Business, whether accrued, unrecorded, absolute, contingent or otherwise, and whether due or to become due, including: (i) All of the liabilities of BHC (excluding, except as provided in SECTION 4.3(ii), Loans owed to Baxter or any of its Subsidiaries) which are reflected, disclosed or reserved for on the Balance Sheet, as such liabilities may be increased or reduced in the operation of the Allegiance Business from the date of the Balance Sheet through the Spin-Off Date in the ordinary course of business consistent with past practice; (ii) The Loans of BHC held by BWT and the Loans of BHC held by Baxter set forth on SCHEDULE 4.3(ii) hereto; (iii) All liabilities and obligations of BHC in connection with workers compensation claims relating to facilities transferred to AHC; (iv) All liabilities and obligations of BHC under or related to the Real Estate Leases and the AHC Contracts, such assumption to occur as (i) assignee if such Real Estate Leases and AHC Contracts are assignable and are assigned or otherwise transferred to AHC, or (ii) subcontractor, sublessee or sublicensee as provided in SECTION 6.3 below if assignment of such Real Estate Leases and AHC Contracts and/or the proceeds thereof is prohibited by law, by the terms thereof or not permitted by the other contracting party; - 27 - (v) All warranty, performance and similar obligations entered into or made by BHC prior to the Spin-Off Date with respect to the products or services of the Allegiance Business; (vi) All liabilities and obligations of BHC related to any and all Actions asserting a violation of any law, rule or regulation related to or arising out of the operations of the Allegiance Business, whether before or after the Spin-Off Date and the liabilities relating to any Assumed Actions; (vii) All liabilities and obligations of BHC arising under (A) CERCLA and any other federal, state or local laws regarding the management, control and cleanup of hazardous materials (including off-site waste disposal liabilities) or (B) the Occupational Safety and Health Act or similar state laws or regulations, in either case relating to or arising out of the operations of the Allegiance Business, whether before or after the Spin-Off Date, including those set forth on SCHEDULE 4.3(vii) hereto; (viii) All liabilities and obligations of BHC under any mortgage interest subsidy program on behalf of any Allegiance Employee; (ix) All liabilities associated with the transfer of assets from the Baxter Savings Plan to the Allegiance Savings Plan; (x) The inventory payables from Baxter's U.S. Distribution business to Baxter's Cardiovascular Group and IV Systems division existing on the Spin-Off Date; and (xi) All other liabilities and obligations of BHC relating to the Allegiance Business or any Divested Business, whether existing on the date hereof or arising at any time or from time to time after the date hereof, and whether based on circumstances, events or actions arising heretofore or hereafter, whether or not such obligations shall have been disclosed herein, and whether or not reflected on the books and records or Balance Sheet. The liabilities and obligations described in this SECTION 4.3 are referred to in this Agreement collectively as the "Assumed BHC Liabilities." - 28 - ARTICLE V. ORGANIZATION OF ALLEGIANCE CORPORATION Section 5.1 ORGANIZATION OF ALLEGIANCE. Baxter and Allegiance shall take any and all action necessary so that, at the Spin-Off Date, the Certificate of Incorporation and By-laws of Allegiance shall be in the forms attached hereto as EXHIBITS G and H, respectively. Prior to the Spin-Off Date, the Board of Directors of Allegiance shall adopt a preferred share purchase rights plan in substantially the form attached hereto as EXHIBIT I. At the Spin-Off Date, the Allegiance Board of Directors shall consist of, and Baxter and Allegiance shall take all actions which may be required to elect or otherwise appoint as directors of Allegiance on or prior to the Spin-Off Date, the persons named on EXHIBIT J. Following the transfers of Subsidiaries contemplated by SECTION 5.2, Allegiance shall take appropriate action to be qualified as a foreign corporation under the Business Corporation Act of Illinois. Section 5.2 TRANSFER OF CERTAIN SUBSIDIARIES. Baxter and Allegiance hereby agree to take, or cause to be taken, any and all actions necessary to effect the following transactions, on or prior to the Spin-Off Date and at the approximate times described in SCHEDULE 3.1: (i) BWT shall distribute as a dividend to Baxter all of BWT's right, title and interest in and to the common stock of AHII; (ii) Baxter shall transfer to Allegiance all of Baxter's right, title and interest in and to the common stock of AHII; and (iii) BHC shall distribute as a dividend to Baxter all of BHC's right, title and interest in and to the common stock of AHC; and (iv) Baxter shall contribute to Allegiance all of Baxter's right, title and interest in and to the common stock of AHC. Section 5.3 TRANSFER OF ASSETS. Subject to the terms and conditions of this Agreement, Baxter hereby agrees to convey, assign, transfer, contribute and set over, or cause to be conveyed, assigned, transferred, contributed and set over, to Allegiance on or prior to the Spin-Off Date, all of Baxter's right, title and interest in and to the following assets: (i) INTELLECTUAL PROPERTY. (A) The foreign and domestic Intellectual Property Rights relating primarily to or used exclusively in the Allegiance Business including the Intellectual Property Rights set forth below: - 29 - (1) the patents and patent applications and invention records set -forth on SCHEDULE 5.3(i)(A)(1) hereto, including any continuations, continuations-in-part, divisions, renewals, reissues and extensions thereof; (2) the unregistered copyrights and copyright applications and registrations set forth on SCHEDULE 5.3(i)(A)(2) hereto; and (3) the trade names, trademarks, service marks and service names, whether or not registered, including those set forth on SCHEDULE 5.3(i)(A)(3) hereto and the goodwill associated with each of the foregoing. For completeness, the Parties recognize that certain items included on SCHEDULES 5.3(i)(A)(1)-(3) have been transferred to third parties pursuant to various divestitures. The inclusion of such items on such Schedules does not imply that Baxter has retained any interest therein and reference is made to SECTION 6.2 hereof. All of the rights described in SECTION 4.2(vii)(A) and this SECTION 5.3(i)(A) are referred to collectively as the "Allegiance Assigned Intellectual Property". (B) The Allegiance Assigned Intellectual Property shall include, without limitation: (1) the right to sue, recover and retain such recoveries for infringement of the Allegiance Assigned Intellectual Property prior to the Spin-Off Date; (2) the right to continue in the name of Baxter any pending actions relating to the Allegiance Assigned Intellectual Property, and to recover and retain any damages therefrom; PROVIDED, HOWEVER, that to the extent that such recoveries relate to infringements of both Baxter Products and Allegiance Products, such recoveries shall be apportioned between Baxter and Allegiance on a pro rata basis based on the relative damages suffered by each, after reimbursement of each Parties' costs and expenses incurred in obtaining such recoveries; (3) the assignment of inventions and other Intellectual Property Rights made or conceived by employees, consultants or contractors of Baxter or its Subsidiaries as to which Baxter or its Subsidiaries have rights under any agreement or otherwise relating to the Allegiance Assigned Intellectual Property; (4) the assignment of inventions and other Intellectual Property Rights made or conceived by third parties as to which Baxter or its Subsidiaries have rights - 30 - pursuant to executory agreements with said third parties relating to the Allegiance Assigned Intellectual Property; and (5) all permits, grants, contracts, agreements and licenses running to or from Baxter or its Subsidiaries relating to the Allegiance Assigned Intellectual Property. As of the Spin-Off Date, and except as permitted pursuant to the terms and conditions of SECTION 8.1 herein, Baxter and its Subsidiaries shall cease all use of the Allegiance Assigned Intellectual Property, and Baxter agrees to terminate any licenses granted to its Subsidiaries with respect to the Allegiance Assigned Intellectual Property. (ii) BALANCE SHEET ASSETS. All assets reflected or disclosed on the Balance Sheet, subject to acquisitions, dispositions and adjustments in the ordinary course of the Allegiance Business, consistent with past practice, after June 30, 1996; and (iii) OTHER ASSETS. All other assets, tangible or intangible, including all goodwill, which are exclusive to the operations of the Allegiance Business. Section 5.4 TRANSFER OF LIABILITIES. Subject to the terms and conditions of this Agreement, Allegiance shall assume, effective as of the Spin- Off Date, and pay, comply with and discharge all contractual and other obligations and liabilities of Baxter arising out of or relating to the Allegiance Business or any Divested Business, and/or any of the past or present facilities of Baxter relating to the Allegiance Business or any Divested Business, whether accrued, absolute, contingent or otherwise, and whether due or to become due, including: (i) all liabilities and obligations under each of the guarantees and letters of credit set forth on SCHEDULE 5.4(i) hereto; and (ii) all other liabilities and obligations of the Allegiance Business or any Divested Business, whether existing on the date hereof or arising at any time or from time to time after the date hereof, and whether based on circumstances, events or actions arising heretofore or hereafter, whether or not such obligations shall have been disclosed herein, and whether or not reflected on the books and records of the Balance Sheet of Allegiance. - 31 - ARTICLE VI. OTHER CLOSING MATTERS Section 6.1 INSTRUMENTS OF CONVEYANCE. In order to effectuate the transactions contemplated by ARTICLES III, IV and V, the Parties shall cause to be executed and delivered prior to or as of the Spin-Off Date such deeds, bills of sale, instruments of assumption, trademark and patent assignments, stock powers, certificates of title and other documents of assignment, transfer, assumption and conveyance (collectively, the "Conveyancing Instruments") as the Parties shall reasonably deem necessary or appropriate to effect such transactions. Section 6.2 NO REPRESENTATIONS OR WARRANTIES. Subject to the Operating Agreements, neither Baxter nor any of its Subsidiaries is, in this Agreement or in any other agreement or document contemplated by this Agreement, representing or warranting (a) as to the value or freedom from encumbrance of, or any other matter concerning, any Transferred Assets or Transferred Subsidiaries or (b) as to the legal sufficiency to convey title to any Transferred Assets or Transferred Subsidiaries on the execution, delivery and filing of the Conveyancing Instruments. SUBJECT TO SECTION 7.11 HEREOF AND THE OPERATING AGREEMENTS, ALL SUCH ASSETS AND SUBSIDIARIES ARE BEING TRANSFERRED "AS IS, WHERE IS" WITHOUT ANY REPRESENTATION OR WARRANTY OF MERCHANTABILITY, FITNESS FOR A PARTICULAR PURPOSE, MARKETABILITY, TITLE, VALUE, FREEDOM FROM ENCUMBRANCE OR ANY OTHER REPRESENTATION OR WARRANTY, EXPRESS OR IMPLIED, and Allegiance and its Subsidiaries shall bear the economic and legal risk that any conveyances of such assets and Subsidiaries shall prove to be insufficient or that Allegiance's and its Subsidiaries' title to any such assets and Subsidiaries shall be other than good and marketable and free of encumbrances. Neither Baxter nor any of its Subsidiaries is, in this Agreement or in any other agreement or document contemplated by this Agreement, representing or warranting that the obtaining of the consents or approvals, the execution and delivery of any amendatory agreements and the making of the filings and applications contemplated by this Agreement shall satisfy the provisions of all applicable agreements or the requirements of all applicable laws or judgments and, subject to SECTION 6.3, Allegiance and its Subsidiaries shall bear the economic and legal risk that any necessary consents or approvals are not obtained or that any requirements of law or judgments are not complied with. Notwithstanding the foregoing, the Parties shall fully cooperate and use reasonable efforts to obtain all consents and approvals, to enter into all amendatory agreements and to make all filings and applications which may be required for the consummation of the transactions contemplated by this Agreement, including, without limitation, all applicable regulatory filings or consents under federal or state environmental laws. - 32 - Section 6.3 NON-ASSIGNABLE CONTRACTS. In the event and to the extent that Baxter and its Subsidiaries are unable to obtain any consent, approval or amendment to any Contract, lease, license, or other rights relating to the Allegiance Business that would otherwise be transferred to Allegiance or one of its Subsidiaries as contemplated by this Agreement or any other agreement or document contemplated hereby, (i) Baxter and its Subsidiaries shall continue to be bound thereby, and (ii) unless not permitted by the terms thereof or by law, Allegiance or its Subsidiaries shall pay, perform and discharge fully all the obligations of Baxter or its Subsidiaries thereunder from and after the Spin-Off Date, or such earlier date as such transfer would otherwise have taken place, and indemnify Baxter and its Subsidiaries for all Indemnifiable Losses arising out of such performance by Allegiance or its Subsidiaries. Baxter and its Subsidiaries shall, without further consideration therefor, pay and remit to Allegiance or its Subsidiaries promptly all monies, rights and other considerations received in respect of such performance. Baxter and its Subsidiaries shall exercise or exploit its rights and options under all such Contracts, leases, licenses and other rights and commitments referred to in this SECTION 6.3 only as reasonably directed by Allegiance and at Allegiance's expense. If and when any such consent shall be obtained or such Contract, lease, license or other right shall otherwise become assignable or able to be novated, Baxter or its Subsidiaries shall promptly assign and novate (to the extent permissible) all its rights and obligations thereunder to Allegiance or its Subsidiaries without payment of further consideration, and Allegiance or its Subsidiaries shall, without the payment of any further consideration therefor, assume such rights and obligations. To the extent that the assignment of any Contract, lease, license or other right (or the proceeds thereof) pursuant to this SECTION 6.3 is prohibited by law, the assignment provisions of this SECTION 6.3 shall operate to create a subcontract with Allegiance or its Subsidiaries to perform each relevant unassignable Baxter Contract at a subcontract price equal to the monies, rights and other considerations received by Baxter or its Subsidiaries with respect to the performance by Allegiance or its Subsidiaries under such subcontract. Section 6.4 FURTHER ASSURANCES. (a) In addition to the actions specifically provided for elsewhere in this Agreement, each of the Parties shall use reasonable efforts to take, or cause to be taken, all actions, and to do, or cause to be done, all things, reasonably necessary, proper or advisable under applicable laws, regulations and agreements to consummate and make effective the transactions contemplated by this Agreement and the other agreements and documents contemplated hereby. Without limiting the foregoing, each Party shall cooperate with the other Party, and execute and deliver, or use reasonable efforts to cause to be executed and delivered, all - 33 - instruments, including instruments of conveyance, assignment and transfer, and to make all filings with, and to obtain all consents, approvals or authorizations of, any governmental or regulatory authority or any other Person under any permit, license, Contract or other instrument, and to take all such other actions as such Party may reasonably be requested to take by the other Party from time to time, consistent with the terms of this Agreement, in order to confirm the title of Allegiance and its Subsidiaries to all of the Allegiance Business, to put Allegiance or its Subsidiaries in actual possession and operating control thereof and to permit Allegiance or its Subsidiaries to exercise all rights with respect thereto and to effectuate the provisions and purposes of this Agreement, the Tax Sharing Agreement, the Operating Agreements and the other agreements and documents contemplated hereby or thereby. (b) If as a result of mistake or oversight, any asset reasonably necessary to the conduct of the Allegiance Business is not transferred to Allegiance or one of its Subsidiaries, or any asset reasonably necessary to the conduct of the Retained Business is transferred to Allegiance or one of its Subsidiaries, Baxter and Allegiance shall negotiate in good faith after the Spin-Off Date to determine whether such asset should be transferred to Allegiance or one of its Subsidiaries or to Baxter or one of its Subsidiaries, as the case may be, and/or the terms and conditions upon which such asset shall be made available to Allegiance or one of its Subsidiaries or to Baxter or one of its Subsidiaries, as the case may be. Unless expressly provided to the contrary in this Agreement, the Tax Sharing Agreement or the Operating Agreements, if as a result of a mistake or oversight, any liability or obligation arising out of or relating to the Allegiance Business is retained by Baxter or its Subsidiaries, or any liability or obligation arising out of or relating to the Retained Business is assumed by Allegiance or its Subsidiaries, Baxter and Allegiance shall negotiate in good faith after the Spin-Off Date to determine whether such liability or obligation should be transferred to Allegiance or one of its Subsidiaries or to Baxter or one of its Subsidiaries, as the case may be, and/or the terms and conditions upon which any such liability or obligation shall be transferred. Section 6.5 EXCLUDED ASSETS. Notwithstanding anything to the contrary herein, the following assets (the "Excluded Assets") are not, and shall not be deemed to be, Transferred Assets; (i) Cash and cash equivalents, any cash on hand or in bank accounts, certificates of deposit, commercial paper and similar securities except for (A) cash and cash equivalents of the Transferred Subsidiaries, (B) deposits securing bonds, letters of credit, leases and all other obligations - 34 - related to the Allegiance Business, and (C) petty cash and impressed funds related to the Allegiance Business; (ii) Except as otherwise provided in the Tax Sharing Agreement, any right, title or interest of Baxter and its Subsidiaries in any U.S. federal, state or local tax refund, credit or benefit (including any income with respect thereto) relating to the U.S. operations of the Allegiance Business prior to the Spin-Off Date; (iii) Any amounts accrued on the books and records of Baxter and its Subsidiaries or the Allegiance Business with respect to any Excluded Liabilities; (iv) Assets relating to the provision of pensions and benefits to present or former employees of the Allegiance Business, but excluding assets transferred from the Baxter Savings Plan to the Allegiance Retirement Plan as described in ARTICLE IX; (v) Any corporate allocations of non-Allegiance Business-related assets heretofore made by Baxter or its Subsidiaries to the Allegiance Business for internal management responsibility reporting purposes; (vi) Any intellectual property rights in and to the name "Baxter" and the related emblem design, and any variants thereof, and the trademarks and trade names used by Baxter or its Subsidiaries in relation to the Retained Business except as provided in ARTICLE VIII; and (vii) The preferred stock of Dade International Inc. which is restricted by agreement from transfer, exchange, assignment, pledge or other disposal prior to December 20, 1996. Section 6.6 EXCLUDED LIABILITIES. Notwithstanding anything to the contrary in this Agreement, neither Allegiance nor any of its Subsidiaries shall assume any of the liabilities of Baxter of its Subsidiaries set forth on SCHEDULE 6.6 hereto (the "Excluded Liabilities"). Section 6.7 RELEASE OF BAXTER. It is expressly understood and agreed by the parties hereto that upon the assumption by Allegiance or its appropriate Subsidiaries of the Assumed Liabilities, Baxter, its Subsidiaries, and their respective officers, directors and employees shall be released by Allegiance and its Subsidiaries from any and all liability, whether joint, several or joint and several, for the discharge, performance or observance of any of the Assumed Liabilities. - 35 - Section 6.8 NOMINEE SHARES. Baxter agrees to use reasonable efforts to cause to be transferred to, or as directed by, Allegiance all directors' qualifying or other shares of capital stock of any of the Transferred Subsidiaries (other than Euromedical) held as of the Spin-Off Date by persons who are not Allegiance Employees. Allegiance agrees to use reasonable efforts to cause to be transferred to, or as directed by, Baxter all director's qualifying or other shares of capital stock of any Baxter Subsidiary other than Allegiance and the Transferred Subsidiaries held as of the Spin-Off Date by Allegiance Employees. ARTICLE VII. CERTAIN COVENANTS Section 7.1 CONDUCT OF ALLEGIANCE BUSINESS PENDING THE SPIN-OFF DATE. Each of the Parties agrees that, from the date hereof until the Spin-Off Date, except as otherwise expressly contemplated by this Agreement, it will take, or cause to be taken, all reasonable efforts to carry on the Allegiance Business diligently in the ordinary course and substantially in the same manner as heretofore conducted and to preserve intact the business organization and goodwill of the Allegiance Business. Section 7.2 REGISTRATION AND LISTING. Prior to the Spin-Off Date: (i) Baxter and Allegiance shall prepare a registration statement on Form 10 (the "Registration Statement") to effect the registration of the Allegiance Common Stock under the Securities Exchange Act of 1934, as amended, and the rules and regulations promulgated thereunder (the "Exchange Act"), which Registration Statement shall include an information statement to be sent by Baxter to its stockholders in connection with the Spin-Off (the "Information Statement"). Allegiance shall file the Registration Statement with the SEC and shall use reasonable efforts to cause the Registration Statement to become effective under the Exchange Act as soon as reasonably practicable. After the Registration Statement becomes effective, Baxter shall mail the Information Statement to the holders of Baxter Common Stock as of the Record Date. (ii) The Parties shall use their reasonable efforts to take all such action as may be necessary or appropriate under state and foreign securities and "Blue Sky" laws in connection with the transactions contemplated by this Agreement. (iii) Baxter and Allegiance shall prepare, and Allegiance shall file and seek to make effective, an - 36 - application for the listing of the Allegiance Common Stock on the NYSE, subject to official notice of issuance. (iv) The Parties hereto shall cooperate in preparing, filing with the SEC and causing to become effective any registration statements or amendments thereto which are necessary or appropriate in order to effect the transactions contemplated hereby or to reflect the establishment of, or amendments to, any employee benefit plans contemplated hereby. Section 7.3 FUNDS DISTRIBUTED TO BAXTER. On or prior to the Spin-Off Date, Allegiance shall enter into a new credit facility or facilities with commercial lenders (the "Allegiance Credit Facility") and use the proceeds of the indebtedness incurred under the Allegiance Credit Facility to purchase ten year debentures in the aggregate principal amount of $1,025.2 million from AHC and $27.8 million from AHII. On the Spin-Off Date, (i) Allegiance shall cause (1) AHC to use the proceeds from the sale of its ten year debentures to Allegiance to pay its $1 billion and its $25.2 million intercompany debt to Baxter and (ii) BWT shall repay $25.2 million of its intercompany indebtedness to Baxter. The calculation of the amounts set forth in this SECTION 7.3 is set forth on SCHEDULE 7.3. Section 7.4 POST-SPIN-OFF TAX-RELATED RESTRICTIONS. (a) In order to avoid potentially adverse tax consequences relating to the Spin-Off, for a period of two years after the Spin-Off Date Allegiance shall not: (i) cease to engage in the active conduct of a trade or business within the meaning of Section 355 of the Code; (ii) issue or redeem any share of stock of Allegiance, except for issuances and redemptions (1) for the benefit of Allegiance's employees or (2) to effect acquisitions by Allegiance in the ordinary course of business, or (3) in connection with the issuance of any convertible debt by Allegiance, or (4) in accordance with the requirements for permitted purchases of Allegiance stock as set forth in Section 4.05(l)(b) of Revenue Procedure 96-30 issued by the IRS; or (iii) liquidate or merge with any other corporation; - 37 - unless, with respect to (i), (ii) or (iii) above, either (a) an opinion is obtained from counsel to Baxter, or (b) a ruling is obtained from the IRS, in either case to the effect that such act or event will not adversely affect the federal income tax consequences of the Spin-Off to Baxter, its stockholders who receive Allegiance Shares, or Allegiance. (b) If, as a result of any transaction occurring after the Spin-Off Date involving either the stock or assets of either Allegiance or any of its Subsidiaries, or any combination thereof, the Spin-Off fails to qualify as tax free under the provisions of Section 355 of the Code, Allegiance shall indemnify Baxter for all taxes, liabilities and associated expenses, including penalties and interest, incurred as a result of such failure of the Spin-Off to qualify under Section 355 of the Code. If the Spin-Off fails to qualify as tax free under the provisions of Section 355 of the Code other than as a result of a transaction occurring after the Spin-Off Date involving either the stock or assets of Allegiance or any of its Subsidiaries, or any combination thereof, then Allegiance shall not be liable for such taxes, liabilities or expenses. Section 7.5 INSURANCE POLICIES AND CLAIMS ADMINISTRATION. (a) OWNERSHIP OF INSURANCE POLICIES AND PROGRAMS. Baxter or one or more of its Subsidiaries shall continue to own all property, casualty and liability insurance programs, including, without limitation, primary and excess general liability, automobile, workers' compensation, property and crime insurance policies in effect on or before the Spin-Off Date (collectively, the "Baxter Policies" and individually, a "Baxter Policy"). Baxter shall use reasonable efforts to maintain the Baxter Policies in full force and effect up to and including the Spin-Off Date, and, subject to the provisions of this Agreement, Baxter and its Subsidiaries shall retain all of their respective rights, benefits and privileges, if any, under the Baxter Policies. Nothing contained herein shall be construed to change the ownership of the Baxter Policies. (b) PROCUREMENT OF INSURANCE FOR ALLEGIANCE. To the extent not already provided for by the terms of a Baxter Policy, Baxter shall use reasonable efforts to cause Allegiance and the appropriate Allegiance Subsidiaries to be named as additional insureds under Baxter Policies whose effective policy periods include the Spin-Off Date, in respect of claims arising or relating to periods prior to the Spin-Off Date; PROVIDED, HOWEVER, that nothing contained herein shall be construed to require Baxter or any of its Subsidiaries to pay any additional premium or other charges in respect to, or waive or otherwise limit any of its rights, benefits or privileges under, any Baxter - 38 - Policy in order to effect the naming of Allegiance and its Subsidiaries as such additional insureds. (c) ACQUISITION AND MAINTENANCE OF POST SPIN-OFF ALLEGIANCE INSURANCE POLICIES AND PROGRAMS. Commencing on and as of the Spin-Off Date, Allegiance shall be responsible for establishing and maintaining separate property, casualty and liability insurance policies and programs (including, primary and excess general liability, automobile, workers' compensation, property, fire, crime, surety and other similar insurance policies) for activities and claims involving Allegiance or any of its Subsidiaries or Affiliates. Allegiance will exercise reasonable efforts in securing liability insurance to avoid potential gaps in coverage for claims arising from events prior to the Spin-Off Date which gap would not exist had the Allegiance Business continued to be covered with the same retroactive dates existing in the Baxter Policies in effect on the Spin-Off Date. Allegiance and each of its Subsidiaries, as appropriate, shall be responsible for all administrative and financial matters relating to insurance policies established and maintained by Allegiance and its Subsidiaries or Affiliates for claims relating to any period on or after the Spin-Off Date involving Allegiance or any of its Subsidiaries or Affiliates. Notwithstanding any other agreement or understanding to the contrary, except as set forth in this SECTION 7.5 with respect to claims administration and financial administration of the Baxter Policies, neither Baxter nor any of its Subsidiaries shall have any responsibility for or obligation to Allegiance or any of its Subsidiaries and Affiliates relating to property and casualty insurance matters for any period, whether prior to, on or after the Spin-Off Date. (d) POST SPIN-OFF CLAIMS ADMINISTRATION. (i) Except as provided in SECTION 7.5(d)(ii) concerning 1995-96 excess liability insurance policies, Baxter and its Subsidiaries shall have the primary right, responsibility and authority for claims and financial administration for claims that relate to or affect the Baxter Policies. Upon notification by Allegiance or one of its Subsidiaries of a claim relating to Allegiance or a Subsidiary or Affiliate thereof under one or more of the Baxter Policies, Baxter shall cooperate with Allegiance in asserting and pursuing coverage and payment for such claim by the appropriate insurance carrier(s). In asserting and pursuing such coverage and payment, Baxter shall have sole power and authority to make binding decisions, determinations, commitments and stipulations on its own behalf and on behalf of Allegiance and its Subsidiaries and Affiliates, which decisions, determinations, commitments and stipulations shall be final and conclusive if made to maximize the overall economic benefit of the Baxter Policies. Allegiance, and its Subsidiaries and Affiliates, assume responsibility for, and shall pay to the appropriate insurance carriers or otherwise, any premiums, retrospectively- - 39 - rated premiums, defense costs, indemnity payments, deductibles, retentions or other charges, as appropriate (collectively, "Insurance Charges"), whenever arising, which shall become due and payable under the terms and conditions of any applicable Baxter Policy in respect of any liabilities, losses, claims, actions or occurrences, whenever arising or becoming known, involving or relating to any of the assets, businesses, operations or liabilities of Allegiance or any of its Subsidiaries or Affiliates, whether the same relate to the period prior to, on or after the Spin-Off Date. To the extent that the terms of any applicable Baxter Policy provide that Baxter or any of its Subsidiaries shall have an obligation to pay or guarantee the payment of any Insurance Charges relating to Allegiance or any of its Subsidiaries, Baxter shall be entitled to demand that Allegiance make such payment directly to the Person or entity entitled thereto. In connection with any such demand, Baxter shall submit to Allegiance a copy of any invoice received by Baxter pertaining to such Insurance Charges together with appropriate supporting documentation, to the extent available. In the event that Allegiance fails to pay any such Insurance Charges when due and payable, whether at the request of the party entitled to payment or upon demand by Baxter, Baxter and its Subsidiaries may (but shall not be required to) pay such insurance charges for and on behalf of Allegiance and, thereafter, Allegiance shall forthwith reimburse Baxter for such payment. Subject to the other provisions of this SECTION 7.5, the retention by Baxter of the Baxter Policies and the responsibility for claims administration and financial administration of the Policies are in no way intended to limit, inhibit or preclude any right of Allegiance, Baxter or any other insured to insurance coverage for any Insured Claims under the Baxter Policies. (ii) Notwithstanding the foregoing SECTION 7.5(d)(i), Baxter grants to Allegiance and its Subsidiaries the primary right and responsibility for asserting and pursuing for its benefit (as an insured, successor or otherwise) and for the benefit of Baxter, coverage under, and payment from the underwriters of, the 1995 excess liability policies issued by Lexington Insurance Company, Zurich Re (U.K.) Ltd., Gerling/Konzern Allegneine Versicherungs- Aktiengesellschaft, American Excess Insurance Association, A.C.E. Insurance Company (Bermuda) Ltd., X.L. Insurance Company, Ltd., and Starr Excess Liability Insurance Company, Ltd., for claims concerning or arising from the use of natural rubber latex gloves. Baxter and its Subsidiaries shall cooperate with Allegiance and its Subsidiaries in asserting and pursuing such coverage and payment. In asserting and pursuing such coverage and payment, Allegiance and its Subsidiaries shall have sole power and authority to make binding decisions, determinations, commitments and stipulations on its own behalf and on behalf of Baxter and its Subsidiaries; - 40 - provided, however, that Allegiance shall not affect, prejudice, limit, inhibit or narrow any rights Baxter or its Subsidiaries may have under (a) the policies issued by the foregoing identified underwriters for any periods other than the 1995-96 Policy Period, or relating to any claims or occurrences other than those concerning natural rubber latex gloves, or (b) the other Baxter Policies. The cost of claims administration pursuant to this SECTION 7.5(d)(ii) shall be borne entirely by Allegiance and its Subsidiaries. (e) PRE SPIN-OFF INSURANCE CLAIMS ADMINISTRATION. Allegiance and its Subsidiaries and Affiliates acknowledge that Baxter has previously experienced losses and received claims which were, or might have been, covered by one or more Baxter Policies, and prior to the Spin-Off Date will have made decisions and commitments regarding administration of such claims, and including reaching agreements and stipulations regarding such claims (collectively "Pre Spin-Off Claims Administration"). Allegiance and its Subsidiaries and Affiliates covenant not to contest or challenge in any manner any action taken by Baxter prior to the Spin-Off Date in connection with or relating to Pre Spin-Off Claims Administration, or to interfere with the performance of any agreement, commitment or stipulation so made by Baxter in connection with or relating to Pre-Spin-Off Claims Administration. (f) NON-WAIVER OF RIGHTS TO COVERAGE. An insurance carrier which would otherwise be obligated to pay any claim shall not be relieved of the responsibility with respect thereto, or, solely by virtue of the provisions of this SECTION 7.5, have any subrogation rights with respect thereto, it being expressly understood and agreed that no insurance carrier or any third party shall be entitled to a windfall (I.E., a benefit they would not be entitled to receive had no Spin-Off occurred, or in the absence of the provisions of this SECTION 7.5) by virtue of the provisions hereof. (g) SCOPE OF AFFECTED POLICIES OF INSURANCE. The provisions of this SECTION 7.5 relate solely to matters involving liability, casualty and workers' compensation insurance, and shall not be construed to affect any obligation of or impose any obligation on the parties hereto with respect to any life, health and accident, dental or medical insurance policies applicable to any of the officers, directors, employees or other representatives of the Parties hereto or their Affiliates. Section 7.6 INTERCOMPANY RECEIVABLES AND PAYABLES AND CASH MANAGEMENT. (a) (i) All Intercompany Receivables and Payables between Baxter or any of its Subsidiaries as they will exist - 41 - after the Spin-Off, on the one hand, and any of Euromedical, Eurovac or the Malaysia Silicath unit, on the other hand, shall be settled (A) as of 3:00 p.m., Chicago time, on August 26, 1996 if such Intercompany Receivables and Payables are subject to Baxter's netting process and (B) as of August 28, 1996 if such Intercompany Receivables and Payables are not subject to Baxter's netting process, in each case, in cash with such cash settlement occurring on August 29, 1996. Commencing from the opening of business on August 27, 1996, in the case of transactions subject to the netting process, and August 29, 1996 in the case of transactions not subject to the netting process, Intercompany Receivables and Payables between Baxter or any of its Subsidiaries, on the one hand, and any of Euromedical, Eurovac or the Malaysia Silicath unit shall be recorded for accounting purposes as third party trade account receivables and payables. (ii) All Intercompany Receivables and Payables between Baxter or any of its Subsidiaries, on the one hand (except for Intercompany Receivables and Payables owed by the Surgical Division of BHC to the Malaysian Glove Branch) and the Malaysian Glove Branch, on the other hand, shall be settled (A) as of 3:00 p.m., Chicago time, on September 23, 1996 if such Intercompany Receivables and Payables are subject to Baxter's netting process and (B) as of September 25, 1996 if such Intercompany Receivables and Payables are not subject to Baxter's netting process, in each case, in cash with such cash settlement occurring on September 26, 1996. Commencing from the opening of business on September 24, 1996, in the case of transactions subject to the netting process, and September 26, 1996 in the case of transactions not subject to the netting process, Intercompany Receivables and Payables between Baxter and its Subsidiaries, on the one hand, and the Malaysian Glove Branch, on the other hand, shall be recorded for accounting purposes as third party trade account receivables and payables. (iii) All Intercompany Receivables and Payables between any Subsidiary of Baxter, on the one hand, and any Subsidiary of Allegiance (other than any entity referred to in SECTION 7.6(a)(i) or SECTION 7.6(a)(ii) and other than Allegiance France and Allegiance Germany), on the other hand, shall be settled (A) as of 3:00 p.m., Chicago time, on September 23, 1996 if such Intercompany Receivables and Payables are subject to Baxter's netting process and (B) as of September 25, 1996 if such Intercompany Receivables and Payables are not subject to Baxter's netting process, in each case, in cash with such cash settlement occurring on September 26, 1996. Commencing from the opening of business on September 24, 1996, in the case of transactions subject - 42 - to the netting process, and September 26, 1996, in the case of transactions not subject to the netting process, Intercompany Receivables and Payables between any Subsidiary of Baxter, on the one hand, and any Subsidiary of Allegiance (other than any entity referred to in SECTION 7.6(a)(i) or SECTION 7.6(a)(ii) and other than Allegiance France and Allegiance Germany), on the other hand, shall be recorded for accounting purposes as third party trade account receivables and payables. (b) As provided in SECTION 4.3(i), Baxter shall be entitled to all cash bank balances (other than cash and cash equivalents of the Transferred Subsidiaries) existing immediately prior to the Spin-Off Date relating to the Allegiance Business, or otherwise utilized or maintained in connection with the Allegiance Business, including, without limitation, cash balances representing deposited checks or drafts for which only a provisional credit has been allowed in depository accounts, which are to be transferred to Allegiance or any of its Subsidiaries on or prior to the Spin-Off Date. Any such cash balances as of the Spin-Off Date which have not been transferred to Baxter shall be paid to Baxter. (c) All Loans owing by Allegiance or any of its Subsidiaries to Baxter or any of its Subsidiaries after giving effect to the transactions contemplated by ARTICLES III, IV, and V, shall be repaid no later than the Spin- Off Date. (d) Allegiance or an appropriate Subsidiary thereof shall be responsible for payment of all checks or drafts issued up to the Spin-Off Date against disbursement accounts transferred to Allegiance or such Subsidiary, which checks or drafts have not been charged against such disbursement accounts on or prior to the Spin-Off Date (other than with respect to payroll accounts, which will be assumed by Baxter or its Subsidiaries). (e) Baxter shall assist Allegiance and each of its Subsidiaries in establishing a separate cash management system effective as of and immediately after the Spin-Off Date. (f) Each Party shall, and shall cause its respective Subsidiaries to, promptly remit to the other any cash or other payment received by such Party or its Subsidiaries in respect of accounts or notes receivables of the other Party. Section 7.7 INTERCOMPANY DEBT TRUE-UP. (a) CALCULATION OF OPERATIONAL CASH FLOW. As soon as practicable, but in any event within 60 days after the Spin-Off Date, Baxter shall prepare a statement of operational cash flow for its U.S. healthcare business excluding the IV Systems - 43 - Division (but including the respiratory therapy business unit within the IV Systems Division), for the period January 1, 1996 through the Spin-Off Date. The operational cash flow statement shall be prepared from the books and records of Baxter relating to its U.S. healthcare business in a manner consistent with the definition of operational cash flow. The statement shall also be consistent with Baxter's historical cash flow allocation among its various business units, except for the elimination of the one-month lag period in recording the payment of certain liabilities such as payroll, payroll taxes, sales and use taxes, on the Division's books. The effect of the elimination of this lag on operational cash flow (the "lag adjustment") shall be included as a separate schedule accompanying the statement of operational cash flow. The statement of operational cash flow will also be adjusted (the "Unbudgeted Transfer Adjustment") to eliminate the operational cash flow impact of any assets, liabilities and reserves transferred to Allegiance pursuant to the Spin-Off but that were not taken into account in the initial budgeting process upon which this SECTION 7.7 was based. Any such adjustment shall be as mutually agreed by the Parties. The Unbudgeted Transfer Adjustments shall not include the impact of any expenses that Allegiance is required to pay under the terms of Section 12.1 or Section 12.2. The effect of these unbudgeted transfers on operational cash flow shall be included as a separate schedule accompanying the statement of operational cash flow. Subject to SECTION 7.7(c), the statement of operational cash flow delivered by Baxter to Allegiance shall be final, binding and conclusive on the Parties for all purposes of this Agreement and shall provide the basis for determining the adjustments (if any) specified in SECTION 7.7(d). (b) DEFINITION OF OPERATIONAL CASH FLOW. Operational cash flow for each Baxter operating unit consists of net income plus depreciation and amortization, increased or decreased, as appropriate, by cash restructuring utilization and the net change in "managed capital" (as defined in Baxter Finance Policy #1402) during the period, but excluding the effects of any non- cash restructuring utilization and acquisitions and divestitures on managed capital. The operational cash flow shall be computed in the same manner as reflected in the Consco Management Report, "Cash Flow Trends", except for the elimination of the one month lag for certain items, as described in SECTION 7.7(a). (c) CASH FLOW TRUE-UP. In the event that the final determination of the cash flow statement indicates that the operational cash flow is less than $147 million plus or minus the lag adjustment and the Unbudgeted Transfer Adjustment, the amount of the difference shall be paid by Allegiance to Baxter, as an adjustment to intercompany debt assumed by Allegiance or its Subsidiaries pursuant to SECTION 4.3(ii), within 10 days of the final determination of such adjustment. In the event that the - 44 - final determination of the cash flow statement indicates that the operational cash flow is greater than $147 million plus or minus the lag adjustment and the Unbudgeted Transfer Adjustment, the amount of the difference shall be paid by Baxter to Allegiance, as an adjustment to intercompany debt assumed by Allegiance pursuant to SECTION 4.3(ii), within 10 days of the final determination of such adjustment. (d) OFFSHORE CASH TRUE-UP. Within 30 days of the Spin-Off Date, Baxter shall calculate the following and shall provide Allegiance prompt written notice of such calculation: (i) the amount by which U.S.$3,912,828.13 exceeds the U.S. dollar equivalent of the purchase price paid by Allegiance France to Baxter France to purchase the Chateaubriant Plant; plus (ii) the amount by which US$83,919.73 exceeds the U.S. dollar equivalent of the purchase price paid by Allegiance Germany to Baxter Deutschland to purchase the German Business plus 100,000 DM; plus (iii) the amount of any cash or cash equivalents of AHSB as of the Spin-Off Date excluding the proceeds of the Euromedical Loan; plus (iv) any amounts owing by Baxter or any of its Subsidiaries to Allegiance or any of its Subsidiaries that were required to be settled pursuant to SECTION 7.6(a)(i), (ii) or (iii) but which were legally prohibited from being settled; minus (v) any amounts owing by Allegiance or any of its Subsidiaries to Baxter or any of its Subsidiaries that were required to be settled pursuant to SECTION 7.6(a)(i), (ii) or (iii) but were legally prohibited from being settled. If the sum of the amounts in (i) through (v) above is a positive number, Allegiance shall pay such amount to Baxter as an adjustment to intercompany debt assumed by Allegiance pursuant to SECTION 4.3(ii) within 10 days of the final determination of such amount. If the sum of the amounts in (i) through (v) above is a negative number, Baxter shall pay such amount to Allegiance as an adjustment to intercompany debt assumed by Allegiance or its Subsidiaries pursuant to SECTION 4.3(ii) within 10 days of the final determination of such amount. (e) DISPUTES. Any disputes regarding the computation of operational cash flow or the offshore cash true-up shall be resolved in accordance with ARTICLE XIV of this Agreement. - 45 - Section 7.8 AGREEMENTS RELATING TO BAXTER AND ALLEGIANCE. (a) Each of Baxter and Allegiance shall use its reasonable efforts to take, or cause to be taken, all actions, and to do, or cause to be done, all things, reasonably necessary, proper or advisable under applicable laws, regulations and agreements to consummate, make effective and perform its or its Subsidiaries' allocable portion of all purchase, distribution, and other obligations under all Contracts with customers, suppliers, vendors or other third parties relating to both the Allegiance Business and the Retained Business (the "Shared Agreements"), including those Shared Agreements set forth on SCHEDULE 7.8 hereto. Each of Baxter and its Subsidiaries and Allegiance and its Subsidiaries shall be entitled to the rights and privileges of its allocable portion of the Shared Agreements. (b) Each of Baxter and Allegiance shall use its reasonable efforts to take, or cause to be taken, all actions, and to do, or cause to be done, all things reasonably necessary, proper or advisable under applicable laws, regulations, and agreements to afford the rights and privileges of the allocable portion of the Shared Agreements to the other. (c) For purposes of this SECTION 7.8, the allocable portion shall be the pro rata portion of the agreement of each party based on performance under the agreement during the twelve-month period immediately prior to the Spin-Off Date. Section 7.9 CERTAIN RELEASES. Baxter or one or more of its Subsidiaries is a guarantor of certain obligations of the Allegiance Business, including those obligations set forth on SCHEDULE 5.4(i). Allegiance shall use its reasonable efforts to release Baxter and its Subsidiaries from such guarantees prior to the Spin-Off Date and shall indemnity Baxter and its Subsidiaries and save it harmless from any liabilities relating to such guarantees. Section 7.10 LITIGATION. (a) On or as of the Spin-Off Date, Allegiance or its Subsidiaries, as appropriate, shall assume and pay all liabilities which may result from the Assumed Actions and all fees and costs relating to the defense of the Assumed Actions, including attorneys' fees and costs incurred after the Spin-Off Date. "Assumed Actions" shall mean those cases, claims and investigations (on which Baxter or its Subsidiaries, other than Allegiance and its Subsidiaries, is a defendant or the party against which the claim or investigation is directed) related to the Allegiance Business, including those listed on SCHEDULE 7.10(a). (b) Baxter and its Subsidiaries shall transfer the Transferred Actions to Allegiance and its Subsidiaries, and Allegiance and its Subsidiaries shall receive and have the - 46 - benefit of all of the proceeds of such Transferred Actions. "Transferred Actions" shall mean those cases and claims (on which Baxter or its Subsidiaries are plaintiffs or claimants) relating to the Allegiance Business and listed on SCHEDULE 4.2(x). Section 7.11 LIABILITY FOR PREVIOUSLY DELIVERED PRODUCTS. The following provisions shall apply to all Baxter Products sold or transferred to the Allegiance Business prior to the Spin-Off Date for distribution and to all Allegiance Products sold or transferred to the Retained Business prior to the Spin-Off Date for distribution (in each case, the "Products"): (i) Each Party warrants to the other Party that, at the time of delivery to the other Party or its Subsidiaries, the Products were not at the time of delivery (A) adulterated or misbranded within the meaning of the Federal Food, Drug and Cosmetic Act, as amended, and the regulations issued thereunder, or (B) products that may not under the provisions of SECTIONS 404, 505, 514 or 515 of said Act be introduced into interstate commerce, or (C) banned devices under Section 516 of said Act. THE FOREGOING WARRANTY IS EXCLUSIVE AND IN LIEU OF ALL OTHER WARRANTIES OF ANY KIND WITH RESPECT TO THE PRODUCTS, WHETHER STATUTORY, WRITTEN, ORAL, EXPRESS OR IMPLIED, INCLUDING ANY WARRANTIES OF FITNESS FOR A PARTICULAR PURPOSE AND MERCHANTABILITY. ANY LIABILITY OF A PARTY AND ITS SUBSIDIARIES TO THE OTHER PARTY AND ITS SUBSIDIARIES UNDER THE FOREGOING WARRANTY SHALL BE LIMITED TO THE TOTAL PRICE PAID BY SUCH PARTY AND ITS SUBSIDIARIES FOR THE PRODUCTS WHICH ARE THE SUBJECT OF SUCH LIABILITY PLUS ALL COSTS FOR TRANSPORTATION AND OTHER DIRECT EXPENSES INCURRED BY ALLEGIANCE AND ITS SUBSIDIARIES WITH RESPECT TO SUCH PRODUCTS. A Party's and its Subsidiaries' exclusive remedy against the other Party and its Subsidiaries for any breach of the foregoing warranty shall be the right to require the other Party or its Subsidiaries to repair or replace (at the other Party's option and expense) any Product which proves not to be in conformity with applicable labeling or specifications. The other Party or its Subsidiaries shall pay the transportation and other costs incurred by a Party or its Subsidiaries with respect to any Products returned to the other Party or its Subsidiaries for repair or replacement under this Section, or, at the other Party's option, reimburse a Party or its Subsidiaries for any such costs. The foregoing right to require repair or replacement shall commence on the date of receipt by a Party or its Subsidiaries of each Product from the other Party or its Subsidiaries and expire six months after receipt by the end-user customer (the "Repair or Replacement Period"), except that the Repair or Replacement Period for each Product the use of which is subject to an - 47 - expiration date shall expire on the applicable expiration date, if sooner. (ii) Each Party and its Subsidiaries warrants to the other Party and its Subsidiaries that, at the time of delivery to the other Party or its Subsidiaries, the Party or its Subsidiaries shall have good and marketable title to all such Products free and clear of all liens or encumbrances (other than any created by the other Party or its Subsidiaries). (iii) Each Party and its Subsidiaries shall indemnify and hold the Allegiance Indemnified Parties or the Baxter Indemnified Parties, as the case may be, harmless from and against, and in respect of, any and all Claims and Losses by any of the Allegiance Indemnified Parties or the Baxter Indemnified Parties, as the case may be, which result from a third party claim and which arise out of or relate to: (A) any actual or alleged patent, copyright or trademark infringement, or violation of any other proprietary right, arising out of the purchase, sale or use of the Products; (B) defects in Products; (C) any actual or alleged breach of warranty or obligation, if any, accompanying the Product or Products, subject to the limitations in SECTION 7.11(i) to the extent provided therein; and (D) any claim for personal injury, wrongful death or property damage arising out of the use of a Product; PROVIDED that this SECTION 7.11(iii) shall not apply to any Claim or Loss (x) to the extent that the Parties agree; (y) to any tort claim, including claims for personal injury, wrongful death or property damage, to the extent such claims are based upon any wrongful or negligent act or omission by the other Party or its Subsidiaries or business units (but excluding Subsidiaries or business units that become Subsidiaries or business units of the Party claiming indemnification as a result of the Spin-Off), or their employees or other agents, including, but not limited to, any Claims or Losses caused by any such wrongful or negligent act or omission constituting a representation concerning the characteristics or method of usage of Products, or relating to the storage, handling, or delivery of Products or selection of Products for use in Kits; or (z) to any actual or alleged patent, copyright or trademark infringement, or violation of any other proprietary right, arising out of any act or omission of the other Party, its Subsidiaries or any of their Affiliates or business units (but excluding Subsidiaries of business units that become Subsidiaries or business units of the Party claiming indemnification as a result of the Spin-Off), in connection with the sale of Kits or relating to any intellectual property owned by a Party, its Subsidiaries or any of their Affiliates and used in connection with the sale of Kits. - 48 - Section 7.12 ALLEGIANCE BANK ACCOUNTS. On or prior to the Spin-Off Date, Baxter and its Subsidiaries shall transfer the bank accounts set forth on SCHEDULE 7.12 hereto to Allegiance or one of its Subsidiaries, as directed by Allegiance. Allegiance shall cause any amounts received, by mistake or otherwise, in such accounts after the Spin-Off Date on account of the Retained Business to be promptly transferred to Baxter and its Subsidiaries, as appropriate. Baxter shall cause any amounts received, by mistake or otherwise, after the Spin-Off Date on account of the Allegiance Business to be promptly transferred to Allegiance and its Subsidiaries, as appropriate. Section 7.13 UNASSIGNED INDEMNIFIABLE CONTRACTS. (a) SCHEDULE 4.2(viii)(A) sets forth certain contracts noted as not being assigned to AHC but subject to indemnity by Allegiance (the "UNASSIGNED INDEMNIFIABLE CONTRACTS"). (b) Allegiance or one of its Subsidiaries shall pay, perform and discharge fully all the obligations of Baxter or its Subsidiaries under the Unassigned Indemnifiable Contracts from and after the Spin-Off Date and indemnify Baxter and its Subsidiaries for all Claims and Losses arising out of such performance by Allegiance or its Subsidiaries. Baxter and its Subsidiaries shall, without further consideration therefor, pay and remit to Allegiance or its Subsidiaries promptly all monies, rights and other considerations received with respect to the Unassigned Indemnifiable Contracts or otherwise received in respect of performance thereunder. (c) Baxter and its Subsidiaries shall perform and exploit their rights and options and otherwise take action under the Unassigned Indemnifiable Contracts as and only as reasonably directed by Allegiance. Section 7.14 AD NOW PROGRAM. Baxter hereby agrees to cause BHC to offer and administer the "Advantage Now" program for Baxter Products to the full extent necessary to comply with Section 5(e)(12) of the Amended and Restated Exclusive Distribution Agreement, dated as of September 15, 1995, by and between Dade