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Filed pursuant to Rule 424(b)(2)
Registration No. 333-54310
PROSPECTUS SUPPLEMENT
(TO PROSPECTUS DATED JUNE 1, 2001)
$550,000,000
[QUEST DIAGNOSTICS LOGO]
$275,000,000 6 3/4% SENIOR NOTES DUE 2006
$275,000,000 7 1/2% SENIOR NOTES DUE 2011
----------------------
We will pay interest on the notes on January 12 and July 12 of each year,
beginning January 12, 2002. The 6 3/4% notes will mature on July 12, 2006. The
7 1/2% notes will mature on July 12, 2011. We may redeem some or all of the
notes at any time at redemption prices described in this prospectus supplement.
The notes will be senior unsecured obligations of ours and will rank
equally with our other unsecured senior obligations. Each of our domestic wholly
owned subsidiaries that operate clinical laboratories in the United States will
guarantee the notes. Each guarantee will be a senior unsecured obligation of the
subsidiary guarantor issuing such guarantee and will rank equally with the other
senior unsecured obligations of such subsidiary guarantor. The notes will be
issued only in registered form in denominations of $1,000.
INVESTING IN THE NOTES INVOLVES RISKS THAT ARE DESCRIBED IN THE "RISK
FACTORS" SECTION BEGINNING ON PAGE S-11 OF THIS PROSPECTUS SUPPLEMENT.
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6 3/4% SENIOR 7 1/2% SENIOR
NOTES DUE 2006 NOTES DUE 2011
----------------------- -----------------------
PER NOTE TOTAL PER NOTE TOTAL
-------- ----- -------- -----
Public offering price (1).................... 99.432% $273,438,000 99.598% $273,894,500
Underwriting discount........................ .6% $1,650,000 .65% $1,787,500
Proceeds, before expenses, to Quest
Diagnostics................................ 98.832% $271,788,000 98.948% $272,107,000
(1) Plus accrued interest from June 27, 2001, if settlement occurs after
that date
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if this
prospectus supplement or the accompanying prospectus is truthful or complete.
Any representation to the contrary is a criminal offense.
The notes will be ready for delivery in book entry form only through The
Depository Trust Company on or about June 27, 2001.
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Joint Book-Running Managers
MERRILL LYNCH & CO. CREDIT SUISSE FIRST BOSTON
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BANC OF AMERICA SECURITIES LLC UBS WARBURG
WACHOVIA SECURITIES, INC. BNY CAPITAL MARKETS, INC.
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The date of this prospectus supplement is June 20, 2001.
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TABLE OF CONTENTS
PAGE
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PROSPECTUS SUPPLEMENT
Summary..................................................... S-2
Risk Factors................................................ S-11
Cautionary Statement For Purposes of the "Safe Harbor"
Provisions of The Private Securities Litigation Reform Act
of 1995................................................... S-19
Use of Proceeds............................................. S-22
Capitalization.............................................. S-23
Description of Other Indebtedness........................... S-24
Selected Historical Financial Data.......................... S-25
Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. S-28
Business.................................................... S-43
Description of Notes........................................ S-58
United States Federal Income Tax Considerations............. S-69
Underwriting................................................ S-72
Notice to Canadian Residents................................ S-73
Legal Matters............................................... S-74
Experts..................................................... S-74
Where You Can Find More Information......................... S-75
PROSPECTUS
About This Prospectus....................................... ii
Quest Diagnostics Incorporated.............................. ii
Risk Factors................................................ 1
Ratio of Earnings to Fixed Charges and Earnings to Combined
Fixed Charges and Preferred Stock Dividends............... 9
Use of Proceeds............................................. 9
Where You Can Find More Information......................... 10
Forward-Looking Statements.................................. 11
Securities We May Issue..................................... 12
Description of Debt Securities.............................. 16
Description of the Preferred Stock and the Depositary Shares
Representing Fractional Shares of Preferred Stock......... 28
Description of Common Stock................................. 33
Selling Stockholder......................................... 36
Plan of Distribution........................................ 37
Validity of the Securities.................................. 38
Independent Accountants..................................... 38
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You should rely only on the information contained or incorporated by
reference in this prospectus supplement and the accompanying prospectus. We have
not, and the underwriters have not, authorized any other person to provide you
with different information. If anyone provides you with different or
inconsistent information, you should not rely on it. We are not, and the
underwriters are not, making an offer to sell these securities in any
jurisdiction where the offer or sale is not permitted. You should assume that
the information appearing in this prospectus supplement, the accompanying
prospectus and the documents incorporated by reference is accurate only as of
their respective dates. Our business, financial condition, results of operations
and prospects may have changed since these dates.
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SUMMARY
This summary highlights selected information appearing elsewhere in this
prospectus supplement and may not contain all of the information that is
important to you. You should carefully read this prospectus supplement and the
accompanying prospectus in their entirety, including the documents incorporated
by reference. All references to "notes" refer to the 6 3/4% senior notes due
2006 and the 7 1/2% senior notes due 2011, collectively, unless otherwise
specified. All references to Adjusted EBITDA refer to our EBITDA adjusted as
described under "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Adjusted EBITDA." All references to number of common
shares and per common share amounts have been restated to reflect our
two-for-one stock split which became effective May 31, 2001.
OUR COMPANY
We are the nation's leading provider of diagnostic testing and related
services for the healthcare industry, with net revenues and Adjusted EBITDA of
approximately $3.4 billion and $484 million, respectively, for the twelve month
period ended March 31, 2001. We offer a broad range of clinical laboratory
testing services used by physicians in the detection, diagnosis, evaluation,
monitoring and treatment of diseases and other medical conditions. We have a
more extensive national network of laboratories and patient service centers than
our competitors and revenues nearly double those of our nearest competitor. We
have the leading market share in clinical laboratory testing and esoteric
testing, including molecular diagnostics, as well as non-hospital based anatomic
pathology services and testing for drugs of abuse.
We currently process over 100 million requisitions each year. Each
requisition form accompanies a patient specimen, indicating the tests to be
performed and the party to be billed for the tests. Our customers include
physicians, hospitals, managed care organizations, employers, governmental
institutions and other independent clinical laboratories.
We have a network of principal laboratories located in approximately 30
major metropolitan areas throughout the United States, several joint venture
laboratories, approximately 150 smaller "rapid response" laboratories and
approximately 1,300 patient service centers. We also operate a leading esoteric
testing laboratory and development facility known as Nichols Institute located
in San Juan Capistrano, California as well as laboratory facilities in Mexico
City, Mexico and near London, England.
In addition to our laboratory testing business, our clinical trials
business is one of the leading providers of testing to support clinical trials
of new pharmaceuticals worldwide. We also collect and analyze laboratory,
pharmaceutical and other data through our Quest Informatics division in order to
help pharmaceutical companies with their marketing and disease management
efforts, as well as to help healthcare customers better manage the health of
their patients.
On August 16, 1999, we completed the acquisition of SmithKline Beecham
Clinical Laboratories, Inc., or SBCL. We estimate that the successful execution
of our business strategy, along with the expected benefits of the SBCL
acquisition, will yield an annual earnings growth rate greater than 30% over the
next several years, before special charges.
BUSINESS STRATEGY
Our mission is to be recognized by our customers and employees as the best
provider of comprehensive and innovative diagnostic testing, information and
related services. The principal components of this strategy are to:
- CAPITALIZE ON OUR LEADING POSITION WITHIN THE LABORATORY TESTING
MARKET: We are the leader in our core clinical laboratory testing
business, and we have the most extensive national clinical laboratory
testing network. Our network of approximately 1,300 patient service
centers, 150 rapid response laboratories and principal laboratories in
approximately 30 major metropolitan areas enables us to serve managed
care organizations, hospitals, physicians, employers and other healthcare
providers and their patients throughout the United States. We believe
that customers will increasingly seek to utilize laboratory testing
companies that have a nationwide presence and
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offer a comprehensive range of services and that, as a result, we will be
able to profitably enhance our market position.