International Inc., a Delaware corporation ("Dade"), and BHC (the "Dade Distribution Agreement"). Section 7.15 PRODUCTS AT COST TO DADE. (a) Baxter hereby agrees to, and to cause its appropriate Subsidiaries to, provide laboratory supply products manufactured by Baxter and its Subsidiaries at actual cost to Dade for Dade's internal use only and not for resale in accordance with Section 5(r) of the Dade Distribution Agreement. (b) Allegiance hereby agrees to, and to cause its appropriate Subsidiaries to, provide laboratory supply products - 49 - manufactured by Allegiance and its Subsidiaries at actual cost to Dade for Dade's internal use only and not for resale in accordance with the Amended and Restated Exclusive Distribution Agreement, dated as of September 15, 1995, by and between Dade and Baxter Sales and Distribution Corp., a Delaware corporation. Section 7.16 INFORMAL, NONDOCUMENTED REAL ESTATE LEASES. Each Party and its Subsidiaries may continue to occupy, from and after the Spin-Off Date, such space in the facilities of the other Party and its Subsidiaries as is occupied immediately prior to the Spin-Off Date, or such other space therein as may be mutually agreed to from time to time by Baxter and Allegiance, and which occupancy is otherwise not documented by written leasing agreements, on the following terms and conditions: (a) The occupying Party shall pay to the other Party rent with respect to such occupied space for the period from and after the Spin-Off Date during which such space is so occupied, which rent shall be determined by the other Party on the same basis on which the other Party allocates rent with respect to the occupancy of space by business units of the other Party or as the occupying Party presently is paying, whichever is lower. Such rent shall be payable from time to time by the occupying Party (but not more frequently than monthly) promptly following delivery by the other Party to the occupying Party of a statement therefor. (b) The occupying Party may, at any time, upon not less than 15 days' prior written notice to Baxter's Director of Corporate Real Estate, with a copy to Allegiance, terminate its occupancy of any or all of such space. (c) The other Party may, at any time, upon not less than 30 days' prior written notice to the occupying Party, require the occupying Party to cease occupancy of any or all of such space as designated in such notice; provided, however, that Allegiance shall not be required to cease occupancy of any of the space at BHC's Deerfield facility prior to July 1, 1997. Section 7.17 REXAM PAYMENT. Allegiance hereby agrees to cause AHC to distribute to BHC promptly upon receipt by AHC fifty-two percent (52%) of the payment to be received from Rexam Medical Packaging Inc. ("Rexam") on or about January 1, 1997, pursuant to Section 2.5.2 of the Asset Purchase Agreement, dated April 22, 1993 between Rexam and BHC. As soon as practical after May 1, 1997, Baxter and Allegiance agree to adjust this payment to reflect actual purchases by BHC and AHC, respectively, from Rexam, consistent with the methodology used to calculate the 52% set forth above and past practices for allocating similar payments received from Rexam among operating units. - 50 - Section 7.18 CLINTEC RECEIVABLES. From time to time after the Spin- Off Date as accounts receivable held by AHC as of October 1, 1996 and which arose from the sale of Clintec products are determined (consistent with past practice) to be uncollectible, Allegiance shall give notice to Baxter of such uncollectible accounts. Promptly following receipt of any such notice, Baxter shall pay to Allegiance the amount of such accounts receivable so determined to be uncollectible in the same manner in which uncollectible accounts receivable were charged to Clintec Nutrition Company prior to the Spin-Off Date. ARTICLE VIII. INTELLECTUAL PROPERTY Section 8.1 LICENSE OF ALLEGIANCE INTELLECTUAL PROPERTY TO BAXTER. (a) GRANT OF LICENSE. Allegiance and its Subsidiaries hereby grant, and Baxter and its Subsidiaries hereby accept and retain, a perpetual, nonexclusive, fully paid-up, worldwide right and license to use, manufacture, make, have made for Baxter (provided that any disclosure to a third party contract manufacturer of proprietary or confidential information of Allegiance shall be pursuant to a confidentiality agreement in a form consistent with the terms of SECTION 10.4 herein), sell and otherwise practice the patents, patent applications, nonpatented inventions, copyrights, trade secrets, technical data, know-how, and other Intellectual Property Rights set forth on SCHEDULE 8.1(a), attached hereto and incorporated herein (hereinafter, the "Licensed Allegiance Intellectual Property"), in connection with the Baxter Products Actually Using the Licensed Allegiance Intellectual Property as of the Spin-Off Date, including new products which are substitutes for, or line extensions of, such products. For the purposes of this SECTION 8.1, Baxter will be deemed to be "Actually Using" Licensed Allegiance Intellectual Property if as of the Spin-Off Date: (i) it is manufacturing a product incorporating the Licensed Allegiance Intellectual Property; or (ii) a product incorporating the Licensed Allegiance Intellectual Property is under development and the use of other Intellectual Property Rights by Baxter would require substantial additional expense; provided, however, that Baxter will not be deemed to be "Actually Using" Licensed Allegiance Intellectual Property if the sole use thereof is to manufacture a product for Allegiance. (b) OWNERSHIP OF THE LICENSED ALLEGIANCE INTELLECTUAL PROPERTY. Baxter and its Subsidiaries acknowledge that, subject to the foregoing license, Allegiance and its Subsidiaries, as the case may be, are the sole and exclusive owner of all of right, title and interest in and to the Licensed Allegiance Intellectual Property. Baxter and its Subsidiaries agree that they will do - 51 - nothing inconsistent with Allegiance's or its Subsidiaries' ownership of, or rights in, the Licensed Allegiance Intellectual Property. Allegiance and its Subsidiaries, at their expense, agree to take all steps reasonably necessary to protect, enforce or otherwise maintain in full force and effect the Licensed Allegiance Intellectual Property, including, without limitation, the filing of any required renewals and the payment of any required fees, taxes or other payments that may become due. Baxter and its Subsidiaries shall cooperate with Allegiance and its Subsidiaries in connection with such steps at Allegiance's reasonable request and at Allegiance's expense, including, without limitation, by obtaining execution by Baxter's and Baxter's Subsidiaries' employees, consultants and agents of any papers Allegiance or its Subsidiaries consider necessary to enable Allegiance and its Subsidiaries to protect the Licensed Allegiance Intellectual Property. Baxter and its Subsidiaries shall make their employees, consultants and agents, who have direct knowledge of facts pertaining to an invention that is the subject of a patent application or another Intellectual Property Right that is the subject of intellectual property protection, available at Allegiance's expense to Allegiance and its Subsidiaries for the purpose of disclosing sufficient facts for the preparation of necessary documentation required for patent applications and other protection. At Allegiance's or its Subsidiaries' reasonable request and expense, Baxter and its Subsidiaries will assist Allegiance and its Subsidiaries in the preparation and review of patent documents related to the Licensed Allegiance Intellectual Property to the extent that such assistance is necessary for such preparation. Baxter and its Subsidiaries do not represent that they are qualified to provide any legal or other professional services, the providers of which must be licensed or are otherwise subject to requirements of law establishing educational, professional or similar qualifications for providers of such service, and nothing contained in this Section shall be construed as requiring Baxter and its Subsidiaries to provide any such services. Allegiance and its Subsidiaries will procure all such professional service from its own employees or third parties. Except to the extent provided otherwise in SECTION 6.4 herein, all reasonable expenses, including, without limitation, charges for staff costs, including approved travel and other expenses incurred in connection with any assistance requested by Allegiance or its Subsidiaries in the preparation or prosecution of a patent will be reimbursed by Allegiance and will not constitute a part of the payments for research and development work. Allegiance and its Subsidiaries shall not allow the protection for any Licensed Allegiance Intellectual Property to lapse without not less than three months' prior written notice to Baxter. If Allegiance so notifies Baxter, (a) Baxter and its Subsidiaries shall have the right, but not the obligation, to take such steps to prevent such a lapse, at Baxter's expense and in Allegiance's and its - 52 - Subsidiaries' names, if necessary, and (b) Allegiance and its Subsidiaries shall cooperate with Baxter and its Subsidiaries at Baxter's or its Subsidiaries' reasonable request and at Baxter's expense. (c) MARKING AND NOTICES. Baxter and its Subsidiaries agree that any products which are manufactured, made, offered, sold or otherwise distributed by them pursuant to the license(s) granted hereunder shall bear a legal or proprietary rights notice in such form as may be reasonably requested by and to the extent directed by Allegiance from time to time. (d) TERMINATION OF LICENSES. The licenses granted in SECTION 8.1 may be terminated by Allegiance only under the following conditions: (i) BREACH. If Baxter or its Subsidiaries are in breach or default of a material term of this SECTION 8.1 which breach or default continues for sixty (60) days after written notice thereof by Allegiance, Allegiance may terminate the license granted pursuant to this SECTION 8.1, PROVIDED that such termination shall be limited to those Licensed Allegiance Intellectual Property rights that relate to the uncured breach. (ii) DIVESTITURE. If Baxter or its Subsidiaries sell, assign, transfer or otherwise divest themselves of ownership of any business units or product lines that use or are manufactured under the Licensed Allegiance Intellectual Property, the licenses granted in this SECTION 8.1 may be assigned, but only with respect to the divested products or new products that are substitutes for or line extensions of such products, and only with the written consent of Allegiance, which consent shall not be unreasonably withheld. Allegiance shall have no obligation to consent to the transfer of such license to any entity that is a competitor of Allegiance or any of its Subsidiaries in the field in which Allegiance uses the Intellectual Property that is the subject of the license. (iii) CHANGE OF CONTROL. If more than 30% of the voting stock of Baxter or any Affiliate thereof is acquired, directly or indirectly, by a competitor of Allegiance in the field in which Allegiance or its Subsidiaries are then using the Licensed Allegiance Intellectual Property, then by written notice to Baxter Allegiance may (A) in the case of the acquisition of the voting stock of Baxter, terminate the license granted pursuant to this SECTION 8.1 in its entirety, or (B) in the case of the acquisition of the voting stock of an Affiliate terminate the license granted - 53 - pursuant to this SECTION 8.1 only with respect to such Affiliate. Section 8.2 LICENSE OF BAXTER INTELLECTUAL PROPERTY TO ALLEGIANCE. (a) GRANT OF LICENSE. Baxter and its Subsidiaries hereby grant, and Allegiance and its Subsidiaries hereby accept and retain, a perpetual, nonexclusive, fully paid-up, worldwide right and license to use, manufacture, make, have made for Allegiance (provided that any disclosure to a third party contract manufacturer of proprietary or confidential information of Baxter shall be pursuant to a confidentiality agreement in a form consistent with the terms of SECTION 10.4 herein), sell and otherwise practice the patents, patent applications, nonpatented inventions, copyrights, trade secrets, technical data, know-how, and other Intellectual Property Rights set forth on SCHEDULE 8.2(a), attached hereto and incorporated herein (hereinafter, the "Licensed Baxter Intellectual Property") in connection with the Allegiance Products Actually Using the Licensed Baxter Intellectual Property as of the Spin-Off Date, including new products which are substitutes for, or line extensions of, such products. For the purposes of this SECTION 8.2, Allegiance will be deemed to be "Actually Using" Licensed Baxter Intellectual Property if as of the Spin-Off Date: (i) it is manufacturing a product incorporating the Licensed Baxter Intellectual Property; or (ii) a product incorporating the Licensed Baxter Intellectual Property is under development and the use of other Intellectual Property Rights by Allegiance would require substantial additional expense; provided, however, that Allegiance will not be deemed to be "Actually Using" Licensed Baxter Intellectual Property if the sole use thereof is to manufacture a product for Baxter. (b) OWNERSHIP OF THE LICENSED BAXTER INTELLECTUAL PROPERTY. Allegiance and its Subsidiaries acknowledge that, subject to the foregoing license, Baxter and its Subsidiaries are the sole and exclusive owner of all of right, title and interest in and to the Licensed Baxter Intellectual Property. Allegiance and its Subsidiaries agree that they will do nothing inconsistent with Baxter's and its Subsidiaries' ownership of, or rights in, the Licensed Baxter Intellectual Property. Baxter and its Subsidiaries, at their expense, agree to take all steps reasonably necessary to protect, enforce or otherwise maintain in full force and effect the Licensed Baxter Intellectual Property, including, without limitation, the filing of any required renewals and the payment of any required fees, taxes or other payments that may become due. Allegiance and its Subsidiaries shall cooperate with Baxter and its Subsidiaries in connection with such steps at Baxter's reasonable request and at Baxter's expense, including, without limitation, by obtaining execution by - 54 - Allegiance's and its Subsidiaries' employees, consultants and agents of any papers Baxter or its Subsidiaries consider necessary to enable Baxter and its Subsidiaries to protect the Licensed Baxter Intellectual Property. Allegiance and its Subsidiaries shall make their employees, consultants and agents, who have direct knowledge of facts pertaining to an invention that is the subject of a patent application or another Intellectual Property Right that is the subject of intellectual property protection, available to Baxter and its Subsidiaries at Baxter's expense for the purpose of disclosing sufficient facts for the preparation of necessary documentation required for patent applications and other protection. At Baxter's or its Subsidiaries' reasonable request and expense, Allegiance and its Subsidiaries will assist Baxter and its Subsidiaries in the preparation and review of patent documents related to the Licensed Baxter Intellectual Property to the extent that such assistance is necessary for such preparation. Allegiance and its Subsidiaries do not represent that they are qualified to provide any legal or other professional services, the providers of which must be licensed or are otherwise subject to requirements of law establishing educational, professional or similar qualifications for providers of such service. Nothing contained in this Section shall be construed as requiring Allegiance and its Subsidiaries to provide any such services. Baxter and its Subsidiaries will procure all such professional service from its own employees or third parties. Except to the extent provided otherwise in SECTION 6.4 herein, all reasonable expenses, including, without limitation, charges for staff costs, including approved travel and other expenses incurred in connection with any assistance requested by Baxter or its Subsidiaries in the preparation or prosecution of a patent will be reimbursed by Baxter and will not constitute a part of the payments for research and development work. Baxter and its Subsidiaries shall not allow the protection for any Licensed Baxter Intellectual Property to lapse without not less than three months' prior written notice to Allegiance. If Baxter so notifies Allegiance, (a) Allegiance shall have the right, but not the obligation, to take such steps to prevent such a lapse, at Allegiance's expense and in Baxter's and its Subsidiaries' name, if necessary, and (b) Baxter and its Subsidiaries shall cooperate with Allegiance and its Subsidiaries at Allegiance's and its Subsidiaries' reasonable request and at Allegiance's expense. (c) MARKING AND NOTICES. Allegiance and its Subsidiaries agree that any products which are manufactured, made, offered, sold or otherwise distributed by them pursuant to the license(s) granted hereunder shall bear a legal or proprietary rights notice in such form as may be reasonably requested by and to the extent directed by Baxter from time to time. - 55 - (d) TERMINATION OF LICENSES. The licenses granted in SECTION 8.2 may be terminated by Baxter only under the following conditions: (i) BREACH. If Allegiance or its Subsidiaries are in breach or default of a material term of this SECTION 8.2 which breach or default continues for sixty (60) days after written notice thereof by Baxter, Baxter may terminate this Agreement, PROVIDED that such termination shall be limited to those Licensed Baxter Intellectual Property rights that relate to the uncured breach. (ii) DIVESTITURE. If Allegiance or its Subsidiaries sell, assign, transfer or otherwise divest themselves of ownership of any business units or product lines that use the Licensed Baxter Intellectual Property, the licenses granted in this SECTION 8.2 may be assigned, but only with respect to the divested products or new products that are substitutes for or line extensions of such products, and only with the written consent of Baxter, which consent shall not be unreasonably withheld. Baxter shall have no obligation to consent to the transfer of such license to any entity that is a competitor of Baxter or any of its Subsidiaries in the field in which Baxter uses the Intellectual Property that is the subject of the license. (iii) CHANGE OF CONTROL. If more than 30% of the voting stock of Allegiance or any Affiliate thereof is acquired, directly or indirectly, by a competitor of Baxter in the field in which Baxter or its Subsidiaries are then using the Licensed Baxter Intellectual Property, then by written notice to Allegiance Baxter may (A) in the case of the acquisition of the voting stock of Allegiance, terminate the license granted pursuant to this SECTION 8.2 in its entirety, or (B) in the case of the acquisition of the voting stock of an Affiliate, terminate the license granted pursuant to this SECTION 8.2 only with respect to such Affiliate. Section 8.3 USE OF BAXTER TRADE NAMES AND TRADEMARKS. (a) Allegiance and its Subsidiaries shall discontinue use of the names "Baxter," "Baxter Healthcare," "Baxter International Inc." and all other trademarks, service marks and trade names owned by or licensed to Baxter (the "Baxter Marks") as follows: (i) Allegiance and its Subsidiaries will cease use of the Baxter Marks on or in connection with materials other than labels of Allegiance Products, including, by way of example and not limitation, signs, stationery, trucks, and customer brochures, on or before December 31, 1997. - 56 - (ii) Allegiance and its Subsidiaries will cease use of the Baxter Marks on or in connection with Allegiance Products containing latex as soon as practical, but in no event later than March 31, 1997 with respect to gloves manufactured after that date and June 30, 1997 with respect to other products containing, as a significant component, natural rubber latex manufactured after that date. (iii) Allegiance and its Subsidiaries will cease use of the Baxter Marks on or in connection with products of the type subject to regulation under Section 351 of the Public Health Service Act ("Biologics"), if any, as soon as practical, but in no event later than March 31, 1997 with respect such products manufactured after that date. (iv) Allegiance and its Subsidiaries will cease use of the Baxter Marks on or in connection with high volume products, namely, those products which constitute 80% of Allegiance's product volume and a minimum of 80% of the total number of product code product labels, as of December 31, 1997. (v) Allegiance and its Subsidiaries will cease use of the Baxter marks on or in connection with all other products as of June 30, 1998, in that neither Allegiance nor its Subsidiaries shall quality control release any products bearing any of the Baxter Marks after such date. (b) Any use of the Baxter Marks by Allegiance or its Subsidiaries pursuant to the above terms and conditions shall be in the same form as existed prior to the Spin-Off Date and any products or processes offered by Allegiance or its Subsidiaries for sale under the Baxter Marks shall meet the same product specifications and quality assurance standards as existed prior to the Spin-Off Date. Any new label copy created after the Spin-Off Date or the development of which is in progress as of the Spin-Off Date, shall not bear any of the Baxter Marks. ARTICLE IX. EMPLOYEES AND EMPLOYEE BENEFITS Section 9.1 ALLEGIANCE EMPLOYEES. SCHEDULE 9.1 describes or otherwise identifies all Allegiance Employees. The Parties recognize that SCHEDULE 9.1 includes Inactive Employees other than persons with a "PD" status code. Section 9.2 EMPLOYMENT OF ALLEGIANCE EMPLOYEES. On the Spin-Off Date, Allegiance shall, or shall cause its Subsidiaries to, employ or continue to employ each Allegiance Employee. Allegiance and Baxter (and their Subsidiaries) shall use their reasonable efforts to accomplish any transfers of - 57 - employment required by this SECTION 9.2 in a timely manner. Active Allegiance Employees shall be paid by Allegiance or one of its Subsidiaries at the salary and wage rate levels (including but not limited to bonus programs) paid by Baxter or its Subsidiaries as of the Spin-Off Date; PROVIDED, HOWEVER, that Allegiance (or the applicable Allegiance Subsidiary) retains the right to determine the compensation of Allegiance Employees after the Spin-Off Date. Section 9.3 TERMINATIONS/LAYOFF/SEVERANCE. (a) Allegiance Employees shall not be eligible for any severance benefits from Baxter or its Subsidiaries or Affiliates as a result of either their employment by Allegiance or its Subsidiaries or Affiliates or their subsequent termination of employment with Allegiance or its Subsidiaries or Affiliates. Notwithstanding the foregoing, Baxter and Allegiance have agreed on the payment of certain severance costs as provided in SECTION 9.3(d). (b) Any Allegiance Employee who receives a written notice prior to the Spin-Off Date regarding such employee's termination of employment on a fixed date between the Spin-Off Date and January 31, 1997 from Allegiance or any of its Subsidiaries shall be eligible to receive from Allegiance (or the applicable Allegiance Subsidiary) severance pay which is calculated with the formula used under the Baxter Severance Pay Plan. No Allegiance business unit shall notify any Allegiance Employee prior to the Spin-Off Date that such person shall terminate employment with Allegiance or any of its Subsidiaries on a fixed date which is after January 31, 1997. The manner in which this SECTION 9.3(b) is implemented shall be governed by the terms of the Allegiance Severance Pay Plan. (c) Effective as of the Spin-Off Date, Allegiance (or the applicable Allegiance Subsidiary) shall have the obligation to reimburse Baxter for the severance benefits paid by Baxter under the Baxter Severance Pay Plan to any employee who was terminated by Baxter prior to the Spin-Off Date while employed in any Allegiance Business unit who is receiving severance benefits under the Baxter Severance Pay Plan as of the Spin-Off Date. Allegiance (or the applicable Allegiance Subsidiary) shall have the obligation to pay severance benefits to any employee terminated by Allegiance after the Spin-Off Date who is eligible to receive severance benefits under the Allegiance Severance Pay Plan. (d) Baxter and Allegiance shall each be responsible for the payment of one-half of the severance of Allegiance Employees who currently provide IV customer service functions in field locations who are terminated without cause within six months following the Spin-Off Date. - 58 - Section 9.4 INTERNATIONAL ALLEGIANCE EMPLOYEES. All issues relating to any person who, immediately prior to the Spin-Off Date, is employed by a Transferred Subsidiary in a foreign jurisdiction shall be addressed in connection with the transactions applicable to such Transferred Subsidiary and are outside the scope of this Agreement. Section 9.5 EMPLOYMENT SOLICITATION. During the period beginning on the Spin-Off Date and ending one year after the Spin-Off Date, neither Baxter nor Allegiance shall, or shall permit any of their respective Subsidiaries or agents to, directly or indirectly, without the prior written consent of the other, actively solicit or recruit for employment any then current employee of the other or of any of the other's Subsidiaries. However, nothing contained in this clause shall (a) prohibit the hiring of any employee who in good faith is believed to be actively seeking employment on his or her own initiative without prior contact initiated by any employee or agent of the company where employment is sought, or any of such company's Affiliates, provided that such employee has obtained authorization from an officer (or a direct report to a current officer) of his or her current employer; or (b) prohibit Baxter or Allegiance or any of their respective Subsidiaries from hiring any person who has terminated employment with the other company. After one year after the Spin-Off Date, the foregoing restriction shall not apply. Section 9.6 WARN ACT. Allegiance and its Subsidiaries agree that they shall not, at any time during the 90-day period following the Spin-Off Date, effectuate (i) a "plant closing" as defined in the Worker Adjustment and Retraining Notification Act of 1988 (the "WARN Act") affecting any site of employment or operating units within any site of employment of the Allegiance Business or (ii) take any action to precipitate a "mass layoff" as defined in the WARN Act affecting any site of employment of the Allegiance Business, except, in either case, after complying fully with the notice and other requirements of the WARN Act. Allegiance agrees to indemnify Baxter and its Subsidiaries and to defend and hold Baxter and its Subsidiaries harmless from and against any and all claims, losses, damages, expenses, obligations and liabilities (including attorney's fees and other costs of defense) which Baxter and its Subsidiaries may incur in connection with any suit or claim of violation brought against Baxter under the WARN Act, which relate in whole or in part to actions taken by Allegiance or its Subsidiaries with regard to any site of employment of Allegiance or operating units within any site of employment of the Allegiance Business. - 59 - Section 9.7 LEAVE OF ABSENCE POLICIES. (a) Through the Spin-Off Date, Baxter and its Subsidiaries shall be responsible for administering compliance with the Baxter leave of absence policies with respect to Allegiance Employees. (b) Effective immediately after the Spin-Off Date: (i) Allegiance shall adopt, and shall cause each Allegiance Subsidiary to adopt, its own leave of absence policies; (ii) Allegiance shall honor, and shall cause each Allegiance Subsidiary to honor, all terms and conditions of leaves of absence which have been granted to any Allegiance Employee under a Baxter leave of absence policy before the Spin-Off Date by Baxter or any of its Subsidiaries, including such leaves that are to commence after the Spin-Off Date where Baxter or any of its Subsidiaries has approved such leave or where an employee has submitted appropriate paperwork to Baxter or any of its Subsidiaries for such leave prior to the Spin-Off Date; (iii) Allegiance and its Subsidiaries shall be solely responsible for administering leaves of absence policies and compliance with all applicable laws with respect to their employees; and (iv) Allegiance and its Subsidiaries shall recognize all periods of service of Allegiance Employees with Baxter or any of its Subsidiaries, as applicable, to the extent such service is recognized by Baxter or its Subsidiaries for the purpose of eligibility for leave entitlement under the Baxter leave of absence policies; PROVIDED, HOWEVER, that no duplication of benefits shall be required by the foregoing. (c) As soon as administratively possible after the Spin-Off Date and upon request to Baxter's Senior Vice President of Human Resources, Baxter shall provide to Allegiance copies of all records pertaining to the Baxter leave of absence policies with respect to all Allegiance Employees to the extent such records have not been provided previously to Allegiance or one of its Subsidiaries. Section 9.8 WITHDRAWAL FROM PARTICIPATION IN BAXTER PLANS AND ESTABLISHMENT OF ALLEGIANCE PLANS. (a) Effective as of the Spin-Off Date, Allegiance and its Subsidiaries shall cease to be participating employers in the Baxter Plans and shall take any and all action necessary to effectuate their withdrawal as participating employers under the terms of such plans. Each Allegiance Employee shall cease accruing benefits under the Baxter Plans as of the Spin-Off Date (other than imputed compensation taken into account under the Baxter Pension Plan from the Spin-Off Date through December 31, 1996). (b) Effective as of the Spin-Off Date, Allegiance or any Allegiance Subsidiary shall establish its own employee benefit plans for the benefit of eligible employees of Allegiance and its Subsidiaries, including but not limited to the Allegiance - 60 - Retirement Plan, the Allegiance Welfare Plans and the Allegiance 1996 Incentive Compensation Program, as described in the Registration Statement. Section 9.9 TRANSFER OF SAVINGS PLAN ACCOUNT BALANCES. Subject to applicable law and the provisions of the Baxter Savings Plan, effective as of the first day of the first calendar month following the Spin-Off, or effective as of any other date as agreed to in writing by the plan administrator for the Baxter Savings Plan and the plan administrator for the Allegiance Retirement Plan, the account balances (including outstanding loans) of all Baxter Savings Plan participants who are Allegiance Employees shall be spun off from the Baxter Savings Plan and merged into the Allegiance Retirement Plan (the "Transferred Accounts"). The plan administrator for the Allegiance Retirement Plan shall distribute any amounts from such Transferred Accounts which may be necessary in order for the Baxter Savings Plan to satisfy any requirements of applicable law (including, but not limited to, nondiscrimination rules) as instructed by the plan administrator for the Baxter Savings Plan. The plan administrator for the Allegiance Retirement Plan shall take any other action reasonably requested by the plan administrator for the Baxter Savings Plan which is necessary or advisable, in the opinion of the plan administrator for the Baxter Savings Plan, to maintain the tax-qualified status of the Baxter Savings Plan or to avoid the imposition of any penalties with respect to such plan. Section 9.10 ENTITLEMENT TO DISTRIBUTIONS UNDER PENSION PLAN. Each Allegiance Employee shall be treated as having terminated employment with an "Employer" as defined in the Baxter Pension Plan effective as of the Spin-Off Date and shall be fully vested in his or her accrued benefit under the Baxter Pension Plan as of such date; PROVIDED, HOWEVER, that no such employee shall be treated as terminated for purposes of eligibility to receive plan distributions until such employee is no longer eligible to have compensation with Allegiance (or the applicable Allegiance Subsidiary) count for purposes of determining benefits under the Baxter Pension Plan. Section 9.11 WELFARE BENEFITS PROVIDED UNDER ALLEGIANCE PLANS. (a) Each employee of Allegiance or any of its Subsidiaries who is eligible to participate in the Allegiance Welfare Plans shall be credited with (1) deductibles and co-payments paid by such employee during the plan year commencing April 1, 1996 under the Baxter Medical Plan (including dental benefits) and (2) periods of service with any Baxter Group member for all purposes under such plan. Amounts paid under the Baxter Medical Plan which are taken into account for purposes of determining each Allegiance Employee's lifetime maximum under such plan shall be taken into account for purposes of determining - 61 - such Allegiance Employee's lifetime maximum benefits under the Allegiance Medical Plan. (b) Baxter (or the applicable Baxter Subsidiary) shall pay all costs associated with the provision of disability benefits to any employee or former employee of Allegiance or any of its Subsidiaries who as of the Spin-Off Date is totally and permanently disabled. Allegiance (or the applicable Allegiance Subsidiary) shall pay all costs associated with the provision of disability benefits to any employee or former employee of Allegiance or any of its Subsidiaries other than the persons described in the first sentence of this SECTION 9.11(b); Allegiance (or the applicable Allegiance Subsidiary) shall provide benefits to any such persons who on the Spin-Off Date are entitled to receive disability benefits in an amount equal to the benefits such persons would have received if they had remained covered under the Baxter Plans during the period of such disability leave. Notwithstanding the foregoing, any Allegiance Employee receiving benefits under the Baxter Long-Term Disability Insurance Plan on the Spin-Off Date shall continue to receive benefits under the terms of such plan and the insurance contract used to fund such plan, and neither Allegiance nor any Allegiance Subsidiary shall be charged for the payment of such benefits. As of the Spin-Off Date, Allegiance (or the applicable Allegiance Subsidiary) shall assume all liabilities determined under FAS 112 relating to all Allegiance Employees. (c) Baxter (or the applicable Baxter Subsidiary) shall pay all claims under the Baxter Medical Plan (including dental benefits) which as of the Spin- Off Date have been incurred but not paid relating to employees of Allegiance and its Subsidiaries, but only if claims for such costs are submitted in written form to the authorized agents of Baxter (or the applicable Baxter Subsidiary) during the nine-month period beginning on the Spin-Off Date. (d) Baxter (or the applicable Baxter Subsidiary) shall pay all costs associated with the provision of benefits under the terms of the Baxter Retiree Welfare Plan for all persons who as of the Spin-Off Date have satisfied the age and service eligibility requirements for receiving benefits under such plan. Allegiance (or the applicable Allegiance Subsidiary) shall assume and pay all costs associated with the provision of retiree welfare benefits for all employees of Allegiance and its Subsidiaries who after the Spin-Off Date satisfy the age and service eligibility requirements under the corresponding Allegiance plan, if any, for receiving such benefits. (e) Effective as of the Spin-Off Date, the account balances (including assets and liabilities) of all participants in the Baxter Cafeteria Plans who are Allegiance Employees shall - 62 - be spun off from the Baxter Cafeteria Plans and merged into the corresponding cafeteria plans which are established by Allegiance or the applicable Allegiance Subsidiary. Section 9.12 STOCK PURCHASE PLAN. Except as otherwise provided in the plan, on the Spin-Off Date, employees of Allegiance and its Subsidiaries shall not be eligible to purchase Baxter Common Stock under the terms of the Baxter Stock Purchase Plan. Section 9.13 WORKERS' COMPENSATION. As soon as administratively practicable following the Spin-Off Date but in no event later than December 31, 1996, a Senior Vice President of each of the Parties shall agree upon the allocation between the Parties of responsibility and liability for workers' compensation claims and expenses relating to employees and former employees of the Parties and their respective Subsidiaries. Section 9.14 VACATION PAY POLICY. After the Spin-Off Date, it is expected that Allegiance shall maintain for its employees and employees of its Subsidiaries a vacation pay policy and Allegiance (or the applicable Allegiance Subsidiary) shall be responsible for costs incurred to provide vacation pay to employees of Allegiance and its Subsidiaries following such date. Allegiance (or the applicable Allegiance Subsidiary) shall assume any and all Baxter liabilities to provide to Allegiance Employees vacation which such persons accrued under the Baxter vacation pay policy as of the Spin-Off Date, and no payment of such accrued vacation pay shall be made by Baxter (or the applicable subsidiary) on the Spin-Off Date. Section 9.15 NON-QUALIFIED DEFERRED COMPENSATION PLANS. Baxter (or the applicable Baxter Subsidiary) shall assume the liability to provide benefits accrued as of the Spin-Off Date under the Baxter and Subsidiaries Supplemental Pension Plan with respect to all Allegiance Employees. Allegiance (or the applicable Subsidiary) shall assume the liability to provide benefits accrued under the Baxter and Subsidiaries Incentive Investment Excess Plan and the Baxter and Subsidiaries Deferred Compensation Plan with respect to Allegiance Employees. No assets shall be transferred between the Parties with respect to the plans listed in this SECTION 9.16; PROVIDED, HOWEVER, that Baxter shall receive a balance sheet credit for the amounts assumed in the first sentence of this Section. Section 9.16 INFORMATION TO BE PROVIDED TO BAXTER. Allegiance (or the applicable Allegiance Subsidiary) shall provide any information which Baxter (or any Baxter Subsidiary) may reasonably request, including but not limited to information relating to dates of termination of employment, in order to provide benefits to any eligible employee of Allegiance or any of - 63 - its Subsidiaries under the terms and conditions described herein or under the applicable Baxter Plans. Any information relating to an employee's termination of employment shall be provided by Allegiance (or the applicable Allegiance Subsidiary) to Baxter as soon as available to Allegiance or any of its Subsidiaries, but in any event no later than 30 days after such information is made available to Allegiance or any such Subsidiaries. Allegiance (or the applicable Allegiance Subsidiary) shall, as necessary, update the system used to keep such information in such timely manner as is required to administer the Baxter Plans. Section 9.17 CORPORATE ACTION; DELEGATION OF AUTHORITY. Any action taken by the Senior Vice President of Human Resources shall be considered to be action taken by either Baxter or Allegiance or their respective Subsidiaries for purposes of this ARTICLE IX. Without limiting the foregoing, the Chief Executive Officer of Baxter or Allegiance or their respective Subsidiaries may delegate in writing to any other person the authority to act on behalf of Baxter or Allegiance, respectively, or their respective Subsidiaries, with respect to actions required under the terms of this ARTICLE IX. Section 9.18 SPLIT-DOLLAR LIFE INSURANCE. Effective as of the Spin- Off Date, Baxter (or the applicable Baxter Subsidiary) shall transfer to Allegiance (or the applicable Allegiance Subsidiary) all split-dollar life insurance policies relating to, and Allegiance (or the applicable Allegiance Subsidiary) shall assume all liabilities associated with the provision of such split-dollar life insurance to, any Allegiance Employee who as of such date had met the eligibility requirements under such policies (I.E., any Allegiance Employee who has accumulated 65 points for purposes of determining the amount of benefits accrued under the Baxter Pension Plan). ARTICLE X. ACCESS TO INFORMATION Section 10.1 ACCESS TO INFORMATION. (a) ACCESS TO FINANCIAL INFORMATION. At all times from and after the Spin-Off Date for a period of ten years, (1) Baxter, upon reasonable notice, shall afford Allegiance, its Subsidiaries and their authorized accountants, counsel and other designated representatives reasonable access during normal business hours to, or, at Allegiance's expense, provide copies of, all records, books, contracts, instruments, data, documents and other information (collectively, "Information") relating to Allegiance or any of its Subsidiaries, the Allegiance Business or the Allegiance Employees within Baxter's possession or control immediately following the Spin-Off Date, insofar as such access or copies are required by Allegiance, and (2) Allegiance, upon - 64 - reasonable notice, shall afford to Baxter, its Subsidiaries and their authorized accountants, counsel and other designated representatives reasonable access during normal business hours to, or, at Baxter's expense, provide copies of, Information relating to Baxter or any of its Subsidiaries, the Retained Business or any employees of Baxter or any of its Subsidiaries within Allegiance's possession or control immediately following the Spin-Off Date insofar as such access or copies are required by Baxter. Information may be requested under this SECTION 10.1(a) for audit, accounting, claims defense, regulatory filings, litigation and tax purposes, for purposes of fulfilling disclosure and reporting obligations, for compensation, benefit or welfare plan administration and for other proper business purposes but not for competitive purposes. Baxter and Allegiance shall maintain the Information in the same way that Baxter maintains similar material relating to the ongoing business of Baxter. The provisions of this ARTICLE X shall not prejudice the rights or obligations of the Parties under the Tax Sharing Agreement or any of the Operating Agreements. (b) ACCESS TO TECHNICAL INFORMATION AND DATA. Prior to the Spin-Off Date, Allegiance and its Subsidiaries had access to technical information and data compilations including, without limitation, the materials testing registry ("MTR"), the Chemical and Toxicology data and the Baxter Materials Database, concerning, INTER ALIA, materials and formulations accumulated and maintained by Baxter and its Subsidiaries. For the period beginning on the Spin-Off Date and ending on the earlier to occur of the tenth anniversary of the Spin-Off Date or the termination of the license granted pursuant to SECTION 8.2(d), Allegiance and its Subsidiaries shall have reasonable access to the technical information and data compilations of Baxter and its Subsidiaries in existence on the Spin- Off Date, and services available therethrough, reasonably necessary for the Allegiance Products and products under development by Allegiance or its Subsidiaries, including the right to make copies and abstracts thereof for its business purposes in relation to such products. (c) LIMITATIONS. Baxter makes no representations or warranties, express or implied, about the accuracy, completeness, adequacy or sufficiency of the financial and technical information and data compilations and EXPRESSLY DISCLAIMS ALL WARRANTIES WHATSOEVER, WHETHER STATUTORY, WRITTEN, ORAL, EXPRESS OR IMPLIED, AND EXPRESSLY DISCLAIMS EACH SUCH WARRANTY, INCLUDING ANY WARRANTY OF MERCHANTABILITY AND FITNESS FOR A PARTICULAR PURPOSES. The rights of access pursuant to this SECTION 10.1 shall not include, however, such information of Baxter and its Subsidiaries relating to (1) products, materials and components under development by Baxter and its Subsidiaries; (2) information pertaining to potential acquisitions, divestitures and other business arrangements of Baxter and its Subsidiaries; (3) studies - 65 - and investigations being undertaken by Baxter and its Subsidiaries for its or their own benefit or for the benefit of a third party; and (4) information and data Baxter and its Subsidiaries are obligated to a third-party to maintain in confidence. Allegiance and its Subsidiaries agree to abide by and adhere to all reasonable requirements and limitations imposed by Baxter and its Subsidiaries in respect of the information and data compilations and access thereto and utilization of services available through such compilations. Neither Allegiance nor any of its Subsidiaries shall have any right to, and Allegiance agrees and agrees to cause of each of its Subsidiaries not to, make, have made, use or sell any products incorporating the technical information and data accessible to Allegiance and its Subsidiaries pursuant to SECTION 10.1(b) hereof, unless expressly conveyed pursuant to SECTION 4.2(vii), 5.3(i) or 8.2(a). Section 10.2 PRODUCTION OF WITNESSES. At all times from and after the Spin-Off Date, each Party shall use its reasonable efforts to make available to the other Party (without cost (other than reimbursement of actual out-of- pocket expenses) to, and upon prior written request of, the other Party) its officers, directors, employees and agents as witnesses to the extent that the same may reasonably be required by the other Party in connection with any legal, administrative or other proceedings in which the requesting Party may from time to time be involved with respect to the Allegiance Business, the Retained Business, the Spin-Off or any related transactions. Section 10.3 PROVISION OF CORPORATE RECORDS. Prior to or as promptly as practicable after the Spin-Off Date, Baxter shall deliver to Allegiance or one or more of its Subsidiaries all corporate books and records of Allegiance and its Subsidiaries and copies of all corporate books and records of Baxter relating to the Allegiance Business, including in each case all active agreements, litigation files and government filings. From and after the Spin- Off Date, all books, records and copies so delivered shall be the property of Allegiance or such Subsidiaries. Section 10.4 CONFIDENTIALITY. (a) From and after the Spin-Off Date, each of Baxter and Allegiance shall hold, and shall cause its Subsidiaries and its and their officers, employees, agents, consultants, advisors and other representatives to hold, in strict confidence all non-public information concerning the other Party or any of its Subsidiaries or Affiliates obtained by it prior to the Spin-Off Date, accessed by it pursuant to SECTION 10.1 hereof, or furnished to it by the other Party or any of its Subsidiaries or Affiliates pursuant to this Agreement or any agreement or document contemplated hereby, including, without limitation, any trade secrets, technology, know-how-and other non-public, proprietary intellectual property - 66 - rights licensed pursuant to SECTIONS 8.1 and 8.2 herein, and shall not release or disclose such information to any other Person, except its representatives, who shall be bound by the provisions of this SECTION 10.4; PROVIDED, HOWEVER, that Baxter and Allegiance and their respective Subsidiaries, officers, employees, agents, consultants, advisors and representatives may disclose such information if, and only to the extent that, (a) a disclosure of such information is compelled by judicial or administrative process or, in the opinion of such Party's counsel, by other requirements of law (in which case the disclosing party will provide, to the extent practicable under the circumstances, advance written notice to the other Party of its intent to make such disclosure), or (b) such Party can show that such information (i) is published or is or otherwise becomes available to the general public as part of the public domain without breach of this Agreement; (ii) has been furnished or made known to the recipient without any obligation to keep it confidential by a third party under circumstances which are not known to the recipient to involve a breach of the third party's obligations to a Party hereto; (iii) was developed independently of information furnished to the recipient under this Agreement; or (iv) in the case of information furnished after the Spin-Off Date, was known to the recipient at the time of receipt thereof from the other Party. (b) Each Party (the "first Party") acknowledges that the other Party would not have an adequate remedy at law for the breach by the first Party of any one or more of the covenants contained in this SECTION 10.4 and agrees that, in the event of such breach, the other Party may, in addition to the other remedies which may be available to it, apply to a court for an injunction to prevent breaches of this SECTION 10.4 and to enforce specifically the terms and provisions of this Section. Notwithstanding SECTION 13.1 hereof, the provisions of this SECTION 10.4 shall survive the Spin-Off Date indefinitely. Section 10.5 PRIVILEGED MATTERS. (a) Each of Baxter and Allegiance agree to maintain, preserve and assert all privileges, including, without limitation, privileges arising under or relating to the attorney-client relationship (which shall include without limitation the attorney-client and work product privileges), not heretofore waived, that relate to the Allegiance Business and the Transferred Services for any period prior to the Spin-Off Date ("Privilege" or "Privileges"). Each Party agrees that it shall not waive any Privilege that could be asserted under applicable law without the prior written consent of the other Party. The rights and obligations created by this SECTION 10.5 shall apply to all information relating to the Allegiance Business as to which, but for the Spin-Off, either Party would have been entitled to assert or did assert the protection of a Privilege ("Privileged Information"), including - 67 - without limitation, any and all information generated prior to the Spin-Off Date but which, after the Spin-Off, is in the possession of either Party; and (2) all information generated, received or arising after the Spin-Off Date that refers to or relates to Privileged Information generated, received or arising prior to the Spin-Off Date. (b) Upon receipt by either Party of any subpoena, discovery or other request that may call for the production or disclosure of Privileged Information or if either Party obtains knowledge that any current or former employee of Baxter or Allegiance has received any subpoena, discovery or other request that may call for the production or disclosure of Privileged Information, such Party shall notify promptly the other Party of the existence of the request and shall provide the other Party a reasonable opportunity to review the information and to assert any rights it may have under this SECTION 10.5 or otherwise to prevent the production or disclosure of Privileged Information. Each Party agrees that it will not produce or disclose any information that may be covered by a Privilege under this SECTION 10.5 unless (1) the other Party has provided its written consent to such production or disclosure (which consent will not be unreasonably withheld), or (2) a court of competent jurisdiction has entered a final, nonappealable order finding that the information is not entitled to protection under any applicable Privilege. (c) Baxter's transfer of books and records and other information to Allegiance, and Baxter's agreement to permit Allegiance to possess Privileged Information occurring or generated prior to the Spin-Off Date, are made in reliance on Allegiance's agreement, as set forth in this SECTION 10.5, to maintain the confidentiality of Privileged Information and to assert and maintain all applicable Privileges. The access to information being granted pursuant to SECTION 10.1, the agreement to provide witnesses and individuals pursuant to SECTION 10.2 and the transfer of Privileged Information to Allegiance pursuant to this Agreement shall not be deemed a waiver of any Privilege that has been or may be asserted under this SECTION 10.5 or otherwise. Nothing in this Agreement shall operate to reduce, minimize or condition the rights granted to Baxter in, or the obligations imposed upon Allegiance by, this SECTION 10.5. ARTICLE XI. CONDITIONS PRECEDENT TO SPIN-OFF The obligation of Baxter to effect the Spin-Off is subject to the satisfaction or the waiver by Baxter (if permissible) at or prior to the Spin- Off Date of each of the following conditions: - 68 - Section 11.1 TAX RULING. Baxter shall have received a ruling from the United States Internal Revenue Service or, at Baxter's discretion, an opinion of tax counsel, substantially to the effect that no income, gain or loss will be recognized by Baxter or its stockholders (other than with respect to cash received in lieu of fractional shares) upon the distribution to Baxter's stockholders of shares of Allegiance Common Stock. Section 11.2 NO ACTIONS. No action shall have been instituted or threatened by or before any court or administrative body to restrain, enjoin or otherwise prevent the Spin-Off or the other transactions contemplated hereby (including but not limited to a stop order with respect to the effectiveness of the Registration Statement), and no order, injunction or decree issued by any court of competent jurisdiction shall be in effect restraining the Spin-Off or such other transactions. Section 11.3 NYSE LISTING. The Allegiance Shares shall have been approved for listing on the NYSE, subject to official notice of issuance. Section 11.4 OPINIONS OF FINANCIAL ADVISOR. The Board of Directors of Baxter shall have received written opinions of CS First Boston Corporation to the effect that (i) the Spin-Off will not have a material adverse effect on the financial viability of Baxter after the Spin-Off or of Allegiance through the period ending December 31, 1998 and (ii) the Spin-Off is fair to the stockholders of Baxter from a financial point of view, which opinions shall not have been withdrawn or modified. Section 11.5 CONSENTS. All material authorizations, consents, approvals and clearances of all federal, state, local and foreign governmental agencies required to permit the valid consummation of the transactions contemplated herein shall have been obtained without any conditions being imposed that would have a material adverse effect on Allegiance. Section 11.6 REGISTRATION STATEMENT. The Registration Statement shall have become effective and no stop order shall have been issued or threatened. Section 11.7 NEW CREDIT FACILITY. The definitive agreements governing the Allegiance Credit Facility shall have been executed. Section 11.8 PRE-SPIN-OFF TRANSACTIONS. The pre-Spin-Off transactions contemplated by ARTICLES III, IV and V of this Agreement shall have been consummated in all material respects. Section 11.9 ANCILLARY AGREEMENTS. Each of the Tax Sharing Agreement and the Operating Agreements shall have been - 69 - executed and each of such agreements shall be in full force and effect. Section 11.10 RESIGNATIONS. Baxter shall cause all of its designees to resign or to be removed as officers and from all Boards of Directors or similar governing bodies of Allegiance and its Affiliates and any Transferred Subsidiary on which they serve. Section 11.11 BOARD APPROVAL. The Board of Directors of Baxter shall have approved the declaration of the Spin-Off. Section 11.12 ELECTION OF ALLEGIANCE BOARD. The Board of Directors of Allegiance as set forth on EXHIBIT J shall have been duly elected. Section 11.13 SATISFACTION OF CONDITIONS. The satisfaction of such conditions shall not create any obligations on the part of Baxter or any other party hereto to effect the Spin-Off or in any way limit Baxter's power of termination set forth in SECTION 15.9. ARTICLE XII. EXPENSES; TAXES Section 12.1 ALLOCATION OF EXPENSES. (a) Except as otherwise provided in this Agreement or any other agreement contemplated hereby, or as otherwise agreed to in writing by the Parties, all fees and expenses incurred in connection with the transactions contemplated hereby or thereby shall be paid by Baxter. Specifically, (i) Baxter shall absorb all costs associated with the dedication of internal resources and personnel to such transactions at all times prior to the Spin-Off Date, (ii) Baxter will pay all fees and expenses which are directly related to the implementation of the Spin-Off transactions on or prior to the Spin-Off Date, and certain agreed software contractor fees and expenses after the Spin-Off, and (iii) Allegiance will pay all fees and expenses with respect to services for which Allegiance procures and receives the primary benefit prior to and after the Spin-Off Date. (b) Notwithstanding SECTION 12.1(a) above, Baxter shall be solely responsible for the following costs incurred in connection with the transactions contemplated hereby: (i) the reasonable fees and expenses of Sidley & Austin in connection with its representation of Baxter; (ii) the reasonable fees and expenses of Skadden, Arps, Slate, Meagher & Flom in connection with its representation of Baxter relating to the tax ruling and the opinion of counsel on tax matters; (iii) the reasonable fees and expenses of Goldman Sachs & Co., First Chicago Bank and Bank of America, N.A. relating to their financial advisory services - 70 - rendered to Baxter; (iv) the reasonable fees and expenses of CS First Boston Corporation and Lehman