- BECOME A LEADING PROVIDER OF MEDICAL INFORMATION: We believe that we
have the largest private clinical laboratory results database in the
world. This database continues to grow as we perform tests related to
over 100 million requisitions each year. We believe that this database
has substantial value since a significant portion of all healthcare
decisions and spending are impacted by laboratory testing results. Large
customers of clinical laboratories are increasingly interested in
integrating our clinical laboratory data with other healthcare
information to answer quality, marketing and finance related questions.
In addition, pharmaceutical manufacturers are increasing their use of
this type of data to expand their marketing efforts, as well as to
promote disease management. In order to meet these emerging needs for
medical information, our Quest Informatics division has developed a
portfolio of information products, including Internet-based health and
information services, that provide customers secure access to our
extensive database, along with medical and analytical expertise. We also
provide customized services for pharmaceutical and health product
companies to support the development and implementation of their business
strategies. We intend to maintain the trust of patients and providers by
ensuring the security and confidentiality of individual patient results.
- COMPETE THROUGH PROVIDING THE HIGHEST QUALITY SERVICES: We intend to
become recognized as the quality leader in the healthcare services
industry. We are implementing a Six Sigma initiative throughout our
organization. Six Sigma is an approach to management that requires a
thorough understanding of customer needs and requirements, rigorous
tracking and measuring of services, and training of employees in
methodologies so they can be held accountable for improving results.
During 2000, we provided training to our employees in the Six Sigma
methodology and introduced high-impact quality improvement projects
throughout our organization. Two of our laboratories and our diagnostics
kits facility have achieved ISO-9001 certification and three of our
laboratories have achieved ISO-9002 certification, international
standards for quality management systems. Our Nichols Institute was the
first clinical laboratory in North America to achieve ISO-9001
certification. Several additional regional laboratories are currently
pursuing ISO-9002 certification.
- CONTINUE TO LEAD INNOVATION: We intend to remain a leading innovator in
the clinical laboratory industry by continuing to introduce new tests,
technology and services. As the industry leader with the largest and
broadest network, we believe we are the best channel for developers of
new equipment and tests to introduce their products to the marketplace.
Through our relationship with the academic community and pharmaceutical
and biotechnology firms, we believe that we are one of the leaders in
transferring technical innovation to the market. For example, we recently
developed and introduced an HIV-genotyping test which predicts the drug
resistance of HIV-infected patients and will help commercialize
HIV-phenotyping tests developed by third parties, which help identify the
most appropriate combination therapy for HIV-infected patients. We intend
to continue to collaborate with and invest in emerging medical technology
companies that develop and commercialize novel diagnostics,
pharmaceutical and device technologies. We also intend to continue to
introduce new tests that we develop at Nichols Institute, one of the
leading esoteric testing laboratories in the world and the largest
provider of molecular diagnostics testing in the United States. We
believe that, with the unveiling of the human genome, new genes and the
association of these genes with disease will continue to be discovered at
an accelerating pace, leading to research that will result in ever more
complex and thorough diagnostic testing. We believe that we are well
positioned to capture this growth.
- PURSUE STRATEGIC GROWTH OPPORTUNITIES: We intend to continue to leverage
our network in order to capitalize on targeted strategic growth
opportunities both inside and outside our core laboratory business. These
opportunities are more fully described under "Strategic Growth
Opportunities" and include continuing to make selective regional
acquisitions, capturing growth in the areas of genomics and specialty
testing, expanding into the direct-to-consumer market by providing
testing and medical information services directly to consumers,
leveraging our leading anatomic pathology
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business into higher margin areas and expanding our clinical trials
testing and other services to the pharmaceutical and biotechnology
industries.
- LEVERAGE OUR SATISFACTION MODEL: Our business philosophy is that
satisfied employees lead to satisfied customers, which in turn benefits
our stockholders. We regularly survey our employees and customers and
follow up on their concerns. We emphasize skills training for all
employees and leadership training for our supervisory employees. Most
importantly, we are committed to treating each employee with dignity and
respect and trust them to treat our customers the same way. We believe
that our management approach to our employees, together with our
competitive pay and benefits, helps improve employee satisfaction and
performance, enabling us to provide superior services to our customers.
STRATEGIC GROWTH OPPORTUNITIES
In addition to expanding our core clinical laboratory business through
internal growth and pursuing our strategy to become a leading provider of
medical information, we intend to continue to leverage our network in order to
capitalize on targeted growth opportunities both inside and outside our core
laboratory testing business.
- SELECTIVE REGIONAL ACQUISITIONS: The clinical laboratory industry is
still fragmented. Historically, regional acquisitions fueled our growth.
We expect to focus future clinical laboratory acquisition efforts on
laboratories that can be integrated into our existing laboratories
without impeding the integration of SBCL's operations, such as our
acquisition of the assets of Clinical Laboratories of Colorado, LLC in
February 2001. This strategy will enable us to reduce costs and gain
other benefits from the elimination of redundant facilities and
equipment, and reductions in personnel. We may also consider acquisitions
of ancillary businesses as part of our overall growth strategy.
- GENOMICS AND SPECIALTY TESTING: We intend to remain a leading innovator
in the clinical laboratory industry by continuing to introduce new tests,
technology and services. We estimate that the current United States
market in gene based testing is approximately $1 billion per year. We
believe that we have the largest gene based testing business in the
United States, with more than $225 million in annual revenues, and that
this business will grow by at least 25% per year over the next several
years. We believe that, with the unveiling of the human genome, the
discovery of new genes and the association of these genes with disease
will result in more complex and thorough diagnostic testing. We believe
that we are well positioned to capture this growth. We intend to focus on
commercializing diagnostic applications of discoveries in the areas of
functional genomics, or the analysis of genes and their functions, and
proteomics, or the discovery of new proteins made possible by the human
genome project.
- MEDICAL INFORMATION: We believe that we have the largest private
clinical laboratory results database in the world. This database
continues to grow as we perform tests related to over 100 million
requisitions each year. We believe that this database has substantial
value since a significant portion of all healthcare decisions and
spending are impacted by laboratory testing results. Large customers of
clinical laboratories are increasingly interested in integrating our
clinical laboratory data with other healthcare information to answer
quality, marketing and finance related questions. In addition,
pharmaceutical manufacturers are increasing their use of this type of
data to expand their marketing efforts as well as to promote disease
management. In order to meet these emerging needs for medical
information, our Quest Informatics division has developed a portfolio of
information products, including Internet-based health and information
services, that provide customers secure access to our extensive database,
along with medical and analytical expertise. We also provide customized
services for pharmaceutical and health product companies to support the
development and implementation of their business strategies. We intend to
maintain the trust of patients and providers by ensuring the security and
confidentiality of individual patient results.
- CONSUMER HEALTH: Currently, almost all the testing we perform is ordered
directly by a physician, who then receives the test results. However,
consumers are becoming increasingly interested in
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managing their own health and health records. We believe that consumers
will increasingly want to order clinical laboratory tests themselves,
including tests that measure levels of cholesterol, PSA (prostate
specific antigen), glucose, hemoglobin A1c (diabetes monitoring), and TSH
(thyroid disorders), even if they are responsible for paying for the
tests themselves. Instead of first having to go to their treating
physician to order a test, consumers could order testing services
directly through the Internet or our network of patient service centers,
which already services over 80,000 patients each day. We have initiated a
pilot program providing direct testing access to consumers in several
test markets and have recently expanded this program into additional test
markets. A consumer-focused web site will be integral to the awareness
and delivery of information content surrounding the testing services
provided in our facilities. Laws in a number of states restrict the
ability of consumers to order tests directly and permit test results to
be provided only to the ordering physician. In order to serve consumers
in these states and comply with applicable law, we are utilizing a
physician network to facilitate ordering of tests and reporting of
results. We believe that consumer demand may result, over time, in the
re-examination of regulatory restrictions on consumers' ability to order
clinical tests and to receive test results directly.
- ANATOMIC PATHOLOGY: While we are the leading provider of non-hospital
based anatomic pathology services in the United States, we have
traditionally been strongest in the less profitable segments of the
business, such as pap smears. We intend to expand our anatomic pathology
business into higher profit margin areas. For example, we have currently
converted more than 50% of our pap smear business to ThinPrep(R), a
higher quality, higher margin product offering. We believe that the
current United States market for anatomic pathology services is
approximately $5 billion per year and that we perform approximately $300
million of such services each year, representing a market position
significantly less than our share of the entire clinical laboratory
market.
- PHARMACEUTICAL AND BIOTECHNOLOGY SERVICES: Recently, the global
pharmaceutical industry has invested approximately $50 billion annually
in research and development of new products and additional amounts in
support of their commercialization. This spending is expected to grow
about 10% per annum in support of the increasing need for new, innovative
pharmaceutical products. Beyond our existing clinical trials business,
profitable growth opportunities exist in the following areas:
post-marketing (Phase IV) research, patient recruitment, genomics (drug
discovery), over-the-counter drug testing and pharmaceutical sales and
product detailing.
PRINCIPAL EXECUTIVE OFFICES
Our principal executive offices are located at One Malcolm Avenue,
Teterboro, New Jersey 07608. Our telephone number at that location is (201)
393-5000.
RECENT DEVELOPMENTS
OUR REFINANCING PLAN
This offering is part of our plan to refinance a majority of our long-term
debt in order to reduce overall interest costs. As part of this plan, we also
commenced a cash tender offer for all of our outstanding 10 3/4% senior
subordinated notes due 2006 and intend to enter into a new senior unsecured
credit facility of up to $500 million. As part of these transactions, we expect
to incur a special charge of up to $45 million, of which approximately one-half
is anticipated to be payable in cash related to the tender offer premium and
consent solicitation, and the settlement of our existing interest rate swap
agreements.
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Tender Offer
On Thursday, May 24, 2001, we commenced a cash tender offer for all of our
outstanding 10 3/4% senior subordinated notes due 2006 and a consent
solicitation to amend the terms of the indenture under which those notes were
issued. As of June 7, 2001, we had received tenders for approximately 98%, or
$146.5 million, of the outstanding $150 million aggregate principal amount of
notes and the requisite consents from the noteholders to amend the indenture to
eliminate substantially all of its restrictive provisions. Consummation of the
tender offer is subject to certain conditions, including the receipt of adequate
long-term financing to pay for the cost of the tender offer and consent
solicitation.
New Senior Unsecured Credit Facility
We recently received commitments, subject to certain conditions, for a new
$500 million senior unsecured credit facility from a group of banks led by Banc
of America and UBS Warburg. The new senior unsecured credit facility consists of
a five-year $325 million revolving credit facility and a five-year term loan
facility of $175 million. The new senior unsecured credit facility will be
guaranteed by each of our subsidiaries that will guarantee the notes offered
pursuant to this prospectus supplement. The closing of this offering of notes is
conditioned on the closing of our new senior unsecured credit facility. For a
more detailed description of our new senior unsecured credit facility, see
"Description of Other Indebtedness."
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THE OFFERING
The following is a brief summary of some of the terms of this offering. For
a more complete description of the terms of the notes, see "Description of
Notes" in this prospectus supplement.
Issuer.............................. Quest Diagnostics Incorporated
Notes offered....................... $275,000,000 aggregate principal amount
of 6 3/4% senior notes due 2006.
$275,000,000 aggregate principal amount
of 7 1/2% senior notes due 2011.
Maturities.......................... 6 3/4% senior notes due July 12, 2006.
7 1/2% senior notes due July 12, 2011.
Interest payment dates.............. January 12 and July 12, beginning
January 12, 2002.
Guarantees.......................... The notes will be fully and
unconditionally guaranteed, jointly and
severally, by each of our domestic
wholly owned subsidiaries that operate
clinical laboratories in the United
States.
Ranking............................. The notes will be senior unsecured
obligations of ours and will rank
equally with our other senior unsecured
obligations. Each guarantee will be a
senior unsecured obligation of the
subsidiary guarantor issuing such
guarantee and will rank equally with
the other senior unsecured obligations
of such subsidiary guarantor. The notes
and the guarantees will effectively
rank junior to all liabilities of our
subsidiaries that are not guarantors.
The notes and the guarantees will also
effectively be subordinated to any
secured obligations of ours or our
subsidiary guarantors as to the assets
securing such obligations.
As of March 31, 2001, after giving pro
forma effect to this offering of notes,
the closing of the new senior unsecured
credit facility and application of the
net proceeds from these two financing
transactions:
- we and our subsidiary guarantors
would have had outstanding $758
million of long-term debt
(including the current portion
thereof), of which $33 million
would have been secured; and
- our subsidiaries that are not
guarantors would have had
outstanding $256 million of debt
(including the current portion
thereof), all of which was
incurred under our receivables
credit facility. For a more
detailed description, see
"Description of Other
Indebtedness."
Optional redemption................. We may redeem some or all of the notes,
at any time, at the redemption prices
described in this prospectus
supplement. For a more detailed
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description, see "Description of
Notes -- Optional Redemption."
Covenants........................... The indenture governing the notes will
contain covenants that, among other
things, will limit our ability and the
ability of our subsidiary guarantors
to:
- create certain liens;
- enter into certain sale and
leaseback transactions;
- consolidate, merge or transfer
all or substantially all of our
assets and the assets of our
subsidiaries on a consolidated
basis; and
- incur indebtedness of
non-guarantor subsidiaries.
These covenants are subject to
important exceptions and
qualifications, which are described in
this prospectus supplement. For a more
detailed description, see "Description
of Notes."
Use of proceeds..................... We estimate that the net proceeds from
this offering of notes will be
approximately $542 million. We intend
to use these proceeds, together with
our cash on hand and the proceeds from
our new senior unsecured credit
facility to:
- make payments of approximately
$163 million under the cash
tender offer and consent
solicitation for our 10 3/4%
senior subordinated notes due
2006, assuming all of those
notes are tendered; and
- repay all amounts outstanding
under our existing senior
secured credit facility. At May
31, 2001, we had $584 million of
borrowings outstanding under our
existing senior secured credit
facility.
Risk factors........................ See "Risk Factors" and the other
information in this prospectus
supplement for a discussion of factors
you should carefully consider before
deciding to invest in the notes.