Brothers Inc. relating to their financial advisory services rendered to Baxter; (v) the reasonable fees and expenses of Price Waterhouse LLP in connection with its audit and tax services rendered to Baxter; (vi) the reasonable fees and expenses of Towers, Perrin and Hewitt Associates in connection with their consulting services relating to benefits plans rendered to Baxter; (vii) all SEC registration and "blue sky" filing fees associated with the Registration Statement; (viii) the printing, mailing and distributing the Information Statement to Baxter's stockholders; (ix) the reasonable fees and expenses of Allegiance's transfer agent and registrar relating to the initial issuance of Allegiance Shares as a dividend to Baxter's stockholders, (x) the NYSE listing fees for the Allegiance Shares; (xi) the design and initial printing of certificates of the Allegiance Shares; (xii) the initial distribution of the certificates of Allegiance Common Stock as a dividend to Baxter stockholders; (xiii) the development, search and registration of the name "Allegiance"; (xiv) third party vendors for software licenses; (xv) retention bonuses to employees in the amount of $5,271,174; (xvi) employee relocation expenses in an amount not to exceed $3,500,000; and (xvii) various international professional services directly related to the Spin-Off transactions. (c) Notwithstanding SECTION 12(a)(i) above, Allegiance shall be solely responsible for all fees, expenses and other costs incurred in connection with the transactions contemplated hereby related to: (i) the reasonable fees and expenses of McDermott, Will & Emery in connection with its representation of Allegiance relating to the creation of benefits plans; (ii) the reasonable fees and expenses of Bank of America, N.A. relating to their syndication and arrangement of revolving credit facilities for Allegiance; (iii) the reasonable fees and expenses of Goldman Sachs & Co. for advisory services rendered to Allegiance; and (iv) the reasonable fees or expenses of any financial advisors retained by Allegiance in connection with any "road shows" or presentations to investors. Section 12.2 TAXES. Baxter will determine the amount of sales, transfer, V.A.T. or other similar taxes or fees (including, without limitation, all real estate, patent, copyright and trademark transfer taxes and real estate recording fees but not patent, copyright and trademark recording fees) payable in connection with the transactions contemplated by this Agreement (the "Transaction Taxes"). Baxter and/or Allegiance as the case may be, agree to file promptly and timely the returns for such Transaction Taxes with the appropriate taxing authorities and remit payment of the Transaction Taxes. Subject to exceptions, if any, agreed to in the Tax Sharing Agreement, - 71 - Baxter shall be responsible for the payment of the Transaction Taxes. Section 12.3 DIRECTORS' AND OFFICERS' INSURANCE. Baxter shall use reasonable efforts to cause the persons currently serving as officers and/or directors of Baxter or any of its Subsidiaries to be covered for a period of six years from the Spin-Off Date by the directors' and officers' liability insurance policy maintained by Baxter (including corporate reimbursement) (PROVIDED that Baxter may substitute therefor policies of at least the same coverage and amounts containing terms and conditions which are not less advantageous than such policy) with respect to matters covered under the existing policy occurring prior to the Spin-Off Date which were committed by such officers and/or directors in their capacity as such; PROVIDED, HOWEVER, that in no event shall Baxter be required to expend with respect to any year more than 200% of the current annual premium expended by Baxter (the "Insurance Amount") to maintain or procure insurance coverage pursuant hereto; and PROVIDED, FURTHER, that if Baxter is unable to maintain or obtain the insurance called for by this SECTION 12.3, Baxter shall use reasonable efforts to obtain as much comparable insurance as available for the Insurance Amount. In the event Baxter or any of its successors or assigns (i) consolidates with or merges into any other Person and shall not be the continuing or surviving corporation or entity of such consolidation or merger, or (ii) transfers or conveys all or substantially all of its properties and assets to any Person, then, and in each such case, to the extent necessary, proper provision shall be made so that the successors and assigns of Baxter assume the obligations set forth in this SECTION 12.3. The provisions of this SECTION 12.3 are intended to be for the benefit of, and shall be enforceable by, each such officer and director and his or her heirs and representatives. As provided in SECTION 13.5, any amount Allegiance is required to pay to Baxter as an indemnity under this Agreement is reduced to the extent Baxter receives insurance proceeds from the above coverage, but only to the extent such proceeds are actually received by Baxter. ARTICLE XIII. SURVIVAL, INDEMNIFICATION, CLAIMS AND OTHER MATTERS Section 13.1 SURVIVAL. All covenants and agreements of Baxter and Allegiance contained in this Agreement shall survive the Spin-Off Date indefinitely, unless a specific survival or other applicable period is expressly set forth therein. - 72 - Section 13.2 INDEMNIFICATION. (a) Baxter shall indemnify, defend and hold harmless Allegiance and each of its Affiliates, directors, officers, employees and agents (collectively, "Allegiance Indemnified Parties") from and against any and all Claims and Losses incurred or suffered by Allegiance (and/or one or more of the Allegiance Indemnified Parties) in connection with or arising out of or due to, directly or indirectly: (i) any claim that the information included in the Registration Statement or the Information Statement which relates to Baxter or the Retained Business is false or misleading with respect to any material fact or omits to state any material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading, regardless of whether the occurrence, action or other event giving rise to the applicable matter took place prior or subsequent to the Spin-Off; (ii) the business (other than the Allegiance Business) conducted by Baxter or its Subsidiaries, Affiliates or predecessors on or at any time prior to the Spin-Off Date (including, but not limited to, any environmental liabilities associated with such business); (iii) the assets owned by Baxter or its Subsidiaries other than the Transferred Assets; (iv) the liabilities and obligations (including the Excluded Liabilities) of Baxter or its Subsidiaries other than the Assumed Liabilities; (v) the breach by Baxter or any of its Subsidiaries of any covenant or agreement set forth in this Agreement or any Conveyancing Instruments, regardless of when or where the loss, claim, accident, occurrence, event or happening giving rise to the Claim or Loss took place, or whether any such loss, claim, accident, or occurrence, event or happening is known or unknown, or reported or unreported; (vi) Baxter's reduction, elimination or failure to provide any benefit previously provided to its employees (or employees of its Subsidiaries) and any act or omission by Baxter in connection with the transfer of assets and liabilities from the Baxter Savings Plan to the Allegiance Retirement Plan; (vii) the indemnifiable matters set forth in SECTION 7.11(iii). - 73 - (b) Allegiance shall indemnify, defend and hold harmless Baxter and each of its Affiliates, directors, officers, employees and agents (collectively, "Baxter Indemnified Parties") from and against any and all Claims and Losses incurred or suffered by Baxter (and/or one or more of the Baxter Indemnified Parties) in connection with or arising out of or due to, directly or indirectly: (i) any claim that the information included in the Registration Statement or Information Statement which relates to the Allegiance Business is false or misleading with respect to any material fact or omits to state any material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading, regardless or whether the occurrence, action or other event giving rise to the applicable matter took place prior to or subsequent to the Spin-Off Date; (ii) the Allegiance Business as conducted by Baxter or its Subsidiaries, Affiliates or predecessors on or at any time prior to the Spin-Off Date; (iii) the Transferred Assets; (iv) the Assumed Liabilities; (v) the Transferred Subsidiaries; (vi) the breach by Allegiance or any of its Subsidiaries of any covenant or agreement set forth in this Agreement or any Conveyancing Instrument, regardless of when or where the loss, claim, accident, occurrence, event or happening giving rise to the Claim or Loss took place, or whether any such loss, claim, accident, occurrence, event or happening is known or unknown, or reported or unreported; (vii) the employee benefits provided or the actions taken or omitted to be taken with respect thereto in connection with this Agreement or otherwise relating to the provision of employee benefits to employees or former employees of Allegiance (or its Subsidiaries), their beneficiaries, alternate payees or any other person claiming benefits through them (except to the extent such Claims or Losses are specifically allocated to Baxter pursuant to SECTION 13.2(a)(vi)), including without limitation Claims or Losses arising in connection with (1) Allegiance's reduction, elimination or failure to provide any benefit previously provided to its employees or employees of any of its Subsidiaries and (2) the transfer of account balances from the Baxter Savings Plan to the Allegiance Retirement - 74 - Plan where such Claims or Losses are incurred as a result of (1) any act or omission by Allegiance (or Allegiance's representative) or (2) a determination by the Internal Revenue Service that the Allegiance Retirement Plan is not a tax-qualified plan; (viii) the indemnifiable matters set forth in SECTIONS 6.3, 7.4 and 7.11(iii); (ix) any use of, access to or reliance upon the technical information or data made available to Allegiance or its Subsidiaries pursuant to SECTION 10.1(b); or (x) the Unassigned Indemnifiable Contracts. (c) EXCEPT AS EXPRESSLY PROVIDED HEREIN, THE INDEMNITY OBLIGATION UNDER THIS SECTION 13.2 SHALL APPLY NOTWITHSTANDING ANY INVESTIGATION MADE BY OR ON BEHALF OF ANY INDEMNIFIED PARTY AND SHALL APPLY WITHOUT REGARD TO WHETHER THE LOSS, LIABILITY, CLAIM, DAMAGE, COST OR EXPENSE FOR WHICH INDEMNITY IS CLAIMED HEREUNDER IS BASED ON STRICT LIABILITY, ABSOLUTE LIABILITY OR ARISES AS AN OBLIGATION FOR CONTRIBUTION. (d) NOTWITHSTANDING ANYTHING IN THIS AGREEMENT TO THE CONTRARY, IN NO EVENT SHALL BAXTER BE LIABLE TO ALLEGIANCE (OR ANY ALLEGIANCE INDEMNIFIED PARTY), OR ALLEGIANCE BE LIABLE TO BAXTER (OR ANY BAXTER INDEMNIFIED PARTY), UNDER THIS AGREEMENT FOR ANY SPECIAL, INDIRECT, INCIDENTAL, CONSEQUENTIAL (EXCEPT WITH RESPECT TO LIABILITY UNDER SECTION 7.11 HEREOF) OR PUNITIVE DAMAGES, INCLUDING, WITHOUT LIMITATION, LOSS OF ANTICIPATED PROFITS OR LOSS OR DIMINUTION OF REVENUES, REGARDLESS OF THE FORM OF ACTION, WHETHER IN CONTRACT, TORT OR OTHERWISE, EXCEPT TO THE EXTENT THAT SUCH LIABILITY HAS BEEN ASSERTED BY A THIRD PARTY AGAINST A PARTY ENTITLED TO INDEMNIFICATION HEREUNDER. Section 13.3 PROCEDURE FOR INDEMNIFICATION. (a) If any third party shall make any claim or commence any arbitration proceeding or suit against any one or more of the Indemnified Parties with respect to which an Indemnified Party intends to make any claim for indemnification against Allegiance under SECTION 13.2(b) or against Baxter under SECTION 13.2(a), such Indemnified Parties shall promptly give written notice to the Indemnifying Party of such third party claim, arbitration proceeding or suit and the following provisions shall apply. (b) The Indemnifying Party shall have 20 business days after receipt of the notice referred to in SECTION 13.3(a) to notify the Indemnified Party that it elects to conduct and control the defense of such claim, proceeding or suit. If the Indemnifying Party does not give the foregoing notice, the Indemnified Party shall have the right to defend, contest, settle - 75 - or compromise such claim, proceeding or suit in the exercise of its exclusive discretion subject to the provisions of SECTION 13.3(c), and the Indemnifying Party shall, upon request from any of the Indemnified Parties, promptly pay to such Indemnified Parties in accordance with the other terms of this SECTION 13.3(b) the amount of any Claim or Loss resulting from their liability to the third party claimant. If the Indemnifying Party gives the foregoing notice, the Indemnifying Party shall have the right to undertake, conduct and control, through counsel reasonably acceptable to the Indemnified Party, and at its sole expense, the conduct and settlement of such claim, proceeding or suit, and the Indemnified Party shall cooperate with the Indemnifying Party in connection therewith, PROVIDED that (i) the Indemnifying Party shall not thereby permit any lien, encumbrance or other adverse charge to thereafter attach to any asset of any Indemnified Party; (ii) the Indemnifying Party shall not thereby permit any injunction against any Indemnified Party; (iii) the Indemnifying Party shall permit the Indemnified Party and counsel chosen by the Indemnified Party and reasonably acceptable to the Indemnifying Party to monitor such conduct or settlement and shall provide the Indemnified Party and such counsel with such information regarding such claim, proceeding or suit as either of them may reasonably request (which request may be general or specific), but the fees and expenses of such counsel shall be borne by the Indemnified Party unless (1) the Indemnifying Party and the Indemnified Party shall have mutually agreed to the retention of such counsel or (2) the named parties to any such claim, proceeding or suit include the Indemnified Party and the Indemnifying Party and in the reasonable opinion of counsel to the Indemnified Party representation of both parties by the same counsel would be inappropriate due to actual or likely conflicts of interest between them, in either of which cases the reasonable fees and disbursements of counsel for such Indemnified Party shall be reimbursed by the Indemnifying Party to the Indemnified Party); and (iv) the Indemnifying Party shall agree promptly to reimburse to the extent required under this ARTICLE XIII the Indemnified Party for the full amount of any Claim or Loss resulting from such claim, proceeding or suit and all related expenses incurred by the Indemnified Party. In no event shall the Indemnifying Party without the prior written consent of the Indemnified Party, settle or comprise any claim or consent to the entry of any judgment that does not include as an unconditional term thereof the giving by the claimant or the plaintiff to the Indemnified Party a release from all liability in respect of such claim. If the Indemnifying Party shall not have undertaken the conduct and control of the defense of any claim, suit or proceeding as provided above, the Indemnifying Party shall nevertheless be entitled through counsel chosen by the Indemnifying Party and reasonably acceptable to the Indemnified - 76 - Party to monitor the conduct or settlement of such claim by the Indemnified Party, and the Indemnified Party shall provide the Indemnifying Party and such counsel with such information regarding such action or suit as either of them may reasonably request (which request may be general or specific), but all costs and expenses incurred in connection with such monitoring shall be borne by the Indemnifying Party. (c) So long as the Indemnifying Party is contesting any such claim, suit or proceeding in good faith, the Indemnified Party shall not pay or settle any such claim, proceeding or suit. Notwithstanding the foregoing, the Indemnified Party shall have the right to pay or settle any such claim, proceeding or suit, PROVIDED that in such event the Indemnified Party shall waive any right to indemnity therefor by the Indemnifying Party, and no amount in respect thereof shall be claimed as a Claim or Loss under this SECTION 13.3(c). If the Indemnifying Party shall have undertaken the conduct and control of the defense of any claim, suit or proceeding as provided above, the Indemnified Party, on not less than 30 days' prior written notice to the Indemnifying Party, may make settlement (including payment in full) of such claim and such settlement shall be binding upon the Parties hereto for the purposes hereof, unless within said 30-day period the Indemnifying Party shall have requested the Indemnified Party to contest such claim at the expense of the Indemnifying Party. In such event, the Indemnified Party shall promptly comply with such request and the Indemnifying Party shall have the right to direct the defense of such claim or any litigation based thereon subject to all of the conditions of SECTION 13.3(b). Anything in this SECTION 13.3(c) to the contrary notwithstanding, if the Indemnified Party, in the belief that a claim may materially and adversely affect it other than as a result of money damages or other money payments, advises the Indemnifying Party that it has determined to make settlement of a claim, the Indemnified Party shall have the right to do so at its own cost and expense, without any requirement to contest such claim at the request of the Indemnifying Party, but without any right under the provisions of this SECTION 13.3(c) for indemnification by the Indemnifying Party. Section 13.4 DIRECT CLAIMS. Any claim for indemnity on account of a Claim or Loss made directly by the Indemnified Party against the Indemnifying Party and which does not result from a third party claim shall be asserted by written notice from the Indemnified Party to the Indemnifying Party specifically claiming indemnification hereunder. Such Indemnifying Party shall have a period of 30 business days within which to respond thereto. If such Indemnifying Party does not respond within such 30 business-day period, such Indemnifying Party shall be deemed - 77 - to have accepted responsibility to make payment and shall have no further right to contest the validity of such claim. If such Indemnifying Party does respond within such 30 business-day period and rejects such claim in whole or in part, such Indemnified Party shall be free to pursue resolution as provided in ARTICLE XIV. Section 13.5 ADJUSTMENT OF INDEMNIFIABLE LOSSES. (a) The amount which an Indemnifying Party is required to pay to an Indemnified Party shall be reduced (including, without limitation, retroactively) by any insurance proceeds and other amounts actually recovered by such Indemnified Party in reduction of the related Claim or Loss. If an Indemnified Party shall have received an Indemnity Payment in respect of a Claim or Loss and shall subsequently actually receive insurance proceeds or the other amounts in respect of such Claim or Loss, then such Indemnified Party shall pay to such Indemnifying Party a sum equal to the lesser of (1) the amount of such insurance proceeds or other amounts actually received and (2) the net amount of Indemnity Payments actually received previously. The Indemnified Party agrees that the Indemnifying Party shall be subrogated to such Indemnified Party under any insurance policy. An insurer who would otherwise be obligated to pay any claim shall not be relieved of the responsibility with respect thereto, or, solely by virtue of the indemnification provisions hereof, have any subrogation rights with respect thereto, it being expressly understood and agreed that no insurer or any other third party shall be entitled to a "windfall" (I.E., a benefit they would not be entitled to receive in the absence of the indemnification provisions) by virtue of the indemnification provisions hereof. (b) If any Indemnified Party realizes a Tax benefit or detriment in one or more Tax periods by reason of having incurred a Claim or Loss for which such Indemnified Party receives an Indemnity Payment from an Indemnifying Party (or by reason of the receipt of any Indemnity Payment), then such Indemnified Party shall pay to such Indemnifying Party an amount equal to the Tax benefit or such Indemnifying Party shall pay to such Indemnified Party an additional amount equal to the Tax detriment (taking into account, without limitation, any Tax detriment resulting from the receipt of such additional amounts), as the case may be. The amount of any Tax benefit or any Tax detriment for a Tax period realized by an Indemnified Party by reason of having incurred a Claim or Loss (or by reason of the receipt of any Indemnity Payment) shall be deemed to equal the product obtained by multiplying (i) the amount of any deduction or loss or inclusion in income for such period resulting from such Claim or Loss (or the receipt of any Indemnity Payment or additional amount), as the case may be (without regard to whether such deduction or loss or such inclusion in income results in any actual decrease or increase in Tax liability for such period), by - 78 - (ii) the highest applicable marginal Tax rate for such period (PROVIDED, HOWEVER, that the amount of any Tax benefit attributable to an amount that is creditable shall be deemed to equal the amount of such creditable item). Any payment due under this SECTION 13.5(b) with respect to a Tax benefit or Tax detriment realized by an Indemnified Party in a Tax period shall be due and payable within 30 days from the time the return for such Tax period is due, without taking into account any extension of time granted to the Party filing such return. (c) In the event that an Indemnity Payment shall be denominated in a currency other than United States dollars, the amount of such payment shall be translated into United States dollars using the Foreign Exchange Rate for such currency determined in accordance with the following rules: (i) with respect to a Claim or Loss arising from payment by a financial institution under a guarantee, comfort letter, letter of credit, foreign exchange contract or similar instrument, the Foreign Exchange Rate for such currency shall be determined as of the date on which such financial institution shall have been reimbursed; (ii) with respect to a Claim or Loss covered by insurance, the Foreign Exchange Rate for such currency shall be the Foreign Exchange Rate employed by the insurance company providing such insurance in settling such Claim or Loss with the Indemnifying Party; and (iii) with respect to a Claim or Loss not covered by clause (i) or (ii) above, the Foreign Exchange Rate for such currency shall be determined as of the date that notice of the claim with respect to such Claim or Loss shall be given to the Indemnified Party. Section 13.6 CONTRIBUTION. If the indemnification provided for in SECTION 13.2 is unavailable to an Indemnified Party in respect of any Claim or Loss arising out of or related to information contained in the Registration Statement or the Information Statement, then the Indemnifying Party, in lieu of indemnifying such Indemnified Party, shall contribute to the amount paid or payable by such Indemnified Party as a result of such Claim or Loss in such proportion as is appropriate to reflect the relative fault of Allegiance or the Allegiance Indemnified Parties (an "Allegiance Party"), on the one hand, or Baxter or the Baxter Indemnified Parties (a "Baxter Party"), on the other hand, in connection with the statements or omissions which resulted in such Claim or Loss. The relative fault of any Allegiance Party, on the one hand, and of any Baxter Party, on the other hand, shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a - 79 - material fact or the omission or alleged omission of a material fact or the omission or alleged omission of a material fact relates to information about or supplied by the Allegiance Business or an Allegiance Party, on the one hand, or about or by the Retained Business or a Baxter Party, on the other hand. Section 13.7 NO THIRD PARTY BENEFICIARIES. Except to the extent expressly provided otherwise in this ARTICLE XIII, the indemnification provided for in this Agreement, the Tax Sharing Agreement or any Operating Agreement shall not inure to the benefit of any third party or parties and shall not relieve any insurer or other third party who would otherwise be obligated to pay any claim or the responsibility with respect thereto or, solely by virtue of the indemnification provisions hereof, provide any subrogation rights with respect thereto, and each Party agrees to waive such rights against the other to the fullest extent permitted. Section 13.8 RELEASE OF PRE-DIVESTITURE LIABILITIES. Each of Baxter and Allegiance does hereby for itself, its Affiliates, successors and assigns, remise, release and forever discharge each other Party, its Affiliates, successors and assigns and all Persons who at any time prior to the Spin-Off Date have been shareholders, directors, officers, agents or employees of any such other Party or Affiliate, their heirs, executors, administrators and assigns, any and all claims, debts, demands, actions, causes of action, suits, sum or sums of money, accounts, reckonings, bonds, specialties, indemnities, exonerations, covenants, contracts, controversies, agreements, obligations, promises, doings, omissions, variances, damages, executions and liabilities whatsoever, both at law and in equity, arising from any events in the ordinary course of business on or prior to the Spin-Off Date and relating to the operations of the Retained Business or the Allegiance Business, including the transactions and all other activities to implement the Spin-Off (each of the foregoing being hereinafter referred to as a "liability"), PROVIDED, HOWEVER, that nothing in this SECTION 13.8 shall release (a) any Party from (i) any liability, contingent or otherwise, transferred, assigned or allocated and assumed, or retained in accordance with this Agreement, the Tax Sharing Agreement or any Operating Agreement, or (ii) any liability provided in or resulting from this Agreement, the Tax Sharing Agreement, any Operating Agreement or any agreement between any of Baxter and its Subsidiaries, on the one hand, and Allegiance and its Subsidiaries, on the other hand, not terminated pursuant to the Spin-Off or any other agreement between any of the Parties entered into in contemplation that such agreement would remain in effect after the Spin-Off, or (b) any Party from any liability for unpaid amounts for the sale, lease, construction or receipt of goods, property or services purchased, obtained or used by it in the ordinary course of - 80 - business prior to the Spin-Off Date, or (c) any Party from any liability for unpaid amounts for products or services or refunds owing on products or services due on a value-received basis for work done at one Party's request or done on such Party's behalf, or (d) any Party from any liability the release of which would result in the release of any party other than a Person released pursuant to this SECTION 13.8. ARTICLE XIV. DISPUTE RESOLUTION Section 14.1 ESCALATION. The Parties agree that they will attempt to settle any claim or controversy arising out of this Agreement through good faith negotiations in the spirit of mutual cooperation between business executives with authority to resolve the controversy. Subject to the provisions set forth in SECTION 7.7, prior to taking action as provided in SECTION 14.2, the Parties first shall submit such claim or controversy to an appropriate corporate officer of each Party for resolution, and if such corporate officers are unable to resolve such claim or controversy, either Party may request that their respective chief executive officers, or their respective delegees, attempt to resolve the dispute. The officers or delegees to whom any such claim or controversy is submitted shall attempt to resolve the dispute through good faith negotiations over a reasonable period, not to exceed 30 days in the aggregate unless otherwise agreed. Such 30 day period shall be deemed to commence on the date of a notice from either Party describing the particular claim or controversy. If any claim or controversy relates to invoiced services and products, a late payment fee equal to 1% per month will accrue on all outstanding balances. The late payment fee shall accrue from date when such services and products are due for payment until the time when such payment is actually made or settled upon resolution of the dispute. Section 14.2 ARBITRATION. Subject to the provisions set forth in SECTION 7.7, any dispute that is not resolved by negotiations pursuant to SECTION 14.1 will, upon the written request of either Party, be resolved by binding arbitration conducted in accordance with the Rules of the CPR Institute for Dispute Resolution by a sole arbitrator who is a former federal judge or other mutually agreed upon individual. Such arbitrator shall set a schedule for determination of such dispute that is reasonable under the circumstances. Such arbitrator shall determine the dispute in accordance with this Agreement and the substantive rules of law (but not the rules of procedure) that would be applied by a federal court sitting in Illinois. The arbitration shall take place in Lake County, Illinois. The arbitration will be governed by the United States Arbitration Act, 9 U.S.C. Sections 1-16 and the Patent Arbitration Act, 35 U.S.C. Section 294. Judgment upon the award rendered by the arbitrator may be - 81 - entered by any court having jurisdiction. Where this Agreement provides for future agreement by the parties, failure to reach such agreement shall not constitute a dispute subject to the provisions of this SECTION 14.2 except as expressly provided otherwise. Section 14.3 INJUNCTIVE RELIEF. Nothing contained in this ARTICLE XIV shall prevent either Party from resorting to judicial process if injunctive or other equitable relief from a court is necessary to prevent serious and irreparable injury to one Party or to others. The use of arbitration procedures will not be construed under the doctrine of laches, waiver or estoppel to affect adversely either Party's right to assert any claim or defense. ARTICLE XV. MISCELLANEOUS PROVISIONS Section 15.1 ENTIRE AGREEMENT. This Agreement, the Tax Sharing Agreement, the Operating Agreements and the Conveyancing Instruments constitute the only agreements between the Parties with respect to the subject matter hereof, there being no prior written or oral promises or representations not incorporated herein or therein. Section 15.2 CHOICE OF LAW. This Agreement shall be governed by and construed and enforced in accordance with the laws of the State of Illinois and the federal laws of the United States of America applicable therein, as though all acts and omissions related hereto occurred in Illinois. Any lawsuit arising from or related to this Agreement shall only be brought in the United States District Court for the Northern District of Illinois or the Circuit Court of Lake County, Illinois. To the extent permissible by law, the Parties hereby consent to the jurisdiction and venue of such courts. Each Party hereby waives, releases and agrees not to assert, and agrees to cause its Affiliates to waive, release and not assert, any rights such Party or its Affiliates may have under any foreign law or regulation that would be inconsistent with the terms of this Agreement as governed by Illinois law. Section 15.3 AMENDMENT; WAIVER. No amendment or modification of the terms of this Agreement shall be binding on either Party unless reduced to writing and signed by an authorized representative of the Party to be bound. The waiver by either Party of any particular default by the other Party shall not affect or impair the rights of the Party so waiving with respect to any subsequent default of the same or a different kind; nor shall any delay or omission by either Party to exercise any right arising from any default by the other affect or impair - 82 - any rights which the nondefaulting Party may have with respect to the same or any future default. Section 15.4 SEVERABILITY. Any provision of this Agreement which is prohibited or unenforceable in any jurisdiction shall be ineffective in such jurisdiction to the extent of such prohibition or unenforceability without affecting, impairing or invalidating the remaining provisions or the enforceability of this Agreement. Section 15.5 COUNTERPARTS. For convenience of the Parties, this Agreement may be executed in one or more counterparts, each of which shall be deemed an original for all purposes. Section 15.6 RECORDS RETENTION. Each Party will retain all information obtained or created in the course of performance hereunder in accordance with the records retention guidelines of the other Party existing from time to time; PROVIDED, HOWEVER, that such information shall be retained for a period of at least ten years following the date hereof. Each Party has advised the other of its respective guidelines as in effect on the Spin-Off Date and will advise the other Party of any subsequent changes therein. Each Party shall provide 30 days' prior notice to the other Party before destroying any such information. The provisions of this SECTION 15.6 shall not prejudice the rights or alter the obligations of the Parties under the Tax Sharing Agreement or any of the Operating Agreements with respect to records retention. Section 15.7 BENEFICIARIES. Except for the provisions of SECTIONS 12.3 and 13.2 hereof, this Agreement is solely for the benefit of the Parties and their respective Affiliates, successors and permitted assigns and shall not confer upon any other Person any remedy, claim, liability, reimbursement or other right in excess of those existing without reference to this Agreement. Nothing in this Agreement shall obligate Baxter, Allegiance or any of their respective direct or indirect Subsidiaries to assist any Allegiance Employee to enforce any rights such employee may have with respect to any of the employee benefits described in this Agreement. Section 15.8 NOTICES. All notices, requests, claims, demands and other communications hereunder shall be in writing and shall be given (and shall be deemed to have been duly given upon receipt) by delivery in person, by cable, telegram, telex, facsimile or other standard form of telecommunications, or by registered or certified mail, postage prepaid, return receipt requested, addressed as follows: - 83 - If to Baxter: Baxter International Inc. One Deerfield Parkway Deerfield, IL 60015 Attention: General Counsel Facsimile: (847) 948-4000 If to Allegiance: Allegiance Corporation 1430 Waukegan Road McGaw Park, IL 60085 Attention: General Counsel Facsimile: (847) 689-6812 Section 15.9 TERMINATION. Notwithstanding any provision hereof, this Agreement may be terminated and the Spin-Off abandoned at any time prior to the Spin-Off Date by and in the sole discretion of the Board of Directors of Baxter without the approval of any Person. In the event of such termination, no Party shall have any liability to any Person by reason of this Agreement, except that Baxter shall be liable for any costs and expenses, including attorneys' fees, incurred by Allegiance or its Subsidiaries prior to or arising out of such termination. Section 15.10 PERFORMANCE. Each Party shall cause to be performed, and hereby guarantee the performance of, all actions, agreements and obligations set forth herein to be performed by any Subsidiary or Affiliate of such Party. - 84 - IN WITNESS WHEREOF, the Parties hereto have caused this Agreement to be signed by their authorized representatives as of the date first above written. BAXTER INTERNATIONAL INC. By: -------------------------------------- Vernon R. Loucks Jr. Chairman and Chief Executive Officer ALLEGIANCE CORPORATION By: -------------------------------------- Lester B. Knight Chairman and Chief Executive Officer - 85 - EXHIBIT A THE TRANSFERRED BUSINESS The marketing, sales and distribution of healthcare, surgical, patient-care and clinical laboratory products for various manufacturers to hospitals and non-hospital customers in the United States, including without limitation Hospital Supply/Scientific Products, Hospitex, network sales and support services and specialized distribution (the "Distribution Business"). The research, development, testing and manufacture of surgical and medical products of the type manufactured by the following Baxter business units: Converters/Custom Sterile, Respiratory, Gloves, Medi-Vac, Special Procedures, Thermal, V. Mueller and Urology (the "Surgical Business"). Health care cost-containment and management programs for medical and related supplies and services, including without limitation ValueLink-Registered Trademark- services, risk sharing, PBDS Service, sterile processing, textile cost management and clinical consulting (the "Cost Management Business"). The Surgical Business, the Cost Management Business and the Distribution Business shall be known as the "Transferred Business." EXHIBIT B TRANSFERRED SERVICES The services provided by Allegiance or its Subsidiaries under the agreements listed as items A1, A2 and A3 in EXHIBIT D hereto. EXHIBIT C TRANSFERRED SUBSIDIARIES Alco, Inc. Eurovac Ltd. Euromedical Industries Senderihan Berhad Cirmex de Chihuahua S.A. de C.V. Cirpro de Delicios S.A. de C.V. Convertors de Mexico S.A. de C.V. Quiroproductos de Cuauhtemoc S.A. de C.V. Productos Urologos de Mexico S.A. de C.V. Allegiance Healthcare Sdn. Bhd. Allegiance Sante , S.A. Allegiance Healthcare Deutschland Gmbh Allegiance Healthcare Canada Inc. Allegiance Healthcare Corporation Allegiance Healthcare International Inc. EXHIBIT D OPERATING AGREEMENTS I. SERVICES AGREEMENTS A. ALLEGIANCE PROVIDED SERVICES 1. Administrative Services Agreement (Albuquerque U.S.) 2. Communication and Information Services Agreement B. BAXTER PROVIDED SERVICES 1. Transition Services Agreement (U.S.) 2. Transition Services Agreement (International) 3. Research and Development Agreement 4. Information Services Agreement C. INTERNATIONAL SERVICES 1. France Services Agreement 2. Germany Services Agreement 3. Administrative Services Agreement (Albuquerque Canada) 4. Malta Services Agreement II. DISTRIBUTION AGREEMENTS A. DOMESTIC DISTRIBUTION AGREEMENTS 1. Agency, Services and Distribution Agreement (IV Systems) 2. Agency, Services and Distribution Agreement (Renal) 3. Services and Distribution Agreement (CVG) 4. Agency, Services and Distribution Agreement (Biotech) 5. Sales Services Agreement (Flip) 6. Replenishment Center Distribution Agreement 7. Agency Model Fixed Fee Cost Management Letter 8. Replenishment Center Letter Agreement B. INTERNATIONAL DISTRIBUTION AGREEMENTS 1. International Distribution Agreement (Distribution) 2. International Distribution Agreement ("Profit Split") 3. International Distribution Agreement (France) 4. International Distribution Agreement (Germany) 5. International Distribution Agreement (Canada) 6. International Sales Promotion Agreement (France) 7. International Sales Promotion Agreement (Germany) C. OPERATING AGREEMENT: CANADA III. CONTRACT MANUFACTURING AGREEMENTS 1. Manufacturing Agreement (Baxter Manufactured Products/Baxter Owned Specifications-Domestic) 2. Manufacturing Agreement (Baxter Manufactured Products/Allegiance Owned Specifications-Domestic) 3. Manufacturing Agreement (Allegiance Manufactured Products/Allegiance Owned Specifications) 4. Manufacturing Agreement (Allegiance Manufactured Products/Baxter Owned Specifications) 5. Manufacturing Agreement (Baxter Manufactured Products/Allegiance Owned Specifications-Puerto Rico) 6. Manufacturing Agreement (Baxter Manufactured Products/Allegiance Owned Specifications-Moscow) IV. LEASES 1. Sublease by BHC to AHC of space at Lake-Cook Road facility. 2. Sublease by AHC to BHC of space in Romulus, Michigan facility. 3. Lease by AHC to BHC of Building R in McGaw Park. 4. Lease by BHC to AHC of 17111 Red Hill Avenue, Irvine, California (leased premises to be transferred to AHC upon municipal approval of subdivision). EXHIBIT E TAX SHARING AGREEMENT See attached. EXHIBIT F JUNE 30, 1996 BALANCE SHEET See attached. EXHIBIT G CERTIFICATE OF INCORPORATION OF ALLEGIANCE See attached. EXHIBIT H BY-LAWS OF ALLEGIANCE See attached. EXHIBIT I ALLEGIANCE PREFERRED SHARE PURCHASE RIGHTS PLAN See attached. EXHIBIT J ALLEGIANCE BOARD OF DIRECTORS Kenneth D. Bloem Silas S. Cathcart Connie Curran, Ph.D. Joseph F. Damico Arthur F. Golden David W. Grainger Lester B. Knight Michael D. O'Halleran ANNEX A GLOBE BUILDING MATERIALS, INC. "Miscellaneous" Stockholders
Common Stock Preferred Stock ------------ --------------- Steven Shipley 75 shares (3%) Rodney Pensinger 12 shares (Greater than 1%) George Stinson 34 shares (1%) Jacob Pollock 41 shares (2%) John McMahon 6 shares (Greater than 1%) James Strain 18 shares (1%) 5,748 shares (23.5%) Kim and Mary Angelo 16 shares (1%) John Kinsella 2 shares (Greater than 1%) Michael Ferguson 5 shares (Greater than 1%) Roger Ferguson 1,534 shares (6.3%) Greg Feldman 34 shares (1%) North Atlantic Life 17 shares (1%) 2,199 shares (9.0%) Insurance Company of America Northwest National 48 shares (2%) 4,398 shares (18.0%) Life Insurance Company Northern Life 28 shares (1%) 3,665 shares (15.0%) Insurance Co. Northwest National 18 shares (1%) 4,398 shares (18.0%) Life Insurance Co. (#5) Martin Bernstein 9 shares (Greater than 1%) Nathan Bernstein 9 shares (Greater than 1%) Janet Kirschner 1 share (Greater than 1%) 236 shares (1.0%) Ben Reid 1 share (Greater than 1%) Thomas Clarke 119 shares (5%) George Kunath ----------------- --------------------- 491 shares (20%) 22,178 shares (90.8%)
ANNEX B GLOBE BUILDING MATERIALS, INC. "Miscellaneous" Stockholders
Class A (Nonvoting) Common Stock Preferred Stock ------------ --------------- Phillip Roman 177 shares (6.7%) Thomas Clarke 260 shares (9.9%) Steven Shipley 173 shares (6.6%) Rodney Pensinger 60 shares (2.3%) Rodney Ruess 60 shares (2.3%) PJR Associates 1,684.44 shares (38.5%) Defined Benefit Plan No. 1 Karen Roman IRS 1,684.44 shares (38.5%) ------------------ ----------------------- 730 shares (27.8%) 3,368.88 shares (77.0%)
-2- EX-4.1 3 EXHIBIT 4.1 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- ALLEGIANCE CORPORATION TO PNC BANK, KENTUCKY, INC. TRUSTEE -------------- INDENTURE DATED AS OF OCTOBER 1, 1996 -------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- TABLE OF CONTENTS ---------- PAGE ---- RECITALS OF THE COMPANY. . . . . . . . . . . . . . . . . . . . . . . . . . 1 ARTICLE ONE DEFINITIONS AND OTHER PROVISIONS OF GENERAL APPLICATION SECTION 101. Definitions: Act . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 Affiliate; control. . . . . . . . . . . . . . . . . . . . . 2 Attributable Debt . . . . . . . . . . . . . . . . . . . . . 2 Authenticating Agent. . . . . . . . . . . . . . . . . . . . 3 Board of Directors. . . . . . . . . . . . . . . . . . . . . 3 Board Resolution. . . . . . . . . . . . . . . . . . . . . . 3 Business Day. . . . . . . . . . . . . . . . . . . . . . . . 3 Commission. . . . . . . . . . . . . . . . . . . . . . . . . 3 Company . . . . . . . . . . . . . . . . . . . . . . . . . . 3 Company Request; Company Order. . . . . . . . . . . . . . . 3 Consolidated Net tangible Assets. . . . . . . . . . . . . . 3 Corporate Trust Office. . . . . . . . . . . . . . . . . . . 4 corporation . . . . . . . . . . . . . . . . . . . . . . . . 4 Covenant Defeasance . . . . . . . . . . . . . . . . . . . . 4 Debt. . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 Defaulted Interest. . . . . . . . . . . . . . . . . . . . . 4 Defeasance. . . . . . . . . . . . . . . . . . . . . . . . . 4 Depositary. . . . . . . . . . . . . . . . . . . . . . . . . 4 Event of Default. . . . . . . . . . . . . . . . . . . . . . 4 Exchange Act. . . . . . . . . . . . . . . . . . . . . . . . 4 Expiration Date . . . . . . . . . . . . . . . . . . . . . . 5 Global Security . . . . . . . . . . . . . . . . . . . . . . 5 Holder. . . . . . . . . . . . . . . . . . . . . . . . . . . 5 Incur . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 Indenture . . . . . . . . . . . . . . . . . . . . . . . . . 5 interest. . . . . . . . . . . . . . . . . . . . . . . . . . 5 Interest Payment Date . . . . . . . . . . . . . . . . . . . 5 Investment Company Act. . . . . . . . . . . . . . . . . . . 5 Maturity. . . . . . . . . . . . . . . . . . . . . . . . . . 5 Nonrecourse Obligation. . . . . . . . . . . . . . . . . . . 5 Notice of Default . . . . . . . . . . . . . . . . . . . . . 6 Officers' Certificate . . . . . . . . . . . . . . . . . . . 6 Opinion of Counsel. . . . . . . . . . . . . . . . . . . . . 6 Original Issue Discount Security. . . . . . . . . . . . . . 6 Outstanding . . . . . . . . . . . . . . . . . . . . . . . . 6 Paying Agent. . . . . . . . . . . . . . . . . . . . . . . . 7 - --------------- NOTE: This table of contents shall not, for any purpose, be deemed to be a part of the Indenture. PAGE ---- Person. . . . . . . . . . . . . . . . . . . . . . . . . . . 7 Place of Payment. . . . . . . . . . . . . . . . . . . . . . 7 Predecessor Security. . . . . . . . . . . . . . . . . . . . 7 Principal Property. . . . . . . . . . . . . . . . . . . . . 8 Redemption Date . . . . . . . . . . . . . . . . . . . . . . 8 Redemption Price. . . . . . . . . . . . . . . . . . . . . . 8 Regular Record Date . . . . . . . . . . . . . . . . . . . . 8 Restricted Security . . . . . . . . . . . . . . . . . . . . 8 Sale and Lease-Back Transaction . . . . . . . . . . . . . . 8 Securities. . . . . . . . . . . . . . . . . . . . . . . . . 8 Securities Act. . . . . . . . . . . . . . . . . . . . . . . 8 Security Register and Security Registrar. . . . . . . . . . 8 Special Record Date . . . . . . . . . . . . . . . . . . . . 9 Stated Maturity . . . . . . . . . . . . . . . . . . . . . . 9 Subsidiary. . . . . . . . . . . . . . . . . . . . . . . . . 9 Trust Indenture Act . . . . . . . . . . . . . . . . . . . . 9 Trustee . . . . . . . . . . . . . . . . . . . . . . . . . . 9 U.S. Government Obligation. . . . . . . . . . . . . . . . . 9 Vice President. . . . . . . . . . . . . . . . . . . . . . . 9 Wholly Owned Subsidiary . . . . . . . . . . . . . . . . . . 9 SECTION 102. Compliance Certificates and Opinions. . . . . . . . . . . . 10 SECTION 103. Form of Documents Delivered to Trustee. . . . . . . . . . . 10 SECTION 104. Acts of Holders; Record Dates . . . . . . . . . . . . . . . 11 SECTION 105. Notices, Etc., to Trustee and Company . . . . . . . . . . . 13 SECTION 106. Notice to Holders; Waiver . . . . . . . . . . . . . . . . . 14 SECTION 107. Conflict with Trust Indenture Act . . . . . . . . . . . . . 14 SECTION 108. Effect of Headings and Table of Contents. . . . . . . . . . 14 SECTION 109. Successors and Assigns. . . . . . . . . . . . . . . . . . . 14 SECTION 110. Separability Clause . . . . . . . . . . . . . . . . . . . . 15 SECTION 111. Benefits of Indenture . . . . . . . . . . . . . . . . . . . 15 SECTION 112. Governing Law . . . . . . . . . . . . . . . . . . . . . . . 15 SECTION 113. Legal Holidays. . . . . . . . . . . . . . . . . . . . . . . 15 ARTICLE TWO SECURITY FORMS SECTION 201. Forms Generally . . . . . . . . . . . . . . . . . . . . . . 15 SECTION 202. Form of Face of Security. . . . . . . . . . . . . . . . . . 16 SECTION 203. Form of Reverse of Security . . . . . . . . . . . . . . . . 16 SECTION 204. Form of Legend for Global Securities. . . . . . . . . . . . 23 SECTION 205. Form of Trustee's Certificate of Authentication . . . . . . 23 -ii- PAGE ---- ARTICLE THREE THE SECURITIES SECTION 301. Amount Unlimited; Issuable in Series. . . . . . . . . . . . 24 SECTION 302. Denominations . . . . . . . . . . . . . . . . . . . . . . . 27 SECTION 303. Execution, Authentication, Delivery and Dating. . . . . . . 27 SECTION 304. Temporary Securities. . . . . . . . . . . . . . . . . . . . 28 SECTION 305. Registration, Registration of Transfer and Exchange . . . . 29 SECTION 306. Mutilated, Destroyed, Lost and Stolen Securities. . . . . . 31 SECTION 307. Payment of Interest; Interest Rights Preserved. . . . . . . 32 SECTION 308. Persons Deemed Owners . . . . . . . . . . . . . . . . . . . 33 SECTION 309. Cancellation. . . . . . . . . . . . . . . . . . . . . . . . 33 SECTION 310. Computation of Interest . . . . . . . . . . . . . . . . . . 34 ARTICLE FOUR SATISFACTION AND DISCHARGE SECTION 401. Satisfaction and Discharge of Indenture . . . . . . . . . . 34 SECTION 402. Application of Trust Money. . . . . . . . . . . . . . . . . 35 ARTICLE FIVE REMEDIES SECTION 501. Events of Default . . . . . . . . . . . . . . . . . . . . . 35 SECTION 502. Acceleration of Maturity; Rescission and Annulment. . . . . 37 SECTION 503. Collection of Indebtedness and Suits for Enforcement by Trustee. . . . . . . . . . . . . . . . . 39 SECTION 504. Trustee May File Proofs of Claim. . . . . . . . . . . . . . 39 SECTION 505. Trustee May Enforce Claims Without Possession of Securities . . . . . . . . . . . . . . . . . . . . . 40 SECTION 506. Application of Money Collected. . . . . . . . . . . . . . . 40 SECTION 507. Limitation on Suits . . . . . . . . . . . . . . . . . . . . 41 SECTION 508. Unconditional Right of Holders to Receive Principal, Premium and Interest. . . . . . . . . . . . . . . . . . 41 SECTION 509. Restoration of Rights and Remedies. . . . . . . . . . . . . 42 SECTION 510. Rights and Remedies Cumulative. . . . . . . . . . . . . . . 42 -iii- PAGE ---- SECTION 511. Delay or Omission Not Waiver. . . . . . . . . . . . . . . . 42 SECTION 512. Control by Holders. . . . . . . . . . . . . . . . . . . . . 42 SECTION 513. Waiver of Past Defaults . . . . . . . . . . . . . . . . . . 43 SECTION 514. Undertaking for Costs . . . . . . . . . . . . . . . . . . . 43 SECTION 515. Waiver of Usury, Stay or Extension Laws . . . . . . . . . . 43 ARTICLE SIX THE TRUSTEE SECTION 601. Certain Duties and Responsibilities . . . . . . . . . . . . 44 SECTION 602. Notice of Defaults. . . . . . . . . . . . . . . . . . . . . 44 SECTION 603. Certain Rights of Trustee . . . . . . . . . . . . . . . . . 44 SECTION 604. Not Responsible for Recitals or Issuance of Securities. . . 45 SECTION 605. May Hold Securities . . . . . . . . . . . . . . . . . . . . 46 SECTION 606. Money Held in Trust . . . . . . . . . . . . . . . . . . . . 46 SECTION 607. Compensation and Reimbursement. . . . . . . . . . . . . . . 46 SECTION 608. Conflicting Interests . . . . . . . . . . . . . . . . . . . 47 SECTION 609. Corporate Trustee Required; Eligibility . . . . . . . . . . 47 SECTION 610. Resignation and Removal; Appointment of Successor . . . . . 47 SECTION 611. Acceptance of Appointment by Successor. . . . . . . . . . . 49 SECTION 612. Merger, Conversion, Consolidation or Succession to Business . . . . . . . . . . . . . . . . . . . . . . 50 SECTION 613. Preferential Collection of Claims Against Company . . . . . 50 SECTION 614. Appointment of Authenticating Agent . . . . . . . . . . . . 50 ARTICLE SEVEN HOLDERS' LISTS AND REPORTS BY TRUSTEE AND COMPANY SECTION 701. Company to Furnish Trustee Names and Addresses of Holders. . . . . . . . . . . . . . . . . . . . . . . 52 SECTION 702. Preservation of Information; Communication to Holders. . . . . . . . . . . . . . . . . . . . . . . 53 SECTION 703. Reports by Trustee. . . . . . . . . . . . . . . . . . . . . 53 SECTION 704. Reports by Company. . . . . . . . . . . . . . . . . . . . . 53 -iv- PAGE ---- ARTICLE EIGHT CONSOLIDATION, MERGER, CONVEYANCE, TRANSFER OR LEASE SECTION 801. Company May Consolidate, Etc., Only on Certain Terms . . . . . . . . . . . . . . . . . . . . . 54 SECTION 802. Successor Substituted . . . . . . . . . . . . . . . . . . . 55 ARTICLE NINE SUPPLEMENTAL INDENTURES SECTION 901. Supplemental Indentures Without Consent of Holders. . . . . 55 SECTION 902. Supplemental Indentures with Consent of Holders . . . . . . 57 SECTION 903. Execution of Supplemental Indentures. . . . . . . . . . . . 58 SECTION 904. Effect of Supplemental Indentures . . . . . . . . . . . . . 58 SECTION 905. Conformity with Trust Indenture Act . . . . . . . . . . . . 58 SECTION 906. Reference in Securities to Supplemental Indentures. . . . . 58 ARTICLE TEN COVENANTS SECTION 1001. Payment of Principal, Premium and Interest. . . . . . . . . 59 SECTION 1002. Maintenance of Office or Agency . . . . . . . . . . . . . . 59 SECTION 1003. Money for Securities Payments to Be Held in Trust . . . . . 59 SECTION 1004. Statement by Officers as to Default . . . . . . . . . . . . 61 SECTION 1005. Existence . . . . . . . . . . . . . . . . . . . . . . . . . 61 SECTION 1006. Maintenance of Properties . . . . . . . . . . . . . . . . . 61 SECTION 1007. Payment of Taxes and Other Claims . . . . . . . . . . . . . 61 SECTION 1008. Limitation on Liens . . . . . . . . . . . . . . . . . . . . 62 SECTION 1009. Limitation on Sale and Lease-Back Transactions. . . . . . . 64 SECTION 1010. Limitation on Subsidiary Debt . . . . . . . . . . . . . . . 64 SECTION 1011. Waiver of Certain Covenants . . . . . . . . . . . . . . . . 65 ARTICLE ELEVEN REDEMPTION OF SECURITIES SECTION 1101. Applicability of Article. . . . . . . . . . . . . . . . . . 65 SECTION 1102. Election to Redeem; Notice to Trustee . . . . . . . . . . . 66 -v- PAGE ---- SECTION 1103. Selection by Trustee of Securities to Be Redeemed . . . . . 66 SECTION 1104. Notice of Redemption. . . . . . . . . . . . . . . . . . . . 67 SECTION 1105. Deposit of Redemption Price . . . . . . . . . . . . . . . . 67 SECTION 1106. Securities Payable on Redemption Date . . . . . . . . . . . 68 SECTION 1107. Securities Redeemed in Part . . . . . . . . . . . . . . . . 68 SECTION 1108. Right of Repayment. . . . . . . . . . . . . . . . . . . . . 68 SECTION 1109. Form of Option to Elect Repayment . . . . . . . . . . . . . 69 ARTICLE TWELVE SINKING FUNDS SECTION 1201. Applicability of Article. . . . . . . . . . . . . . . . . . 70 SECTION 1202. Satisfaction of Sinking Fund Payments with Securities . . . 70 SECTION 1203. Redemption of Securities for Sinking Fund . . . . . . . . . 71 ARTICLE THIRTEEN DEFEASANCE AND COVENANT DEFEASANCE SECTION 1301. Company's Option to Effect Defeasance or Covenant Defeasance . . . . . . . . . . . . . . . . . . 71 SECTION 1302. Defeasance and Discharge. . . . . . . . . . . . . . . . . . 71 SECTION 1303. Covenant Defeasance . . . . . . . . . . . . . . . . . . . . 72 SECTION 1304. Conditions to Defeasance or Covenant Defeasance . . . . . . 72 SECTION 1305. Deposited Money and U.S. Government Obligations to Be Held in Trust; Miscellaneous Provisions . . . . . 74 SECTION 1306. Reinstatement . . . . . . . . . . . . . . . . . . . . . . . 75 .............................................................. CERTAIN SECTIONS OF THIS INDENTURE RELATING TO SECTIONS 310 THROUGH 318, INCLUSIVE, OF THE TRUST INDENTURE ACT OF 1939: TRUST INDENTURE ACT SECTION INDENTURE SECTION Section 310(a)(1) . . . . . . . . . . . . . . . . . . . . 609 (a)(2) . . . . . . . . . . . . . . . . . . . . 609 (a)(3) . . . . . . . . . . . . . . . . . . . . Not Applicable (a)(4) . . . . . . . . . . . . . . . . . . . . Not Applicable (b) . . . . . . . . . . . . . . . . . . . . 608 610 Section 311(a) . . . . . . . . . . . . . . . . . . . . 613 (b) . . . . . . . . . . . . . . . . . . . . 613 -vi- Section 312(a) . . . . . . . . . . . . . . . . . . . . 701 702 (b) . . . . . . . . . . . . . . . . . . . . 702 (c) . . . . . . . . . . . . . . . . . . . . 702 Section 313(a) . . . . . . . . . . . . . . . . . . . . 703 (b) . . . . . . . . . . . . . . . . . . . . 703 (c) . . . . . . . . . . . . . . . . . . . . 703 (d) . . . . . . . . . . . . . . . . . . . . 703 Section 314(a) . . . . . . . . . . . . . . . . . . . . 704 (a)(4) . . . . . . . . . . . . . . . . . . . . 101 1004 (b) . . . . . . . . . . . . . . . . . . . . Not Applicable (c)(1) . . . . . . . . . . . . . . . . . . . . 102 (c)(2) . . . . . . . . . . . . . . . . . . . . 102 (c)(3) . . . . . . . . . . . . . . . . . . . . Not Applicable (d) . . . . . . . . . . . . . . . . . . . . Not Applicable (e) . . . . . . . . . . . . . . . . . . . . 102 Section 315(a) . . . . . . . . . . . . . . . . . . . . 601 (b) . . . . . . . . . . . . . . . . . . . . 602 (c) . . . . . . . . . . . . . . . . . . . . 601 (d) . . . . . . . . . . . . . . . . . . . . 601 (e) . . . . . . . . . . . . . . . . . . . . 514 Section 316(a) . . . . . . . . . . . . . . . . . . . . 101 (a)(1)(A) . . . . . . . . . . . . . . . . . . . . 502 512 (a)(1)(B) . . . . . . . . . . . . . . . . . . . . 513 (a)(2) . . . . . . . . . . . . . . . . . . . . Not Applicable (b) . . . . . . . . . . . . . . . . . . . . 508 (c) . . . . . . . . . . . . . . . . . . . . 104 Section 317(a)(1) . . . . . . . . . . . . . . . . . . . . 503 (a)(2) . . . . . . . . . . . . . . . . . . . . 504 (b) . . . . . . . . . . . . . . . . . . . . 1003 Section 318(a) . . . . . . . . . . . . . . . . . . . . 107 - -------------------- NOTE: This reconciliation and tie shall not, for any purpose, be deemed to be a part of the Indenture. -viii- INDENTURE, dated as of October 1, 1996, between Allegiance Corporation, a corporation duly organized and existing under the laws of the State of Delaware (herein called the "Company"), having its principal office at 1430 Waukegan Road, McGaw Park, Illinois 60085, and PNC Bank, Kentucky, Inc., a corporation duly organized and existing under the laws of Kentucky, as Trustee (herein called the "Trustee"). RECITALS OF THE COMPANY The Company has duly authorized the execution and delivery of this Indenture to provide for the issuance from time to time of its unsecured debentures, notes or other evidences of indebtedness (herein called the "Securities"), to be issued in one or more series as in this Indenture provided. All things necessary to make this Indenture a valid agreement of the Company, 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 agreed, for the equal and proportionate benefit of all Holders of the Securities or of series thereof, 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, and, except as otherwise herein expressly provided, the term "generally accepted accounting prin- ciples" with respect to any computation required or permitted hereunder shall mean such accounting principles as are generally accepted at the date of such computation; (4) unless the context otherwise requires, any reference to an "Article" or a "Section" refers to an Article or a Section, as the case may be, of this Indenture; and (5) 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. "Act", when used with respect to any Holder, has the meaning specified in Section 104. "Affiliate" of any specified Person means any other Person directly or indirectly controlling or controlled by or under direct or indirect common control with such specified Person. For the purposes of this definition, "control" when used with respect to any specified 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. "Attributable Debt" when used in connection with a Sale and Lease-Back Transaction involving a Principal Property means, at the time of determination, the lesser of: (a) the fair value of such property (as determined in good faith by the Board of Directors of the Company); or (b) the present value of the total net amount of rent required to be paid under such lease during the remaining term thereof (including any renewal term or period for which such lease has been extended), discounted at the rate of interest set forth or implicit in the terms of such lease or, if not practicable to determine such rate, the weighted average interest rate per annum (in the case of Original Issue Discount Securities, the imputed interest rate) borne by the Securities of each series outstanding pursuant to the Indenture compounded semi-annually. For purposes of the foregoing definition, rent shall not include amounts required to be paid by the lessee, whether or not designated as rent or additional rent, on account of or contingent upon maintenance and repairs, insurance, taxes, assessments, water rates and similar charges. In the case of any lease which is terminable by the lessee upon the payment of a penalty, such net amount shall be the lesser of the net amount determined assuming termination upon the first date such lease may be terminated (in which case the net amount shall also include the amount of the penalty, but 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) and the net amount determined assuming no such termination. -2- "Authenticating Agent" means any Person authorized by the Trustee pursuant to Section 614 to act on behalf of the Trustee to authenticate Securities of one or more series. "Board of Directors" means either the board of directors of the Company or any duly authorized committee of that board. "Board Resolution" means a copy of a resolution certified by the Secretary or an Assistant Secretary of the Company to have been duly adopted by the Board of Directors and to be in full force and effect on the date of such certification, and delivered to the Trustee. In the event the Board of Directors shall delegate to any director or officer of the Company or any group consisting of directors of the Company, officers of the Company or directors and officers of the Company the authority to take any action which under the terms of this Indenture may be taken by "Board Resolution," then any action so taken by, and set forth in a resolution adopted by, the director, officer or group within the scope of such delegation shall be deemed to be a "Board Resolution" for purposes of this Indenture. "Business Day", when used with respect to any Place of Payment, means each Monday, Tuesday, Wednesday, Thursday and Friday which is not a day on which banking institutions in that Place of Payment are authorized or obligated by law or executive order to close. "Commission" means the Securities and Exchange Commission, 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 performing the duties now assigned to it under the Trust Indenture Act, then the body performing such duties at such time. "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 of the Board, its Vice Chairman of the Board, 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 Net Tangible Assets" means, as of any particular time, total assets (excluding applicable reserves and other properly deductible items) less: (a) total current liabilities, except for (1) notes and loans payable, (2) current maturities of long-term debt, and (3) current maturities of obligations under capital leases; and (b) goodwill, patents and trademarks, to the extent included in total assets; all as set forth on the most -3- recent consolidated balance sheet of the Company and its Restricted Subsidiaries and computed in accordance with generally accepted accounting principles. "Corporate Trust Office" means the principal office of the Trustee in Louisville, Kentucky at which at any particular time its corporate trust business shall be administered. "corporation" means a corporation, association, company, joint-stock company or business trust. "Covenant Defeasance" has the meaning specified in Section 1303. "Debt" means (without duplication), with respect to any Person, whether recourse is to all or a portion of the assets of such Person and whether or not contingent, (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) the maximum fixed redemption or repurchase price of redeemable stock of such Person at the time of determination, (vi) every obligation to pay rent or other payment amounts of such Person with respect to any Sale and Lease-back Transaction to which such Person is a party and (vii) every obligation of the type referred to in Clauses (i) through (vi) of another Person and all dividends of another Person the payment of which, in either case, such Person has guaranteed or is responsible or liable, directly or indirectly, as obligor, guarantor or otherwise. "Defaulted Interest" has the meaning specified in Section 307. "Defeasance" has the meaning specified in Section 1302. "Depositary" means, with respect to Securities of any series issuable in whole or in part in the form of one or more Global Securities, a clearing agency registered under the Exchange Act that is designated to act as Depositary for such Securities as contemplated by Section 301. "Event of Default" has the meaning specified in Section 501. "Exchange Act" means the Securities Exchange Act of 1934 and any statute successor thereto, in each case as amended from time to time. -4- "Expiration Date" has the meaning specified in Section 104. "Global Security" means a Security that evidences all or part of the Securities of any series and bears the legend set forth in Section 204 (or such legend as may be specified as contemplated by Section 301 for such Securities). "Holder" means a Person in whose name a Security is registered in the Security Register. "Incur" means, with respect to any Debt 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 the meanings correlative to the foregoing); PROVIDED, HOWEVER, that a change in generally accepting 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. The term "Indenture" shall also include the terms of particular series of Securities established as contemplated by Section 301. "Interest", when used with respect to an Original Issue Discount Security which by its terms bears interest only after Maturity, means interest payable after Maturity. "Interest Payment Date", when used with respect to any Security, means the Stated Maturity of an instalment of interest on such Security. "Investment Company Act" means the Investment Company Act of 1940 and any statute successor thereto, in each case as amended from time to time. "Maturity", when used with respect to any Security, means the date on which the principal of such Security or an instalment of principal becomes due and payable as therein or herein provided, whether at the Stated Maturity or by declaration of acceleration, call for redemption or otherwise. "Nonrecourse Obligation" means indebtedness or other obligations substantially related to (i) the acquisition of assets not previously owned by the Company or any -5- Restricted Subsidiary or (ii) the financing of a project involving the development or expansion of properties of the Company or any Restricted Subsidiary, as to which the obligee with respect to such indebtedness or obligation has no recourse to the Company or any Restricted Subsidiary or any assets of the Company or any Restricted Subsidiary other than the assets which were acquired with the proceeds of such transaction or the project financed with the proceeds of such transaction (and the proceeds thereof). "Notice of Default" means a written notice of the kind specified in Section 501(4) or 501(5). "Officers' Certificate" means a certificate signed by the Chairman of the Board, a Vice Chairman of the Board, the President or a Vice President, and by the Treasurer, an Assistant Treasurer, the Secretary or an Assistant Secretary, of the Company, and delivered to the Trustee. One of the officers signing an Officers' Certificate given pursuant to Section 1004 shall be the principal executive, financial or accounting officer of the Company. "Opinion of Counsel" means a written opinion of counsel, who may be counsel for the Company, and who shall be acceptable to the Trustee. "Original Issue Discount Security" means any Security which provides for an amount less than the principal amount thereof to be due and payable upon a declaration of acceleration of the Maturity thereof pursuant to Section 502. "Outstanding", when used with respect to Securities, means, as of the date of determination, all Securities theretofore authenticated and delivered under this Indenture, EXCEPT: (1) Securities theretofore cancelled by the Trustee or delivered to the Trustee for cancellation; (2) 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) in trust or set aside and segregated in trust by the Company (if the Company shall act as its own Paying Agent) for the Holders of such Securities; PROVIDED that, if such Securities are to be redeemed, notice of such redemption has been duly given pursuant to this Indenture or provision therefor satisfactory to the Trustee has been made; (3) Securities as to which Defeasance has been effected pursuant to Section 1302; and -6- (4) 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, made or taken any request, demand, authorization, direction, notice, consent, waiver or other action hereunder as of any date, (A) the principal amount of an Original Issue Discount Security which shall be deemed to be Outstanding shall be the amount of the principal thereof which would be due and payable as of such date upon acceleration of the Maturity thereof to such date pursuant to Section 502, (B) if, as of such date, the principal amount payable at the Stated Maturity of a Security is not determinable, the principal amount of such Security which shall be deemed to be Outstanding shall be the amount as specified or determined as contemplated by Section 301, (C) the principal amount of a Security denominated in one or more foreign currencies or currency units which shall be deemed to be Outstanding shall be the U.S. dollar equivalent, determined as of such date in the manner provided as contemplated by Section 301, of the principal amount of such Security (or, in the case of a Security described in Clause (A) or (B) above, of the amount determined as provided in such Clause), and (D) Securities owned by the Company or any other obligor upon the Securities or any Affiliate of the Company 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, waiver or other action, only Securities which the Trustee 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 or any other obligor upon the Securities or any Affiliate of the Company or of such other obligor. "Paying Agent" means any Person authorized by the Company to pay the principal of or any premium or interest on any Securities on behalf of the Company. "Person" means any individual, corporation, partnership, joint venture, trust, unincorporated organization or government or any agency or political subdivision thereof. "Place of Payment", when used with respect to the Securities of any series, means the place or places where the principal of and any premium and interest on the Securities of that series are payable as specified as contemplated by Section 301. "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; -7- 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. "Principal Property" means the land, land improvements, buildings and fixtures (to the extent they constitute real property interests), (including any leasehold interest therein) constituting the principal corporate office, any manufacturing facility, or any distribution center (whether now owned or hereafter acquired) which: (a) is owned by the Company or any Subsidiary; (b) is located within any of the present 50 states of the United States (or the District of Columbia); (c) has not been determined in good faith by the Board of Directors of the Company not to be materially important to the total business conducted by the Company and its Subsidiaries taken as a whole; and (d) has a market value on the date as of which the determination is being made in excess of 1.0% of Consolidated Net Tangible Assets of the Company as most recently determined on or prior to such date. "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 on the Securities of any series means the date specified for that purpose as contemplated by Section 301. "Restricted Subsidiary" means any Subsidiary which owns any Principal Property. "Sale and Lease-Back Transaction" means any arrangement with any person providing for the leasing by the Company or any Restricted Subsidiary of any Principal Property which property has been or is to be sold or transferred by the Company or such Restricted Subsidiary to such person. "Securities" has the meaning stated in the first recital of this Indenture and more particularly means any Securities authenticated and delivered under this Indenture. "Securities Act" means the Securities Act of 1933 and any statute successor thereto, in each case as amended from time to time. "Security Register" and "Security Registrar" have the respective meanings specified in Section 305. -8- "Special Record Date" for the payment of any Defaulted Interest means a date fixed by the Trustee pursuant to Section 307. "Stated Maturity", when used with respect to any Security or any instalment of principal thereof or interest thereon, means the date specified in such Security as the fixed date on which the principal of such Security or such instalment of principal or interest is due and payable. "Subsidiary" means any corporation of which at least a majority of the outstanding voting stock having the power to elect a majority of the board of directors of such corporation is at the time owned, directly or indirectly, by the Company or by one or more other Subsidiaries, or by the Company and one or more other Subsidiaries. For the purposes of this definition, "voting stock" means stock which ordinarily has voting power for the election of directors, whether at all times or only so long as no senior class of stock has such voting power by reason of any contingency. "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. "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 or include each Person who is then a Trustee hereunder, and if at any time there is more than one such Person, "Trustee" as used with respect to the Securities of any series shall mean the Trustee with respect to Securities of that series. "U.S. Government Obligation" has the meaning specified in Section 1304. "Vice President", when used with respect to the Company 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". "Wholly Owned Subsidiary" of any Person means a Subsidiary of such Person all of the outstanding capital stock or other ownership interests of which (other than directors' qualifying shares) shall at the time be owned by such Person or by one or more Wholly Owned Subsidiaries of such Person or by such Person and one or more Wholly Owned Subsidiaries of such Person. -9- 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 requirements 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 (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 -10- 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 DATES. 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 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, 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 -11- 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 of any series 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 of such series, 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 any record date is set pursuant to this paragraph, the Holders of Outstanding Securities of the relevant series 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 of such series 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 of the relevant series 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 of the relevant series 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 of any series entitled to join in the giving or making of (i) any Notice of 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, in each case with respect to Securities of such series. If any record date is set pursuant to this paragraph, the Holders of Outstanding Securities of such series 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 applicable Expiration Date by Holders of the requisite principal amount of Outstanding Securities of such series 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 -12- Outstanding Securities of the relevant series 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 of the relevant series 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 dates 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 Expiration Date shall be later than the 180th day after the applicable record date; and PROVIDED, FURTHER, 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 of the relevant series 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. 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 shall be sufficient for every purpose hereunder if made, given, furnished or filed in writing to or with the Trustee at its Corporate Trust Office, Attention: Corporate Trust Department, or (2) the Company 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, to the Company addressed to it at the address of its principal office specified in the first paragraph of this instrument or at any other address previously furnished in writing to the Trustee by the Company. -13- 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. SECTION 107. CONFLICT WITH TRUST INDENTURE ACT. If any provision hereof limits, qualifies or conflicts with a provision of the Trust Indenture Act which is required under such Act to be a 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 which 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. SECTION 109. SUCCESSORS AND ASSIGNS. All covenants and agreements in this Indenture by the Company shall bind its successors and assigns, whether so expressed or not. -14- SECTION 110. SEPARABILITY CLAUSE. In case any provision in this Indenture or in the Securities 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, express or implied, shall give to any Person, other than the parties hereto and their successors hereunder and the Holders, any benefit or any legal or equitable right, remedy or claim under this Indenture. SECTION 112. GOVERNING LAW. This Indenture and the Securities shall be governed by and construed in accordance with the law of the State of New York. SECTION 113. LEGAL HOLIDAYS. In any case where any Interest Payment Date, Redemption Date or Stated Maturity of any Security shall not be a Business Day at any Place of Payment, then (notwithstanding any other provision of this Indenture or of the Securities (other than a provision of any Security which specifically states that such provision shall apply in lieu of this Section)) payment of interest or principal (and premium, if any) need not be made at such Place of Payment on such date, but may be made on the next succeeding Business Day at such Place of Payment with the same force and effect as if made on the Interest Payment Date or Redemption Date, or at the Stated Maturity. ARTICLE TWO SECURITY FORMS SECTION 201. FORMS GENERALLY. The Securities of each series shall be in substantially the form set forth in this Article, or in such other form as shall be established by or pursuant to a Board Resolution or in one or more indentures supplemental hereto, in each case with such appropriate insertions, omissions, substitutions and other variations as are required or -15- 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 Depositary therefor or as may, consistently herewith, be determined by the officers executing such Securities, as evidenced by their execution thereof. If the form of Securities of any series is established by action taken pursuant to a Board Resolution, a copy of an appropriate record of such action shall be certified by the Secretary or an Assistant Secretary of the Company and delivered to the Trustee at or prior to the delivery of the Company Order contemplated by Section 303 for the authentication and delivery of such Securities. The definitive Securities shall be typewritten, printed, lithographed or engraved on steel engraved borders or may be produced in any other manner, all as determined by the officers executing such Securities, as evidenced by their execution of such Securities. SECTION 202. FORM OF FACE OF SECURITY. [INSERT ANY LEGEND REQUIRED BY THE INTERNAL REVENUE CODE AND THE REGULATIONS THEREUNDER.] .......................................................... .......................................................................... No. ......... $ ........ .........................., a corporation duly organized and existing under the laws of ............... (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 ........................................................ [IF THE SECURITY IS TO BEAR INTEREST PRIOR TO MATURITY, INSERT -- , and to pay interest thereon from ............. or from the most recent Interest Payment Date to which interest has been paid or duly provided for, semi-annually on ............ and ............ in each year, commencing ........., at the rate of ....% per annum, until the principal hereof is paid or made available for payment [IF APPLICABLE, INSERT -- , PROVIDED that any principal and premium, and any such instalment of interest, which is overdue shall bear interest at the rate of ...% per annum (to the extent that the payment of such interest shall be legally enforceable), from the dates such amounts are due until they are paid or made available for payment, and such interest shall be payable on demand]. 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 -16- for such interest, which shall be the ....... or ....... (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 of this series 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 of this series may be listed, and upon such notice as may be required by such exchange, all as more fully provided in said Indenture]. [IF THE SECURITY IS NOT TO BEAR INTEREST PRIOR TO MATURITY, INSERT -- The principal of this Security shall not bear interest except in the case of a default in payment of principal upon acceleration, upon redemption[, repayment] or at Stated Maturity and in such case the overdue principal and any overdue premium shall bear interest at the rate of ....% per annum (to the extent that the payment of such interest shall be legally enforceable), from the dates such amounts are due until they are paid or made available for payment. Interest on any overdue principal or premium shall be payable on demand. [Any such interest on overdue principal or premium which is not paid on demand shall bear interest at the rate of ......% per annum (to the extent that the payment of such interest on interest shall be legally enforceable), from the date of such demand until the amount so demanded is paid or made available for payment. Interest on any overdue interest shall be payable on demand.]] Payment of the principal of (and premium, if any) and [if applicable, insert ___ any such] interest on this Security will be made at the office or agency of the Company maintained for that purpose in ............, 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 [IF APPLICABLE, INSERT -- ; 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]. 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. -17- 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. Dated: .................................................. By................................................ Attest: ......................................... SECTION 203. FORM OF REVERSE OF SECURITY. This Security is one of a duly authorized issue of securities of the Company (herein called the "Securities"), issued and to be issued in one or more series under an Indenture, dated as of ............... (herein called the "Indenture", which term shall have the meaning assigned to it in such instrument), between the Company and ..................., as Trustee (herein called the "Trustee", which term includes any successor trustee under the Indenture), and reference is hereby made to the Indenture for a statement of the respective rights, limitations of rights, duties and immunities thereunder of the Company, the Trustee and the Holders of the Securities and of the terms upon which the Securities are, and are to be, authenticated and delivered. This Security is one of the series designated on the face hereof [IF APPLICABLE, INSERT -- , limited in aggregate principal amount to $...........]. [IF APPLICABLE, INSERT -- The Securities of this Series are subject to repayment on or after ________, ____, at the option of the Holder upon not less than 30 days' (but not more than 60 days') notice by mail to the Paying Agent prior to the repayment date including (a) appropriate wire instructions and (b) either (i) the Security with the form entitled Option to Elect Repayment (as set forth below) attached to the Security duly completed or (ii) a telegram, telex, facsimile transmission or letter from a member of a national securities exchange or the National Association of Securities Dealers, Inc. or a commercial bank or trust company in the United States setting forth the name of the Holder of such Security, the principal amount of such Debenture, the portion of the principal amount of such Security to be repaid, the certificate number or a description -18- of the tenor and terms of such Security, a statement that the option to elect repayment is being exercised thereby and a guarantee that such Security to be repaid with the form entitled Option to Elect Repayment (substantially in the form set out in the Indenture) attached to such Security duly completed will be received by the Paying Agent not later than five Business Days after the date of such telegram, telex, facsimile transmission or letter and such Security and form duly completed must be received by the Paying Agent by such fifth Business Day. Exercise of the repayment option by the Holder of such Security shall be irrevocable. The repayment option may be exercised by the Holder of such Security for less than the entire principal amount of the Security provided that the principal amount of the Security remaining outstanding after repayment is an authorized denomination. No registration of, transfer or exchange of such Security (or, in the event that such Security is to be repaid in part, the portion of the Security to be repaid) will be permitted after exercise of a repayment option.] [IF APPLICABLE, INSERT -- The Securities of this series are subject to redemption upon not less than 30 days' notice by mail, [IF APPLICABLE, INSERT -- (1) on ........... in any year commencing with the year ...... and ending with the year ...... through operation of the sinking fund for this series at a Redemption Price equal to 100% of the principal amount, and (2)] at any time [IF APPLICABLE, INSERT -- on or after .........., 19..], 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 [IF APPLICABLE, INSERT -- on or before ..............., ...%, and if redeemed] during the 12-month period beginning ............. of the years indicated, Redemption Redemption Year Price Year Price - ---- ---------- ---- ---------- and thereafter at a Redemption Price equal to .....% of the principal amount, together in the case of any such redemption [IF APPLICABLE, INSERT -- (whether through operation of the sinking fund or otherwise)] 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 of business on the relevant Record Dates referred to on the face hereof, all as provided in the Indenture.] -19- [IF APPLICABLE, INSERT -- The Securities of this series are subject to redemption upon not less than 30 days' notice by mail, (1) on ............ in any year commencing with the year .... and ending with the year .... through operation of the sinking fund for this series at the Redemption Prices for redemption through operation of the sinking fund (expressed as percentages of the principal amount) set forth in the table below, and (2) at any time [IF APPLICABLE, INSERT -- on or after ............], as a whole or in part, at the election of the Company, at the Redemption Prices for redemption otherwise than through operation of the sinking fund (expressed as percentages of the principal amount) set forth in the table below: If redeemed during the 12-month period beginning ............ of the years indicated, Redemption Price For Redemption Redemption Price For Through Operation Redemption Otherwise of the Than Through Operation Year Sinking Fund of the Sinking Fund - ---- ----------------- ---------------------- and thereafter at a Redemption Price equal to .....% of the principal amount, together in the case of any such redemption (whether through operation of the sinking fund or otherwise) 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 of business on the relevant Record Dates referred to on the face hereof, all as provided in the Indenture.] [IF APPLICABLE, INSERT -- Notwithstanding the foregoing, the Company may not, prior to ............., redeem any Securities of this series as contemplated by [IF APPLICABLE, INSERT -- Clause (2) of] the preceding paragraph as a part of, or in anticipation of, any refunding operation by the application, directly or indirectly, of moneys borrowed having an interest cost to the Company (calculated in accordance with generally accepted financial practice) of less than .....% per annum.] [IF APPLICABLE, INSERT -- The sinking fund for this series provides for the redemption on ............ in each year beginning with the year ....... and ending with the year ...... of [IF APPLICABLE, INSERT -- not less than $.......... ("mandatory sinking fund") and not -20- more than] $......... aggregate principal amount of Securities of this series. Securities of this series acquired or redeemed by the Company otherwise than through [IF APPLICABLE, INSERT -- mandatory] sinking fund payments may be credited against subsequent [IF APPLICABLE, INSERT -- mandatory] sinking fund payments otherwise required to be made [IF APPLICABLE, INSERT -- , in the inverse order in which they become due].] [IF THE SECURITY IS SUBJECT TO REDEMPTION OF ANY KIND, INSERT -- In the event of redemption of this Security in part only, a new Security or Securities of this series and of like tenor for the unredeemed portion hereof will be issued in the name of the Holder hereof upon the cancellation hereof.] [IF APPLICABLE, INSERT -- The Indenture contains provisions for defeasance at any time of [the entire indebtedness of this Security] [or] [certain restrictive covenants and Events of Default with respect to this Security] [, in each case] upon compliance with certain conditions set forth in the Indenture.] [IF THE SECURITY IS NOT AN ORIGINAL ISSUE DISCOUNT SECURITY, INSERT -- If an Event of Default with respect to Securities of this series shall occur and be continuing, the principal of the Securities of this series may be declared due and payable in the manner and with the effect provided in the Indenture.] [IF THE SECURITY IS AN ORIGINAL ISSUE DISCOUNT SECURITY, INSERT -- If an Event of Default with respect to Securities of this series shall occur and be continuing, an amount of principal of the Securities of this series may be declared due and payable in the manner and with the effect provided in the Indenture. Such amount shall be equal to -- INSERT FORMULA FOR DETERMINING THE AMOUNT. Upon payment (i) of the amount of principal so declared due and payable and (ii) of interest on any overdue principal, premium and interest (in each case to the extent that the payment of such interest shall be legally enforceable), all of the Company's obligations in respect of the payment of the principal of and premium and interest, if any, on the Securities of this series shall terminate.] 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 rights of the Holders of the Securities of each series to be affected under the Indenture at any time by the Company and the Trustee with the consent of the Holders of 66 2/3% in principal amount of the Securities at the time Outstanding of each series to be affected. The Indenture also contains provisions permitting the Holders of specified percentages in principal amount of the Securities of each series at the time Outstanding, on behalf of the Holders of all Securities of such series, to waive compliance by the Company 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 of this Security or in exchange for -21- or in lieu of this Security, 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 any premium 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 in any place where the principal of and any premium and interest on this Security are payable, 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 this series and of like tenor, of authorized denominations and for the same aggregate principal amount, will be issued to the designated transferee or transferees. The Securities of this series are issuable only in registered form without coupons in denominations of $....... and any integral multiple thereof. As provided in the Indenture and subject to certain limitations therein set forth, Securities of this series are exchangeable for a like aggregate principal amount of Securities of this series and of like tenor 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. -22- Prior to due presentment of this Security for registration of transfer, the Company, the Trustee and any agent of the Company 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 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. SECTION 204. FORM OF LEGEND FOR GLOBAL SECURITIES. Unless otherwise specified as contemplated by Section 301 for the Securities evidenced thereby, every Global Security authenticated and delivered hereunder shall bear a legend in substantially the following form: THIS SECURITY IS A GLOBAL SECURITY WITHIN THE MEANING OF THE INDENTURE HEREINAFTER REFERRED TO AND IS REGISTERED IN THE NAME OF A DEPOSITARY OR A NOMINEE THEREOF. THIS SECURITY MAY NOT BE EXCHANGED IN WHOLE OR IN PART FOR A SECURITY REGISTERED, AND NO TRANSFER OF THIS SECURITY IN WHOLE OR IN PART MAY BE REGISTERED, IN THE NAME OF ANY PERSON OTHER THAN SUCH DEPOSITARY OR A NOMINEE THEREOF, EXCEPT IN THE LIMITED CIRCUMSTANCES DESCRIBED IN THE INDENTURE. SECTION 205. FORM OF TRUSTEE'S CERTIFICATE OF AUTHENTICATION. The Trustee's certificates of authentication shall be in substantially the following form: This is one of the Securities of the series designated therein referred to in the within-mentioned Indenture. .........................................., AS TRUSTEE By......................................... AUTHORIZED OFFICER -23- ARTICLE THREE THE SECURITIES SECTION 301. AMOUNT UNLIMITED; ISSUABLE IN SERIES. The aggregate principal amount of Securities which may be authenticated and delivered under this Indenture is unlimited. The Securities may be issued in one or more series. There shall be established in or pursuant to a Board Resolution and, subject to Section 303, set forth, or determined in the manner provided, in an Officers' Certificate, or established in one or more indentures supplemental hereto, prior to the first issuance of a Security of any series, (1) the title of the Securities of the series (which shall distinguish the Securities of the series from Securities of any other series); (2) any limit upon the aggregate principal amount of the Securities of the series which may be authenticated and delivered under this Indenture (except for Securities authenticated and delivered upon registration of transfer of, or in exchange for, or in lieu of, other Securities of the series pursuant to Section 304, 305, 306, 906 or 1107 and except for any Securities which, pursuant to Section 303, are deemed never to have been authenticated and delivered hereunder); (3) the Person to whom any interest on a Security of the series shall be payable, if other than 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; (4) the date or dates on which the principal of any Securities of the series is payable; (5) the rate or rates at which any Securities of the series shall bear interest, if any, the date or dates from which any such interest shall accrue, the Interest Payment Dates on which any such interest shall be payable and the Regular Record Date for any such interest payable on any Interest Payment Date; (6) the place or places where the principal of and any premium and interest on any Securities of the series shall be payable; (7) the period or periods within which, the price or prices at which and the terms and conditions upon which any Securities of the series may be redeemed, in whole or -24- in part, at the option of the Company and, if other than by a Board Resolution, the manner in which any election by the Company to redeem the Securities shall be evidenced; (8) the obligation, if any, of the Company to redeem or purchase any Securities of the series pursuant to any sinking fund or analogous provisions or at the option of the Holder thereof and the period or periods within which, the price or prices at which and the terms and conditions upon which any Securities of the series shall be redeemed or purchased, in whole or in part, pursuant to such obligation; (9) if other than denominations of $1,000 and any integral multiple thereof, the denominations in which any Securities of the series shall be issuable; (10) if the amount of principal of or any premium or interest on any Securities of the series may be determined with reference to an index or pursuant to a formula, the manner in which such amounts shall be determined; (11) if other than the currency of the United States of America, the currency, currencies or currency units in which the principal of or any premium or interest on any Securities of the series shall be payable and the manner of determining the equivalent thereof in the currency of the United States of America for any purpose, including for purposes of the definition of "Outstanding" in Section 101; (12) if the principal of or any premium or interest on any Securities of the series is to be payable, at the election of the Company or the Holder thereof, in one or more currencies or currency units other than that or those in which such Securities are stated to be payable, the currency, currencies or currency units in which the principal of or any premium or interest on such Securities as to which such election is made shall be payable, the periods within which and the terms and conditions upon which such election is to be made and the amount so payable (or the manner in which such amount shall be determined); (13) if other than the entire principal amount thereof, the portion of the principal amount of any Securities of the series which shall be payable upon declaration of acceleration of the Maturity thereof pursuant to Section 502; (14) if the principal amount payable at the Stated Maturity of any Securities of the series will not be determinable as of any one or more dates prior to the Stated Maturity, the amount which shall be deemed to be the principal amount of such Securities as of any such date for any purpose thereunder or hereunder, including the principal amount thereof which shall be due and payable upon any Maturity other than the Stated Maturity or which shall be deemed to be Outstanding as of any date prior -25- to the Stated Maturity (or, in any such case, the manner in which such amount deemed to be the principal amount shall be determined); (15) if applicable, that the Securities of the series, in whole or any specified part, shall be defeasible pursuant to Section 1302 or Section 1303 or both such Sections and, if other than by a Board Resolution, the manner in which any election by the Company to defease such Securities shall be evidenced; (16) if applicable, that any Securities of the series shall be issuable in whole or in part in the form of one or more Global Securities and, in such case, the respective Depositaries for such Global Securities, the form of any legend or legends which shall be borne by any such Global Security in addition to or in lieu of that set forth in Section 204 and any circumstances in addition to or in lieu of those set forth in Clause (2) of the last paragraph of Section 305 in which any such Global Security may be exchanged in whole or in part for Securities registered, and any transfer of such Global Security in whole or in part may be registered, in the name or names of Persons other than the Depositary for such Global Security or a nominee thereof; (17) any addition to or change in the Events of Default which applies to any Securities of the series and any change in the right of the Trustee or the requisite Holders of such Securities to declare the principal amount thereof due and payable pursuant to Section 502; (18) any addition to or change in the covenants set forth in Article Ten which applies to Securities of the series; and (19) any other terms of the series (which terms shall not be inconsistent with the provisions of this Indenture, except as permitted by Section 901(5)). All Securities of any one series shall be substantially identical except as to denomination and except as may otherwise be provided in or pursuant to the Board Resolution referred to above and (subject to Section 303) set forth, or determined in the manner provided, in the Officers' Certificate referred to above or in any such indenture supplemental hereto. If any of the terms of the series are established by action taken pursuant to a Board Resolution, a copy of an appropriate record of such action shall be certified by the Secretary or an Assistant Secretary of the Company and delivered to the Trustee at or prior to the delivery of the Officers' Certificate setting forth the terms of the series. -26- SECTION 302. DENOMINATIONS. The Securities of each series shall be issuable only in registered form without coupons and only in such denominations as shall be specified as contemplated by Section 301. In the absence of any such specified denomination with respect to the Securities of any series, the Securities of such series shall be issuable 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 of the Board, its Vice Chairman of the Board, 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 of any series executed by the Company to the Trustee for authentication, together with a Company Order for the authentication and delivery of such Securities, and the Trustee in accordance with the Company Order shall authenticate and deliver such Securities. If the form or terms of the Securities of the series have been established by or pursuant to one or more Board Resolutions as permitted by Sections 201 and 301, in authenticating such Securities, and accepting the additional responsibilities under this Indenture in relation to such Securities, the Trustee shall be entitled to receive, and (subject to Section 601) shall be fully protected in relying upon, an Opinion of Counsel stating, (1) if the form of such Securities has been established by or pursuant to Board Resolution as permitted by Section 201, that such form has been established in conformity with the provisions of this Indenture; (2) if the terms of such Securities have been established by or pursuant to Board Resolution as permitted by Section 301, that such terms have been established in conformity with the provisions of this Indenture; and -27- (3) that such Securities, when authenticated and delivered by the Trustee and issued by the Company in the manner and subject to any conditions specified in such Opinion of Counsel, will constitute valid and legally binding obligations of the Company enforceable in accordance with their terms, subject to bankruptcy, insolvency, fraudulent transfer, reorganization, moratorium and similar laws of general applicability relating to or affecting creditors' rights and to general equity principles. If such form or terms have been so established, the Trustee shall not be required to authenticate such Securities if the issue of such Securities pursuant to this Indenture will affect the Trustee's own rights, duties or immunities under the Securities and this Indenture or otherwise in a manner which is not reasonably acceptable to the Trustee. Notwithstanding the provisions of Section 301 and of the preceding paragraph, if all Securities of a series are not to be originally issued at one time, it shall not be necessary to deliver the Officers' Certificate otherwise required pursuant to Section 301 or the Company Order and Opinion of Counsel otherwise required pursuant to such preceding paragraph at or prior to the authentication of each Security of such series if such documents are delivered at or prior to the authentication upon original issuance of the first Security of such series to be issued. Each Security shall be dated the date of its authentication. No Security 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. Notwithstanding the foregoing, if any Security shall have been authenticated and delivered hereunder but never issued and sold by the Company, and the Company shall deliver such Security to the Trustee for cancellation as provided in Section 309, for all purposes of this Indenture such Security shall be deemed never to have been authenticated and delivered hereunder and shall never be entitled to the benefits of this Indenture. SECTION 304. TEMPORARY SECURITIES. Pending the preparation of definitive Securities of any series, the Company may execute, and upon Company Order the Trustee shall authenticate and deliver, temporary Securities which are typewritten, printed, lithographed, typewritten, mimeographed or otherwise produced, in any authorized denomination, substantially of the tenor of the definitive Securities in lieu of which they are issued and with such appropriate insertions, -28- omissions, substitutions and other variations as the officers executing such Securities may determine, as evidenced by their execution of such Securities. If temporary Securities of any series are issued, the Company will cause definitive Securities of that series to be prepared without unreasonable delay. After the preparation of definitive Securities of such series, the temporary Securities of such series shall be exchangeable for definitive Securities of such series upon surrender of the temporary Securities of such series at the office or agency of the Company in a Place of Payment for that series, without charge to the Holder. Upon surrender for cancellation of any one or more temporary Securities of any series, the Company shall execute and the Trustee shall authenticate and deliver in exchange therefor one or more definitive Securities of the same series, of any authorized denominations and of like tenor and aggregate principal amount. Until so exchanged, the temporary Securities of any series shall in all respects be entitled to the same benefits under this Indenture as definitive Securities of such series and tenor. 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 of the Company in a Place of Payment 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 of a series at the office or agency of the Company in a Place of Payment for that series, 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 the same series, of any authorized denominations and of like tenor and aggregate principal amount. At the option of the Holder, Securities of any series may be exchanged for other Securities of the same series, of any authorized denominations and of like tenor and aggregate principal amount, 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, and the Trustee shall authenticate and deliver, the Securities which the Holder making the exchange is entitled to receive. All Securities issued upon any registration of transfer or exchange of Securities shall be the valid obligations of the Company, evidencing the same debt, and entitled to the -29- same benefits under this Indenture, as the Securities 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 1107 not involving any transfer. If the Securities of any series (or of any series and specified tenor) are to be redeemed in part, the Company shall not be required (A) to issue, register the transfer of or exchange any Securities of that series (or of that series and specified tenor, as the case may be) during a period beginning at the opening of business 15 days before the day of the mailing of a notice of redemption of any such Securities selected for redemption under Section 1103 and ending at the close of business on the day of such mailing, or (B) 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. The provisions of Clauses (1), (2), (3) and (4) below shall apply only to Global Securities: (1) Each Global Security authenticated under this Indenture shall be registered in the name of the Depositary designated for such Global Security or a nominee thereof and delivered to such Depositary or a nominee thereof or custodian therefor, and each such Global Security shall constitute a single Security for all purposes of this Indenture. (2) Notwithstanding any other provision in this Indenture, no Global Security may be exchanged in whole or in part for Securities registered, and no transfer of a Global Security in whole or in part may be registered, in the name of any Person other than the Depositary for such Global Security or a nominee thereof unless (A) such Depositary (i) has notified the Company that it is unwilling or unable to continue as Depositary for such Global Security or (ii) has ceased to be a clearing agency registered under the Exchange Act, (B) there shall have occurred and be continuing an Event of Default with respect to such Global Security or (C) there shall exist such circumstances, if any, in addition to or in lieu of the foregoing as have been specified for this purpose as contemplated by Section 301. -30- (3) Subject to Clause (2) above, any exchange of a Global Security for other Securities may be made in whole or in part, and all Securities issued in exchange for a Global Security or any portion thereof shall be registered in such names as the Depositary for such Global Security shall direct. (4) Every Security authenticated and delivered upon registration of transfer of, or in exchange for or in lieu of, a Global Security or any portion thereof, whether pursuant to this Section, Section 304, 306, 906 or 1107 or otherwise, shall be authenticated and delivered in the form of, and shall be, a Global Security, unless such Security is registered in the name of a Person other than the Depositary for such Global Security or a nominee thereof. SECTION 306. MUTILATED, DESTROYED, LOST AND STOLEN SECURITIES. If any mutilated Security is surrendered to the Trustee, the Company shall execute and the Trustee shall authenticate and deliver in exchange therefor a new Security of the same series and 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 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 the Trustee shall authenticate and deliver, in lieu of any such destroyed, lost or stolen Security, a new Security of the same series and of like tenor and principal amount 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 imposed in relation thereto and any other expenses (including the fees and expenses of the Trustee) connected therewith. Every new Security of any series issued pursuant to this Section in lieu of any destroyed, lost or stolen Security shall constitute an original additional contractual obligation of the Company, whether or not the destroyed, lost or stolen Security shall be at any time enforceable by anyone, and shall be entitled to all the benefits of this Indenture -31- equally and proportionately with any and all other Securities of that series 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. Except as otherwise provided as contemplated by Section 301 with respect to any series of Securities, 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 of any series 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 of such series (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 of such series 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 payment of such Defaulted Interest and the Special Record Date therefor to be given to each Holder of Securities of such series in the manner set forth in Section 106, not less than 10 days prior to such Special Record Date. Notice of the proposed payment of such Defaulted Interest and the Special -32- Record Date therefor having been so mailed, such Defaulted Interest shall be paid to the Persons in whose names the Securities of such series (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 on the Securities of any series in any other lawful manner not inconsistent with the requirements of any securities exchange on which such 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 Trustee and any agent of the Company 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 any premium and (subject to Section 307) any interest on such Security and for all other purposes whatsoever, whether or not such Security be overdue, and neither the Company, the Trustee nor any agent of the Company 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 credit against any sinking fund payment 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 may deliver to the Trustee (or to any other Person for delivery to the Trustee) for cancellation any Securities previously authenticated hereunder which the Company has not issued and sold, 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 as directed by a Company Order. -33- SECTION 310. COMPUTATION OF INTEREST. Except as otherwise specified as contemplated by Section 301 for Securities of any series, interest on the Securities of each series shall be computed on the basis of a 360-day year of twelve 30-day months. ARTICLE FOUR SATISFACTION AND DISCHARGE SECTION 401. SATISFACTION AND DISCHARGE OF INDENTURE. This Indenture shall upon Company Request 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, at the expense of the Company, shall execute proper instruments acknowledging satisfaction and discharge of this Indenture, 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 (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, 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 money in an amount sufficient to pay and discharge the entire indebtedness on such Securities not theretofore delivered to the Trustee for cancellation, for principal and any premium -34- 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 has paid or caused to be paid all other sums payable hereunder by the Company; 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, the obligations of the Company to the Trustee under Section 607, the obligations of the Trustee 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 and the last paragraph of Section 1003 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 any premium and interest for whose payment such money has been deposited with the Trustee. ARTICLE FIVE REMEDIES SECTION 501. EVENTS OF DEFAULT. "Event of Default", wherever used herein with respect to Securities of any series, means any one of the following events (whatever the reason for such Event of Default and whether it shall 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 any interest upon any Security of that series when it becomes due and payable, and continuance of such default for a period of 30 days; or -35- (2) default in the payment of the principal of or any premium on any Security of that series at its Maturity; or (3) default in the deposit of any sinking fund payment, when and as due by the terms of a Security of that series; or (4) default in the performance, or breach, of any covenant or warranty of the Company in this Indenture (other than a covenant or warranty a default in whose performance or whose breach is elsewhere in this Section specifically dealt with or which has expressly been included in this Indenture solely for the benefit of series of Securities other than that series), 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 10% in principal amount of the Outstanding Securities of that series 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 under any bond, debenture, note or other evidence of indebtedness for money borrowed by the Company (including a default with respect to Securities of any series other than that series), or under any mortgage, indenture or instrument (including this Indenture) under which there may be issued or by which there may be secured or evidenced any indebtedness for money borrowed by the Company having an aggregate principal amount outstanding of at least $10 million, whether such indebtedness now exists or shall hereafter be created, which default (A) shall constitute a failure to pay any portion of the principal of such indebtedness when due and payable after the expiration of any applicable grace period with respect thereto or (B) shall have resulted in such indebtedness becoming or being declared due and payable prior to the date on which it would otherwise have become due and payable, without, in the case of Clause (A), such indebtedness having been discharged or without, in the case of Clause (B), such indebtedness having been discharged or such acceleration having been rescinded or annulled, in each such case, within a period of 10 days after there shall have 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 10% in principal amount of the Outstanding Securities of that series a written notice specifying such default and requiring the Company to cause such indebtedness to be discharged or cause such acceleration to be rescinded or annulled, as the case may be, and stating that such notice is a "Notice of Default" hereunder; or (6) 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 of its Restricted Subsidiaries 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 of its Restricted Subsidiaries a bankrupt or insolvent, or approving -36- as properly filed a petition seeking reorganization, arrangement, adjustment or composition of or in respect of the Company or any of its Restricted Subsidiaries 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 of its Restricted Subsidiaries or of any substantial part of its property (or that of any such Restricted Subsidiary), or ordering the winding up or liquidation of its affairs, 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 (7) the commencement by the Company 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 a bankrupt or insolvent, or the consent by it to the entry of a decree or order for relief in respect of the Company or any of its Restricted Subsidiaries 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 it, or the filing by it of a petition or answer or consent seeking reorganization or relief under any applicable Federal or State law, or the consent by it to the filing of such petition or to the appointment of or taking possession by a custodian, receiver, liquidator, assignee, trustee, sequestrator or other similar official of the Company or any of its Restricted Subsidiaries or of any substantial part of its property ( or that of any such Restricted Subsidiary), or the making by it of an assignment for the benefit of creditors, or the admission by it 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 of its Restricted Subsidiaries in furtherance of any such action; or (8) any other Event of Default provided with respect to Securities of that series. SECTION 502. ACCELERATION OF MATURITY; RESCISSION AND ANNULMENT. If an Event of Default (other than an Event of Default specified in Section 501(6) or 501(7)) with respect to Securities of any series at the time Outstanding occurs and is continuing, then in every such case the Trustee or the Holders of not less than 25% in principal amount of the Outstanding Securities of that series may declare the principal amount of all the Securities of that series (or, if any Securities of that series are Original Issue Discount Securities, such portion of the principal amount of such Securities as may be specified by the terms thereof) 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 amount (or specified amount) shall become immediately due and payable. If an Event of Default specified in Section 501(6) or 501 (7) with respect to Securities of any series at the time Outstanding occurs, the principal amount of all the Securities of that series (or, if any Securities of that series are Original Issue Discount -37- Securities, such portion of the principal amount of such Securities as may be specified by the terms thereof) shall automatically, and without any declaration or other action on the part of the Trustee or any Holder, become immediately due and payable. At any time after such a declaration of acceleration with respect to Securities of any series 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 of that series, by written notice to the Company and the Trustee, may rescind and annul such declaration and its consequences if (1) the Company has paid or deposited with the Trustee a sum sufficient to pay (A) all overdue interest on all Securities of that series, (B) the principal of (and premium, if any, on) any Securities of that series which have become due otherwise than by such declaration of acceleration and any interest thereon at the rate or rates prescribed therefor in such Securities, (C) to the extent that payment of such interest is lawful, interest upon overdue interest at the rate or rates prescribed therefor in such 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; and (2) all Events of Default with respect to Securities of that series, other than the non-payment of the principal of Securities of that series 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. -38- 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, 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 any premium and interest and, to the extent that payment of such interest shall be legally enforceable, interest on any overdue principal and premium and on any overdue interest, at the rate or rates prescribed therefor in such 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 with respect to Securities of any series occurs and is continuing, the Trustee may in its discretion proceed to protect and enforce its rights and the rights of the Holders of Securities of such series 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 (or any other obligor upon the Securities), its property or 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 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, -39- 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; PROVIDED, HOWEVER, that the Trustee may, on behalf of the Holders, vote for the election of a trustee in bankruptcy or similar official and be a member of a creditors' or other similar committee. SECTION 505. TRUSTEE MAY ENFORCE CLAIMS WITHOUT POSSESSION OF SECURITIES. All rights of action and claims under this Indenture or the Securities 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. 