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SUMMARY SELECTED HISTORICAL FINANCIAL DATA
THREE MONTHS ENDED
MARCH 31, YEAR ENDED DECEMBER 31,
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2001 2000 2000 1999(a) 1998
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(IN THOUSANDS)
OPERATIONS DATA:
Net revenues........................... $ 882,553 $ 857,479 $3,421,162 $2,205,243 $1,458,607
Costs and expenses:
Cost of services..................... 529,065 529,037 2,056,237 1,379,989 896,793
Selling, general and
administrative..................... 252,802 249,835 1,001,443 643,440 445,885
Interest, net........................ 22,700 29,763 113,092 61,450 33,403
Amortization of intangible assets.... 11,100 11,940 45,665 29,784 21,697
Provisions for restructuring and
other special charges.............. -- -- 2,100(b) 73,385(c) --
Minority share of income............. 1,116 2,136 9,359 5,431 2,017
Other, net........................... 298 (428) (7,715) (2,620) 4,951
---------- ---------- ---------- ---------- ----------
Total................................ 817,081 822,283 3,220,181 2,190,859 1,404,746
---------- ---------- ---------- ---------- ----------
Income before taxes and extraordinary
loss................................. 65,472 35,196 200,981 14,384 53,861
Income (loss) before extraordinary
loss................................. 35,748 17,809 104,948(d) (1,274)(e) 26,885
Net income (loss)...................... 35,748 17,809 102,052(d) (3,413)(e) 26,885
BALANCE SHEET DATA (AT END OF PERIOD):
Cash and cash equivalents.............. $ 120,730 $ 28,487 $ 171,477 $ 27,284 $ 202,908
Accounts receivable, net............... 509,272 484,225 485,573 539,256 220,861
Total assets........................... 2,903,235 2,838,635 2,864,536 2,878,481 1,360,240
Long-term debt......................... 758,481 1,157,899 760,705 1,171,442 413,426
Total debt............................. 1,023,511 1,205,628 1,026,113 1,216,877 464,870
Preferred stock........................ 1,000 1,000 1,000 1,000 1,000
Common stockholders' equity............ 1,099,216 896,030 1,030,795 862,062 566,930
OTHER DATA:
Net cash provided by operating
activities........................... $ 40,731 $ 33,157 $ 369,455 $ 249,535 $ 141,382
Net cash used in investing
activities........................... (90,268) (20,477) (48,015) (1,107,990) (39,720)
Net cash provided by (used in)
financing activities................. (1,210) (11,477) (177,247) 682,831 (60,415)
Bad debt expense....................... 55,283 62,646 234,694 142,333 89,428
Rent expense........................... 19,950 19,259 76,515 59,073 46,259
Capital expenditures................... 43,615 17,613 116,450 76,029 39,575
Adjusted EBITDA(f)..................... 122,438 98,144 459,380 237,038 158,609
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(a) On August 16, 1999, we completed the acquisition of SBCL. Consolidated
operating results for 1999 include the results of operations of SBCL
subsequent to the closing of the acquisition. See Note 3 to the consolidated
financial statements, included in our Form 10-K for the year ended December
31, 2000, which is incorporated by reference into this prospectus
supplement.
(b) During 2000, we recorded a net special charge of $2.1 million. This net
charge resulted from a $13.4 million charge related to the costs to cancel
certain contracts that we believed were not economically viable as a result
of the SBCL acquisition, and which were principally associated with the
cancellation of a co-marketing agreement for clinical trials testing
services, which charges were in large part offset by a reduction in reserves
attributable to a favorable resolution of outstanding claims for
reimbursements associated with billings of certain tests.
(c) During 1999, we recorded special charges principally incurred in conjunction
with the acquisition and planned integration of SBCL. See Note 7 to the
consolidated financial statements, included in our Form 10-K for the year
ended December 31, 2000, which is incorporated by reference into this
prospectus supplement.
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(d) During 2000, we prepaid $155.0 million of debt under our existing senior
secured credit facility. The extraordinary loss represented $4.8 million
($2.9 million, net of tax) of deferred financing costs which were
written-off in connection with the prepayment.
(e) In conjunction with the acquisition of SBCL, we repaid the entire amount
outstanding under our then existing credit agreement. The extraordinary loss
recorded in 1999 represented $3.6 million ($2.1 million, net of tax) of
deferred financing costs which were written-off in connection with the
extinguishment of the credit agreement.
(f) Adjusted EBITDA represents income (loss) before extraordinary loss, income
taxes, net interest expense, depreciation, amortization and special items.
Special items include the provisions for restructuring and other special
charges reflected in the selected historical financial data above, $8.9
million of costs related to the integration of SBCL which were included in
operating costs and expensed as incurred in 2000, a $3.0 million gain
related to the sale of an investment in 1999 and a $2.5 million charge
recorded in selling, general and administrative expenses in 1998 related to
the consolidation of our laboratory network announced in 1997. Adjusted
EBITDA is presented and discussed because management believes that Adjusted
EBITDA is a useful adjunct to net income and other measurements under
accounting principles generally accepted in the United States since it is a
meaningful measure of a company's performance and ability to meet its future
debt service requirements, fund capital expenditures and meet working
capital requirements. Adjusted EBITDA is not a measure of financial
performance under accounting principles generally accepted in the United
States and should not be considered as an alternative to (1) net income (or
any other measure of performance under generally accepted accounting
principles) as a measure of performance or (2) cash flows from operating,
investing or financing activities as an indicator of cash flows or as a
measure of liquidity.
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RISK FACTORS
You should carefully consider the risks described below before making a
decision to invest in our notes. Some of the following factors relate
principally to our business and the industry in which we operate. Other factors
relate principally to your investment in the notes. The risks and uncertainties
described below are not the only ones facing our company. Additional risks and
uncertainties not presently known to us or that we currently deem immaterial may
also adversely affect our business and operations.
If any of the matters included in the following risks were to occur, our
business, financial condition, results of operations, cash flows or prospects
could be materially adversely affected. In such case, you may lose all or part
of your original investment.
OUR SUBSTANTIAL DEBT MAY IMPAIR OUR FINANCIAL AND OPERATING FLEXIBILITY.
We have a significant amount of debt. As of March 31, 2001, on a pro forma
basis we would have had approximately $1 billion of debt outstanding. We would
also have had approximately $312 million of available borrowings under our new
$325 million senior unsecured revolving credit facility. Set forth in the table
below for each of the next five years, on a pro forma basis, is the aggregate
amount of principal, interest and total payment obligations with respect to our
debt, including capital leases. The amounts in this table were calculated on a
pro forma basis to reflect, as of March 31, 2001, the completion of this $550
million offering of notes, the incurrence of $175 million of term loans under
the new senior unsecured credit facility, each at market rates, and the
application of the net proceeds from these two financing transactions, together
with cash on hand to repay our existing senior secured credit facility in its
entirety and to make the payments required to complete the tender offer and
consent solicitation for our 10 3/4% senior subordinated notes due 2006,
assuming all of those notes were tendered. We have also assumed that the current
interest rate swap agreements related to our outstanding variable rate debt are
terminated and we did not enter into any new interest rate swap agreements.
TWELVE MONTHS
ENDED DECEMBER 31, PRINCIPAL INTEREST TOTAL
------------------ --------- -------- -----
(IN THOUSANDS)
2001........................... $23,627 $77,228 $100,855
2002........................... $59,431 $68,362 $127,793
2003........................... $35,530 $64,295 $ 99,825
2004........................... $35,400 $62,142 $ 97,542
2005........................... $41,963 $59,776 $101,739
The above table excludes our principal payment obligations with respect to
our receivables credit facility. As further described under "Description of
Other Indebtedness -- Receivables Credit Facility," the receivables credit
facility is classified as a current liability and therefore would be included in
the principal and total payment obligation amounts for the twelve months ended
December 31, 2001. The amount outstanding under the receivables credit facility
as of March 31, 2001 was $256 million.
Based on our net exposure to interest rate changes, an assumed 10% increase
in interest rates would result in an increase of approximately $2 million in
annual interest payments during each of the next five twelve-month periods
ending December 31, 2005. The primary interest rate exposures on our debt
carrying variable interest rates are with respect to interest rates on United
States dollars as quoted in the London interbank market.