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 any premium 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; and SECOND: To the payment of the amounts then due and unpaid for principal of and any premium 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 any premium and interest, respectively. -40- SECTION 507. LIMITATION ON SUITS. No Holder of any Security of any series 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 with respect to the Securities of that series; (2) the Holders of not less than 25% in principal amount of the Outstanding Securities of that series 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 of that series; it being understood and intended that no one or more of such 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 of such Holders, or to obtain or to seek to obtain priority or preference over any other of such Holders or to enforce any right under this Indenture, except in the manner herein provided and for the equal and ratable benefit of all of such 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 any premium 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) and to institute suit for the enforcement of any such payment, and such rights shall not be impaired without the consent of such Holder. -41- 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 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 Securities 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 of any series 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, with respect to the Securities of such series, PROVIDED that (1) such direction shall not be in conflict with any rule of law or with this Indenture, and -42- (2) the Trustee may take any other action deemed proper by the Trustee which is not inconsistent with such direction. SECTION 513. WAIVER OF PAST DEFAULTS. The Holders of not less than a majority in principal amount of the Outstanding Securities of any series may on behalf of the Holders of all the Securities of such series waive any past default hereunder with respect to such series and its consequences, except a default (1) in the payment of the principal of or any premium or interest on any Security of such series, 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 of such series 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. SECTION 515. WAIVER OF USURY, STAY OR EXTENSION LAWS. The Company 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 the Company (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 -43- impede the execution of any 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. If a default occurs hereunder with respect to Securities of any series, the Trustee shall give the Holders of Securities of such series notice of such default 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) with respect to Securities of such series, 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 with respect to Securities of such series. SECTION 603. CERTAIN RIGHTS OF TRUSTEE. Subject to the provisions of Section 601: (1) 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; -44- (2) 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 shall be sufficiently evidenced by a Board Resolution; (3) whenever in the administration of this Indenture the Trustee shall deem it desirable that a matter be proved or established prior to taking, 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; (4) the Trustee may consult with counsel 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; (5) 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; (6) 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 (7) 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, except the Trustee's certificates of authentication, shall be taken as the statements of the Company, and neither the Trustee nor any Authenticating Agent assumes any responsibility for their correctness. The Trustee makes no representations as to the validity or sufficiency of this Indenture or of the Securities. Neither the Trustee nor any Authenticating Agent shall be -45- accountable for the use or application by the Company of Securities or the proceeds thereof. SECTION 605. MAY HOLD SECURITIES. The Trustee, any Authenticating Agent, any Paying Agent, any Security Registrar or any other agent of the Company, 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 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. SECTION 607. COMPENSATION AND REIMBURSEMENT. The Company agrees (1) to pay to the Trustee from time to time reasonable compensation 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 the Trustee for, and to hold it harmless against, any loss, liability or expense incurred without negligence or bad faith on its part, arising out of or in connection with the acceptance or administration of the trust or trusts hereunder, 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. -46- SECTION 608. 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. To the extent permitted by such Act, the Trustee shall not be deemed to have a conflicting interest by virtue of being a trustee under this Indenture with respect to Securities of more than one series. SECTION 609. CORPORATE TRUSTEE REQUIRED; ELIGIBILITY. There shall at all times be one (and only one) Trustee hereunder with respect to the Securities of each series, which may be Trustee hereunder for Securities of one or more other series. Each Trustee shall be a Person that is eligible pursuant to the Trust Indenture Act to act as such has a combined capital and surplus of at least $50,000,000 and has its Corporate Trust Office in Louisville, Kentucky. If any 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 and to the extent permitted by the Trust Indenture Act, 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 with respect to the Securities of any series 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. 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 in accordance with the applicable requirements of Section 611. The Trustee may resign at any time with respect to the Securities of one or more series by giving written notice thereof to the Company. If the instrument of acceptance by a successor Trustee required by Section 611 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 with respect to the Securities of such series. The Trustee may be removed at any time with respect to the Securities of any series by Act of the Holders of a majority in principal amount of the Outstanding Securities of such series, delivered to the Trustee and to the Company. -47- If at any time: (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, (A) the Company by a Board Resolution may remove the Trustee with respect to all Securities, or (B) 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 with respect to all Securities and the appointment of a successor Trustee or Trustees. 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, with respect to the Securities of one or more series, the Company, by a Board Resolution, shall promptly appoint a successor Trustee or Trustees with respect to the Securities of that or those series (it being understood that any such successor Trustee may be appointed with respect to the Securities of one or more or all of such series and that at any time there shall be only one Trustee with respect to the Securities of any particular series) and shall comply with the applicable requirements of Section 611. If, within one year after such resignation, removal or incapability, or the occurrence of such vacancy, a successor Trustee with respect to the Securities of any series shall be appointed by Act of the Holders of a majority in principal amount of the Outstanding Securities of such series delivered to the Company and the retiring Trustee, the successor Trustee so appointed shall, forthwith upon its acceptance of such appointment in accordance with the applicable requirements of Section 611, become the successor Trustee with respect to the Securities of such series and to that extent supersede the successor Trustee appointed by the Company. If no successor Trustee with respect to the Securities of any series shall have been so appointed by the Company or the Holders and accepted appointment in the manner required by Section 611, any Holder who has been a bona fide Holder of a Security of such series 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 with respect to the Securities of such series. -48- The Company shall give notice of each resignation and each removal of the Trustee with respect to the Securities of any series and each appointment of a successor Trustee with respect to the Securities of any series to all Holders of Securities of such series in the manner provided in Section 106. Each notice shall include the name of the successor Trustee with respect to the Securities of such series and the address of its Corporate Trust Office. SECTION 611. ACCEPTANCE OF APPOINTMENT BY SUCCESSOR. In case of the appointment hereunder of a successor Trustee with respect to all Securities, every such successor Trustee so appointed shall execute, acknowledge and deliver to the Company 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 the request of the Company or the successor Trustee, such retiring Trustee shall, upon 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. In case of the appointment hereunder of a successor Trustee with respect to the Securities of one or more (but not all) series, the Company, the retiring Trustee and each successor Trustee with respect to the Securities of one or more series shall execute and deliver an indenture supplemental hereto wherein each successor Trustee shall accept such appointment and which (1) shall contain such provisions as shall be necessary or desirable to transfer and confirm to, and to vest in, each successor Trustee all the rights, powers, trusts and duties of the retiring Trustee with respect to the Securities of that or those series to which the appointment of such successor Trustee relates, (2) if the retiring Trustee is not retiring with respect to all Securities, shall contain such provisions as shall be deemed necessary or desirable to confirm that all the rights, powers, trusts and duties of the retiring Trustee with respect to the Securities of that or those series as to which the retiring Trustee is not retiring shall continue to be vested in the retiring Trustee, and (3) shall add to or change any of the provisions of this Indenture as shall be necessary to provide for or facilitate the administration of the trusts hereunder by more than one Trustee, it being understood that nothing herein or in such supplemental indenture shall constitute such Trustees co-trustees of the same trust and that each such Trustee shall be trustee of a trust or trusts hereunder separate and apart from any trust or trusts hereunder administered by any other such Trustee; and upon the execution and delivery of such supplemental indenture the resignation or removal of the retiring Trustee shall become effective to the extent provided therein and each such successor Trustee, without any further act, deed or conveyance, shall become vested with all the rights, powers, trusts -49- and duties of the retiring Trustee with respect to the Securities of that or those series to which the appointment of such successor Trustee relates; but, on request of the Company or any successor Trustee, such retiring Trustee shall duly assign, transfer and deliver to such successor Trustee all property and money held by such retiring Trustee hereunder with respect to the Securities of that or those series to which the appointment of such successor Trustee relates. Upon request of any such successor Trustee, the Company 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 referred to in the first or second preceding paragraph, as the case may be. 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 (or any other obligor upon the Securities), the Trustee shall be subject to the provisions of the Trust Indenture Act regarding the collection of claims against the Company (or any such other obligor). SECTION 614. APPOINTMENT OF AUTHENTICATING AGENT. The Trustee may appoint an Authenticating Agent or Agents with respect to one or more series of Securities which shall be authorized to act on behalf of the Trustee to -50- authenticate Securities of such series issued upon original issue and upon exchange, registration of transfer or partial redemption thereof or pursuant to Section 306, and Securities so authenticated 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 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 $50,000,000 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 give notice of such appointment in the manner provided in Section 106 to all Holders of Securities of the series with respect to which such Authenticating Agent will serve. 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. -51- 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 with respect to one or more series is made pursuant to this Section, the Securities of such series may have endorsed thereon, in addition to the Trustee's certificate of authentication, an alternative certificate of authentication in the following form: This is one of the Securities of the series designated therein referred to in the within-mentioned Indenture. ........................................, 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 (1) semi-annually, not later than January 15 and July 15 in each year, a list, in such form as the Trustee may reasonably require, of the names and addresses of the Holders of Securities of each series as of the preceding December 31 or June 30, as the case may be, and -52- (2) 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. 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 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. 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 privileges of the Trustee, shall be as provided by the Trust Indenture Act. Every Holder of Securities, by receiving and holding the same, agrees with the Company and the Trustee that neither the Company nor the Trustee nor any agent of either 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. 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. 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 any Securities are listed, with the Commission and with the Company. The Company will notify the Trustee when any Securities are listed on any stock exchange. SECTION 704. REPORTS BY COMPANY. The Company 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 -53- 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. ARTICLE EIGHT CONSOLIDATION, MERGER, CONVEYANCE, TRANSFER OR LEASE SECTION 801. COMPANY MAY CONSOLIDATE, ETC., ONLY ON CERTAIN TERMS. The Company shall not consolidate with or merge into any other Person or convey, transfer or lease its properties and assets substantially as an entirety to any Person, and the Company shall not permit any Person to consolidate with or merge into the Company or convey, transfer or lease its properties and assets substantially as an entirety to the Company, unless: (1) in case the Company shall consolidate with or merge into another Person or convey, transfer or lease its properties and assets substantially as an entirety to any Person, the Person formed by such consolidation or into which the Company is merged or the Person which acquires by conveyance or transfer, or which leases, the properties and assets of the Company substantially as an entirety shall be a corporation, partnership or trust, shall be organized and validly existing under the laws of the United States of America, any State thereof or the District of Columbia and shall expressly assume, by an indenture supplemental hereto, executed and delivered to the Trustee, in form satisfactory to the Trustee, the due and punctual payment of the principal of and any premium and interest on all the Securities and the performance or observance of every covenant of this Indenture on the part of the Company to be performed or observed; (2) immediately after giving effect to such transaction and treating any indebtedness which becomes an obligation of the Company or any Subsidiary as a result of such transaction as having been incurred by the Company or such Subsidiary at the time of such transaction, no Event of Default, and no event which, after notice or lapse of time or both, would become an Event of Default, shall have happened and be continuing; (3) if, as a result of any such consolidation or merger or such conveyance, transfer or lease, properties or assets of the Company would become subject to a mortgage, pledge, lien, security interest or other encumbrance which would not be permitted by this Indenture, the Company or such successor Person, as the case may be, shall take -54- such steps as shall be necessary effectively to secure the Securities equally and ratably with (or prior to) all indebtedness secured thereby; and (4) the Company has delivered to the Trustee an Officers' Certificate and an Opinion of Counsel, each stating that such consolidation, merger, conveyance, transfer or lease and, if a supplemental indenture is required in connection with such transaction, such supplemental indenture comply with this Article and that all conditions precedent herein provided for relating to such transaction have been complied with. SECTION 802. SUCCESSOR SUBSTITUTED. Upon any consolidation of the Company with, or merger of the Company into, any other Person or any conveyance, transfer or lease of the properties and assets of the Company substantially as an entirety in accordance with Section 801, the successor Person formed by such consolidation or into which the Company is merged or to which such conveyance, transfer or lease is made 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. 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, 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 and the assumption by any such successor of the covenants of the Company herein and in the Securities; or (2) to add to the covenants of the Company for the benefit of the Holders of all or any series of Securities (and if such covenants are to be for the benefit of less than all series of Securities, stating that such covenants are expressly being included solely -55- for the benefit of such series) or to surrender any right or power herein conferred upon the Company; or (3) to add any additional Events of Default for the benefit of the Holders of all or any series of Securities (and if such additional Events of Default are to be for the benefit of less than all series of Securities, stating that such additional Events of Default are expressly being included solely for the benefit of such series); or (4) to add to or change any of the provisions of this Indenture to such extent as shall be necessary to permit or facilitate the issuance of Securities in bearer form, registrable or not registrable as to principal, and with or without interest coupons, or to permit or facilitate the issuance of Securities in uncertificated form; or (5) to add to, change or eliminate any of the provisions of this Indenture in respect of one or more series of Securities, PROVIDED that any such addition, change or elimination (A) shall neither (i) apply to any Security of any series created prior to the execution of such supplemental indenture and entitled to the benefit of such provision nor (ii) modify the rights of the Holder of any such Security with respect to such provision or (B) shall become effective only when there is no such Security Outstanding; or (6) to secure the Securities pursuant to the requirements of Section 1008 or otherwise; or (7) to establish the form or terms of Securities of any series as permitted by Sections 201 and 301; or (8) to evidence and provide for the acceptance of appointment hereunder by a successor Trustee with respect to the Securities of one or more series and to add to or change any of the provisions of this Indenture as shall be necessary to provide for or facilitate the administration of the trusts hereunder by more than one Trustee, pursuant to the requirements of Section 611; or (9) to cure any ambiguity, to correct or supplement any provision herein which may be defective or inconsistent with any other provision herein, or to make any other provisions with respect to matters or questions arising under this Indenture, PROVIDED that such action pursuant to this Clause (9) shall not adversely affect the interests of the Holders of Securities of any series. -56- SECTION 902. SUPPLEMENTAL INDENTURES WITH CONSENT OF HOLDERS. With the consent of the Holders of not less than 66 2/3% in principal amount of the Outstanding Securities of each series affected by such supplemental indenture, by Act of said Holders delivered to the Company and the Trustee, the Company, when authorized by a Board Resolution, 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 of Securities of such series 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 instalment of principal of or 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 reduce the amount of the principal of an Original Issue Discount Security or any other Security which would be due and payable upon a declaration of acceleration of the Maturity thereof pursuant to Section 502, or change any 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 (2) reduce the percentage in principal amount of the Outstanding Securities of any series, 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 1010, 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; PROVIDED, HOWEVER, that this clause shall not be deemed to require the consent of any Holder with respect to changes in the references to "the Trustee" and concomitant changes in this Section and Section 1010, or the deletion of this proviso, in accordance with the requirements of Sections 611 and 901(8). A supplemental indenture which changes or eliminates any covenant or other provision of this Indenture which has expressly been included solely for the benefit of one or more particular series of Securities, or which modifies the rights of the Holders of Securities of such series with respect to such covenant or other provision, shall be deemed not to affect the rights under this Indenture of the Holders of Securities of any other series. -57- 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. 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 of any series 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 shall so determine, new Securities of any series so modified as to conform, in the opinion of the Trustee and the Company, to any such supplemental indenture may be prepared and executed by the Company and authenticated and delivered by the Trustee in exchange for Outstanding Securities of such series. -58- ARTICLE TEN COVENANTS SECTION 1001. PAYMENT OF PRINCIPAL, PREMIUM AND INTEREST. The Company covenants and agrees for the benefit of each series of Securities that it will duly and punctually pay the principal of and any premium and interest on the Securities of that series in accordance with the terms of the Securities and this Indenture. SECTION 1002. MAINTENANCE OF OFFICE OR AGENCY. The Company will maintain in each Place of Payment for any series of Securities an office or agency where Securities of that series may be presented or surrendered for payment, where Securities of that series may be surrendered for registration of transfer or exchange and where notices and demands to or upon the Company in respect of the Securities of that series 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 hereby appoints the Trustee as its 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 where the Securities of one or more series 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 each Place of Payment for Securities of any series 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 SECURITIES PAYMENTS TO BE HELD IN TRUST. If the Company shall at any time act as its own Paying Agent with respect to any series of Securities, it will, on or before each due date of the principal of or any premium or interest on any of the Securities of that series, segregate and hold in trust for the benefit of the Persons entitled thereto a sum sufficient to pay the principal and any premium and interest so becoming due until such sums shall be paid to such Persons or -59- otherwise disposed of as herein provided and will promptly notify the Trustee of its action or failure so to act. Whenever the Company shall have one or more Paying Agents for any series of Securities, it will, prior to each due date of the principal of or any premium or interest on any Securities of that series, deposit with a Paying Agent a sum sufficient to pay such amount, such sum to be held as provided by the Trust Indenture Act, 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 for any series of Securities 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) comply with the provisions of the Trust Indenture Act applicable to it as a Paying Agent and (2) during the continuance of any default by the Company (or any other obligor upon the Securities of that series) in the making of any payment in respect of the Securities of that series, upon the written request of the Trustee, forthwith pay to the Trustee all sums held in trust by such Paying Agent for payment in respect of the Securities of that series. 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 or any premium or interest on any Security of any series and remaining unclaimed for two years after such principal, premium 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 New York City, 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. -60- SECTION 1004. STATEMENT BY OFFICERS AS TO DEFAULT. The Company will deliver to the Trustee, within 120 days after the end of each fiscal year of the Company ending after the date hereof, an Officers' Certificate, stating whether or not to the best knowledge of the signers thereof the Company is in default in the performance and observance of any of the terms, provisions and conditions of this Indenture (without regard to any period of grace or requirement of notice provided hereunder) and, if the Company shall be in default, specifying all such defaults and the nature and status thereof of which they may have knowledge. SECTION 1005. EXISTENCE. Subject to Article Eight, the Company will do or cause to be done all things necessary to preserve and keep in full force and effect its existence, rights (charter and statutory) and franchises; PROVIDED, HOWEVER, that the Company shall not be required to preserve any such right or franchise if the Board of Directors 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 disadvantageous in any material respect to the Holders. SECTION 1006. MAINTENANCE OF PROPERTIES. The Company will cause all properties used or useful in the conduct of its business or the business of any Subsidiary 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, in the judgment of the Company, desirable in the conduct of its business or the business of any Subsidiary and not disadvantageous in any material respect to the Holders. SECTION 1007. 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 Subsidiary or upon the income, profits or property of the Company or any Subsidiary, and (2) all lawful claims for labor, materials and -61- supplies which, if unpaid, might by law become a lien upon the property of the Company or any Subsidiary; 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. SECTION 1008. LIMITATION ON LIENS. The Company will not issue, incur, create, assume or guarantee, and will not permit any Restricted Subsidiary to issue, incur, create, assume or guarantee, any debt for borrowed money secured by a mortgage, security interest, pledge, lien, charge or other encumbrance ("mortgages") upon any Principal Property of the Company or any Restricted Subsidiary or upon any shares of stock or indebtedness of any Restricted Subsidiary (whether such Principal Property, shares or indebtedness are now existing or owned or hereafter created or acquired) without in any such case effectively providing concurrently with the issuance, incurrence, creation, assumption or guarantee of any such secured debt, or the grant of a mortgage with respect to any such indebtedness, that the Securities (together with, if the Company shall so determine, any other indebtedness of or guarantee by the Company or such Restricted Subsidiary ranking equally with the Securities) shall be secured equally and ratably with (or, at the option of the Company, prior to) such secured debt. The foregoing restriction, however, will not apply to: (1) mortgages on property existing at the time of acquisition thereof by the Company or any Subsidiary, provided that such mortgages were in existence prior to the contemplation of such acquisition; (2) mortgages on property, shares of stock or indebtedness or other assets of any corporation existing at the time such corporation becomes a Restricted Subsidiary, provided that such mortgages are not incurred in anticipation of such corporation becoming a Restricted Subsidiary; (3) mortgages on property, shares of stock or indebtedness existing at the time of acquisition thereof by the Company or a Restricted Subsidiary or mortgages thereon to secure the payment of all or any part of the purchase price thereof, or mortgages on property, shares of stock or indebtedness to secure any indebtedness for borrowed money incurred prior to, at the time of or within 270 days after, the latest of the acquisition thereof, or, in the case of property, the completion of construction, the completion of improvements, or the commencement of substantial commercial operation of such property for the purpose of financing all or any part of the purchase price thereof, such construction, or the making of such improvements; -62- (4) mortgages to secure indebtedness owing to the Company or to a Restricted Subsidiary; (5) mortgages existing at the date of this Indenture; (6) mortgages on property of a corporation existing at the time such corporation is merged into or consolidated with the Company or a Restricted Subsidiary or at the time of a sale, lease or other disposition of the properties of a corporation as an entirety or substantially as an entirety to the Company or a Restricted Subsidiary, provided that such mortgage was not incurred in anticipation of such merger or consolidation or sale, lease or other disposition; (7) mortgages in favor of the United States or any State, territory or possession thereof (or the District of Columbia), or any department, agency, instrumentality or political subdivision of the United States or any State, territory or possession thereof (or the District of Columbia), to secure partial, progress, advance or other payments pursuant to any contract or statute or to secure any indebtedness incurred for the purpose of financing all or any part of the purchase price or the cost of constructing or improving the property subject to such mortgages; (8) mortgages created in connection with the acquisition of assets or a project financed with, and created to secure, a Nonrecourse Obligation; and (9) extensions, renewals, refinancings or replacements of any mortgage referred to in the foregoing clauses (1), (2), (3), (5), (6), (7) and (8) provided, however, that any mortgages permitted by any of the foregoing clauses (1), (2), (3), (5), (6), (7) and (8) shall not extend to or cover any property of the Company or such Restricted Subsidiary, as the case may be, other than the property, if any, specified in such clauses and improvements thereto, and provided further that any refinancing or replacement of any mortgages permitted by the foregoing clauses (7) and (8) shall be of the type referred to in such clauses (7) or (8), as the case may be. Notwithstanding the restrictions set forth in the preceding paragraph, the Company or any Restricted Subsidiary will be permitted to issue, incur, create, assume or guarantee debt secured by a mortgage which would otherwise by subject to such restrictions, without equally and ratably securing the Securities, provided that after giving effect thereto, the aggregate amount of all debt so secured by mortgages (not including mortgages permitted under clauses (1) through (9) above) does not exceed 10% of the Consolidated Net Tangible Assets of the Company as most recently determined on or prior to such date. -63- SECTION 1009. LIMITATION ON SALE AND LEASE-BACK TRANSACTIONS. The Company will not, nor will it permit any Restricted Subsidiary to, enter into any Sale and Lease-Back Transaction with respect to any Principal Property, other than any such transaction involving a lease for a term of not more than three years or any such transaction between the Company and a Restricted Subsidiary or between Restricted Subsidiaries, unless: (1) the Company or such Restricted Subsidiary would be entitled to incur indebtedness secured by a mortgage on the Principal Property involved in such transaction at least equal in amount to the Attributable Debt with respect to such Sale and Lease-Back Transaction, without equally and ratably securing the Securities, pursuant to Section 1008; or (2) the Company shall apply an amount equal to the greater of the net proceeds of such sale or the Attributable Debt with respect to such Sale and Lease-Back Transaction within 180 days of such sale to either (or a combination of) the retirement (other than any mandatory retirement, mandatory prepayment or sinking fund payment or by payment at maturity) of debt for borrowed money of the Company or a Restricted Subsidiary that matures more than 12 months after the creation of such indebtedness or the purchase, construction or development of other comparable property. SECTION 1010. LIMITATION ON SUBSIDIARY DEBT. The Company shall not permit any Subsidiary of the Company to Incur or suffer to exist any Debt except: (1) Debt outstanding on the date of this Indenture; (2) Debt issued to and held by the Company or a Wholly Owned Subsidiary of the Company (provided that such Debt is at all times held by the Company or a Person which is a Wholly Owned Subsidiary of the Company); (3) Debt Incurred by a Person prior to the time (a) such Person became a Subsidiary of the Company, (b) such Person merges into or consolidates with a Subsidiary of the Company or (c) another Subsidiary of the Company merges into or consolidates with such Person (in a transaction in which such Person becomes a Subsidiary of the Company), which Debt was not Incurred in anticipation of such transaction and was outstanding prior to such transaction; (4) Debt which is exchanged for, or the proceeds of which are used to refinance or refund, any Debt permitted to be outstanding pursuant to Clauses (1) through (3) hereof (or any extension or renewal thereof), in an aggregate principal amount not to exceed the principal amount of the Debt so exchanged, refinanced or refunded and provided such refinancing or refunding Debt by its terms, or by the terms of any agreement or instrument pursuant to which such Debt is issued (x) does not provide for payments of principal at the stated maturity of such Debt or by way of a sinking fund applicable to -64- such Debt or by way of any mandatory redemption, defeasance, retirement or repurchase of such Debt 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 stated maturity of the Debt being refinanced or refunded and (y) does not permit redemption or other retirement (including pursuant to an offer to purchase made by the Company) of such Debt at the option of the holder thereof prior to the 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 (including pursuant to an offer to purchase made by the Company) which is conditioned upon the change of control of the Company; and (5) Debt having a principal amount and liquidation value not in excess of 20% of the Consolidated Net Tangible Assets of the Company in the aggregate. SECTION 1011. WAIVER OF CERTAIN COVENANTS. Except as otherwise specified as contemplated by Section 301 for Securities of such series, the Company may, with respect to the Securities of any series, omit in any particular instance to comply with any term, provision or condition set forth in any covenant provided pursuant to Section 301(18), 901(2) or 901(7) for the benefit of the Holders of such series or in any of Sections 1008 to 1010, inclusive, if before the time for such compliance the Holders of at least 66 2/3% in principal amount of the Outstanding Securities of such series shall, by Act of such Holders, either waive such compliance in such instance or generally waive compliance with such term, provision or condition, but no such waiver shall extend to or affect such term, provision 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 term, provision or condition shall remain in full force and effect. ARTICLE ELEVEN REDEMPTION OR REPAYMENT OF SECURITIES SECTION 1101. APPLICABILITY OF ARTICLE. Securities of any series which are redeemable or repayable before their Stated Maturity shall be redeemable or repayable in accordance with their terms and (except as otherwise specified as contemplated by Section 301 for such Securities) in accordance with this Article. -65- SECTION 1102. ELECTION TO REDEEM; NOTICE TO TRUSTEE. The election of the Company to redeem any Securities shall be evidenced by a Board Resolution or in another manner specified as contemplated by Section 301 for such Securities. In case of any redemption at the election of the Company of less than all the Securities of any series (including any such redemption affecting only a single Security), 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, of the principal amount of Securities of such series to be redeemed and, if applicable, of the tenor of the Securities to be redeemed. In the case of any redemption of Securities prior to the expiration of any restriction on such redemption provided in the terms of such Securities or elsewhere in this Indenture, the Company shall furnish the Trustee with an Officers' Certificate evidencing compliance with such restriction. SECTION 1103. SELECTION BY TRUSTEE OF SECURITIES TO BE REDEEMED. If less than all the Securities of any series are to be redeemed (unless all the Securities of such series and of a specified tenor are to be redeemed or unless such redemption affects only a single Security), 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 of such series 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 a portion of the principal amount of any Security of such series, PROVIDED that the unredeemed portion of the principal amount of any Security shall be in an authorized denomination (which shall not be less than the minimum authorized denomination) for such Security. If less than all the Securities of such series and of a specified tenor are to be redeemed (unless such redemption affects only a single Security), 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 of such series and specified tenor not previously called for redemption in accordance with the preceding sentence. The Trustee shall promptly notify the Company in writing of the Securities selected for redemption as aforesaid and, in case of any Securities selected for partial redemption as aforesaid, the principal amount thereof to be redeemed. The provisions of the two preceding paragraphs shall not apply with respect to any redemption affecting only a single Security, whether such Security is to be redeemed in whole or in part. In the case of any such redemption in part, the unredeemed portion of the principal amount of the Security shall be in an authorized denomination (which shall not be less than the minimum authorized denomination) for such Security. -66- 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 1104. 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 prior to the Redemption Date, to each Holder of Securities to be redeemed, at his address appearing in the Security Register. All notices of redemption shall state: (1) the Redemption Date, (2) the Redemption Price, (3) if less than all the Outstanding Securities of any series consisting of more than a single Security are to be redeemed, the identification (and, in the case of partial redemption of any such Securities, the principal amounts) of the particular Securities to be redeemed and, if less than all the Outstanding Securities of any series consisting of a single Security are to be redeemed, the principal amount of the particular Security 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, if applicable, that interest thereon will cease to accrue on and after said date, (5) the place or places where each such Security is to be surrendered for payment of the Redemption Price, and (6) that the redemption is for a sinking fund, if such is the case. 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 and shall be irrevocable. SECTION 1105. 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 -67- 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 1106. 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, unless otherwise specified as contemplated by Section 301, installments of interest whose Stated Maturity is on or prior to the Redemption 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. If any Security called for redemption shall not be so paid upon surrender thereof for redemption, the principal and any premium shall, until paid, bear interest from the Redemption Date at the rate prescribed therefor in the Security. SECTION 1107. SECURITIES REDEEMED IN PART. Any Security which is to be redeemed only in part shall be surrendered at a Place of Payment therefor (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, and the Trustee shall authenticate and deliver to the Holder of such Security without service charge, a new Security or Securities of the same series and of like tenor, 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. SECTION 1108. RIGHT OF REPAYMENT. In order for any Security that is subject to repayment at the option of the Holder to be repaid, the Paying Agent must receive at least 30 days but not more than 60 days prior to the repayment date (a) appropriate wire instructions and (b) either (i) the Security -68- with the form entitled Option to Elect Repayment (as set forth below) attached to the Security duly completed or (ii) a telegram, telex, facsimile transmission or letter from a member of a national securities exchange or the National Association of Securities Dealers, Inc. or a commercial bank or trust company in the United States setting forth the name of the Holder of such Security, the principal amount of such Debenture, the portion of the principal amount of such Security to be repaid, the certificate number or a description of the tenor and terms of such Security, a statement that the option to elect repayment is being exercised thereby and a guarantee that such Security to be repaid with the form entitled Option to Elect Repayment attached to such Security duly completed will be received by the Paying Agent not later than five Business Days after the date of such telegram, telex, facsimile transmission or letter and such Security and form duly completed must be received by the Paying Agent by such fifth Business Day. Exercise of the repayment option by the Holder of such Security shall be irrevocable, except as otherwise provided in the Board Resolution establishing the term of the Security. The repayment option may be exercised by the Holder of such Security for less than the entire principal amount of the Security provided that the principal amount of the Security remaining outstanding after repayment is an authorized denomination. No registration of, transfer or exchange of such Security (or, in the event that such Security is to be repaid in part, the portion of the Security to be repaid) will be permitted after exercise of a repayment option. All questions as to the validity, eligibility (including time of receipt) and acceptance of any Security for repayment will be determined by the Company, whose determination will be final, binding and non-appealable. SECTION 1109. FORM OF OPTION TO ELECT REPAYMENT The following text shall be attached to each Security to which the provisions of Section 1108 apply: FORM OF OPTION TO ELECT REPAYMENT ON ___________, __________ I or we hereby irrevocably elect to exercise the option to have the principal sum of together with accrued interest thereon to __________, ___ repaid by the Company on ________________, ______. If less than the entire principal amount of the Security is to be repaid specify the denomination or denominations (which shall be in authorized denominations) of the Securities to be issued to the Holder for the portion of the within Security not being repaid (in the absence of any such specification, one such Security will be issued for the portion not being repaid. - -------------------------------------------------------------------------------- Dated: ------------------------------------------------------------------------- Signed: ------------------------------------------------------------------------ Signature Guarantee: ---------------------------------------------- (Signature must be guaranteed by an eligible institution within the meaning of Rule 17A(d)-15 under the Securities Exchange Act of 1934, as amended) -69- ARTICLE TWELVE SINKING FUNDS SECTION 1201. APPLICABILITY OF ARTICLE. The provisions of this Article shall be applicable to any sinking fund for the retirement of Securities of any series except as otherwise specified as contemplated by Section 301 for such Securities. The minimum amount of any sinking fund payment provided for by the terms of any Securities is herein referred to as a "mandatory sinking fund payment", and any payment in excess of such minimum amount provided for by the terms of such Securities is herein referred to as an "optional sinking fund payment". If provided for by the terms of any Securities, the cash amount of any sinking fund payment may be subject to reduction as provided in Section 1202. Each sinking fund payment shall be applied to the redemption of Securities as provided for by the terms of such Securities. SECTION 1202. SATISFACTION OF SINKING FUND PAYMENTS WITH SECURITIES. The Company (1) may deliver Outstanding Securities of a series (other than any previously called for redemption) and (2) may apply as a credit Securities of a series which have been redeemed either at the election of the Company pursuant to the terms of such Securities or through the application of permitted optional sinking fund payments pursuant to the terms of such Securities, in each case in satisfaction of all or any part of any sinking fund payment with respect to any Securities of such series required to be made pursuant to the terms of such Securities as and to the extent provided for by the terms of such Securities; PROVIDED that the Securities to be so credited have not been previously so credited. The Securities to be so credited shall be received and credited for such purpose by the Trustee at the Redemption Price, as specified in the Securities so to be redeemed, for redemption through operation of the sinking fund and the amount of such sinking fund payment shall be reduced accordingly. -70- SECTION 1203. REDEMPTION OF SECURITIES FOR SINKING FUND. Not less than 30 days prior to each sinking fund payment date for any Securities, the Company will deliver to the Trustee an Officers' Certificate specifying the amount of the next ensuing sinking fund payment for such Securities pursuant to the terms of such Securities, the portion thereof, if any, which is to be satisfied by payment of cash and the portion thereof, if any, which is to be satisfied by delivering and crediting Securities pursuant to Section 1202 and will also deliver to the Trustee any Securities to be so delivered. Not less than 20 days prior to each such sinking fund payment date, the Trustee shall select the Securities to be redeemed upon such sinking fund payment date in the manner specified in Section 1103 and cause notice of the redemption thereof to be given in the name of and at the expense of the Company in the manner provided in Section 1104. Such notice having been duly given, the redemption of such Securities shall be made upon the terms and in the manner stated in Sections 1106 and 1107. ARTICLE THIRTEEN DEFEASANCE AND COVENANT DEFEASANCE SECTION 1301. COMPANY'S OPTION TO EFFECT DEFEASANCE OR COVENANT DEFEASANCE. The Company may elect, at its option at any time, to have Section 1302 or Section 1303 applied to any Securities or any series of Securities, as the case may be, designated pursuant to Section 301 as being defeasible pursuant to such Section 1302 or 1303, in accordance with any applicable requirements provided pursuant to Section 301 and upon compliance with the conditions set forth below in this Article. Any such election shall be evidenced by a Board Resolution or in another manner specified as contemplated by Section 301 for such Securities. SECTION 1302. DEFEASANCE AND DISCHARGE. Upon the Company's exercise of its option (if any) to have this Section applied to any Securities or any series of Securities, as the case may be, the Company shall be deemed to have been discharged from its obligations with respect to such Securities as provided in this Section on and after the date the conditions set forth in Section 1304 are satisfied (hereinafter called "Defeasance"). For this purpose, such Defeasance means that the Company shall be deemed to have paid and discharged the entire indebtedness represented by such 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 -71- same), subject to the following which shall survive until otherwise terminated or discharged hereunder: (1) the rights of Holders of such Securities to receive, solely from the trust fund described in Section 1304 and as more fully set forth in such Section, payments in respect of the principal of and any premium and interest on such Securities when payments are due, (2) the Company's obligations with respect to such Securities under Sections 304, 305, 306, 1002 and 1003, (3) the rights, powers, trusts, duties and immunities of the Trustee hereunder and (4) this Article. Subject to compliance with this Article, the Company may exercise its option (if any) to have this Section applied to any Securities notwithstanding the prior exercise of its option (if any) to have Section 1303 applied to such