We and our subsidiaries may be able to incur additional indebtedness in the
future. If new debt is added to our current debt levels, an even greater portion
of our cash flow will be needed to satisfy our debt service obligations. As a
result, we would be more vulnerable to general adverse economic and industry
conditions and the other risks associated with high levels of indebtedness.
These risks could limit our ability to make payments under the notes.
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Our debt agreements contain various restrictive covenants. All these
restrictions, together with our high level of debt, could:
- limit our ability to use operating cash flow in other areas of our
business, because we must use a portion of these funds to make principal
and interest payments on our debt; and
- increase our vulnerability to interest-rate fluctuations because the debt
under our credit facility is at variable interest rates.
Our ability to make principal and interest payments on our debt and to
satisfy our other debt obligations will depend on our ability to generate cash
in the future. If we do not generate sufficient cash flow to meet our debt
service requirements, we may need to seek additional financing. This may make it
more difficult for us to obtain financing on terms that are acceptable to us, or
at all. For additional information regarding our debt see "Description of Other
Indebtedness."
SECURED INDEBTEDNESS AND BORROWINGS BY SUBSIDIARIES THAT ARE NOT GUARANTORS WILL
BE EFFECTIVELY SENIOR TO THE NOTES.
The notes and the guarantees are senior unsecured obligations and therefore
will be effectively subordinated to any of our or our subsidiary guarantors'
secured obligations to the extent of the value of the assets securing such
obligations. The indenture does not limit the amount of indebtedness that we and
any of our subsidiary guarantors can incur, but does limit the amount of secured
indebtedness pursuant to the covenant described under the heading "Description
of Notes -- Limitation on Liens." This covenant is subject to important
exceptions described under such heading. As of March 31, 2001, after giving pro
forma effect to this offering of notes, the closing of the new senior unsecured
credit facility and application of the net proceeds from these two financing
transactions, we and our subsidiary guarantors would have had outstanding $33
million of secured long-term debt (including the current portion thereof).
We conduct our operations through subsidiaries, which generate a
substantial portion of our operating income and cash flow. As a result,
distributions or advances from our subsidiaries are a major source of funds
necessary to meet our debt service and other obligations. Contractual
provisions, laws or regulations, as well as any subsidiary's financial condition
and operating requirements, may limit our ability to obtain cash required to pay
our debt service obligations, including payments on the notes. The notes will be
structurally subordinated to all existing and future obligations of our
subsidiaries (unless such subsidiaries are subsidiary guarantors), including
claims with respect to trade payables. In addition, the guarantees of our
subsidiary guarantors will be structurally subordinated to all existing and
future obligations of the subsidiary guarantors' subsidiaries (such subsidiaries
are also subsidiary guarantors), including claims with respect to trade
payables. This means that holders of our notes as guaranteed by our subsidiary
guarantors will have a junior position to the claims of creditors of our direct
and indirect subsidiaries which are not subsidiary guarantors on the assets and
earnings of such subsidiaries. Our non-guarantor subsidiaries are limited in the
amount of indebtedness they are permitted to incur pursuant to the covenant
described under "Description of Notes -- Limitation of Subsidiary Indebtedness
and Preferred Stock." This covenant is subject to important exceptions described
under such heading. In addition, the guarantees of our subsidiary guarantors may
be released in certain circumstances, which are described under the heading
"Description of Notes -- Guarantees." As of March 31, 2001, after giving pro
forma effect to this offering of notes, the closing of the new senior unsecured
credit facility and application of the net proceeds from these two financing
transactions, our non-guarantor subsidiaries would have had outstanding $256
million of debt (including the current portion thereof) all of which was
incurred under our existing receivables credit facility. For a more detailed
description of our receivables credit facility, see "Description of Other
Indebtedness -- Receivables Credit Facility."
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FEDERAL AND STATE LAWS PERMIT A COURT TO VOID A GUARANTEE ISSUED BY ANY OF OUR
SUBSIDIARIES IF THE COURT FINDS THE GUARANTEE TO CONSTITUTE A FRAUDULENT
CONVEYANCE.
Our obligations under the notes are guaranteed by our subsidiaries to the
extent described in this prospectus supplement. These guarantees are subject to
attack under various federal and state fraudulent conveyance laws enacted for
the protection of creditors.
The issuance of a guarantee by any of our subsidiaries will constitute a
fraudulent conveyance if:
- the guarantee was incurred by the subsidiary with the intent to hinder,
delay or defraud any present or future creditor; or
- the subsidiary did not receive fair consideration for issuing the
guarantee and such subsidiary (1) was insolvent or rendered insolvent by
reason of the issuance of the guarantee, (2) was engaged or about to
engage in a business or transaction for which the remaining assets of the
subsidiary constituted unreasonably small capital to carry on its
business or (3) intended to incur debts beyond its ability to pay such
debts as they matured.
Generally, an entity will be considered insolvent if:
- the sum of its debts is greater than the fair value of its property;
- the present fair value of its assets is less than the amount that it will
be required to pay on its existing debts as they become due; or
- it cannot pay its debts as they become due.
If a court finds a guarantee issued by a subsidiary of ours to constitute a
fraudulent conveyance, the court could give a lower priority to, or subordinate,
the claims of the notes against this subsidiary to the claims of other creditors
of this subsidiary. In addition, a court could void all or part of the
guarantee. To the extent the guarantee issued by a subsidiary of ours was voided
as a fraudulent conveyance, the holders of our notes guaranteed by our
subsidiary guarantors would cease to have any claim against the subsidiary and
would be creditors solely of Quest Diagnostics and any other subsidiary
guarantor which was not found to have made a fraudulent conveyance. See
"Description of Notes -- Guarantees."
INTEGRATING OUR BUSINESS OPERATIONS WITH THOSE BUSINESSES THAT WE HAVE ACQUIRED
OR MAY ACQUIRE IN THE FUTURE MAY BE DIFFICULT AND MAY HAVE A MATERIAL ADVERSE
IMPACT ON OUR BUSINESS.
We are in the process of integrating into our company the operations of
SBCL, which we acquired in August 1999. While we have substantially completed
the transition of our business affected by this integration, including
consolidation of redundant facilities and infrastructure and administrative and
other duplicative functions, certain other activities, such as standardization
of information systems, will continue beyond 2001. Given the large size of
SBCL's operations and the complexity of the clinical laboratory testing
business, we expect that it will take as long as three years from the date of
this prospectus supplement before we fully complete the process. In addition, in
February 2001 we acquired the assets of Clinical Laboratories of Colorado, LLC.
We may also acquire additional clinical laboratories in the future as part of
our growth strategy. Each of these acquisitions involves the integration of
separate companies that have previously operated independently and have
different corporate cultures. The process of combining such companies may be
disruptive to their businesses and may cause an interruption of, or a loss of
momentum in, such businesses as a result of the following difficulties, among
others:
- loss of key customers or employees;
- inconsistencies in standards, controls, procedures and policies among the
companies being combined make it more difficult to implement and
harmonize company-wide financial, accounting, billing, information and
other systems;
- failure to maintain the quality of services that such companies have
historically provided;
- coordination of geographically diverse organizations; and
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- diversion of management's attention from the day-to-day business of our
company as a result of the need to deal with the above disruptions and
difficulties and the added costs of dealing with such disruptions.
In particular, since most of our clinical laboratory testing is performed under
arrangements that are terminable at will or on short notice, any such
interruption of or deterioration in our services may result in a customer's
decision to stop using us for clinical laboratory testing.
OUR ACQUISITIONS MAY NOT PRODUCE THE ANTICIPATED BENEFITS.