Securities. SECTION 1303. COVENANT DEFEASANCE. Upon the Company's exercise of its option (if any) to have this Section applied to any Securities or any series of Securities, as the case may be, (1) the Company shall be released from its obligations under Section 801(3), Sections 1006 through 1010, inclusive, and any covenants provided pursuant to Section 301(18), 901(2) or 901(7) for the benefit of the Holders of such Securities and (2) the occurrence of any event specified in Sections 501(4) (with respect to any of Section 801(3), Sections 1006 through 1010, inclusive, and any such covenants provided pursuant to Section 301(18), 901(2) or 901(7)), 501(5) and 501(8) shall be deemed not to be or result in an Event of Default, in each case with respect to such Securities as provided in this Section on and after the date the conditions set forth in Section 1304 are satisfied (hereinafter called "Covenant Defeasance"). For this purpose, such Covenant Defeasance means that, with respect to such Securities, 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 specified Section (to the extent so specified in the case of Section 501(4)), whether directly or indirectly by reason of any reference elsewhere herein to any such Section or by reason of any reference in any such Section to any other provision herein or in any other document, but the remainder of this Indenture and such Securities shall be unaffected thereby. SECTION 1304. CONDITIONS TO DEFEASANCE OR COVENANT DEFEASANCE. The following shall be the conditions to the application of Section 1302 or Section 1303 to any Securities or any series of Securities, as the case may be: (1) The Company shall irrevocably have deposited or caused to be deposited with the Trustee (or another trustee which satisfies the requirements contemplated by Section 609 and agrees to comply with the provisions of this Article 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 benefits of the Holders of such -72- 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, in each case 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 any such other qualifying trustee) to pay and discharge, the principal of and any premium and interest on such Securities on the respective Stated Maturities, in accordance with the terms of this Indenture and such Securities. As used herein, "U.S. Government Obligation" means (x) any security which is (i) a direct obligation of the United States of America for the payment of which the full faith and credit of the United States of America is pledged or (ii) an obligation 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 (i) or (ii), is not callable or redeemable at the option of the issuer thereof, and (y) any depositary receipt issued by a bank (as defined in Section 3(a)(2) of the Securities Act) as custodian with respect to any U.S. Government Obligation which is specified in Clause (x) above and held by such bank for the account of the holder of such depositary receipt, or with respect to any specific payment of principal of or interest on any U.S. Government Obligation which is so specified and held, 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 depositary receipt from any amount received by the custodian in respect of the U.S. Government Obligation or the specific payment of principal or interest evidenced by such depositary receipt. (2) In the event of an election to have Section 1302 apply to any Securities or any series of Securities, as the case may be, the Company shall have delivered to the Trustee an Opinion of Counsel stating that (A) the Company has received from, or there has been published by, the Internal Revenue Service a ruling or (B) since the date of this instrument, there has been a change in the applicable Federal income tax law, in either case (A) or (B) to the effect that, and based thereon such opinion shall confirm that, the Holders of such Securities will not recognize gain or loss for Federal income tax purposes as a result of the deposit, Defeasance and discharge to be effected with respect to such Securities and will be subject to Federal income tax on the same amount, in the same manner and at the same times as would be the case if such deposit, Defeasance and discharge were not to occur. (3) In the event of an election to have Section 1303 apply to any Securities or any series of Securities, as the case may be, the Company shall have delivered to the Trustee an Opinion of Counsel to the effect that the Holders of such Securities will not recognize gain or loss for Federal income tax purposes as a result of the deposit and -73- Covenant Defeasance to be effected with respect to such Securities and will be subject to Federal income tax on the same amount, in the same manner and at the same times as would be the case if such deposit and Covenant Defeasance were not to occur. (4) The Company shall have delivered to the Trustee an Officer's Certificate to the effect that neither such Securities nor any other Securities of the same series, if then listed on any securities exchange, will be delisted as a result of such deposit. (5) No event which is, or after notice or lapse of time or both would become, an Event of Default with respect to such Securities or any other Securities shall have occurred and be continuing at the time of such deposit or, with regard to any such event specified in Sections 501(6) and (7), at any time on or prior to the 90th day after the date of such deposit (it being understood that this condition shall not be deemed satisfied until after such 90th day). (6) Such Defeasance or Covenant Defeasance shall not cause the Trustee to have a conflicting interest within the meaning of the Trust Indenture Act (assuming all Securities are in default within the meaning of such Act). (7) 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. (8) Such Defeasance or Covenant Defeasance shall not result in the trust arising from such deposit constituting an investment company within the meaning of the Investment Company Act unless such trust shall be registered under such Act or exempt from registration thereunder. (9) The Company shall have delivered to the Trustee an Officer's Certificate and an Opinion of Counsel, each stating that all conditions precedent with respect to such Defeasance or Covenant Defeasance have been complied with. SECTION 1305. DEPOSITED MONEY AND U.S. GOVERNMENT OBLIGATIONS TO BE HELD IN TRUST; 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 (solely for purposes of this Section and Section 1306, the Trustee and any such other trustee are referred to collectively as the "Trustee") pursuant to Section 1304 in respect of any 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 such Paying Agent (including the Company acting as its -74- 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 any premium and interest, but money so held in trust need not be segregated from other funds except to the extent required by law. The Company 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 1304 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 Outstanding Securities. Anything in this Article 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 1304 with respect to any Securities 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 the Defeasance or Covenant Defeasance, as the case may be, with respect to such Securities. SECTION 1306. REINSTATEMENT. If the Trustee or the Paying Agent is unable to apply any money in accordance with this Article with respect to any Securities by reason of any order or judgment of any court or governmental authority enjoining, restraining or otherwise prohibiting such application, then the obligations under this Indenture and such Securities from which the Company has been discharged or released pursuant to Section 1302 or 1303 shall be revived and reinstated as though no deposit had occurred pursuant to this Article with respect to such Securities, until such time as the Trustee or Paying Agent is permitted to apply all money held in trust pursuant to Section 1305 with respect to such Securities in accordance with this Article; PROVIDED, HOWEVER, that if the Company makes any payment of principal of or any premium or interest on any such Security following such reinstatement of its obligations, the Company shall be subrogated to the rights (if any) of the Holders of such Securities to receive such payment from the money so held in trust. ----------------------------- -75- 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. ALLEGIANCE CORPORATION By...................................... Attest: ...................................... PNC BANK, KENTUCKY, INC. By...................................... Attest: ...................................... -76- State of ) ) ss.: County of ) On the ___ day of _____________________, ______, before me personally came _____________________________, to me known, who, being by me duly sworn, did depose and say that he is ____________________ of Allegiance Corporation, one of the corporations described in and which executed the foregoing instrument; that he knows the seal of said corporation; that the seal affixed to said instrument is such corporate seal; that it was so affixed by authority of the Board of Directors of said corporation; and that he signed his name thereto by like authority. __________________________________________ State of ) ) ss.: County of ) On the ___ day of _____________________, ______, before me personally came _____________________________, to me known, who, being by me duly sworn, did depose and say that he is ____________________ of PNC Bank, Kentucky, Inc., one of the corporations described in and which executed the foregoing instrument; that he knows the seal of said corporation; that the seal affixed to said instrument is such corporate seal; that it was so affixed by authority of the Board of Directors of said corporation; and that he signed his name thereto by like authority. __________________________________________ EX-10.9 4 EXHIBIT 10.9 \ Allegiance Corporation and FIRST CHICAGO TRUST COMPANY OF NEW YORK -------------------- Rights Agent Rights Agreement Dated as of September 30, 1996 TABLE OF CONTENTS SECTION PAGE ------- ---- Section 1. Certain Definitions . . . . . . . . . . . . . . . . . . .1 Section 2. Appointment of Rights Agent . . . . . . . . . . . . . . .5 Section 3. Issue of Rights Certificates. . . . . . . . . . . . . . .6 Section 4. Form of Rights Certificates . . . . . . . . . . . . . . .8 Section 5. Countersignature and Registration . . . . . . . . . . . .9 Section 6. Transfer, Split Up, Combination and Exchange of Rights Certificates; Mutilated, Destroyed, Lost or Stolen Rights Certificates . . . . . . . . . . . . . . . . . . 10 Section 7. Exercise of Rights; Purchase Price; Expiration Date of Rights. . . . . . . . . . . . . . . . . . . . . . . . . 11 Section 8. Cancellation and Destruction of Rights Certificates . . 13 Section 9. Reservation and Availability of Capital Stock . . . . . . . . . . . . . . . . . . . . . . . . . 14 Section 10. Preferred Stock Record Date . . . . . . . . . . . . . . 16 Section 11. Adjustment of Purchase Price, Number and Kind of Shares or Number of Rights. . . . . . . . . 16 Section 12. Certificate of Adjusted Purchase Price or Number of Shares . . . . . . . . . . . . . . . 27 Section 13. Consolidation, Merger or Sale or Transfer of Assets or Earning Power . . . . . . . . . . 28 Section 14. Fractional Rights and Fractional Shares . . . . . . . . 31 Section 15. Rights of Action. . . . . . . . . . . . . . . . . . . . 32 Section 16. Agreement of Rights Holders . . . . . . . . . . . . . . 33 Section 17. Rights Certificate Holder Not Deemed a Stockholder. . . 34 Section 18. Concerning the Rights Agent . . . . . . . . . . . . . . 34 Section 19. Merger or Consolidation or Change of Name of Rights Agent. . . . . . . . . . . . . . . . . . 34 Section 20. Duties of Rights Agent. . . . . . . . . . . . . . . . . 35 Section 21. Change of Rights Agent. . . . . . . . . . . . . . . . . 38 Section 22. Issuance of New Rights Certificates . . . . . . . . . . 39 Section 23. Redemption and Termination. . . . . . . . . . . . . . . 40 Section 24. Exchange. . . . . . . . . . . . . . . . . . . . . . . . 41 Section 25. Notice of Certain Events. . . . . . . . . . . . . . . . 42 Section 26. Notices . . . . . . . . . . . . . . . . . . . . . . . . 43 Section 27. Supplements and Amendments. . . . . . . . . . . . . . . 44 Section 28. Successors. . . . . . . . . . . . . . . . . . . . . . . 45 Section 29. Determination and Actions by the Board of Directors, etc . . . . . . . . . . . . . . . . 45 Section 30. Benefits of this Agreement. . . . . . . . . . . . . . . 45 Section 31. Severability. . . . . . . . . . . . . . . . . . . . . . 45 Section 32. Governing Law . . . . . . . . . . . . . . . . . . . . . 46 Section 33. Counterparts. . . . . . . . . . . . . . . . . . . . . . 46 -i- SECTION PAGE ------- ---- Section 34. Descriptive Headings. . . . . . . . . . . . . . . . . . 46 -ii- RIGHTS AGREEMENT RIGHTS AGREEMENT, dated as of September 30, 1996 (the "Agreement"), between Allegiance Corporation, a Delaware corporation (the "Company"), and First Chicago Trust Company of New York, a New York corporation (the "Rights Agent"). W I T N E S E T H: WHEREAS, on September 16, 1996 (the "Rights Dividend Declaration Date"), the Board of Directors of the Company authorized and declared a dividend distribution of one Right for each share of Common Stock (as hereinafter defined) of the Company outstanding at the close of business on September 30, 1996, after giving effect to the distribution of shares of Common Stock (the "Spin-off") by Baxter International Inc. to its stockholders (the "Record Date"), each Right initially representing the right to purchase one one-hundredth of a share of Series A Junior Participating Preferred Stock of the Company having the rights, powers and preferences set forth in the form of Certificate of Designation, Preferences and Rights attached hereto as Exhibit A, upon the terms and subject to the conditions hereinafter set forth (the "Rights"), and has further authorized the issuance of one Right (as such number may hereinafter be adjusted pursuant to the provisions of Section 11(p) hereof) for each share of Common Stock of the Company issued between the Record Date and the Distribution Date (as hereinafter defined); NOW, THEREFORE, in consideration of the premises and the mutual agreements herein set forth, the parties hereby agree as follows: Section 1. CERTAIN DEFINITIONS. For purposes of this Agreement, the following terms have the meanings indicated: (a) "Acquiring Person" shall mean any Person who or which, together with all Affiliates and Associates of such Person, shall be the Beneficial Owner of 15% or more of the shares of Common Stock then outstanding, but shall not include the Company, any Subsidiary of the Company, any employee benefit plan of the Company or of any Subsidiary of the Company, or any Person organized, appointed or established by the Company for or pursuant to the terms of any such plan. Notwithstanding the foregoing, no Person shall become an "Acquiring Person" as the result of an acquisition of shares of Common Stock by the Company which, by -1- reducing the number of shares outstanding, increases the proportionate number of shares beneficially owned by such Person to 15% or more of the shares of Common Stock then outstanding; PROVIDED, HOWEVER, that if a Person shall become the Beneficial Owner of 15% or more of the shares of Common Stock then outstanding by reason of share purchases by the Company and shall, after such share purchases by the Company, become the Beneficial Owner of any additional shares of Common Stock, then such Person shall be deemed to be an "Acquiring Person". Notwithstanding the foregoing, if the Board of Directors of the Company determines in good faith that a Person who would otherwise be an "Acquiring Person" (as defined pursuant to the foregoing provisions of this paragraph (a)) has become such inadvertently, and such Person divests as promptly as practicable a sufficient number of shares of Common Stock so that such Person would no longer be an "Acquiring Person" (as defined pursuant to the foregoing provisions of this paragraph (a)), then such Person shall not be deemed to be an "Acquiring Person" for any purposes of this Agreement. (b) "Act" shall mean the Securities Act of 1933. (c) "Affiliate" and "Associate" shall have the respective meanings ascribed to such terms in Rule 12b-2 of the General Rules and Regulations under the Securities Exchange Act of 1934, as amended and in effect on the date of this Agreement (the "Exchange Act"). (d) A Person shall be deemed the "Beneficial Owner" of, and shall be deemed to "beneficially own," any securities: (i) which such Person or any of such Person's Affiliates or Associates, directly or indirectly, has the right to acquire (whether such right is exercisable immediately or only after the passage of time) pursuant to any agreement, arrangement or understanding (whether or not in writing) or upon the exercise of conversion rights, exchange rights, rights, warrants or options, or otherwise; PROVIDED, HOWEVER, that a Person shall not be deemed the "Beneficial Owner" of, or to "beneficially own," (A) securities tendered pursuant to a tender or exchange offer made by such Person or any of such Person's Affiliates or Associates until such tendered securities are accepted for purchase or exchange, or (B) securities issuable upon -2- exercise of Rights at any time prior to the occurrence of a Triggering Event, or (C) securities issuable upon exercise of Rights from and after the occurrence of a Triggering Event which Rights were acquired by such Person or any such Person's Affiliates or Associates prior to the Distribution Date or pursuant to Section 3(a) or Section 22 hereof (the "Original Rights") or pursuant to Section 11(i) hereof in connection with an adjustment made with respect to any Original Rights; (ii) which such Person or any of such Person's Affiliates or Associates, directly or indirectly, has the right to vote or dispose of or has "beneficial ownership" of (as determined pursuant to Rule 13d-3 of the General Rules and Regulations under the Exchange Act), including pursuant to any agreement, arrangement or understanding, whether or not in writing; PROVIDED, however, that a Person shall not be deemed the "Beneficial Owner" of, or to "beneficially own," any security under this subparagraph (ii) as a result of an agreement, arrangement or understanding to vote such security if such agreement, arrangement or understanding: (A) arises solely from a revocable proxy given in response to a public proxy or consent solicitation made pursuant to, and in accordance with, the applicable provisions of the General Rules and Regulations under the Exchange Act, and (B) is not also then reportable by such Person on Schedule 13D under the Exchange Act (or any comparable or successor report); or (iii) which are beneficially owned, directly or indirectly, by any other Person (or any Affiliate or Associate thereof) with which such Person (or any of such Person's Affiliates or Associates) has any agreement, arrangement or understanding (whether or not in writing), for the purpose of acquiring, holding, voting (except pursuant to a revocable proxy as described in the proviso to subparagraph (ii) of this paragraph (d)) or disposing of any voting securities of the Company; PROVIDED, HOWEVER, that nothing in this paragraph (d) shall cause a Person engaged in business as an underwriter of securities to be the "Beneficial Owner" of, or to "beneficially own," any securities acquired through such Person's participation in good faith in a firm commitment underwriting until the expiration of forty days after the date of such acquisition. -3- (e) "Business Day" shall mean any day other than a Saturday, Sunday or a day on which banking institutions in the State of Illinois are authorized or obligated by law or executive order to close. (f) "Close of business" on any given date shall mean 5:00 P.M., Chicago time, on such date, PROVIDED, HOWEVER, that if such date is not a Business Day it shall mean 5:00 P.M., Chicago time, on the next succeeding Business Day. (g) "Common Stock" shall mean the common stock, par value $1.00 per share, of the Company, except that "Common Stock" when used with reference to any Person other than the Company shall mean the capital stock of such Person with the greatest voting power, or the equity securities or other equity interest having power to control or direct the management, of such Person. (h) "Person" shall mean any individual, firm, limited liability company, corporation, partnership or other entity. (i) "Preferred Stock" shall mean shares of Series A Junior Participating Preferred Stock, par value $.01 per share, of the Company, and, to the extent that there is not a sufficient number of shares of Series A Junior Participating Preferred Stock authorized to permit the full exercise of the Rights, any other series of Preferred Stock, par value $.01 per share, of the Company designated for such purpose containing terms substantially similar to the terms of the Series A Junior Participating Preferred Stock. (j) "Section 11(a)(ii) Event" shall mean the event described in Section 11(a)(ii) hereof. (k) "Section 13 Event" shall mean any event described in clauses (x), (y) or (z) of Section 13(a) hereof. (l) "Stock Acquisition Date" shall mean the first date of public announcement (which, for purposes of this definition, shall include, without limitation, a report filed pursuant to Section 13(d) under the Exchange Act) by the Company or an Acquiring Person that an Acquiring Person has become such. (m) "Subsidiary" shall mean, with reference to any Person, any corporation of which an amount of voting securities sufficient to elect at least a majority of the directors of such corporation is -4- beneficially owned, directly or indirectly, by such Person, or otherwise controlled by such Person. (n) "Triggering Event" shall mean any Section 11(a)(ii) Event or any Section 13 Event. In addition, for purposes of this Agreement, the following terms have the meanings indicated in specified sections of this Agreement: (i) "Adjustment Shares" shall have the meaning set forth in Section 11(a)(ii) hereof; (ii) "common stock equivalents" shall have the meaning set forth in Section 11(a)(iii) hereof; (iii) "current market price" shall have the meanings set forth in Section 11(d) hereof; (iv) "Current Value" shall have the meaning set forth in Section 11(a)(iii) hereof; (v) "Distribution Date" shall have the meaning set forth in Section 3(a) hereof; (vi) "equivalent preferred stock" shall have the meaning set forth in Section 11(b) hereof; (vii) "NASDAQ" shall have the meaning set forth in Section 11(d)(i) hereof; (viii) "Principal Party" shall have the meaning set forth in Section 13(b) hereof; (ix) "Purchase Price" shall have the meaning set forth in Section 4(a) hereof; (x) "Redemption Price" shall have the meaning set forth in Section 23(a) hereof; (xi) "Rights Certificates" shall have the meaning set forth in Section 3(a) hereof; (xii) "Section 11(a)(ii) Trigger Date" shall have the meaning set forth in Section 11(a)(iii) hereof; (xiii) "Spread" shall have the meaning set forth in Section 11(a)(ii) hereof; (xiv) "Substitution Period" shall have the meaning set forth in Section 11(a)(iii) hereof; (xv) "Summary of Rights" shall have the meaning set forth in Section 3(b) hereof; and (xvi) "Trading Day" shall have the meaning set forth in Section 11(d)(i) hereof. Section 2. APPOINTMENT OF RIGHTS AGENT. The Company hereby appoints the Rights Agent to act as agent for the Company and the holders of the Rights (who, in accordance with Section 3 hereof, shall, prior to the Distribution Date, also be the holders of the Common Stock) in accordance with the terms and conditions hereof, and the Rights Agent hereby accepts such appointment. The Company may from time to time appoint such Co-Rights Agents as it may deem necessary or desirable. Section 3. ISSUE OF RIGHTS CERTIFICATES. (a) Until the earlier of (i) the close of business on the tenth day after the Stock Acquisition Date (or, if the tenth day after the Stock Acquisition Date occurs before the Record Date, the close of business on the Record Date), or (ii) the close of business on the tenth business day (or such later date as may be determined by action of the Board of Directors of the Company prior to such time as any Person becomes an Acquiring Person) after the date that a tender or exchange offer by any Person (other than the Company, any Subsidiary of the Company, -5- any employee benefit plan of the Company or of any Subsidiary of the Company, or any Person organized, appointed or established by the Company for or pursuant to the terms of any such plan) is first published or sent or given within the meaning of Rule 14d-2(a) of the General Rules and Regulations under the Exchange Act, if upon consummation thereof, such Person would be the Beneficial Owner of 15% or more of the shares of Common Stock then outstanding (the earlier of (i) and (ii) being herein referred to as the "Distribution Date"), (x) the Rights will be evidenced (subject to the provisions of paragraph (b) of this Section 3) by the certificates for the Common Stock registered in the names of the holders of the Common Stock (which certificates for Common Stock shall be deemed also to be certificates for Rights) and not by separate certificates and (y) the Rights will be transferable only in connection with the transfer of the underlying shares of Common Stock (including a transfer to the Company). As soon as practicable after the Distribution Date, the Rights Agent will send by first-class, insured, postage prepaid mail, to each record holder of the Common Stock as of the close of business on the Distribution Date, at the address of such holder shown on the records of the Company, one or more Rights certificates, in substantially the form of Exhibit B hereto (the "Rights Certificates"), evidencing one Right for each share of Common Stock so held, subject to adjustment as provided herein. In the event that an adjustment in the number of Rights per share of Common Stock has been made pursuant to Section 11(p) hereof, at the time of distribution of the Rights Certificates, the Company shall make the necessary and appropriate rounding adjustments (in accordance with Section 14(a) hereof) so that Rights Certificates representing only whole numbers of Rights are distributed and cash is paid in lieu of any fractional Rights. As of and after the Distribution Date, the Rights will be evidenced solely by such Rights Certificates. (b) As promptly as practicable following the Record Date, the Company will send a copy of a Summary of Rights to Purchase Preferred Stock, in substantially the form attached hereto as Exhibit C (the "Summary of Rights"), by first-class, postage prepaid mail, to each record holder of the Common Stock as of the close of business on the Record Date, at the address of such holder shown on the records of the Company. With respect to certificates for the Common Stock outstanding as of the Record Date, until the Distribution Date, the Rights will be evidenced by such certificates registered in the names of the holders thereof together with a copy of the Summary of Rights attached thereto. Until the earlier of the Distribution Date or the Expiration Date (as such term is defined in Section 7 hereof), the surrender for transfer of any certificate representing shares of Common Stock in respect of which Rights have been issued, with or without a copy of the Summary of Rights attached thereto, shall also constitute the transfer of the Rights associated with such shares of Common Stock. -6- (c) Rights shall be issued in respect of all shares of Common Stock which are issued (whether originally issued or from the Company's treasury) after the Record Date but prior to the earlier of the Distribution Date or the Expiration Date or, in certain circumstances provided in Section 22 hereof, after the Distribution Date. Certificates representing such shares of Common Stock shall also be deemed to be certificates for Rights, and shall bear the following legend: This certificate also evidences and entitles the holder hereof to certain rights as set forth in the Rights Agreement between Allegiance Corporation (the "Company") and First Chicago Trust Company of New York (the "Rights Agent") dated as of September 30, 1996 (the "Rights Agreement"), the terms of which are hereby incorporated herein by reference and a copy of which is on file at the principal offices of the Company. Under certain circumstances, as set forth in the Rights Agreement, such Rights will be evidenced by separate certificates and will no longer be evidenced by this certificate. The Company will mail to the holder of this certificate a copy of the Rights Agreement, as in effect on the date of mailing, without charge promptly after receipt of a written request therefor. Under certain circumstances set forth in the Rights Agreement, Rights issued to, or held by, any Person who is, was or becomes an Acquiring Person or any Affiliate or Associate thereof (as such terms are defined in the Rights Agreement), whether currently held by or on behalf of such Person or by any subsequent holder, may become null and void. With respect to such certificates containing the foregoing legend, until the earlier of (i) the Distribution Date or (ii) the Expiration Date, the Rights associated with the Common Stock represented by such certificates shall be evidenced by such certificates alone and registered holders of Common Stock shall also be the registered holders of the associated Rights, and the surrender for transfer of any of such certificates shall also constitute the transfer of the Rights associated with the Common Stock represented by such certificates. Section 4. FORM OF RIGHTS CERTIFICATES. (a) The Rights Certificates (and the forms of election to purchase and of assignment to be printed on the reverse thereof) shall each be substantially in the form set forth in Exhibit B hereto and may have such marks of identification or designation and such legends, summaries or endorsements printed thereon as the Company may deem appropriate and as are not inconsistent with the provisions of this Agreement, or as may be -7- required to comply with any applicable law or with any rule or regulation made pursuant thereto or with any rule or regulation of any stock exchange on which the Rights may from time to time be listed, or to conform to usage. Subject to the provisions of Section 11 and Section 22 hereof, the Rights Certificates, whenever distributed, shall be dated as of the Record Date and on their face shall entitle the holders thereof to purchase such number of one-hundredths of a share of Preferred Stock as shall be set forth therein at the price set forth therein (such exercise price per one one-hundredth of a share, the "Purchase Price"), but the amount and type of securities purchasable upon the exercise of each Right and the Purchase Price thereof shall be subject to adjustment as provided herein. (b) Any Rights Certificate issued pursuant to Section 3(a) or Section 22 hereof that represents Rights beneficially owned by any Person know to be: (i) an Acquiring Person or any Associate or Affiliate of an Acquiring Person, (ii) a transferee or an Acquiring Person (or of any such Associate or Affiliate) who becomes a transferee after the Acquiring Person becomes such, or (iii) a transferee of an Acquiring Person (or of any such Associate or Affiliate) who becomes a transferee prior to or concurrently with the Acquiring Person becoming such and receives such Rights pursuant to either (A) a transfer (whether or not for consideration) from the Acquiring Person to holders of equity interests in such Acquiring Person or to any Person with whom such Acquiring Person has any continuing agreement, arrangement or understanding regarding the transferred Rights or (B) a transfer which the Board of Directors of the Company has determined is part of a plan, arrangement or understanding which has as a primary purpose of effect avoidance of Section 7(e) hereof, and any Rights Certificate issued pursuant to Section 6 or Section 11 hereof upon transfer, exchange, replacement or adjustment of any other Rights Certificate referred to in this sentence, shall contain (to the extent feasible) the following legend: The Rights represented by this Rights Certificate are or were beneficially owned by a Person who was or became an Acquiring Person or an Affiliate or Associate of an Acquiring Person (as such terms are defined in the Rights Agreement). Accordingly, this Rights Certificate and the Rights represented hereby may become null and void in the circumstances specified in Section 7(e) of such Agreement. -8- Section 5. COUNTERSIGNATURE AND REGISTRATION. (a) The Rights Certificates shall be executed on behalf of the Company by its Chairman of the Board and Chief Executive Officer, its President or any Vice President, either manually or by facsimile signature, and shall have affixed thereto the Company's seal or a facsimile thereof which shall be attested by the Secretary or an Assistant Secretary of the Company, either manually or by facsimile signature. The Rights Certificates shall be countersigned manually or by facsimile signature by the Rights Agent and shall not be valid for any purpose unless so countersigned. In case any officer of the Company who shall have signed any of the Rights Certificates shall cease to be such officer of the Company before countersignature by the Rights Agent and issuance and delivery by the Company, such Rights Certificates, nevertheless, may be countersigned by the Rights Agent and issued and delivered by the Company with the same force and effect as though the person who signed such Rights Certificates had not ceased to be such officer of the Company; and any Rights Certificates may be signed on behalf of the Company by any person who, at the actual date of the execution of such Rights Certificate, shall be a proper officer of the Company to sign such Rights Certificate, although at the date of the execution of this Rights Agreement any such person was not such an officer. (b) Following the Distribution Date, the Rights Agent will keep or cause to be kept, at its principal office or offices designated as the appropriate place for surrender of Rights Certificates upon exercise or transfer, books for registration and transfer of the Rights Certificates issued hereunder. Such books shall show the names and addresses of the respective holders of the Rights Certificates, the number of Rights evidenced on its face by each of the Rights Certificates and the certificate number and the date of each of the Rights Certificates. Section 6. TRANSFER, SPLIT UP, COMBINATION AND EXCHANGE OF RIGHTS CERTIFICATES; MUTILATED, DESTROYED, LOST OR STOLEN RIGHTS CERTIFICATES. (a) Subject to the provisions of Section 4(b), Section 7(e) and Section 14 hereof, at any time after the close of business on the Distribution Date, and at or prior to the close of business on the Expiration Date, any Rights Certificate or Certificates (other than Rights Certificates representing Rights that have been exchanged pursuant to Section 24 hereof) may be transferred, split up, combined or exchanged for another Rights Certificate or Certificates, entitling the registered holder to purchase a like number of one one-hundredths of a share of Preferred Stock (or, following a Triggering Event, Common Stock, other securities, cash or other assets, as the case may be) as the Rights Certificate or Certificates surrendered then entitled such holder (or former -9- holder in the case of a transfer) to purchase. Any registered holder desiring to transfer, split up, combine or exchange any Rights Certificate or Certificates shall make such request in writing delivered to the Rights Agent, and shall surrender the Rights Certificate or Certificates to be transferred, split up, combined or exchanged at the principal office or offices of the Rights Agent designated for such purpose. Neither the Rights Agent nor the Company shall be obligated to take any action whatsoever with respect to the transfer of any such surrendered Rights Certificate until the registered holder shall have completed and signed the certificate contained in the form of assignment on the reverse side of such Rights Certificate and shall have provided such additional evidence of the identity of the Beneficial Owner (or former Beneficial Owner) or Affiliates or Associates thereof as the Company shall reasonably request. Thereupon the Rights Agent shall, subject to Section 4(b), Section 7(e), Section 14 and Section 24 hereof, countersign and deliver to the Person entitled thereto a Rights Certificate or Rights Certificates, as the case may be, as so requested. The Company may require payment of a sum sufficient to cover any tax or governmental charge that may be imposed in connection with any transfer, split up, combination or exchange of Rights Certificates. (b) Upon receipt by the Company and the Rights Agent of evidence reasonably satisfactory to them of the loss, theft, destruction or mutilation of a Rights Certificate, and, in case of loss, theft or destruction, of indemnity or security reasonably satisfactory to them, and reimbursement to the Company and the Rights Agent of all reasonable expenses incidental thereto, and upon surrender to the Rights Agent and cancellation of the Rights Certificates if mutilated, the Company will execute and deliver a new Rights Certificate of like tenor to the Rights Agent for countersignature and delivery to the registered owner in lieu of the Rights Certificate so lost, stolen, destroyed or mutilated. Section 7. EXERCISE OF RIGHTS; PURCHASE PRICE; EXPIRATION DATE OF RIGHTS. (a) Subject to Section 7(e) hereof, the registered holder of any Rights Certificate may exercise the Rights evidenced thereby (except as otherwise provided herein including, without limitation, the restrictions on exercisability set forth in Section 9(c), Section 11(a)(iii) and Section 23(a) hereof) in whole or in part at any time after the Distribution Date upon surrender of the Rights Certificate, with the form of election to purchase and the certificate on the reverse side thereof duly executed, to the Rights Agent at the principal office or offices of the Rights Agent designated for such purpose, together with payment of the aggregate Purchase Price with respect to the total number of one one-hundredths of a share of Preferred Stock (or other securities, cash or other assets, as the case may be) as to which such surrendered Rights are then -10- exercisable, at or prior to the earliest of (i) the close of business on September 30, 2006 (the "Final Expiration Date"), (ii) the time at which the Rights are redeemed as provided in Section 23 hereof or (iii) the time at which such Rights are exchanged pursuant to Section 24 hereof (the earliest of (i), (ii) and (iii) being herein referred to as the "Expiration Date"). (b) The Purchase Price for each one one-hundredth of a share of Preferred Stock pursuant to the exercise of a Right shall initially be $65, and shall be subject to adjustment from time to time as provided in Sections 11 and 13(a) hereof and shall be payable in accordance with paragraph (c) below. (c) Upon receipt of a Rights Certificate representing exercisable Rights, with the form of election to purchase and the certificate duly executed, accompanied by payment, with respect to each Right so exercised, of the Purchase Price per one one-hundredth of a share of Preferred Stock (or other shares, securities, cash or other assets, as the case may be) to be purchased as set forth below and an amount equal to any applicable transfer tax, the Rights Agent shall, subject to Section 20(k) hereof, thereupon promptly (i) (A) requisition from any transfer agent of the shares of Preferred Stock (or make available, if the Rights Agent is the transfer agent for such shares) certificates for the total number of one one-hundredths of a share of Preferred Stock to be purchased and the Company hereby irrevocably authorizes its transfer agent to comply with all such requests, or (B) if the Company shall have elected to deposit the total number of shares of Preferred Stock issuable upon exercise of the Rights hereunder with a depositary agent, requisition from the depositary agent depositary receipts representing such number of one one-hundredths of a share of Preferred Stock as are to be purchased (in which case certificates for the shares of Preferred Stock represented by such receipts shall be deposited by the transfer agent with the depositary agent) and the Company will direct the depositary agent to comply with such request, (ii) requisition from the Company the amount of cash, if any, to be paid in lieu of fractional shares in accordance with Section 14 hereof, (iii) after receipt of such certificates or depositary receipts, cause the same to be delivered to or upon the order of the registered holder of such Rights Certificate, registered in such name or names as may be designated by such holder, and (iv) after receipt thereof, deliver such cash, if any, to or upon the order of the registered holder of such Rights Certificate. The payment of the Purchase Price (as such amount may be reduced pursuant to Section 11(a)(iii) hereof) shall be made in cash or by certified bank check or bank draft payable to the order of the Company. In the event that the Company is obligated to issue other securities (including Common Stock) of the Company, pay cash and/or distribute other property pursuant to Section 11(a) hereof, the -11- Company will make all arrangements necessary so that such other securities, cash and/or other property are available for distribution by the Rights Agent, if and when appropriate. The Company reserves the right to require prior to the occurrence of a Triggering Event that, upon any exercise of Rights, a number of Rights be exercised so that only whole shares of Preferred Stock would be issued. (d) In case the registered holder of any Rights Certificate shall exercise less than all the Rights evidenced thereby, a new Rights Certificate evidencing Rights equivalent to the Rights remaining unexercised shall be issued by the Rights Agent and delivered to, or upon the order of, the registered holder of such Rights Certificate, registered in such name or names as may be designated by such holder, subject to the provisions of Section 14 hereof. (e) Notwithstanding anything in this Agreement to the contrary, from and after the first occurrence of a Section 11(a) (ii) Event, any Rights beneficially owned by (i) an Acquiring Person or an Associate or Affiliate of an Acquiring Person, (ii) a transferee of an Acquiring Person (or of any such Associate or Affiliate) who becomes a transferee after the Acquiring Person becomes such, or (iii) a transferee of an Acquiring Person (or of any such Associate or Affiliate) who becomes a transferee prior to or concurrently with the Acquiring Person becoming such and receives such Rights pursuant to either (A) a transfer (whether or not for consideration) from the Acquiring Person to holders of equity interests in such Acquiring Person or to any Person with whom the Acquiring Person has any continuing agreement, arrangement or understanding regarding the transferred Rights or (B) a transfer which the Board of Directors of the Company has determined is part of a plan, arrangement or understanding which has as a primary purpose or effect the avoidance of this Section 7(e), shall become null and void without any further action and no holder of such Rights shall have any rights whatsoever with respect to such Rights, whether under any provision of this Agreement or otherwise. The Company shall use all reasonable efforts to insure that the provisions of this Section 7(e) and Section 4(b) hereof are complied with, but shall have no liability to any holder of Rights Certificates or other Person as a result of its failure to make any determinations with respect to an Acquiring Person or any of its Affiliates, Associates or transferees hereunder. (f) Notwithstanding anything in this Agreement to the contrary, neither the Rights Agent nor the Company shall be obligated to undertake any action with respect to a registered holder upon the occurrence of any purported exercise as set forth in this Section 7 unless such registered holder shall have (i) completed and signed the certificate contained in the form of election to purchase set forth on the reverse side of the Rights -12- Certificate surrendered for such exercise, and (ii) provided such additional evidence of the identity of the Beneficial Owner (or former Beneficial Owner) or Affiliates or Associates thereof as the Company shall reasonably request. Section 8. CANCELLATION AND DESTRUCTION OF RIGHTS CERTIFICATES. All Rights Certificates surrendered for the purpose of exercise, transfer, split up, combination or exchange shall, if surrendered to the Company or any of its agents, be delivered to the Rights Agent for cancellation or in cancelled form, or, if surrendered to the Rights Agent, shall be cancelled by it, and no Rights Certificates shall be issued in lieu thereof, except as expressly permitted by any of the provisions of this Agreement. The Company shall deliver to the Rights Agent for cancellation and retirement, and the Rights Agent shall so cancel and retire, any other Rights Certificates purchased or acquired by the Company otherwise than upon the exercise thereof. The Rights Agent shall deliver all cancelled Rights Certificates to the Company, or shall, at the written request of the Company, destroy such cancelled Rights Certificates, and in such case shall deliver a certificate of destruction thereof to the Company. Section 9. RESERVATION AND AVAILABILITY OF CAPITAL STOCK. (a) The Company covenants and agrees that it will cause to be reserved and kept available out of its authorized and unissued shares of Preferred Stock (and, following the occurrence of a Triggering Event, out of its authorized and unissued shares of Common Stock and/or other securities or out of its authorized and issued shares held in its treasury), the number of shares of Preferred Stock (and, following the occurrence of a Triggering Event, Common Stock and/or other securities) that, as provided in this Agreement, including Section 11(a)(iii) hereof, will be sufficient to permit the exercise in full of all outstanding Rights. (b) So long as the shares of Preferred Stock (and, following the occurrence of a Triggering Event, Common Stock and/or other securities) issuable and deliverable upon the exercise of the Rights may be listed on any national securities exchange, the Company shall use its best efforts to cause, from and after such time as the Rights become exercisable, all shares reserved for such issuance to be listed on such exchange upon official notice of issuance upon such exercise. (c) The Company shall use its best efforts to (i) file, as soon as practicable following the earliest date after the first occurrence of a Section 11(a)(ii) Event on which the consideration to be delivered by the Company upon exercise of the Rights has been determined in accordance with Section 11(a)(iii) hereof, a registration statement under the Act with respect to the securities purchasable upon exercise of the Rights on an -13- appropriate form, (ii) cause such registration statement to become effective as soon as practicable after such filing, and (iii) cause such registration statement to remain effective (with a prospectus at all times meeting the requirements of the Act) until the earlier of (A) the date as of which the Rights are no longer exercisable for such securities, and (B) the date of the expiration of the Rights. The Company will also take such action as may be appropriate under, or to ensure compliance with, the securities or "blue sky" laws of the various states in connection with the exercisability of the Rights. The Company may temporarily suspend, for a period of time not to exceed ninety (90) days after the date set forth in clause (i) of the first sentence of this Section 9(c), the exercisability of the Rights in order to prepare and file such registration statement and permit it to become effective. Upon any such suspension, the Company shall issue a public announcement stating that the exercisability of the Rights has been temporarily suspended, as well as a public announcement at such time as the suspension is no longer in effect. In addition, if the Company shall determine that a registration statement is required following the Distribution Date, and a Section 11(a)(ii) Event has not occurred, the Company may temporarily suspend the exercisability of Rights until such time as a registration statement has been declared effective. Notwithstanding any provision of this Agreement to the contrary, the Rights shall not be exercisable in any jurisdiction if the requisite qualification in such jurisdiction shall not have been obtained, the exercise thereof shall not be permitted under applicable law or a registration statement shall not have been declared effective. (d) The Company covenants and agrees that it will take all such actions as may be necessary to ensure that all one one-hundredths of a share of Preferred Stock (and, following the occurrence of a Triggering Event, Common Stock and/or other securities) delivered upon exercise of Rights shall, at the time of delivery of the certificates for such shares (subject to payment of the Purchase Price), be duly and validly authorized and issued and fully paid and nonassessable. (e) The Company further covenants and agrees that it will pay, when due and payable, any and all federal and state transfer taxes and charges which may be payable in respect of the issuance or delivery of the Rights Certificates and of any certificates for a number of one one-hundredths of a share of Preferred Stock (or Common Stock and/or other securities, as the case may be) upon the exercise of Rights. The Company shall not, however, be required to pay any transfer tax which may be payable in respect of any transfer or delivery of Rights Certificates to a Person other than, or the issuance or delivery of a number of one one-hundredths of a share of Preferred Stock (or Common Stock and/or other securities, as the case may be) in respect of a name other than that of, the registered holder of the Rights -14- Certificates evidencing Rights surrendered for exercise or to issue or deliver any certificates for a number of one one-hundredths of a share of Preferred Stock (or Common Stock and/or other securities, as the case may be) in a name other than that of the registered holder upon the exercise of any Rights until such tax shall have been paid (any such tax being payable by the holder of such Rights Certificate at the time of surrender) or until it has been established to the Company's satisfaction that no such tax is due. Section 10. PREFERRED STOCK RECORD DATE. Each person in whose name any certificate for a number of one one-hundredths of a share of Preferred Stock (or Common Stock and/or other securities, as the case may be) is issued upon the exercise of Rights shall for all purposes be deemed to have become the holder of record of such fractional shares of Preferred Stock (or Common Stock and/or other securities, as the case may be) represented thereby on, and such certificate shall be dated, the date upon which the Rights Certificate evidencing such Rights was duly surrendered and payment of the Purchase Price (and all applicable transfer taxes) was made; PROVIDED, HOWEVER, that if the date of such surrender and payment is a date upon which the Preferred Stock (or Common Stock and/or other securities, as the case may be) transfer books of the Company are closed, such Person shall be deemed to have become the record holder of such shares (fractional or otherwise) on, and such certificate shall be dated, the next succeeding Business Day on which the Preferred Stock (or Common Stock and/or other securities, as the case may be) transfer books of the Company are open. Prior to the exercise of the Rights evidenced thereby, the holder of a Rights Certificate shall not be entitled to any rights of a stockholder of the Company with respect to shares for which the Rights shall be exercisable, including, without limitation, the right to vote, to receive dividends or other distributions or to exercise any preemptive rights, and shall not be entitled to receive any notice of any proceedings of the Company, except as provided herein. Section 11. ADJUSTMENT OF PURCHASE PRICE, NUMBER AND KIND OF SHARES OR NUMBER OF RIGHTS. The Purchase Price, the number and kind of shares covered by each Right and the number of Rights outstanding are subject to adjustment from time to time as provided in this Section 11. (a)(i) In the event the Company shall at any time after the date of this Agreement (A) declare a dividend on the Preferred Stock payable in shares of Preferred Stock, (B) subdivide the outstanding Preferred Stock, (C) combine the outstanding Preferred Stock into a smaller number of shares, or (D) issue any shares of its capital stock in a reclassification of the Preferred Stock (including any such reclassification in -15- connection with a consolidation or merger in which the Company is the continuing or surviving corporation), except as otherwise provided in this Section 11(a) and Section 7(e) hereof, the Purchase Price in effect at the time of the record date for such dividend or of the effective date of such subdivision, combination or reclassification, and the number and kind of shares of Preferred Stock or capital stock, as the case may be, issuable on such date, shall be proportionately adjusted so that the holder of any Right exercised after such time shall be entitled to receive, upon payment of the Purchase Price then in effect, the aggregate number and kind of shares of Preferred Stock or capital stock, as the case may be, which, if such Right had been exercised immediately prior to such date and at a time when the Preferred Stock transfer books of the Company were open, such holder would have owned upon such exercise and been entitled to receive by virtue of such dividend, subdivision, combination or reclassification. If an event occurs which would require an adjustment under both this Section 11(a)(i) and Section 11(a)(ii) hereof, the adjustment provided for in this Section 11(a)(i) shall be in addition to, and shall be made prior to, any adjustment required pursuant to Section 11(a)(ii) hereof. (ii) In the event any Person (other than the Company, any Subsidiary of the Company, any employee benefit plan of the Company or of any Subsidiary of the Company, or any Person organized, appointed or established by the Company for or pursuant to the terms of any such plan), alone or together with its Affiliates and Associates, shall, at any time after the Rights Dividend Declaration Date, become an Acquiring Person, then each holder of a Right (except as provided below and in Section 7(e) hereof) shall thereafter have the right to receive, upon exercise thereof at the then current Purchase Price in accordance with the terms of this Agreement, in lieu of a number of one one-hundredths of a share of Preferred Stock, such number of shares of Common Stock of the Company as shall equal the result obtained by (x) multiplying the then current Purchase Price by the then number of one one-hundredths of a share of Preferred Stock for which a Right was exercisable immediately prior to the first occurrence of a Section 11(a)(ii) Event and (y) dividing that product (which, following such first occurrence shall thereafter be referred to as the "Purchase Price" for each Right and for all purposes of this Agreement) by 50% of the current market price (determined pursuant to Section 11(d) hereof) per share of Common Stock on the -16- date of such first occurrence (such number of shares, the "Adjustment Shares"). (iii) In the event that the number of shares of Common Stock which are authorized by the Company's certificate of incorporation, but not outstanding or reserved for issuance for purposes other than upon exercise of the Rights, is not sufficient to permit the exercise in full of the Rights in accordance with the foregoing subparagraph (ii) of this Section 11(a), the Company shall: (A) determine the value of the Adjustment Shares issuable upon the exercise of a Right (the "Current Value"), and (B) with respect to each Right, make adequate provision to substitute for the Adjustment Shares, upon payment of the applicable Purchase Price, (1) cash, (2) a reduction in the Purchase Price, (3) Common Stock or other equity securities of the Company (including, without limitation, shares, or units of shares, of preferred stock, such as the Preferred Stock, which the Board of Directors of the Company has deemed to have the same value or economic rights as shares of Common Stock (such shares of preferred stock, "common stock equivalents")), (4) debt securities of the Company, (5) other assets, or (6) any combination of the foregoing, having an aggregate value equal to the Current Value (less the amount of any reduction in the Purchase Price), where such aggregate value has been determined by the Board of Directors of the Company based upon the advice of a nationally recognized investment banking firm selected by the Board of Directors of the Company; PROVIDED, HOWEVER, if