Even if we are able to successfully integrate the operations of SBCL into
our company, or the operations of other companies or businesses we may acquire
in the future, we may not be able to realize the benefits that we expect to
result from such integrations, either in monetary terms or a timely manner. We
continue to expect that the SBCL integration will result in approximately $150
million of annual synergies to be achieved by the end of 2002. During 2000, we
estimate that we realized approximately $50 million of these synergies, and at
the end of 2000 we had achieved an annual rate of synergies approaching $100
million. We expect that during 2001 we will realize additional synergies driven
by cost reductions, and we anticipate that by the end of 2001 we will achieve an
annual rate of synergies of $100 million to $120 million. During the first
quarter of 2001, we estimate that we realized approximately $25 million of these
synergies, and at the end of the first quarter of 2001 we had achieved an annual
rate of synergies of approximately $100 million. However, we may not continue to
realize these synergies or we may not realize any of the additional anticipated
benefits, either at all or in a timely manner.
FAILURE TO TIMELY OR ACCURATELY BILL FOR OUR SERVICES COULD HAVE A MATERIAL
ADVERSE IMPACT ON OUR NET REVENUES AND BAD DEBT EXPENSE.
Billing for laboratory services is extremely complicated. Laboratories must
bill various payers, such as patients, insurance companies, Medicare, Medicaid,
physicians and employer groups, all of which have different billing
requirements. In addition, auditing for compliance with applicable laws and
regulations as well as internal compliance policies and procedures adds further
complexity to the billing process. Among many other factors complicating billing
are:
- pricing differences between our fee schedules and the reimbursement rates
of payers;
- disputes with payers as to which party is responsible for payment; and
- disparity in coverage among various carriers.
We believe that most of our bad debt expense, which was 7% of our net
revenues in 2000, is the result of several non-credit-related issues, primarily
missing or incorrect billing information on requisitions received from
healthcare providers. In general, we perform the requested tests and report test
results even if the billing information is incorrect or incomplete. We
subsequently attempt to contact the provider to obtain any missing information
or rectify incorrect billing information. Missing or incorrect information on
requisitions adds complexity to and slows the billing process, creates backlogs
of unbilled requisitions, and generally increases the aging of accounts
receivable. When all issues relating to the missing or incorrect information are
not resolved in a timely manner, the related receivables are written-off to the
allowance for doubtful accounts.
FAILURE IN OUR INFORMATION TECHNOLOGY SYSTEMS, INCLUDING FAILURES RESULTING FROM
OUR SYSTEMS CONVERSIONS, COULD SIGNIFICANTLY INCREASE TURN-AROUND TIME AND
OTHERWISE DISRUPT OUR OPERATIONS, WHICH COULD REDUCE OUR CUSTOMER BASE AND
RESULT IN LOST NET REVENUES.
Our success depends, in part, on the continued and uninterrupted
performance of our information technology, or IT, systems. Our computer systems
are vulnerable to damage from a variety of sources, including telecommunications
failures, malicious human acts and natural disasters. Moreover, despite network
security measures, some of our servers are potentially vulnerable to physical or
electronic break-ins, computer viruses and similar disruptive problems. Despite
the precautions we have taken,
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unanticipated problems affecting our systems could cause failures in our IT
systems. Sustained or repeated system failures that interrupt our ability to
process test orders, deliver test results or perform tests in a timely manner
would adversely affect our reputation and result in a loss of customers and net
revenues.
In addition, we are in the process of standardizing our systems as a result
of the SBCL acquisition. This process is difficult and will take several years
to complete. SBCL had standardized billing and laboratory information systems
throughout its laboratory network, which are different from our existing
systems. We are developing and implementing an enhanced laboratory information
system and an enhanced billing system that combine the functionality of the
existing systems of Quest Diagnostics and SBCL. We expect that the development
and implementation of the enhanced systems will take several years. During
systems conversions of this type, workflow may be temporarily interrupted, which
may cause backlogs. In addition, the implementation process, including the
transfer of databases and master files to new data centers, presents significant
conversion risks which could cause failures in our IT systems and disrupt our
operations.
THE DEVELOPMENT OF NEW, MORE COST-EFFECTIVE TESTS THAT CAN BE PERFORMED BY
PHYSICIANS IN THEIR OFFICES OR BY PATIENTS COULD NEGATIVELY IMPACT OUR TESTING
VOLUME AND NET REVENUES.
The diagnostics testing industry is faced with technology advances and new
product introductions. Advances in technology may lead to the development of
more cost-effective tests that can be performed outside of an independent
clinical laboratory such as (1) point-of-care tests that can be performed by
physicians in their offices and (2) home testing that can be performed by
patients. Development of such technology and its use by our customers would
reduce the demand for our laboratory testing services and negatively impact our
revenues. Currently, most clinical laboratory testing is categorized as "high"
or "moderate" complexity, and thereby subject to extensive and costly
regulation, under the Clinical Laboratory Improvement Amendments of 1988, or
CLIA. The cost of compliance with CLIA makes it not cost effective for most
physicians to operate clinical laboratories in their offices; other laws limit
the ability of physicians to have ownership in a laboratory and refer tests to
such laboratory. However, manufacturers of laboratory equipment and test kits
could seek to increase their sales by marketing point of care laboratory
equipment to physicians and by selling test kits approved for home use to both
physicians and patients. Over-the-counter diagnostics tests are automatically
deemed to be "waived" tests under CLIA, which may then be performed in physician
office laboratories as well as by patients in their homes with minimal
regulatory oversight. The Food and Drug Administration, or FDA, has regulatory
responsibility over instruments, test kits, reagents and other devices used by
clinical laboratories and recently has taken responsibility from Center for
Disease Control, or CDC, for test classification. Increased approval of home
test kits could lead to increased testing by physicians in their offices, which
could affect our market for laboratory testing services and negatively impact
our revenues.
EFFORTS BY THIRD PARTY PAYERS, INCLUDING THE GOVERNMENT, TO REDUCE UTILIZATION
AND PRICING COULD HAVE A MATERIAL ADVERSE IMPACT ON OUR NET REVENUES AND
PROFITABILITY.
Government payers, such as Medicare and Medicaid, as well as private
payers, including managed care organizations, have taken steps and may continue
to take steps to control the cost, utilization and delivery of healthcare
services, including clinical laboratory services. Primarily as a result of
recent reimbursement rate reductions and utilization controls implemented by
government regulations, the percentage of our aggregate net revenues derived
from Medicare programs declined from 20% in 1995 to 13% in 2000. For a more
detailed description of the developments in government regulations, we urge
investors to read carefully our Form 10-K for the year ended December 31, 2000,
which is incorporated by reference into this prospectus supplement.
In addition to changes in government reimbursement programs, private
payers, including managed care organizations, are demanding discounted fee
structures or the assumption by clinical laboratory service providers of all or
a portion of the financial risk through capitated payment contracts. Under
capitated payment contracts, clinical laboratories receive a fixed monthly fee
per individual enrolled with the managed care organization for all laboratory
tests performed during the month. In particular, managed
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care organizations, which have significant bargaining power, frequently
negotiate for capitated payment contracts. In 2000, we derived approximately 9%
of our revenues from capitated payment contracts with managed care
organizations. As the number of patients covered by managed care organizations
increased during the 1990s, more patients were covered under capitated payment
contracts, which resulted in reduced opportunities for higher priced
fee-for-service business and adversely affected our profit margin. During each
of the past two years, the number of patients covered under capitated payment
contracts has decreased in the United States.
We expect efforts to impose reduced reimbursements and more stringent cost
controls by government and other payers to continue. If we cannot offset
additional reductions in the payments we receive for our services by reducing
costs, increasing test volume and/or introducing new procedures, it could have a
material adverse impact on our net revenues and profitability.