the Company shall not have made adequate provision to deliver value pursuant to clause (B) above within thirty (30) days following the later of (x) the first occurrence of a Section 11(a)(ii) Event and (y) the date on which the Company's right of redemption pursuant to Section 23(a) expires (the later of (x) and (y) being referred to herein as the "Section 11(a)(ii) Trigger Date"), then the Company shall be obligated to deliver, upon the surrender for exercise of a Right and without requiring payment of the Purchase Price, shares of Common Stock (to the extent available) and then, if necessary, cash, which shares and/or cash have an aggregate value equal to the Spread. For purposes of the preceding sentence, the term "Spread" shall mean the excess of (i) the Current Value over (ii) the Purchase Price. If the Board of Directors of the Company shall determine in good faith that it is likely that sufficient additional shares of Common Stock could be authorized for issuance upon exercise in full of the Rights, the thirty (30) day period set forth above may be extended to the extent necessary, but not more than ninety (90) days after the Section 11(a)(ii) Trigger Date, in order that the Company may seek stockholder approval for the authorization of such additional shares (such thirty (30) day period, as -17- it may be extended, the "Substitution Period"). To the extent that action is to be taken pursuant to the first and/or third sentences of this Section 11(a)(iii), the Company (x) shall provide, subject to Section 7(e) hereof, that such action shall apply uniformly to all outstanding Rights, and (y) may suspend the exercisability of the Rights until the expiration of the Substitution Period in order to seek such stockholder approval for such authorization of additional shares and/or to decide the appropriate form of distribution to be made pursuant to such first sentence and to determine the value thereof. In the event of any such suspension, the Company shall issue a public announcement stating that the exercisability of the Rights has been temporarily suspended, as well as a public announcement at such time as the suspension is no longer in effect. For purposes of this Section 11(a)(iii), the value of each Adjustment Share shall be the current market price (as determined pursuant to Section 11(d) hereof) per share of the Common Stock on the Section 11(a)(ii) Trigger Date and the value of any "common stock equivalent" shall be deemed to equal the Current Market Price per share of the Common Stock on such date. (b) In case the Company shall fix a record date for the issuance of rights (other than the Rights), options or warrants to all holders of Preferred Stock entitling them to subscribe for or purchase (for a period expiring within forty-five (45) calendar days after such record date) Preferred Stock (or shares having the same rights, privileges and preferences as the shares of Preferred Stock ("equivalent preferred stock")) or securities convertible into Preferred Stock or equivalent preferred stock at a price per share of Preferred stock or per share of equivalent preferred stock (or having a conversion price per share, if a security convertible into Preferred Stock or equivalent preferred stock) less than the current market price (as determined pursuant to Section 11(d) hereof) per share of Preferred Stock on such record date, the Purchase Price to be in effect after such record date shall be determined by multiplying the Purchase Price in effect immediately prior to such record date by a fraction, the numerator of which shall be the number of shares of Preferred Stock outstanding on such record date, plus -18- the number of shares of Preferred Stock which the aggregate offering price of the total number of shares of Preferred Stock and/or equivalent preferred stock so to be offered (and/or the aggregate initial conversion price of the convertible securities so to be offered) would purchase at such current market price, and the denominator of which shall be the number of shares of Preferred Stock outstanding on such record date, plus the number of additional shares of Preferred Stock and/ or equivalent preferred stock to be offered for subscription or purchase (or into which the convertible securities so to be offered are initially convertible). In case such subscription price may be paid by delivery of consideration part or all of which may be in a form other than cash, the value of such consideration shall be as determined in good faith by the Board of Directors of the Company, whose determination shall be described in a statement filed with the Rights Agent and shall be binding on the Rights Agent and the holders of the Rights. Shares of Preferred Stock owned by or held for the account of the Company shall not be deemed outstanding for the purpose of any such computation. Such adjustment shall be made successively whenever such a record date is fixed, and in the event that such rights or warrants are not so issued, the Purchase Price shall be adjusted to be the Purchase Price which would then be in effect if such record date had not been fixed. (c) In case the Company shall fix a record date for a distribution to all holders of Preferred Stock (including any such distribution made in connection with a consolidation or merger in which the Company is the continuing corporation) of evidences of indebtedness, cash (other than a regular quarterly cash dividend out of the earnings or retained earnings of the Company), assets (other than a dividend payable in Preferred Stock, but including any dividend payable in stock other than Preferred Stock) or subscription rights or warrants (excluding those referred to in Section 11(b) hereof), the Purchase Price to be in effect after such record date shall be determined by multiplying the Purchase Price in effect immediately prior to such record date by a fraction, the numerator of which shall be the current market price (as determined pursuant to Section 11(d) hereof) per share of Preferred Stock on such record date, less the fair market value (as determined in good faith by the Board of Directors of the Company, whose determination shall be described in a statement filed with the Rights Agent and shall be binding on the Rights Agent and the holders of the Rights) of the portion of the cash, assets or evidences of indebtedness so to be distributed or of such subscription rights or warrants applicable to a share of Preferred Stock and the denominator of which shall be such current market price (as determined pursuant to Section 11(d) hereof) per share of Preferred Stock. Such adjustments shall be made successively whenever such a record date is fixed, and in the event that such distribution is not so made, -19- the Purchase Price shall be adjusted to be the Purchase Price which would have been in effect if such record date had not been fixed. (d) (i) For the purpose of any computation hereunder, other than computations made pursuant to Section 11(a)(iii) hereof, the "current market price" per share of Common Stock on any date shall be deemed to be the average of the daily closing prices per share of such Common Stock for the thirty (30) consecutive Trading Days (as such term is hereinafter defined) immediately prior to such date, and for purposes of computations made pursuant to Section 11(a)(iii) hereof, the "current market price" per share of Common Stock on any date shall be deemed to be the average of the daily closing prices per share of such Common Stock for the ten (10) consecutive Trading Days immediately following such date; PROVIDED, HOWEVER, that in the event that the current market price per share of the Common Stock is determined during a period following the announcement by the issuer of such Common Stock of (A) a dividend or distribution on such Common Stock payable in shares of such Common Stock or securities convertible into shares of such Common Stock (other than the Rights), or (B) any subdivision, combination or reclassification of such Common Stock, and the ex-dividend date for such dividend or distribution, or the record date for such subdivision, combination or reclassification shall not have occurred prior to the commencement of the requisite thirty (30) Trading Day or ten (10) Trading Day period, as set forth above, then, and in each such case, the "current market price" shall be properly adjusted to take into account any trading during the period prior to such ex-dividend date or record date. The closing price for each day shall be the last sale price, regular way, or, in case no such sale takes place on such day, the average of the closing bid and asked prices, regular way, in either case as reported in the principal consolidated transaction reporting system with respect to securities listed or admitted to trading on the New York Stock Exchange or, if the shares of Common Stock are not listed or admitted to trading on the New York Stock Exchange, as reported in the principal consolidated transaction reporting system with respect to securities listed on the principal national securities exchange on which the shares of Common Stock are listed or admitted to trading or, if the shares of Common Stock are not listed or admitted to trading on any national securities exchange, the last quoted price or, if not so quoted, the average of the high bid and low asked prices in the over-the-counter market, as reported by -20- the National Association of Securities Dealers, Inc. Automated Quotation System ("NASDAQ") or such other system then in use, or, if on any such date the shares of Common Stock are not quoted by any such organization, the average of the closing bid and asked prices as furnished by a professional market maker making a market in the Common Stock selected by the Board of Directors of the Company. If on any such date no market maker is making a market in the Common Stock, the fair value of such shares on such date as determined in good faith by the Board of Directors of the Company shall be used. The term "Trading Day" shall mean a day on which the principal national securities exchange on which the shares of Common Stock are listed or admitted to trading is open for the transaction of business or, if the shares of Common Stock are not listed or admitted to trading on any national securities exchange, a Business Day. If the Common Stock is not publicly held or not so listed or traded, "current market price" per share shall mean the fair value per share as determined in good faith by the Board of Directors of the Company, whose determination shall be described in a statement filed with the Rights Agent and shall be conclusive for all purposes. (ii) For the purpose of any computation hereunder, the "current market price" per share of Preferred Stock shall be determined in the same manner as set forth above for the Common Stock in clause (i) of this Section 11(d) (other than the last sentence thereof). If the current market price per share of Preferred Stock cannot be determined in the manner provided above, or if the Preferred Stock is not publicly held or listed or traded in a manner described in clause (i) of this Section 11(d), the "current market price" per share of Preferred Stock shall be conclusively deemed to be an amount equal to 100 (as such number may be appropriately adjusted for such events as stock splits, stock dividends and recapitalizations with respect to the Common Stock occurring after the date of this Agreement) multiplied by the current market price per share of the Common Stock. If neither the Common Stock nor the Preferred Stock is publicly held or so listed or traded, "current market price" per share of the Preferred Stock shall mean the fair value per share as determined in good faith by the Board of Directors of the Company, whose determination shall be described in a statement filed with the Rights Agent and shall be binding on the Rights Agent and the holders of the Rights. For all purposes of this Agreement, the "current market price" of one one-hundredth of a share of Preferred Stock shall be equal to the "current -21- market price" of one share of Preferred Stock divided by 100. (e) Anything herein to the contrary notwithstanding, no adjustment in the Purchase Price shall be required unless such adjustment would require an increase or decrease of at least one percent (1%) in the Purchase Price; PROVIDED, HOWEVER, that any adjustments which by reason of this Section 11(e) are not required to be made shall be carried forward and taken into account in any subsequent adjustment. All calculations under this Section 11 shall be made to the nearest cent or to the nearest one ten-thousandth of a share of Common Stock or other share or one one-millionth of a share of Preferred Stock, as the case may be. Notwithstanding the first sentence of this Section 11(e), any adjustment required by this Section 11 shall be made no later than the earlier of (i) three (3) years from the date of the transaction which mandates such adjustment, or (ii) the Expiration Date. (f) If as a result of an adjustment made pursuant to Section 11(a)(ii) or Section 13(a) hereof, the holder of any Right thereafter exercised shall become entitled to receive any shares of capital stock other than Preferred Stock, thereafter the number of such other shares so receivable upon exercise of any Right and the Purchase Price thereof shall be subject to adjustment from time to time in a manner and on terms as nearly equivalent as practicable to the provisions with respect to the Preferred Stock contained in Sections 11(a), (b), (c), (e), (g), (h), (i), (j), (k) and (m), and the provisions of Sections 7, 9, 10, 13 and 14 hereof with respect to the Preferred Stock shall apply on like terms to any such other shares. (g) All Rights originally issued by the Company subsequent to any adjustment made to the Purchase Price hereunder shall evidence the right to purchase, at the adjusted Purchase Price, the number of one one-hundredths of a share of Preferred Stock purchasable from time to time hereunder upon exercise of the Rights, all subject to further adjustment as provided herein. (h) Unless the Company shall have exercised its election as provided in Section 11(i), upon each adjustment of the Purchase Price as a result of the calculations made in Sections 11(b) and (c), each Right outstanding immediately prior to the making of such adjustment shall thereafter evidence the right to purchase, at the adjusted Purchase Price, that number -22- of one-hundredths of a share of Preferred Stock (calculated to the nearest one-millionth) obtained by (i) multiplying (x) the number of one one-hundredths of a share covered by a Right immediately prior to this adjustment, by (y) the Purchase Price in effect immediately prior to such adjustment of the Purchase Price, and (ii) dividing the product so obtained by the Purchase Price in effect immediately after such adjustment of the Purchase Price. (i) The Company may elect on or after the date of any adjustment of the Purchase Price to adjust the number of Rights, in lieu of any adjustment in the number of one one-hundredths of a share of Preferred Stock purchasable upon the exercise of a Right. Each of the Rights outstanding after the adjustment in the number of Rights shall be exercisable for the number of one one-hundredths of a share of Preferred Stock for which a Right was exercisable immediately prior to such adjustment. Each Right held of record prior to such adjustment of the number of Rights shall become that number of Rights (calculated to the nearest one-ten-thousandth) obtained by dividing the Purchase Price in effect immediately prior to adjustment of the Purchase Price by the Purchase Price in effect immediately after adjustment of the Purchase Price. The Company shall make a public announcement of its election to adjust the number of Rights, indicating the record date for the adjustment, and, if known at the time, the amount of the adjustment to be made. This record date may be the date on which the Purchase Price is adjusted or any day thereafter, but, if the Rights Certificates have been issued, shall be at least ten (10) days later than the date of the public announcement. If Rights Certificates have been issued, upon each adjustment of the number of Rights pursuant to this Section 11(i), the Company shall, as promptly as practicable, cause to be distributed to holders of record of Rights Certificates on such record date Rights Certificates evidencing, subject to Section 14 hereof, the additional Rights to which such holders shall be entitled as a result of such adjustment, or, at the option of the Company, shall cause to be distributed to such holders of record in substitution and replacement for the Rights Certificates held by such holders prior to the date of adjustment, and upon surrender thereof, if required by the Company, new Rights Certificates evidencing all the Rights to which such holders shall be entitled after such adjustment. Rights Certificates so to be distributed shall be issued, executed and countersigned in the manner provided for herein (and may bear, at the option of the Company, the adjusted -23- Purchase Price) and shall be registered in the names of the holders of record of Rights Certificates on the record date specified in the public announcement. (j) Irrespective of any adjustment or change in the Purchase Price or the number of one one-hundredths of a share of Preferred Stock issuable upon the exercise of the Rights, the Rights Certificates theretofore and thereafter issued may continue to express the Purchase Price per one one-hundredth of a share and the number of one one-hundredths of a share which were expressed in the initial Rights Certificates issued hereunder. (k) Before taking any action that would cause an adjustment reducing the Purchase Price below the then stated value, if any, of the number of one one-hundredths of a share of Preferred Stock issuable upon exercise of the Rights, the Company shall take any corporate action which may, in the opinion of its counsel, be necessary in order that the Company may validly and legally issue fully paid and nonassessable shares of Preferred Stock at such adjusted Purchase Price. (l) In any case in which this Section 11 shall require that an adjustment in the Purchase Price be made effective as of a record date for a specified event, the Company may elect to defer until the occurrence of such event the issuance to the holder of any Right exercised after such record date the number of one one-hundredths of a share of Preferred Stock and other capital stock or securities of the Company, if any, issuable upon such exercise over and above the number of one one-hundredths of a share of Preferred Stock and other capital stock or securities of the Company, if any, issuable upon such exercise on the basis of the Purchase Price in effect prior to such adjustment; PROVIDED, HOWEVER, that the Company shall deliver to such holder a due bill or other appropriate instrument evidencing such holder's right to receive such additional shares (fractional or otherwise) or securities upon the occurrence of the event requiring such adjustment. (m) Anything in this Section 11 to the contrary notwithstanding, the Company shall be entitled to make such reductions in the Purchase Price, in addition to those adjustments expressly required by this Section 11, as and to the extent that the Board of Directors of the Company, in its good faith judgment, shall determine to be advisable in order that any (i) -24- consolidation or subdivision of the Preferred Stock, (ii) issuance wholly for cash of any shares of Preferred Stock at less than the current market price, (iii) issuance wholly for cash of shares of Preferred Stock or securities which by their terms are convertible into or exchangeable for shares of Preferred Stock, (iv) stock dividends or (v) issuance of rights, options or warrants referred to in this Section 11, hereafter made by the Company to holders of its Preferred Stock shall not be taxable to such stockholders. (n) The Company covenants and agrees that it shall not, at any time after the Distribution Date, (i) consolidate with any other Person (other than a Subsidiary of the Company in a transaction which complies with Section 11(o) hereof), (ii) merge with or into any other Person (other than a Subsidiary of the Company in a transaction which complies with Section 11(o) hereof), or (iii) sell or transfer (or permit any Subsidiary to sell or transfer), in one transaction, or a series of related transactions, assets or earning power aggregating more than 50% of the assets or earning power of the Company and its Subsidiaries (taken as a whole) to any other Person or Persons (other than the Company and/or any of its Subsidiaries in one or more transactions each of which complies with Section 11(o) hereof), if (x) at the time of or immediately after such consolidation, merger, sale or transfer there are any rights, warrants or other instruments or securities outstanding or agreements in effect which would substantially diminish or otherwise eliminate the benefits intended to be afforded by the Rights or (y) prior to, simultaneously with or immediately after such consolidation, merger, sale or transfer, the stockholders of the Person who constitutes, or would constitute, the "Principal Party" for purposes of Section 13(a) hereof shall have received a distribution of Rights previously owned by such Person or any of its Affiliates and Associates. (o) The Company covenants and agrees that, after the Distribution Date, it will not, except as permitted by Section 23 or Section 27 hereof, take (or permit any Subsidiary to take) any action if at the time such action is taken it is reasonably foreseeable that such action will diminish substantially or otherwise eliminate the benefits intended to be afforded by the Rights. (p) In the event that the Company shall at any time after the Rights Dividend Declaration Date and -25- prior to the Distribution Date (i) declare a dividend on the outstanding shares of Common Stock payable in shares of Common Stock, (ii) subdivide the outstanding shares of Common Stock, or (iii) combine the outstanding shares of Common Stock into a smaller number of shares, the number of Rights associated with each share of Common Stock then outstanding, or issued or delivered thereafter but prior to the Distribution Date, shall be proportionately adjusted so that the number of Rights thereafter associated with each share of Common Stock following any such event shall equal the result obtained by multiplying the number of Rights associated with each share of Common Stock immediately prior to such event by a fraction the numerator of which shall be the total number of shares of Common Stock outstanding immediately prior to the occurrence of the event and the denominator of which shall be the total number of shares of Common Stock outstanding immediately following the occurrence of such event. Section 12. CERTIFICATE OF ADJUSTED PURCHASE PRICE OR NUMBER OF SHARES. Whenever an adjustment is made as provided in Section 11 and Section 13 hereof, the Company shall (a) promptly prepare a certificate setting forth such adjustment and a brief statement of the facts accounting for such adjustment, (b) promptly file with the Rights Agent, and with each transfer agent for the Preferred Stock and the Common Stock, a copy of such certificate, and (c) mail a brief summary thereof to each holder of a Rights Certificate (or, if prior to the Distribution Date, to each holder of a certificate representing shares of Common Stock) in accordance with Section 26 hereof. The Rights Agent shall be fully protected in relying on any such certificate and on any adjustment therein contained and shall not be deemed to have knowledge of such adjustment unless and until it shall have received such certificate. Section 13. CONSOLIDATION, MERGER OR SALE OR TRANSFER OF ASSETS OR EARNING POWER. (a) In the event that, following the Stock Acquisition Date, directly or indirectly, (x) the Company shall consolidate with, or merge with and into, any other Person (other than a Subsidiary of the Company in a transaction which complies with Section 11(o) hereof), and the Company shall not be the continuing or surviving corporation of such consolidation or merger, (y) any Person (other than a Subsidiary of the Company in a transaction which complies with Section 11(o) hereof) shall consolidate with, or merge with or into, the Company, and the Company shall be the continuing or surviving corporation of such consolidation or merger and, in connection with such consolidation or merger, all or part of the outstanding shares of Common Stock shall be changed into or exchanged for stock or -26- other securities of any other Person or cash or any other property, or (z) the Company shall sell or otherwise transfer (or one or more of its Subsidiaries shall sell or otherwise transfer), in one transaction or a series of related transactions, assets or earning power aggregating more than 50% of the assets or earning power aggregating more than 50% of the assets or earning power of the Company and its Subsidiaries (taken as a whole) to any Person or Persons (other than the Company or any Subsidiary of the Company in one or more transactions each of which complies with Section 11(o) hereof), then, and in each such case (except as may be contemplated by Section 13(d) hereof), proper provision shall be made so that: (i) each holder of a Right, except as provided in Section 7(e) hereof, shall thereafter have the right to receive upon the exercise thereof at the then current Purchase Price in accordance with the terms of this Agreement, such number of validly authorized and issued, fully paid, nonassessable and freely tradeable shares of Common Stock of the Principal Party (as such term is hereinafter defined), not subject to any liens, encumbrances, rights of first refusal or other adverse claims, as shall be equal to the result obtained by (l) multiplying the then current Purchase Price by the number of one one-hundredths of a share of Preferred Stock for which a Right is exercisable immediately prior to the first occurrence of a Section 13 Event (or, if a Section 11(a)(ii) Event has occurred prior to the first occurrence of a Section 13 Event, multiplying the number of such one one-hundredths of a share of Preferred Stock for which a Right was exercisable immediately prior to the first occurrence of a Section 11(a)(ii) Event by the Purchase Price in effect immediately prior to such first occurrence), and dividing that product (which, following the first occurrence of a Section 13 Event, shall be referred to as the "Purchase Price" for each Right and for all purposes of this Agreement) by (2) 50% of the current market price (determined pursuant to Section 11(d)(i) hereof) per share of the Common Stock of such Principal Party on the date of consummation of such Section 13 Event; (ii) such Principal Party shall thereafter be liable for, and shall assume, by virtue of such Section 13 Event, all the obligations and duties of the Company pursuant to this Agreement; (iii) the term "Company" shall thereafter be deemed to refer to such Principal Party, it being specifically intended that the provisions of Section 11 hereof shall apply only to such Principal Party following the first occurrence of a Section 13 Event; (iv) such Principal Party shall take such steps (including, but not limited to, the reservation of a sufficient number of shares of its Common Stock) in connection with the consummation of any such transaction as may be necessary to assure that the provisions hereof shall thereafter be applicable, as nearly as reasonably may be, in relation to its shares of Common Stock thereafter deliverable upon the exercise of the Rights; and (v) the provisions of Section 11(a)(ii) hereof shall be of no effect following the first occurrence of any Section 13 Event. -27- (b) "Principal Party" shall mean: (i) in the case of any transaction described in clause (x) or (y) of the first sentence of Section 13(a), the Person that is the issuer of any securities into which shares of Common Stock of the Company are converted in such merger or consolidation, and if no securities are so issued, the Person that is the other party to such merger or consolidation; and (ii) in the case of any transaction described in clause (z) of the first sentence of Section 13(a), the Person that is the party receiving the greatest portion of the assets or earning power transferred pursuant to such transaction or transactions; PROVIDED, HOWEVER, that in any such case, (1) if the Common Stock of such Person is not at such time and has not been continuously over the preceding twelve (12) month period registered under Section 12 of the Exchange Act, and such Person is a direct or indirect Subsidiary of another Person the Common Stock of which is and has been so registered, "Principal Party" shall refer to such other Person; and (2) in case such Person is a Subsidiary, directly or indirectly, of more than one Person, the Common Stocks of two or more of which are and have been so registered, "Principal Party" shall refer to whichever of such Persons is the issuer of the Common Stock having the greatest aggregate market value. (c) The Company shall not consummate any such consolidation, merger, sale or transfer unless the Principal Party shall have a sufficient number of authorized shares of its Common Stock which have not been issued or reserved for issuance to permit the exercise in full of the Rights in accordance with this Section 13 and unless prior thereto the Company and such Principal Party shall have executed and delivered to the Rights Agent a supplemental agreement providing for the terms set forth in paragraphs (a) and (b) of this Section 13 and further providing that, as soon as practicable after the date of any consolidation, merger, sale or transfer of assets mentioned in paragraph (a) of this Section 13, the Principal Party will: (i) prepare and file a registration statement under the Act, with respect to the Rights and the securities purchasable upon exercise of the Rights on an appropriate form, and will use its best efforts to cause such registration statement to (A) become effective as soon as practicable after such filing and (B) remain effective (with a prospectus at all times meeting the requirements of the Act) until the Expiration Date; and -28- (ii) will deliver to holders of the Rights historical financial statements for the Principal Party and each of its Affiliates which comply in all respects with the requirements for registration on Form 10 under the Exchange Act. The provisions of this Section 13 shall similarly apply to successive mergers or consolidations or sales or other transfers. In the event that a Section 13 Event shall occur at any time after the occurrence of a Section 11(a)(ii) Event, the Rights which have not theretofore been exercised shall thereafter become exercisable in the manner described in Section 13(a). Section 14. FRACTIONAL RIGHTS AND FRACTIONAL SHARES. (a) The Company shall not be required to issue fractions of Rights or to distribute Rights Certificates which evidence fractional Rights. In lieu of such fractional Rights, there shall be paid to the registered holders of the Rights Certificates with regard to which such fractional Rights would otherwise be issuable, an amount in cash equal to the same fraction of the current market value of a whole Right. For purposes of this Section 14(a), the current market value of a whole Right shall be the closing price of the Rights for the Trading Day immediately prior to the date on which such fractional Rights would have been otherwise issuable. The closing price of the Rights for any day shall be the last sale price, regular way, or, in case no such sale takes place on such day, the average of the closing bid and asked prices, regular way, in either case as reported in the principal consolidated transaction reporting system with respect to securities listed or admitted to trading on the New York Stock Exchange or, if the Rights are not listed or admitted to trading on the New York Stock Exchange, as reported to the principal consolidated transaction reporting system with respect to securities listed on the principal national securities exchange on which the Rights are listed or admitted to trading, or if the Rights are not listed or admitted to trading on any national securities exchange, the last quoted price or, if not so quoted, the average of the high bid and low asked prices in the over-the-counter market, as reported by NASDAQ or such other system then in use or, if on any such date the Rights are not quoted by any such organization, the average of the closing bid and asked prices as furnished by a professional market maker making a market in the Rights selected by the Board of Directors of the Company. If on any such date no such market maker is making a market in the Rights the fair value of the Rights on such date as determined in good faith by the Board of Directors of the Company shall be used. (b) The Company shall not be required to issue fractions of shares of Preferred Stock (other than fractions -29- which are integral multiples of one one-hundredth of a share of Preferred Stock) upon exercise of the Rights or to distribute certificates which evidence fractional shares of Preferred Stock (other than fractions which are integral multiples of one one-hundredth of a share of Preferred Stock). Fractions of shares of Preferred Stock in integral multiples of one-hundredth of a share may, at the election of the Company, be evidenced by depositary receipts pursuant to an appropriate agreement between the Company and a depositary selected by it; PROVIDED, HOWEVER, that such agreement shall provide that the holders of such depositary receipts shall have all the rights, privileges and preferences to which they are entitled as beneficial owners of the shares represented by such depositary receipts. In lieu of fractional shares of Preferred Stock that are not integral multiples of one one-hundredth of a share of Preferred Stock, the Company shall pay to the registered holders of Rights Certificates at the time such Rights are exercised as herein provided an amount in cash equal to the same fraction of the current market value of one one-hundredth of a share of Preferred Stock. For purposes of this Section 14(b), the current market value of one one-hundredth of a share of Preferred Stock shall be one one-hundredth of the closing price of a share of Preferred Stock (as determined pursuant to Section 11(d)(ii) hereof) for the Trading Day immediately prior to the date of such exercise. (c) Following the occurrence of a Triggering Event, the Company shall not be required to issue fractions of shares of Common Stock upon exercise of the Rights or to distribute certificates which evidence fractional shares of Common Stock. In lieu of fractional shares of Common Stock, the Company shall pay to the registered holders of Rights Certificates at the time such Rights are exercised as herein provided an amount in cash equal to the same fraction of the current market value of one (1) share of Common Stock. For purposes of this Section 14(c), the current market value of one share of Common Stock shall be the closing price of one share of Common Stock (as determined pursuant to Section 11(d)(i) hereof) for the Trading Day immediately prior to the date of such exercise. (d) The holder of a Right by the acceptance of the Rights expressly waives his right to receive any fractional Rights or any fractional shares upon exercise of a Right, except as permitted by this Section 14. Section 15. RIGHTS OF ACTION. All rights of action in respect of this Agreement, other than rights of action vested in the Rights Agent pursuant to Section 18 hereof, are vested in the respective registered holders of the Rights Certificates (and, prior to the Distribution Date, the registered holders of the Common Stock); and any registered holder of any Rights Certificate (or, prior to the Distribution Date, of the Common Stock), without the consent of the Rights Agent or of the holder -30- of any other Rights Certificate (or, prior to the Distribution Date, of the Common Stock), may, in his own behalf and for his own benefit, enforce, and may institute and maintain any suit, action or proceeding against the Company to enforce, or otherwise act in respect of, his or her right to exercise the Rights evidenced by such Rights Certificate in the manner provided in such Rights Certificate and in this Agreement. Without limiting the foregoing or any remedies available to the holders of Rights, it is specifically acknowledged that the holders of Rights would not have an adequate remedy at law for any breach of this Agreement and shall be entitled to specific performance of the obligations hereunder and injunctive relief against actual or threatened violations of the obligations hereunder of any Person subject to this Agreement. Section 16. AGREEMENT OF RIGHTS HOLDERS. Every holder of a Right by accepting the same consents and agrees with the Company and the Rights Agent and with every holder of a Right that: (a) prior to the Distribution Date, the Rights will be transferable only in connection with the transfer of Common Stock; (b) after the Distribution Date, the Rights Certificates are transferable only on the registry books of the Rights Agent if surrendered at the principal office or offices of the Rights Agent designated for such purposes, duly endorsed or accompanied by a proper instrument of transfer and with the appropriate forms and certificates fully executed; (c) subject to Section 6(a) and Section 7(f) hereof, the Company and the Rights Agent may deem and treat the person in whose name a Rights Certificate (or, prior to the Distribution Date, the associated Common Stock certificate) is registered as the absolute owner thereof and of the Rights evidenced thereby (notwithstanding any notations of ownership or writing on the Rights Certificates or the associated Common Stock certificates made by anyone other than the Company or the Rights Agent) for all purposes whatsoever, and neither the Company nor the Rights Agent, subject to the last sentence of Section 7(e) hereof, shall be required to be affected by any notice to the contrary; and (d) notwithstanding anything in this Agreement to the contrary, neither the Company nor the Rights Agent shall have any liability to any holder of a Right or other Person as a result of its inability to perform any of its obligations under this Agreement by reason -31- of any preliminary or permanent injunction or other order, decree or ruling issued by a court of competent jurisdiction or by a governmental, regulatory or administrative agency or commission, or any statute, rule, regulation or executive order promulgated or enacted by any governmental authority, prohibiting or otherwise restraining performance of such obligation; PROVIDED, HOWEVER, the Company must use reasonable efforts to have any such order, decree or ruling lifted or otherwise overturned as soon as possible. Section 17. RIGHTS CERTIFICATE HOLDER NOT DEEMED A STOCKHOLDER. No holder, as such, of any Rights Certificate shall be entitled to vote, receive dividends or be deemed for any purpose to be the holder of the number of one one-hundredths of a share of Preferred Stock or any other securities of the Company which may at any time be issuable on the exercise of the Rights represented thereby, nor shall anything contained herein or in any Rights Certificate be construed to confer upon the holder of any Rights Certificate, as such, any of the rights of a stockholder of the Company or any right to vote for the election of directors or upon any matter submitted to stockholders at any meeting thereof, or to give or withhold consent to any corporate action, or to receive notice of meetings or other actions affecting stockholders (except as provided in Section 25 hereof), or to receive dividends or subscription rights, or otherwise, until the Right or Rights evidenced by such Rights Certificate shall have been exercised in accordance with the provisions hereof. Section 18. CONCERNING THE RIGHTS AGENT. (a) The Company agrees to pay to the Rights Agent reasonable compensation for all services rendered by it hereunder and, from time to time, on demand of the Rights Agent, its reasonable expenses and counsel fees and disbursements and other disbursements incurred in the administration and execution of this Agreement and the exercise and performance of its duties hereunder. (b) The Rights Agent shall be protected and shall incur no liability for or in respect of any action taken, suffered or omitted by it in connection with its administration of this Agreement in reliance upon any Rights Certificate or certificate for Common Stock or for other securities of the Company, instrument of assignment or transfer, power of attorney, endorsement, affidavit, letter, notice, direction, consent, certificate, statement, or other paper or document believed by it to be genuine and to be signed, executed and, where necessary, verified or acknowledged, by the proper Person or Persons. -32- Section 19. MERGER OR CONSOLIDATION OR CHANGE OF NAME OF RIGHTS AGENT. (a) Any corporation into which the Rights Agent or any successor Rights Agent may be merged or with which it may be consolidated, or any corporation resulting from any merger or consolidation to which the Rights Agent or any successor Rights Agent shall be a party, or any corporation succeeding to the corporate trust or stock transfer business of the Rights Agent or any successor Rights Agent, shall be the successor to the Rights Agent under this Agreement without the execution or filing of any paper or any further act on the part of any of the parties hereto; PROVIDED, HOWEVER, that such corporation would be eligible for appointment as a successor Rights Agent under the provisions of Section 21 hereof. In case at the time such successor Rights Agent shall succeed to the agency created by this Agreement, any of the Rights Certificates shall have been countersigned but not delivered, any such successor Rights Agent may adopt the countersignature of a predecessor Rights Agent and deliver such Rights Certificates so countersigned; and in case at the time any of the Rights Certificates shall not have been countersigned, any successor Rights Agent may countersign such Rights Certificates either in the name of the predecessor or in the name of the successor Rights Agent; and in all such cases such Rights Certificates shall have the full force provided in the Rights Certificates and in this Agreement. (b) In case at any time the name of the Rights Agent shall be changed, and at such time any of the Rights Certificates shall have been countersigned but not delivered, the Rights Agent may adopt the countersignature under its prior name and deliver Rights Certificates so countersigned; and in case, at that time, any of the Rights Certificates shall not have been countersigned, the Rights Agent may countersign such Rights Certificates either in its prior name or in its changed name; and in all such cases such Rights Certificates shall have the full force provided in the Rights Certificates and in this Agreement. Section 20. DUTIES OF RIGHTS AGENT. The Rights Agent undertakes the duties and obligations imposed by this Agreement upon the following terms and conditions, by all of which the Company and the holders of Rights Certificates, by their acceptance thereof, shall be bound: (a) The Rights Agent may consult with legal counsel (who may be legal counsel for the Company), and the opinion of such counsel shall be full and complete authorization and protection to the Rights Agent as to any action taken or omitted by it in good faith and in accordance with such opinion. -33- (b) Whenever in the performance of its duties under this Agreement the Rights Agent shall deem it necessary or desirable that any fact or matter (including, without limitation, the identity of any Acquiring Person and the determination of "current market price") be proved or established by the Company prior to taking or suffering any action hereunder, such fact or matter (unless other evidence in respect thereof be herein specifically prescribed) may be deemed to be conclusively proved and established by a certificate signed by the Chairman of the Board, the President, any Vice President, the Treasurer, any Assistant Treasurer, the Secretary or any Assistant Secretary of the Company and delivered to the Rights Agent; and such certificate shall be full authorization to the Rights Agent for any action taken or suffered in good faith by it under the provisions of this Agreement in reliance upon such certificate. (c) The Rights Agent shall be liable hereunder only for its own gross negligence, bad faith or willful misconduct. (d) The Rights Agent shall not be liable for or by reason of any of the statements of fact or recital contained in this Agreement or in the Rights Certificates or be required to verify the same (except as to its countersignature on such Rights Certificates), but all such statements and recitals are and shall be deemed to have been made by the Company only. (e) The Rights Agent shall not be under any responsibility in respect of the validity of this Agreement or the execution and delivery hereof (except the due execution hereof by the Rights Agent) or in respect of the validity or execution of any Rights Certificate (except its countersignature thereof); nor shall it be responsible for any breach by the Company of any covenant or condition contained in this Agreement or in any Rights Certificate; nor shall it be responsible for any adjustment required under the provisions of Section 11, Section 13 or Section 24 hereof or responsible for the manner, method or amount of any such adjustment or the ascertaining of the existence of facts that would require any such adjustment (except with respect to the exercise of Rights evidenced by Rights Certificates after actual notice of any such adjustment); nor shall it by any act hereunder be deemed to make any representation or warranty as to the authorization or reservation of any shares of Common Stock or Preferred Stock to be issued -34- pursuant to this Agreement or any Rights Certificate or as to whether any shares of Common Stock or Preferred Stock will, when so issued, be validly authorized and issued, fully paid and nonassessable. (f) The Company agrees that it will perform, execute, acknowledge and deliver or cause to be performed, executed, acknowledged and delivered all such further and other acts, instruments and assurances as may reasonably be required by the Rights Agent for the carrying out or performing by the Rights Agent of the provisions of this Agreement. (g) The Rights Agent is hereby authorized and directed to accept instructions with respect to the performance of its duties hereunder from the Chairman of the Board, the President, any Vice President, the Secretary, any Assistant Secretary, the Treasurer or any Assistant Treasurer of the Company, and to apply to such officers for advice or instructions in connection with its duties, and it shall not be liable for any action taken or suffered to be taken by it in good faith in accordance with instructions of any such officer. (h) The Rights Agent and any stockholder, director, officer or employee of the Rights Agent may buy, sell or deal in any of the Rights or other securities of the Company or become pecuniarily interested in any transaction in which the Company may be interested, or contract with or lend money to the Company or otherwise act as fully and freely as though it were not Rights Agent under this Agreement. Nothing herein shall preclude the Rights Agent from acting in any other capacity for the Company or for any other legal entity. (i) The Rights Agent may execute and exercise any of the rights or powers hereby vested in it or perform any duty hereunder either itself or by or through its attorneys or agents, and the Rights Agent shall not be answerable or accountable for any act, default, neglect or misconduct of any such attorneys or agents or for any loss to the Company resulting from any such act, default, neglect or misconduct; PROVIDED, HOWEVER, that reasonable care was exercised in the selection and continued employment thereof. (j) No provision of this Agreement shall require the Rights Agent 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 its rights if there shall be reasonable -35- grounds for believing that repayment of such funds or adequate indemnification against such risk or liability is not reasonably assured to it. (k) If, with respect to any Rights Certificate surrendered to the Rights Agent for exercise or transfer, the certificate attached to the form of assignment or form of election to purchase, as the case may be, has either not been completed or indicates an affirmative response to clause 1 and/or 2 thereof, the Rights Agent shall not take any further action with respect to such requested exercise or transfer without first consulting with the Company. Section 21. CHANGE OF RIGHTS AGENT. The Rights Agent or any successor Rights Agent may resign and be discharged from its duties under this Agreement upon thirty (30) days' notice in writing mailed to the Company, and to each transfer agent of the Common Stock and Preferred Stock, by registered or certified mail, and to the holders of the Rights Certificates by first-class mail. The Company may remove the Rights Agent or any successor Rights Agent upon thirty (30) days' notice in writing, mailed to the Rights Agent or successor Rights Agent, as the case may be, and to each transfer agent of the Common Stock and Preferred Stock, by registered or certified mail, and to the holders of the Rights Certificates by first-class mail. If the Rights Agent shall resign or be removed or shall otherwise become incapable of acting, the Company shall appoint a successor to the Rights Agent. If the Company shall fail to make such appointment within a period of thirty (30) days after giving notice of such removal or after it has been notified in writing of such resignation or incapacity by the resigning or incapacitated Rights Agent or by the holder of a Rights Certificate (who shall, with such notice, submit his or her Rights Certificate for inspection by the Company), then any registered holder of any Rights Certificate may apply to any court of competent jurisdiction for the appointment of a new Rights Agent. Any successor Rights Agent, whether appointed by the Company or by such a court, shall be a corporation organized and doing business under the laws of the United States or of the State of Illinois (or of any other state of the United States so long as such corporation is authorized to do business as a banking institution in the State of Illinois), in good standing, having an office or agency in the State of New York, which is authorized under such laws to exercise corporate trust or stock transfer powers and is subject to supervision or examination by federal or state authority and which has at the time of its appointment as Rights Agent a combined capital and surplus of at least $50,000,000. After appointment, the successor Rights Agent shall be vested with the same powers, rights, duties and responsibilities as if it had been originally named as Rights Agent without further act or deed; but the predecessor Rights Agent shall deliver and -36- transfer to the successor Rights Agent any property at the time held by it hereunder, and execute and deliver any further reasonable assurance, conveyance, act or deed necessary for the purpose. Not later than the effective date of any such appointment, the Company shall file notice thereof in writing with the predecessor Rights Agent and each transfer agent of the Common Stock and the Preferred Stock, and mail a notice thereof in writing to the registered holders of the Rights Certificates. Failure to give any notice provided for in this Section 21 or any defect therein shall not affect the legality or validity of the resignation or removal of the Rights Agent or the appointment of the successor Rights Agent, as the case may be. Section 22. ISSUANCE OF NEW RIGHTS CERTIFICATES. Notwithstanding any of the provisions of this Agreement or of the Rights to the contrary, the Company may, at its option, issue new Rights Certificates evidencing Rights in such form as may be approved by its Board of Directors to reflect any adjustment or change in the Purchase Price and the number or kind or class of shares or other securities or property purchasable under the Rights Certificates made in accordance with the provisions of this Agreement. In addition, in connection with the issuance or sale of shares of Common Stock following the Distribution Date and prior to the redemption or expiration of the Rights, the Company (a) shall, with respect to shares of Common Stock so issued or sold pursuant to the exercise of stock options or under any employee plan or arrangement, granted or awarded prior to the Distribution Date, or upon the exercise, conversion or exchange of securities hereinafter issued by the Company, and (b) may, in any other case, if deemed necessary or appropriate by the Board of Directors of the Company, issue Rights Certificates representing an appropriate number of Rights in connection with such issuance or sale; PROVIDED, HOWEVER, that (i) no such Rights Certificate shall be issued if, and to the extent that, the Company shall be advised by counsel that such issuance would create a significant risk of material adverse tax consequences to the Company or the Person to whom such Rights Certificate would be issued, and (ii) no such Rights Certificate shall be issued if, and to the extent that, appropriate adjustment shall otherwise have been made in lieu of the issuance thereof. Section 23. REDEMPTION AND TERMINATION. (a) The Board of Directors of the Company may, at its option, at any time prior to the earlier of (i) the close of business on the tenth day following the Stock Acquisition Date (or, if the Stock Acquisition Date shall have occurred prior to the Record Date, the close of business on the tenth day following the Record Date), or (ii) the Final Expiration Date, redeem all but not less than all of the then outstanding Rights at a redemption price of $.01 per Right, as such amount may be appropriately adjusted to reflect any stock split, stock dividend -37- or similar transaction occurring after the date hereof (such redemption price being hereinafter referred to as the "Redemption Price"). Notwithstanding anything contained in this Agreement to the contrary, the Rights shall not be exercisable after the first occurrence of a Section 11(a)(ii) Event until such time as the Company's right of redemption hereunder has expired. The Company may, at its option, pay the Redemption Price in cash, shares of Common Stock (based on the "current market price", as defined in Section 11(d)(i) hereof, of the Common Stock at the time of redemption) or any other form of consideration deemed appropriate by the Board of Directors. The redemption of the Rights by the Board of Directors may be made effective at such time, on such basis and with such conditions as the Board of Directors in its sole discretion may establish. (b) Immediately upon the action of the Board of Directors of the Company ordering the redemption of the Rights, evidence of which shall have been filed with the Rights Agent and without any further action and without any notice, the right to exercise the Rights will terminate and the only right thereafter of the holders of Rights shall be to receive the Redemption Price for each Right so held. Promptly after the action of the Board of Directors ordering the redemption of the Rights, the Company shall give notice of such redemption to the Rights Agent and the holders of the then outstanding Rights by mailing such notice to all such holders at each holder's last address as it appears upon the registry books of the Rights Agent or, prior to the Distribution Date, on the registry books of the transfer agent for the Common Stock. Any notice which is mailed in the manner herein provided shall be deemed given, whether or not the holder receives the notice. Each such notice of redemption will state the method by which the payment of the Redemption Price will be made. Section 24. EXCHANGE. (a) The Board of Directors of the Company may, at its option, at any time after any Person becomes an Acquiring Person, exchange all or part of the then outstanding and exercisable Rights (which shall not include Rights that have become void pursuant to the provisions of Section 7(e) hereof) for shares of Common Stock at an exchange ratio of one share of Common Stock per Right, appropriately adjusted to reflect any stock split, stock dividend or similar transaction occurring after the date hereof (such exchange ratio being hereinafter referred to as the "Exchange Ratio"). Notwithstanding the foregoing, the Board of Directors shall not be empowered to effect such exchange at any time after any Person (other than the Company, any Subsidiary of the Company, any employee benefit plan of the Company or of any Subsidiary of the Company, or any Person organized, appointed or established by the Company for or pursuant to the terms of any such plan), together with all Affiliates and Associates of such -38- Person, becomes the Beneficial Owner of fifty percent (50%) or more of the Common Stock then outstanding. (b) Immediately upon the action