FAILURE TO PROVIDE A HIGHER QUALITY OF SERVICE THAN THAT OF OUR COMPETITORS
COULD HAVE A MATERIAL ADVERSE IMPACT ON OUR NET REVENUES.
While there has been significant consolidation in the clinical laboratory
testing business in recent years, it remains a fragmented and highly competitive
industry. We compete with three types of laboratory providers:
hospital-affiliated laboratories, other independent clinical laboratories and
physician-office laboratories. Most physicians have admitting privileges or
other relationships with hospitals as part of their medical practice. Almost all
hospitals maintain an on-site laboratory to perform routine clinical testing on
their in-patients and out-patients. Many hospitals leverage their relationships
with community physicians and encourage the physicians to send their outreach
(non-hospital patients) testing to the hospital's laboratory. In addition,
hospitals that own physician practices generally require the physicians to refer
tests to the hospital's affiliated laboratories. As a result of the relationship
between hospitals and community physicians, we compete against
hospital-affiliated laboratories primarily based on quality of service. Our
failure to provide service superior to hospital-affiliated laboratories and
other laboratories could have a material adverse impact on our net revenues.
IF WE FAIL TO COMPLY WITH EXTENSIVE LAWS AND REGULATIONS, WE COULD SUFFER
PENALTIES OR BE REQUIRED TO MAKE SIGNIFICANT CHANGES TO OUR OPERATIONS.
We are subject to extensive and frequently changing federal, state and
local laws and regulations. We believe that, based on our experience with
government settlements and public announcements by various government officials,
the federal government continues to strengthen its position on healthcare fraud.
In addition, legislative provisions relating to healthcare fraud and abuse give
federal enforcement personnel substantially increased funding, powers and
remedies to pursue suspected fraud and abuse. While we believe that we are in
material compliance with all applicable laws, many of the regulations applicable
to us, including those relating to billing and reimbursement of tests and those
relating to relationships with physicians and hospitals, are vague or indefinite
and have not been interpreted by the courts. They may be interpreted or applied
by a prosecutorial, regulatory or judicial authority in a manner that could
require us to make changes in our operations, including our billing practices.
If we fail to comply with applicable laws and regulations, we could suffer civil
and criminal penalties, including the loss of licenses or our ability to
participate in Medicare, Medicaid and other federal and state healthcare
programs.
During the mid-1990s, Quest Diagnostics and SBCL settled government claims
that primarily involved industry-wide billing and marketing practices that both
companies believed to be lawful. The aggregate amount of the settlements for
these claims exceeded $500 million. The federal or state governments may bring
additional claims based on new theories as to our practices that we believe to
be in compliance with law. The federal government has substantial leverage in
negotiating settlements since the amount of potential fines far exceeds the
rates at which we are reimbursed and the government has the remedy of excluding
a non-compliant provider from participation in the Medicare program, which
represented approximately 13% of our consolidated net revenues during 2000.
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There remain pending against Quest Diagnostics and SBCL private claims
arising out of the settlement of the government claims, including several class
actions brought against SBCL. We believe that our reserves with respect to such
claims are adequate. However, we understand that there may be pending qui tam,
or "whistle blower," claims brought by former employees or others as to which we
have not been provided with a copy of the complaint and accordingly cannot
determine the extent of any potential liability. Liabilities with respect to the
claims that we know are pending against SBCL are generally covered by an
indemnification from SmithKline Beecham, a subsidiary of GlaxoSmithKline. The
indemnities we obtained from SmithKline Beecham in connection with liabilities
from government investigations do not cover governmental claims that arise after
the closing date of the SBCL acquisition, private claims unrelated to the
governmental claims or investigations subject to SBCL indemnification, and any
consequential or incidental damages relating to billing claims, including losses
of revenues and profits as a consequence of exclusion from participation in
federal or state healthcare programs. For additional information, see our most
recent annual report on Form 10-K for the year ended December 31, 2000 and our
quarterly report on Form 10-Q for the quarter ended March 31, 2001, each of
which is incorporated by reference into this prospectus supplement.
THE FINAL PRIVACY REGULATIONS THAT WILL TAKE EFFECT IN 2003 AND PROPOSED FEDERAL
SECURITY REGULATIONS UNDER THE HEALTH INSURANCE PORTABILITY AND ACCOUNTABILITY
ACT OF 1996 WILL INCREASE OUR COSTS AND COULD LIMIT OUR ABILITY TO PROVIDE
MEDICAL INFORMATION.
Pursuant to the Health Insurance Portability and Accountability Act of
1996, or HIPAA, on December 28, 2000, the Secretary of the Department of Health
and Human Services, or HHS, issued final regulations that established
comprehensive federal standards with respect to the use and disclosure of
protected health information by health plans, healthcare providers and
healthcare data clearinghouses. The regulations establish a complex regulatory
framework on a variety of subjects, including:
- the circumstances under which disclosures and uses of protected health
information require a general patient consent, specific authorization by
the patient, or no patient consent or authorization;
- the content of notices of privacy practices for protected health
information;
- patients' rights to access, amend, and receive an accounting of the
disclosures and uses of protected health information; and
- administrative, technical and physical safeguards required of entities
that use or receive protected health information.
The regulations establish a "floor" and do not supersede state laws that
are more stringent. Therefore, we are required to comply with both federal
privacy standards and varying state privacy laws. In addition, for healthcare
data transfers relating to citizens of other countries, we will need to comply
with the laws of other countries. The federal privacy regulations became
effective in April 2001 for healthcare providers, but healthcare providers have
until April 2003 to comply with the regulations. In addition, final standards
for electronic transactions were issued in August 2000 and will become effective
in October 2002. These regulations provide uniform standards for code sets
(codes representing medical procedures and laboratory tests and diagnosis codes
which are used, among others, in connection with the identification and billing
of medical procedures and laboratory tests), electronic claims, remittance
advice, enrollment, eligibility and other electronic transactions. Finally, the
proposed security and electronic signature regulations issued by the Secretary
of HHS in August 1998 pursuant to HIPAA are expected to be finalized this year.
HIPAA provides for significant fines and other penalties for wrongful disclosure
of protected health information. Compliance with the HIPAA requirements, when
finalized, will require significant capital and personnel resources from all
healthcare organizations, including ours. However, we will not be able to
estimate the cost of complying with all of these regulations, which we expect to
be significant, until after all the regulations are finalized. These
regulations, when finalized and effective, could also restrict our ability to
use our laboratory database to provide medical information for purposes other
than payment, treatment or healthcare operations, except for information that
does not identify a patient.
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OUR TESTS AND BUSINESS PROCESSES MAY INFRINGE ON THE INTELLECTUAL PROPERTY
RIGHTS OF OTHERS, WHICH COULD CAUSE US TO ENGAGE IN COSTLY LITIGATION, PAY
SUBSTANTIAL DAMAGES OR PROHIBIT US FROM SELLING OUR TESTS.
Other companies or individuals, including our competitors, may obtain
patents or other property rights that would prevent, limit or interfere with our
ability to develop, perform or sell our tests or operate our business. As a
result, we may be involved in intellectual property litigation and we may be
found to infringe on the proprietary rights of others, which could force us to
do one or more of the following:
- cease developing, performing or selling products or services that
incorporate the challenged intellectual property;
- obtain and pay for licenses from the holder of the infringed intellectual
property right;
- redesign or reengineer our tests;
- change our business processes; or
- pay substantial damages, court costs and attorneys' fees, including
potentially increased damages for any infringement held to be willful.
Patents generally are not issued until several years after an application
is filed. The possibility that, before a patent is issued to a third party, we
may be performing a test or other activity covered by the patent, is not a
defense to an infringement claim. Thus, tests that we develop could become the
subject of infringement claims if a third party obtains a patent covering those
tests.