of the Board of Directors of the Company ordering the exchange of any Rights pursuant to subsection (a) of this Section 24 and without any further action and without any notice, the right to exercise such Rights shall terminate and the only right thereafter of a holder of such Rights shall be to receive that number of shares of Common Stock equal to the number of such Rights held by such holder multiplied by the Exchange Ratio. The Company shall promptly give public notice of any exchange; PROVIDED, HOWEVER, that the failure to give, or any defect in, such notice shall not affect the validity of such exchange. The Company promptly shall mail a notice of any such exchange to all of the holders of such Rights at their last addresses as they appear upon the registry books of the Rights Agent. Any notice which is mailed in the manner herein provided shall be deemed given, whether or not the holder receives the notice. Each such notice of exchange will state the method by which the exchange of the Common Stock for Rights will be effected and, in the event of any partial exchange, the number of Rights which will be exchanged. Any partial exchange will be effected pro rata based on the number of Rights (other than Rights which have become void pursuant to the provisions of Section 7(e) hereof) held by each holder of Rights. (c) In any exchange pursuant to this Section 24, the Company, at its option, may substitute shares of Preferred Stock (or equivalent preferred stock, as such term is defined in paragraph (b) of Section 11 hereof) for shares of Common Stock exchangeable for Rights, at the initial rate of one one-hundredth of a share of Preferred Stock (or equivalent preferred stock) for each share of Common Stock, as appropriately adjusted to reflect adjustments in the voting rights of the Preferred Stock pursuant to the terms thereof, so that the fraction of a share of Preferred Stock delivered in lieu of each share of Common Stock shall have the same voting rights as one share of Common Stock. (d) In the event that there shall not be sufficient shares of Common Stock issued but not outstanding or authorized but unissued to permit any exchange of Rights as contemplated in accordance with this Section 24, the Company shall take all such actions as may be necessary to authorize additional shares of Common Stock for issuance upon exchange of the Rights. (e) The Company shall not be required to issue fractions of shares of Common Stock or to distribute certificates which evidence fractional shares of Common Stock. In lieu of such fractional shares of Common Stock, there shall be paid to the registered holders of the Rights Certificates with regard to which such fractional shares of Common Stock would otherwise be issuable, an amount in cash equal to the same fraction of the -39- current market value of a whole share of Common Stock. For the purposes of this subsection (e), the current market value of a whole share of Common Stock shall be the closing price of a share of Common Stock (as determined pursuant to the second sentence of Section 11(d)(i) hereof) for the Trading Day immediately prior to the date of exchange pursuant to this Section 24. Section 25. NOTICE OF CERTAIN EVENTS. (a) In case the Company shall propose, at any time after the Distribution Date, (i) to pay any dividend payable in stock of any class to the holders of Preferred Stock or to make any other distribution to the holders of Preferred Stock (other than a regular quarterly cash dividend out of earnings or retained earnings of the Company), or (ii) to offer to the holders of Preferred Stock rights or warrants to subscribe for or to purchase any additional shares of Preferred Stock or shares of stock of any class or any other securities, rights or options, or (iii) to effect any reclassification of its Preferred Stock (other than a reclassification involving only the subdivision of outstanding shares of Preferred Stock), or (iv) to effect any consolidation or merger into or with any other Person (other than a Subsidiary of the Company in a transaction which complies with Section 11(o) hereof), or to effect any sale or other transfer (or to permit one or more of its Subsidiaries to effect any sale or other transfer), in one transaction or a series of related transactions, of more than 50% of the assets or earning power of the Company and its Subsidiaries (taken as a whole) to any other Person or Persons (other than the Company and/or any of its Subsidiaries in one or more transactions each of which complies with Section 11(o) hereof), or (v) to effect the liquidation, dissolution or winding up of the Company, then, in each such case, the Company shall give to each holder of a Rights Certificate, to the extent feasible and in accordance with Section 26 hereof, a notice of such proposed action, which shall specify the record date for the purposes of such stock dividend, distribution of rights or warrants, or the date on which such reclassification, consolidation, merger, sale, transfer, liquidation, dissolution, or winding up is to take place and the date of participation therein by the holders of the shares of Preferred Stock, if any such date is to be fixed, and such notice shall be so given in the case of any action covered by clause (i) or (ii) above at least twenty (20) days prior to the record date for determining holders of the shares of Preferred Stock for purposes of such action, and in the case of any such other action, at least twenty (20) days prior to the date of the taking of such proposed action or the date of participation therein by the holders of the shares of Preferred Stock, whichever shall be the earlier. -40- (b) In case the event set forth in Section 11(a)(ii) hereof shall occur, then, in any such case, (i) the Company shall as soon as practicable thereafter give to each holder of a Rights Certificate, to the extent feasible and in accordance with Section 26 hereof, a notice of the occurrence of such event, which shall specify the event and the consequences of the event to holders of Rights under Section 11(a)(ii) hereof, and (ii) all references in the preceding paragraph to Preferred Stock shall be deemed thereafter to refer to Common Stock and/or, if appropriate, other securities. Section 26. NOTICES. Notices or demands authorized by this Agreement to be given or made by the Rights Agent or by the holder of any Rights Certificate to or on the Company shall be sufficiently given or made if sent by first-class mail, postage prepaid, addressed (until another address is filed in writing with the Rights Agent) as follows: Allegiance Corporation 1430 Waukegan Road McGaw Park, Illinois 60085-6788 Attention: Corporate Secretary Subject to the provisions of Section 21, any notice or demand authorized by this Agreement to be given or made by the Company or by the holder of any Rights Certificate to or on the Rights Agent shall be sufficiently given or made if sent by first-class mail, postage prepaid, addressed (until another address is filed in writing with the Company) as follows: First Chicago Trust Company of New York P.O. Box 2507 Suite 4660 Jersey City, New Jersey 07303-2507 Attention: Tenders & Exchanges Administration Notices or demands authorized by this Agreement to be given or made by the Company or the Rights Agent to the holder of any Rights Certificate (or, if prior to the Distribution Date, to the holder of certificates representing shares of Common Stock) shall be sufficiently given or made if sent by first-class mail, postage prepaid, addressed to such holder at the address of such holder as shown on the registry books of the Company. Section 27. SUPPLEMENTS AND AMENDMENTS. The Company may from time to time supplement or amend this Agreement without the approval of any holders of Rights Certificates in order to cure any ambiguity, to correct or supplement any provision contained herein which may be defective or inconsistent with any other provision herein, or to make any other provisions with respect to the Rights which the Company may deem necessary or desirable, any such supplement or amendment to be evidenced by a -41- writing signed by the Company and the Rights Agent; PROVIDED, HOWEVER, that from and after such time as any Person becomes an Acquiring Person, this Agreement shall not be amended in any manner which would adversely affect the interests of the holders of Rights. Prior to the Distribution Date, the interest of the holders of Rights shall be deemed coincident with the interests of the holders of Common Stock. Without limiting the foregoing, the Company may at any time prior to such time as any Person becomes an Acquiring Person amend this Agreement to lower the thresholds set forth in Sections 1(a) and 3(a) to a percentage that (subject to exceptions for specified Persons or Groups excepted from the definition of "Acquiring Person") is not less than the greater of (i) the sum of .001% and the largest percentage of the outstanding shares of Common Stock then known by the Company to be beneficially owned by any Person (other than the Company, any Subsidiary of the Company, any employee benefit plan of the Company or of any Subsidiary of the Company, any Person organized, appointed or established by the Company for or pursuant to the terms of any such plan or, to the extent excepted from the definition of "Acquiring Person", other Specified Persons or Groups) and (ii) 10.0%. Section 28. SUCCESSORS. All the covenants and provisions of this Agreement by or for the benefit of the Company or the Rights Agent shall bind and inure to the benefit of their respective successors and assigns hereunder. Section 29. DETERMINATION AND ACTIONS BY THE BOARD OF DIRECTORS, ETC. For all purposes of this Agreement, any calculation of the number of shares of Common Stock outstanding at any particular time, including for purposes of determining the particular percentage of such outstanding shares of Common Stock of which any Person is the Beneficial Owner, shall be made in accordance with the last sentence of Rule 13d-3(d)(l)(i) of the General Rules and Regulations under the Exchange Act. The Board of Directors of the Company shall have the exclusive power and authority to administer this Agreement and to exercise all rights and powers specifically granted to the Board of Directors of the Company or to the Company, or as may be necessary or advisable in the administration of this Agreement, including, without limitation, the right and power to (i) interpret the provisions of this Agreement, and (ii) make all determinations deemed necessary or advisable for the administration of this Agreement (including, but not limited to, a determination to redeem or not redeem the Rights or to amend this Agreement). All such actions, calculations, interpretations and determinations (including, for purposes of clause (y) below, all omissions with respect to the foregoing) which are done or made by the Board of Directors of the Company in good faith shall (x) be final, conclusive and binding on the Company, the Rights Agent, the holders of the Rights and all other parties, and (y) not subject the Board of -42- Directors of the Company to any liability to the holders of the Rights. Section 30. BENEFITS OF THIS AGREEMENT. Nothing in this Agreement shall be construed to give to any Person other than the Company, the Rights Agent and the registered holders of the Rights Certificates (and, prior to the Distribution Date, registered holders of the Common Stock) any legal or equitable right, remedy or claim under this Agreement; but this Agreement shall be for the sole and exclusive benefit of the Company, the Rights Agent and the registered holders of the Rights Certificates (and, prior to the Distribution Date, registered holders of the Common Stock). Section 31. SEVERABILITY. If any term, provision, covenant or restriction of this Agreement is held by a court of competent jurisdiction or other authority to be invalid, void or unenforceable, the remainder of the terms, provisions, covenants and restrictions of this Agreement shall remain in full force and effect and shall in no way be affected, impaired or invalidated; PROVIDED, HOWEVER, that notwithstanding anything in this Agreement to the contrary, if any such term, provision, covenant or restriction is held by such court or authority to be invalid, void or unenforceable and the Board of Directors of the Company determines in its good faith judgment that severing the invalid language from this Agreement would adversely affect the purpose or effect of this Agreement, the right of redemption set forth in Section 23 hereof shall be reinstated and shall not expire until the close of business on the tenth day following the date of such determination by the Board of Directors of the Company. Section 32. GOVERNING LAW. This Agreement, each Right and each Rights Certificate issued hereunder shall be deemed to be a contract made under the laws of the State of Delaware and for all purposes shall be governed by and construed in accordance with the laws of such State applicable to contracts made and to be performed entirely within such State. Section 33. COUNTERPARTS. This Agreement may be executed in any number of counterparts and each of such counterparts shall for all purposes be deemed to be an original, and all such counterparts shall together constitute but one and the same instrument. Section 34. DESCRIPTIVE HEADINGS. Descriptive headings of the several Sections of this Agreement are inserted for convenience only and shall not control or affect the meaning or construction of any of the provisions hereof. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed and their respective corporate -43- seals to be hereunto affixed and attested, all as of the day and year first above written. Attest: ALLEGIANCE CORPORATION By: By: ----------------- ----------------- Name: Name: Title: Title: Attest: FIRST CHICAGO TRUST COMPANY OF NEW YORK By: By: ----------------- ----------------- Name: Name: Title: Title: -44- Exhibit A CERTIFICATE OF DESIGNATION OF SERIES A JUNIOR PARTICIPATING PREFERRED STOCK OF ALLEGIANCE CORPORATION - -------------------------------------------------------------------------------- Pursuant to Section 151 of the General Corporation Law of the State of Delaware - -------------------------------------------------------------------------------- The undersigned do hereby certify that the following resolution was duly adopted by the Board of Directors of Allegiance Corporation, a Delaware corporation (the "Corporation"), at a meeting duly convened and held on September 16, 1996, at which a quorum was present and acting throughout: RESOLVED, that pursuant to the authority vested in the board of directors of the Corporation by the Certificate of Incorporation, the board of directors does hereby create, authorize and provide for the issue of a series of Preferred Stock, par value $.01 per share, of the Corporation, to be designated "Series A Junior Participating Preferred Stock" (hereinafter referred to as the "Series A Preferred Stock"), initially consisting of 2,000,000 shares, and to the extent that the designations, powers, preferences and relative and other special rights and the qualifications, limitations or restrictions of the Series A Preferred Stock are not stated and expressed in the Certificate of Incorporation, does hereby fix and herein state and express such designations, powers, preferences and relative and other special rights and the qualifications, limitations and restrictions thereof, as follows (all terms used herein which are defined in the Certificate of Incorporation shall be deemed to have the meanings provided therein): Section 1. DESIGNATION AND AMOUNT. The shares of such series shall be designated as "Series A Junior Participating Preferred Stock" and the number of shares constituting such series shall be 2,000,000. Section 2. DIVIDENDS AND DISTRIBUTIONS. (A) Subject to the prior and superior rights of the holders of any shares of any series of Preferred Stock ranking prior and superior to the shares of Series A Preferred Stock with respect to dividends, the holders of shares of Series A Preferred Stock shall be entitled to receive, when, as and if declared by the Board of Directors out of funds legally available for the purpose, quarterly dividends payable in cash on the first business day of January, April, July and October in each year (each such date being referred to herein as a "Quarterly Dividend Payment Date"), commencing on the first Quarterly Dividend Payment Date after the first issuance of a share or fraction of a share of Series A Preferred Stock, in an amount per share (rounded to the nearest cent) equal to the greater of (a) $.01 or (b) subject to the provision for adjustment hereinafter set forth, 100 times the aggregate per share amount of all cash dividends, and 100 times the aggregate per share amount (payable in kind) of all non-cash dividends or other distributions other than a dividend payable in shares of Common Stock or a subdivision of the outstanding shares of Common Stock (by reclassification or otherwise), declared on the Common Stock, par value $1.00 per share, of the Corporation (the "Common Stock") since the immediately preceding Quarterly Dividend Payment Date, or, with respect to the first Quarterly Dividend Payment Date, since the first issuance of any share or fraction of a share of Series A Preferred Stock. In the event the Corporation shall at any time after September 30, 1996 (the "Rights Declaration Date") (i) declare any dividend on Common Stock payable in shares of Common Stock, (ii) subdivide the outstanding Common Stock, or (iii) combine the outstanding Common Stock into a small number of shares, then in each case the amount to which holders of shares of Series A Preferred Stock were entitled immediately prior to such event under clause (b) of the preceding sentence shall be adjusted by multiplying such amount by a fraction the numerator of which is the number of shares of Common Stock outstanding immediately after such event and the denominator of which is the number of shares of Common Stock that were outstanding immediately prior to such event. (B) The Corporation shall declare a dividend or distribution on the Series A Preferred Stock as provided in paragraph (A) above immediately after it declares a dividend or distribution on the Common Stock (other than a dividend payable in shares of Common Stock); PROVIDED, HOWEVER, that, in the event no dividend or distribution shall have been declared on the Common Stock during the period between any Quarterly Dividend Payment Date and the next subsequent Quarterly Dividend Payment Date, subject to the prior and superior rights of the holders of any shares of any series of Preferred Stock ranking prior to and superior to the shares of Series A Preferred Stock with respect to dividends, a dividend of $.01 per share on the Series A A-2 Preferred Stock shall nevertheless by payable on such subsequent Quarterly Dividend Payment Date. (C) Dividends shall begin to accrue and be cumulative on outstanding shares of Series A Preferred Stock from the Quarterly Dividend Payment Data next preceding the date of issue of such shares of Series A Preferred Stock, unless the date of issue of such shares is prior to the record date for the first Quarterly Dividend Payment Date, in which case dividends on such shares shall begin to accrue from the date of issue of such shares, or unless the date of issue is a Quarterly Dividend Payment Date or is a date after the record date for the determination of holders of shares of Series A Preferred Stock entitled to receive a quarterly dividend and before such Quarterly Dividend Payment Date, in either of which events such dividends shall begin to accrue and be cumulative from such Quarterly Dividend Payment Date. Accrued but unpaid dividends shall not bear interest. Dividends paid on the shares of Series A Preferred Stock in an amount less than the total amount of such dividends at the time accrued and payable on such shares shall be allocated pro rata on a share-by-share basis among all such shares at the time outstanding. The Board of Directors may fix a record date for the determination of holders of shares of Series A Preferred Stock entitled to receive payment of a dividend or distribution declared thereon, which record date shall be no more than 60 days prior to the date fixed for the payment thereof. Section 3. VOTING RIGHTS. The holders of shares of Series A Preferred Stock shall have the following voting rights: (A) Subject to the provision for adjustment hereinafter set forth, each share of Series A Preferred Stock shall entitle the holder thereof to 100 votes on all matters submitted to a vote of the stockholders of the Corporation. In the event the Corporation shall at any time after the Rights Declaration Date (i) declare any dividend on Common Stock payable in shares of Common Stock, (ii) subdivide the outstanding Common Stock, or (iii) combine the outstanding Common Stock into a smaller number of shares, then in each such case the number of votes per share to which holders of shares of Series A Preferred Stock were entitled immediately prior to such event shall be adjusted by multiplying such number by a fraction the numerator of which is the number of shares of Common Stock outstanding immediately after such event and the denominator of which is the number of shares of Common Stock that were outstanding immediately prior to such event. (B) Except as otherwise provided herein or by law, the holders of shares of Series A Preferred Stock and the holders of shares of Common Stock shall vote collectively as one class on A-3 all matters submitted to a vote of stockholders of the Corporation. (C) (i) If at any time dividends on any Series A Preferred Stock shall be in arrears in an amount equal to six (6) quarterly dividends thereon, the occurrence of such contingency shall mark the beginning of a period (herein called a "default period") which shall extend until such time when all accrued and unpaid dividends for all previous quarterly dividend periods and for the current quarterly dividend period on all shares of Series A Preferred Stock then outstanding shall have been declared and paid or set apart for payment. During each default period, all holders of Preferred Stock (including holders of the Series A Preferred Stock) with dividends in arrears in an amount equal to six (6) quarterly dividends thereon, voting as a class, irrespective of series, shall have the right to elect two (2) Directors. (ii) During any default period, such voting right of the holders of Series A Preferred Stock may be exercised initially at a special meeting called pursuant to subparagraph (iii) of this Section 3(c) or at any annual meeting of stockholders, and thereafter at annual meetings of stockholders, provided that such voting right shall not be exercised unless the holders of ten percent (10%) in number of shares of Preferred Stock outstanding shall be present in person or by proxy. The absence of a quorum of the holders of Common Stock shall not affect the exercise by the holders of Preferred Stock of such voting rights. At any meeting at which the holders of Preferred Stock shall exercise such voting right initially during an existing default period, they shall have the right, voting as a class, to elect Directors to fill such vacancies, if any, in the Board of Directors as may then exist up to two (2) Directors or, if such right is exercised at an annual meeting, to elect two (2) Directors. If the number which may be so elected at any special meeting does not amount to the required number, the holders of the Preferred Stock shall have the right to make such increase in the number of Directors as shall be necessary to permit the election by them of the required number. After the holders of the Preferred Stock shall have exercised their right to elect Directors in any default period and during the continuance of such period, the number of Directors shall not be increased or decreased except by vote of the holders of Preferred Stock as herein provided or pursuant to the rights of any equity securities ranking senior to or PARI PASSU with the Series A Preferred Stock. (iii) Unless the holders of Preferred Stock shall, during an existing default period, have previously exercised A-4 their right to elect Directors, the Board of Directors may order, or any stockholder or stockholders owning in the aggregate not less than ten percent (10%) of the total number of shares of Preferred Stock outstanding, irrespective of series, may request, the calling of special meeting of the holders of Preferred Stock, which meeting shall thereupon be called by the Chairman of the Board, the President, a Vice-President or the Secretary of the Corporation. Notice of such meeting and of any annual meeting at which holders of Preferred Stock are entitled to vote pursuant to this paragraph (C)(iii) shall be given to each holder of record of Preferred Stock by mailing a copy of such notice to him or her at his or her last address as the same appears on the books of the Corporation. Such meeting shall be called for a time not earlier than 10 days and not later than 50 days after such order or request, or in default of the calling of such meeting within 50 days after such order or request, such meeting may be called on similar notice by any stockholder or stockholders owning in the aggregate not less than ten percent (10%) of the total number of shares of Preferred Stock outstanding. Notwithstanding the provisions of this paragraph (C)(iii), no such special meeting shall be called during the period within 50 days immediately preceding the date fixed for the next annual meeting of the stockholders. (iv) In any default period, the holders of Common Stock, and, if applicable, other classes of capital stock of the Corporation, shall continue to be entitled to elect the whole number of Directors until the holders of Preferred Stock shall have exercised their right to elect two (2) Directors voting as a class, after the exercise of which right (x) the Directors so elected by the holders of Preferred Stock shall continue in office until their successors shall have been elected by such holders or until the expiration of the default period, and (y) any vacancy in the Board of Directors may (except as provided in paragraph (C)(ii) of this Section 3) be filled by vote of a majority of the remaining Directors theretofore elected by the holders of the class of capital stock which elected the Director whose office shall have become vacant. References in this paragraph (C) to Directors elected by the holders of a particular class of stock shall include Directors appointed by such Directors to fill vacancies as provided in clause (y) of the foregoing sentence. (v) Immediately upon the expiration of a default period, (x) the right of the holders of Preferred Stock as a class to elect Directors shall cease, (y) the term of any Directors elected by the holders of Preferred Stock as a class shall terminate, and (z) the number of Directors shall be such number as may be provided for in the certificate of A-5 incorporation or by-laws irrespective of any increase made pursuant to the provisions of paragraph (C)(ii) of this Section 3 (such number being subject, however, to change thereafter in any manner provided by law or in the certificate of incorporation or by-laws). Any vacancies in the Board of Directors effected by the provisions of clauses (y) and (z) in the preceding sentence may be filled by a majority of the remaining Directors. (D) Except as set forth herein, holders of Series A Preferred Stock shall have no special voting rights and their consent shall not be required (except to the extent they are entitled to vote with holders of Common Stock as set forth herein) for taking any corporate action. Section 4. CERTAIN RESTRICTIONS. (A) Whenever quarterly dividends or other dividends or distributions payable on the Series A Preferred Stock as provided in Section 2 are in arrears, thereafter and until all accrued and unpaid dividends and distributions, whether or not declared, on shares of Series A Preferred Stock outstanding shall have been paid in full, the Corporation shall not: (i) declare or pay dividends on, make any other distributions on, or redeem or purchase or otherwise acquire for consideration any shares of capital stock ranking junior (either as to dividends or upon liquidation, dissolution or winding up) to the Series A Preferred Stock; (ii) declare or pay dividends on or make any other distributions on any shares of stock ranking on a parity (either as to dividends or upon liquidation, dissolution or winding up) with the Series A Preferred Stock, except dividends paid ratably on the Series A Preferred Stock and all such parity stock on which dividends are payable or in arrears in proportion to the total amounts to which the holders of all such shares are then entitled; (iii) redeem or purchase or otherwise acquire for consideration shares of any capital stock ranking on a parity (either as to dividends or upon liquidation, dissolution or winding up) with the Series A Preferred Stock, provided that the Corporation may at any time redeem, purchase or otherwise acquire shares of any such parity stock in exchange for shares of any capital stock of the Corporation ranking junior (either as to dividends or upon dissolution, liquidation or winding up) to the Series A Preferred Stock; or A-6 (iv) purchase or otherwise acquire for consideration any shares of Series A Preferred Stock, or any shares of capital stock ranking on a parity with the Series A Preferred Stock, except in accordance with a purchase offer made in writing or by publication (as determined by the Board of Directors) to all holders of such shares upon such terms as the Board of Directors, after consideration of the respective annual dividend rates and other relative rights and preferences of the respective series and classes, shall determine in good faith will result in fair and equitable treatment among the respective series or classes. (B) The Corporation shall not permit any subsidiary of the Corporation to purchase or otherwise acquire for consideration any shares of stock of the Corporation unless the Corporation could, under paragraph (A) of this Section 4, purchase or otherwise acquire such shares at such time and in such manner. Section 5. REACQUIRED SHARES. Any shares of Series A Preferred Stock purchased or otherwise acquired by the Corporation in any manner whatsoever shall be retired and cancelled promptly after the acquisition thereof. All such shares shall upon their cancellation become authorized but unissued shares of Preferred Stock and may be reissued as part of a new series of Preferred Stock to be created by resolution or resolutions of the Board of Directors, subject to the conditions and restrictions on issuance set forth herein. Section 6. LIQUIDATION, DISSOLUTION OR WINDING UP. (A) Upon any liquidation (voluntary or otherwise), dissolution or winding up of the Corporation, no distribution shall be made to the holders of shares of capital stock ranking junior (either as to dividends or upon liquidation, dissolution or winding up) to the Series A Preferred Stock unless, prior thereto, the holders of shares of Series A Preferred Stock shall have received $100 per share, plus an amount equal to accrued and unpaid dividends and distributions thereon, whether or not declared, to the date of such payment (the "Series A Liquidation Preference"). Following the payment of the full amount of the Series A Liquidation Preference, no additional distributions shall be made to the holders of shares of Series A Preferred Stock unless, prior thereto, the holders of shares of Common Stock shall have received an amount per share (the "Common Adjustment") equal to the quotient obtained by dividing (i) the Series A Liquidation Preference by (ii) 100 (as appropriately adjusted as set forth in subparagraph C below to reflect such events as stock splits, stock dividends and recapitalizations with respect to the Common Stock) (such number in clause (ii), A-7 the "Adjustment Number"). Following the payment of the full amount of the Series A Liquidation Preference and the Common Adjustment in respect of all outstanding shares of Series A Preferred Stock and Common Stock, respectively, and the payment of liquidation preferences of all other shares of capital stock which rank prior to or on a parity with Series A Preferred Stock, holders of Series A Preferred Stock and holders of shares of Common Stock shall receive their ratable and proportionate share of the remaining assets to be distributed in the ratio of the Adjustment Number to 1 with respect to such Preferred Stock and Common Stock, on a per share basis, respectively. (B) In the event, however, that there are not sufficient assets available to permit payment in full of the Series A Liquidation Preference and the liquidation preferences of all other series of Preferred Stock, if any, which rank on a parity with the Series A Preferred Stock, then such remaining assets shall be distributed ratably to the holders of such parity shares in proportion to their respective liquidation preferences. In the event, however, that there are not sufficient assets available to permit payment in full of the Common Adjustment, then such remaining assets shall be distributed ratably to the holders of Common Stock. (C) In the event the Corporation shall at any time after the Rights Declaration Date (i) declare any dividend on Common Stock payable in shares of Common Stock, (ii) subdivide the outstanding Common Stock, or (iii) combine the outstanding Common Stock into a smaller number of shares, then in each such case the Adjustment Number in effect immediately prior to such event shall be adjusted by multiplying such Adjustment Number by a fraction the numerator of which is the number of shares of Common Stock outstanding immediately after such event and the denominator of which is the number of shares of Common Stock that were outstanding immediately prior to such event. Section 7. CONSOLIDATION, MERGER, ETC. In case the Corporation shall enter into any consolidation, merger, combination or other transaction in which the shares of Common Stock are exchanged for or changed into other stock or securities, cash and/or any other property, then in any such case the shares of Series A Preferred Stock shall at the same time be similarly exchanged or changed into an amount per share (subject to the provision for adjustment hereinafter set forth) equal to 100 times the aggregate amount of capital stock, securities, cash and/or any other property (payable in kind), as the case may be, for which or into which each share of Common Stock is exchanged or changed. In the event the Corporation shall at any time after the Rights Declaration Date (i) declare any dividend on Common Stock payable in shares of Common Stock, (ii) subdivide the outstanding Common Stock, or A-8 (iii) combine the outstanding Common Stock into a smaller number of shares, then in each such case the amount set forth in the preceding sentence with respect to the exchange or change of shares of Series A Preferred Stock shall be adjusted by multiplying such amount by a fraction the numerator of which is the number of shares of Common Stock outstanding immediately after such event and the denominator of which is the number of shares of Common Stock that were outstanding immediately prior to such event. Section 8. NO REDEMPTION. The shares of Series A Preferred Stock shall not be redeemable. Section 9. RANKING. The Series A Preferred Stock shall rank junior to all other series of the Corporation's Preferred Stock as to the payment of dividends and the distribution of assets, whether or not upon the dissolution, liquidation or winding up of the Corporation, unless the terms of any such series shall provide otherwise. Section 10. AMENDMENT. The Certificate of Incorporation of the Corporation shall not be amended in any manner which would materially alter or change the powers, preferences or special rights of the Series A Preferred Stock so as to affect them adversely without the affirmative vote of the holders of a majority of the outstanding shares of Series A Preferred Stock, voting separately as a class. Section 11. FRACTIONAL SHARES. Series A Preferred Stock may be issued in fractions of a share which shall entitle the holder, in proportion to such holder's fractional shares, to exercise voting rights, receive dividends, participate in distributions and to have the benefit of all other rights of holders of Series A Preferred Stock. A-9 IN WITNESS WHEREOF, Allegiance Corporation has caused its corporate seal to be hereunto affixed and this certificate to be signed by _____________ ________, its _______, and the same to be attested to by ___________, its _________, this ____ day of September, 1996. ALLEGIANCE CORPORATION By: _____________________________ Name: Title: (Corporate Seal) Attest: - ------------------------ A-10 EXHIBIT B [Form of Rights Certificate] Certificate No. R- __________ Rights NOT EXERCISABLE AFTER SEPTEMBER 30, 2006 OR EARLIER IF REDEEMED BY THE COMPANY. THE RIGHTS ARE SUBJECT TO REDEMPTION, AT THE OPTION OF THE COMPANY, AT $.01 PER RIGHT ON THE TERMS SET FORTH IN THE RIGHTS AGREEMENT. UNDER CERTAIN CIRCUMSTANCES, RIGHTS BENEFICIALLY OWNED BY AN ACQUIRING PERSON (AS SUCH TERM IS DEFINED IN THE RIGHTS AGREEMENT) AND ANY SUBSEQUENT HOLDER OF SUCH RIGHTS MAY BECOME NULL AND VOID. [THE RIGHTS REPRESENTED BY THIS RIGHTS CERTIFICATE ARE OR WERE BENEFICIALLY OWNED BY A PERSON WHO WAS OR BECAME AN ACQUIRING PERSON OR AN AFFILIATE OR ASSOCIATE OF AN ACQUIRING PERSON (AS SUCH TERMS ARE DEFINED IN THE RIGHTS AGREEMENT). ACCORDINGLY, THIS RIGHTS CERTIFICATE AND THE RIGHTS REPRESENTED HEREBY MAY BECOME NULL AND VOID IN THE CIRCUMSTANCES SPECIFIED IN SECTION 7(e) OF SUCH AGREEMENT.] - ------------------- * The portion of the legend in brackets shall be inserted only if applicable and shall replace the preceding sentence. Rights Certificate ALLEGIANCE CORPORATION This certifies that _______________, or registered assigns, is the registered owner of the number of Rights set forth above, each of which entitles the owner thereof, subject to the terms, provisions and conditions of the Rights Agreement, dated as of September 30, 1996 (the "Rights Agreement"), between Allegiance Corporation, a Delaware corporation (the "Company"), and First Chicago Trust Company of New York , a New York corporation (the "Rights Agent"), to purchase from the Company at any time prior to 5:00 P.M. (Chicago time) on September 30, 2006 at the office or offices of the Rights Agent designated for such purpose, or its successors as Rights Agent, one one-hundredth of a fully paid, nonassessable share of Series A Junior Participating Preferred Stock (the "Preferred Stock") of the Company, at a purchase price of $65 per one one-hundredth of a share (the "Purchase Price"), upon presentation and surrender of this Rights Certificate with the Form of Election to Purchase and related Certificate duly executed. The number of Rights evidenced by this Rights Certificate (and the number of shares which may be purchased upon exercise thereof) set forth above, and the Purchase Price per share set forth above, are the number and Purchase Price as of September 30, 1996, based on the Preferred Stock as constituted at such date. The Company reserves the right to require prior to the occurrence of a Triggering Event (as such term is defined in the Rights Agreement) that, upon any exercise of Rights, a number of Rights be exercised so that only whole shares of Preferred Stock will be issued. Upon the occurrence of a Section 11(a)(ii) Event (as such term is defined in the Rights Agreement), if the Rights evidenced by this Rights Certificate are beneficially owned by (i) an Acquiring Person or an Affiliate or Associate of any such Acquiring Person (as such terms are defined in the Rights Agreement), (ii) a transferee of any such Acquiring Person, Associate or Affiliate, or (iii) under certain circumstances specified in the Rights Agreement, a transferee of a person who, after such transfer, became an Acquiring Person or an Affiliate or Associate of such Person, such Rights shall become null and void and no holder hereof shall have any right with respect to such Rights from and after the occurrence of such Section 11(a)(ii) Event. As provided in the Rights Agreement, the Purchase Price and the number and kind of shares of Preferred Stock or other securities which may be purchased upon the exercise of the Rights evidenced by this Rights Certificate are subject to modification B-2 and adjustment upon the happening of certain events, including Triggering Events. This Rights Certificate is subject to all of the terms, provisions and conditions of the Rights Agreement, which terms, provisions and conditions are hereby incorporated herein by reference and made a part hereof and to which Rights Agreement reference is hereby made for a full description of the rights, limitations of rights, obligations, duties and immunities hereunder of the Rights Agent, the Company and the holders of the Rights Certificates, which limitations of rights include the temporary suspension of the exercisability of such Rights under the specific circumstances set forth in the Rights Agreement. Copies of the Rights Agreement are on file at the above-mentioned office of the Rights Agent and are also available upon written request to the Rights Agent. This Rights Certificate, with or without other Rights Certificates, upon surrender at the principal office or offices of the Rights Agent designated for such purpose, may be exchanged for another Rights Certificate or Rights Certificates of like tenor and date evidencing Rights entitling the holder to purchase a like aggregate number of one one-hundredths of a share of Preferred Stock as the Rights evidenced by the Rights Certificates surrendered shall have entitled such holder to purchase. If this Rights Certificate shall be exercised in part, the holder shall be entitled to receive upon surrender hereof another Rights Certificate or Rights Certificates for the number of whole Rights not exercised. Subject to the provisions of the Rights Agreement, the Rights evidenced by this Certificate may, in each case at the option of the Company, be (i) redeemed by the Company at its option at a redemption price of $.01 per Right or (ii) exchanged in whole or in part for shares of Common Stock or other securities of the Company. Immediately upon the action of the Board of Directors of the Company authorizing redemption, the Rights will terminate and the only right of the holders of Rights will be to receive the redemption price. No fractional shares of Preferred Stock will be issued upon the exercise of any Right or Rights evidenced hereby (other than fractions which are integral multiples of one one-hundredth of a share of Preferred Stock, which may, at the election of the Company, be evidenced by depositary receipts), but in lieu thereof a cash payment will be made, as provided in the Rights Agreement. No holder of this Rights Certificate shall be entitled to vote or receive dividends or be deemed for any purpose the holder of shares of Preferred Stock or of any other securities of the Company which may at any time be issuable on the exercise B-3 hereof, nor shall anything contained in the Rights Agreement or herein be construed to confer upon the holder hereof, as such, any of the rights of a stockholder of the Company or any right to vote for the election of directors or upon any matter submitted to stockholders at any meeting thereof, or to give or withhold consent to any corporate action, or, to receive notice of meetings or other actions affecting stockholders (except as provided in the Rights Agreement), or to receive dividends or subscription rights, or otherwise, until the Right or Rights evidenced by this Rights Certificate shall have been exercised as provided in the Rights Agreement. This Rights Certificate shall not be valid or obligatory for any purpose until it shall have been countersigned manually or by facsimile signature by the Rights Agent. WITNESS the facsimile signature of the proper officers of the Company and its corporate seal. Dated as of _______ __, 19__ ATTEST: ALLEGIANCE CORPORATION _________________________ By: ________________________ Secretary Name: Title: Countersigned: FIRST CHICAGO TRUST COMPANY OF NEW YORK By: ____________________ Authorized Signature B-4 [Form of Reverse Side of Rights Certificate] FORM OF ASSIGNMENT (To be executed by the registered holder if such holder desires to transfer the Rights Certificate.) FOR VALUE RECEIVED ________________________________________ hereby sells, assigns and transfers unto __________________ ___________________________________________________________ (Please print name and address of transferee) this Rights Certificate, together with all right, title and interest therein, and does hereby irrevocably constitute and appoint __________ Attorney, to transfer the within Rights Certificate on the books of the within-named Company, with full power of substitution. Dated: ___________________, _____ _____________________________ Signature Signature Guaranteed: CERTIFICATE The undersigned hereby certifies by checking the appropriate boxes that: (1) this Rights Certificate [ ] is [ ] is not being sold, assigned and transferred by or on behalf of a Person who is or was an Acquiring Person or an Affiliate or Associate of an Acquiring Person (as such terms are defined pursuant to the Rights Agreement); (2) after due inquiry and to the best knowledge of the undersigned, it [ ] did [ ] did not acquire the Rights evidenced by this Rights Certificate from any Person who is, was or subsequently became an Acquiring Person or an Affiliate or Associate of an Acquiring Person. Dated: _______, _____ ____________________________ Signature Signature Guaranteed: NOTICE B-5 The signature to the foregoing Assignment and Certificate must correspond to the name as written upon the face of this Rights Certificate in every particular, without alteration or enlargement or any change whatsoever. B-6 FORM OF ELECTION TO PURCHASE (To be executed if holder desires to exercise Rights represented by the Rights Certificate.) TO: ALLEGIANCE CORPORATION The undersigned hereby irrevocably elects to exercise ______ Rights represented by this Rights Certificate to purchase the shares of Preferred Stock issuable upon the exercise of the Rights (or such other securities of the Company or of any other person which may be issuable upon the exercise of the Rights) and requests that certificates for such shares (or other securities) be issued in the name of and delivered to: Please insert social security or other identifying number ________________________________________________________________________________ (Please print name and address) ________________________________________________________________________________ If such number of Rights shall not be all the Rights evidenced by this Rights Certificate, a new Rights Certificate for the balance of such Rights shall be registered in the name of and delivered to: B-7 Please insert social security or other identifying number ________________________________________________________________________________ (Please print name and address) ________________________________________________________________________________ Dated: _____________, ____ ________________________________________ Signature Signature Guaranteed: CERTIFICATE The undersigned hereby certifies by checking the appropriate boxes that: (1) the Rights evidenced by this Rights Certificate [ ] are [ ] are not being exercised by or on behalf of a Person who is or was an Acquiring Person or an Affiliate or Associate of an Acquiring Person (as such terms are defined pursuant to the Rights Agreement); (2) after due inquiry and to the best knowledge of the undersigned, it [ ] did [ ] did not acquire the Rights evidenced by this Rights Certificate from any Person who is, was or became an Acquiring Person or an Affiliate or Associate of an Acquiring Person. Dated: _________, ___ __________________________________ Signature Signature Guaranteed: NOTICE The signature to the foregoing Election to Purchase and Certificate must correspond to the name as written upon the face of this Rights Certificate in every particular, without alteration or enlargement or any change whatsoever. B-8 Exhibit C SUMMARY OF RIGHTS TO PURCHASE PREFERRED STOCK On September 16, 1996, the Board of Directors of Allegiance Corporation (the "Company") declared a dividend distribution of one Right for each outstanding share of the Company's common stock, $1.00 par value per share ("Common Stock"), to stockholders of record at the close of business on September 30, 1996. Each Right entitles the registered holder to purchase from the Company a unit consisting of one one-hundredth of a share (a "Unit") of Series A Junior Participating Preferred Stock, par value $.01 per share (the "Preferred Stock"), at a Purchase Price of $65 per Unit, subject to adjustment. The description and terms of the Rights are set forth in a Rights Agreement (the "Rights Agreement") dated as of September 30, 1996 between the Company and First Chicago Trust Company of New York, as Rights Agent. Initially, the Rights will be attached to all Common Stock certificates representing shares then outstanding, and no separate Rights certificates will be distributed. The Rights will separate from the Common Stock and the Distribution Date will occur upon the earlier of (i) 10 days following a public announcement that a person or group of affiliated or associated persons (an "Acquiring Person") has acquired, or obtained the right to acquire, beneficial ownership of 15% or more of the outstanding shares of Common Stock (the "Stock Acquisition Date"), or (ii) 10 business days (or such later date as may be determined by action of the Board of Directors prior to such time as any person or group becomes an Acquiring Person) following the commencement of a tender offer or exchange offer that would result in a person or group beneficially owning 15% or more of such outstanding shares of Common Stock. Until the Distribution Date, (i) the Rights will be evidenced by the Common Stock certificates and will be transferred with and only with such Common Stock certificates, (ii) new Common Stock certificates issued on or after September 30, 1996 will contain a notation incorporating the Rights Agreement by reference and (iii) the surrender for transfer of any certificates for Common Stock outstanding will also constitute the transfer of the Rights associated with the Common Stock represented by such certificate. Pursuant to the Rights Agreement, the Company reserves the right to require prior to the occurrence of a Triggering Event (as defined below) that, upon any exercise of Rights, a number of Rights be exercised so that only whole shares of Preferred Stock will be issued. The Rights are not exercisable until the Distribution Date and will expire at the close of business on September 30, 2006, unless earlier redeemed by the Company as described below. As soon as practicable after the Distribution Date, Rights certificates will be mailed to holders of record of the Common Stock as of the close of business on the Distribution Date and, thereafter, the separate Rights certificates alone will represent the Rights. Except as otherwise provided in the Rights Agreement, only shares of Common Stock issued prior to the Distribution Date will be issued with Rights. In the event that, at any time following the Distribution Date, a person or group becomes an Acquiring Person, each holder of a Right will thereafter have the right to receive, upon exercise, Common Stock having a value equal to two times the exercise price of the Right. If an insufficient number of shares of Common Stock is authorized for issuance, then the Board would be required to substitute cash, property or other securities of the Company for the Common Stock. Notwithstanding any of the foregoing, following the occurrence of the event set forth in this paragraph, all rights that are, or (under certain circumstances specified in the Rights Agreement) were, beneficially owned by any Acquiring Person will be null and void. However, Rights are not exercisable following the occurrence of the event set forth in this paragraph until such time as the Rights are no longer redeemable by the Company as set forth below. For example, at an exercise price of $65 per Right, each Right not owned by an Acquiring Person (or by certain related parties) following an event set forth in the preceding paragraph would entitle its holder to purchase $130 worth of Common Stock (or other consideration, as noted above) for $65. Assuming that the Common Stock had a per share value of $26 at such time, the holder of each valid Right would be entitled to purchase five shares of Common Stock for $65. In the event that, at any time following the Stock Acquisition Date, (i) the Company is acquired in a merger or other business combination transaction in which the Company is not the surviving corporation, or (ii) 50% or more of the Company's assets or earning power is sold or transferred, each holder of a Right (except Rights which previously have been voided as set forth above) shall thereafter have the right to receive, upon exercise, common stock of the acquiring company having a value equal to two times the exercise price of the Right. The events set forth in this paragraph and in the second preceding paragraph are referred to as the "Triggering Events." In addition, the Rights may be exchanged, in whole or in part, for shares of the Common Stock, or shares of Preferred Stock C-2 having essentially the same value or economic rights as such shares. The purchase price payable, and the number of Units of Preferred Stock or other securities or property issuable, upon exercise of the Rights are subject to adjustment from time to time to prevent dilution (i) in the event of a stock dividend on, or a subdivision, combination or reclassification of, the Preferred Stock, (ii) if holders of the Preferred Stock are granted certain rights or warrants to subscribe for Preferred Stock or convertible securities at less than the current market price of the Preferred Stock, or (iii) upon the distribution to holders of the Preferred Stock of evidences of indebtedness or assets (excluding regular quarterly cash dividends) or of subscription rights or warrants (other than those referred to above). With certain exceptions, no adjustment in the Purchase Price will be required until cumulative adjustments amount to at least 1% of the Purchase Price. No fractional Units will be issued and, in lieu thereof, an adjustment in cash will be made based on the market price of the Preferred Stock on the last trading date prior to the date of exercise. At any time after any person or group becomes an Acquiring Person and prior to the acquisition by such person or group of 50% or more of the outstanding shares of Common Stock, the Board of Directors of the Company may exchange the Rights (other than Rights owned by such person or group which will have become void), in whole or in part, at an exchange ratio of one share of Common Stock, or one one-hundredth of a share of Preferred Stock (or of a share of a class or series of the Company's preferred stock having equivalent rights, preferences and privileges), per Right (subject to adjustment). In general, the Company may redeem the Rights in whole, but not in part, at a price of $.01 per Right (payable in cash, Common Stock or other consideration deemed appropriate by the Board of Directors) at any time until ten days following the Stock Acquisition Date. Immediately upon the action of the Board of Directors authorizing any redemption, the Rights will terminate and the only right of the holders of Rights will be to receive the redemption price. Until a Right is exercised, the holder thereof, as such, will have no rights as a stockholder of the Company, including, without limitation, the right to vote or to receive dividends. While the distribution of the Rights will not result in the recognition of taxable income by stockholders or the Company, stockholders may, depending upon the circumstances, recognize taxable income in the event that the Rights become exercisable for Common Stock (or other consideration of the C-3 Company) or for common stock of the acquiring company as set forth above. The terms of the Rights may be amended by the Board of Directors of the Company without the consent of the holders of the Rights, including an amendment to lower certain thresholds described above to not less than the greater of (i) the sum of .001% and the largest percentage of the outstanding shares of Common Stock then known to the Company to be beneficially owned by any person or group of affiliated or associated persons and (ii) 10%, except that from and after such time as any person or group of affiliated or associated persons becomes an Acquiring Person no such amendment may adversely affect the interests of the holders of the Rights. A copy of the Rights Agreement is available free of charge from the Rights Agent. This description of the Rights does not purport to be complete and is qualified in its entirety by reference to the Rights Agreement, which is incorporated herein by reference. C-4 (Page intentionally left blank) C-5 -----END PRIVACY-ENHANCED MESSAGE-----