Infringement and other intellectual property claims, whether with or
without merit, can be expensive and time-consuming to litigate. In addition, any
requirement to re-engineer our tests or change our business processes could
substantially increase our costs, force us to interrupt product sales or delay
new test releases. In the past, we have settled several disputes regarding our
alleged infringement of intellectual property of third parties. We are currently
involved in settling several additional disputes. We do not believe that
resolution of these disputes will have a material adverse effect on our
operations or financial condition. However, infringement claims could arise in
the future as patents could be issued on tests or processes that we may be
performing, particularly in such emerging areas as gene based testing and other
specialty testing.
PROFESSIONAL LIABILITY LITIGATION COULD HAVE AN ADVERSE IMPACT ON OUR CLIENT
BASE AND REPUTATION.
As a general matter, providers of clinical laboratory testing services may
be subject to lawsuits alleging negligence or other similar legal claims. These
suits could involve claims for substantial damages. Any professional liability
litigation could also have an adverse impact on our client base and reputation.
We maintain liability insurance for professional liability claims, subject to
maximum limits and self-insured retention. Our management believes that the
levels of coverage are adequate to cover currently estimated exposures.
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CAUTIONARY STATEMENT FOR PURPOSES OF THE "SAFE HARBOR" PROVISIONS
OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
Some statements and disclosures in this prospectus supplement and the
accompanying prospectus, including, in each case, the documents incorporated by
reference, are forward-looking statements. Forward-looking statements include
all statements that do not relate solely to historical or current facts and can
often be identified by the use of words such as "may," "believe," "will,"
"expect," "project," "estimate," "anticipate," "plan" or "continue". These
forward-looking statements are based on our current plans and expectations and
are subject to a number of risks and uncertainties that could significantly
cause our plans and expectations, including actual results, to differ materially
from the forward-looking statements. The Private Securities Litigation Reform
Act of 1995 provides a "safe harbor" for forward-looking statements to encourage
companies to provide prospective information about their companies without fear
of litigation.
We would like to take advantage of the "safe harbor" provisions of the
Litigation Reform Act in connection with the forward-looking statements included
in this prospectus supplement and the accompanying prospectus, including, in
each case, the documents incorporated by reference. Investors are cautioned not
to unduly rely on such forward-looking statements when evaluating the
information presented in these documents. The following list of important
factors could cause our actual financial results to differ materially from those
projected, forecasted or estimated by us in forward-looking statements.
(a) Heightened competition, including increased pricing pressure and
competition from hospitals for testing for non-patients. See
"Business -- Competition."
(b) Impact of changes in payer mix, including any shift from traditional,
fee-for-service medicine to capitated managed-cost healthcare. See
"Business -- Payers and Customers -- Customers -- Managed Care
Organizations."
(c) Adverse actions by government or other third-party payers, including
unilateral reduction of fee schedules payable to us and an increase of
the practice of managed care organizations to negotiate for exclusive
contracts that involve aggressively priced capitated payments. See
"Business -- Payers and Customers -- Customers -- Managed Care
Organizations" and see "Business -- Regulation of Reimbursement for
Clinical Laboratory Services" in our Form 10-K for the year ended
December 31, 2000, which is incorporated by reference into this
prospectus supplement.
(d) The impact on our volume and collected revenue or general or
administrative expenses resulting from our compliance with Medicare and
Medicaid administrative policies and requirements of third-party
payers. These include:
- the requirements of Medicare carriers to provide diagnosis codes for
many commonly ordered tests and the likelihood that third-party payers
will increasingly adopt similar requirements;
- the policy of HCFA to limit Medicare reimbursement for tests contained
in automated chemistry panels to the amount that would have been paid
if only the covered tests, determined on the basis of demonstrable
"medical necessity," had been ordered;
- continued inconsistent practices amount the different local carriers
administering Medicare; and
- proposed changes to the ABN form by HCFA.
See "Business -- Billing" and see "Business -- Regulation of
Reimbursement for Clinical Laboratory Services" in our Form 10-K for
the year ended December 31, 2000, which is incorporated by reference
into this prospectus supplement.
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(e) Adverse results from pending or future government investigations or
private actions. These include, in particular:
- significant monetary damages and/or exclusion from the Medicare and
Medicaid programs and/or other significant litigation matters;
- the absence of indemnification from Corning Incorporated for private
claims unrelated to the indemnified government claims or
investigations and for private claims that are not settled by December
31, 2001. See "Business -- Government Investigations and Related
Claims" in our Form 10-K for the year ended December 31, 2000, which
is incorporated by reference into this prospectus supplement;
- the absence of indemnification from SmithKline Beecham for:
(1) governmental claims against SBCL that arise after August 16, 1999,
and (2) private claims unrelated to the indemnified governmental
claims or investigations; and
- the absence of indemnification for consequential damages from either
SmithKline Beecham or Corning.
(f) Failure to obtain new customers at profitable pricing or failure to
retain existing customers, and reduction in tests ordered or specimens
submitted by existing customers.
(g) Failure to efficiently integrate acquired clinical laboratory
businesses, or to efficiently integrate clinical laboratory businesses
from joint ventures and alliances with hospitals, and the costs
related to any such integration, or to retain key technical and
management personnel. See "Business -- Acquisition and Integration."
(h) Inability to obtain professional liability insurance coverage or a
material increase in premiums for such coverage. See
"Business -- Insurance."
(i) Denial of CLIA certification or any other license to any of our
clinical laboratories under the CLIA standards, by HCFA for Medicare
and Medicaid programs or other federal, state and local agencies. See
"Business -- Regulation of Clinical Laboratory Operations."
(j) Adverse publicity and news coverage about us or the clinical
laboratory industry.
(k) Computer or other system failures that affect our ability to perform
tests, report test results or properly bill customers, including
potential failures resulting from systems conversions, including from
the integration of the systems of Quest Diagnostics and SBCL,
telecommunications failures, malicious human acts (such as electronic
break-ins or computer viruses) or natural disasters. See
"Business -- Information Systems" and "Business -- Billing."
(l) Development of technologies that substantially alter the practice of
laboratory medicine, including technology changes that lead to the
development of more cost-effective tests such as (1) point-of-care
tests that can be performed by physicians in their offices, and (2)
home testing that can be carried out without requiring the services
of clinical laboratories.
(m) Issuance of patents or other property rights to our competitors or
others that could prevent, limit or interfere with our ability to
develop, perform or sell our tests or operate our business. See
"Business -- The United States Clinical Laboratory Testing Market."
(n) Development of tests by our competitors or others which we may not be
able to license or unauthorized use of our technology or similar
technologies or our trade secrets by competitors, any of which could
negatively affect our competitive position.
(o) Development of an Internet based electronic commerce business model
that does not require an extensive logistics and laboratory network.
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(p) The impact of the privacy and security regulations issued under HIPAA
on our operations (including our medical information services) as well
as the cost to comply with the regulations. See "Risk Factors."
(q) Changes in interest rates causing a substantial increase in our
effective borrowing rate.
(r) Inability to hire and retain qualified personnel or the loss of the
services of one or more of our key senior management personnel.
Many of these risks are described in greater detail under "Risk Factors" in
this prospectus supplement and we advise investors to review the forward looking
statements in light of the disclosure contained under "Risk Factors."
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USE OF PROCEEDS
We estimate that the net proceeds from this offering of notes will be
approximately $542 million. We intend to use these proceeds, together with our
cash on hand and the proceeds from our new senior unsecured credit facility to:
- make payments of approximately $163 million required under the cash
tender offer and consent solicitation for our 10 3/4% senior subordinated
notes due 2006, assuming all of those notes are tendered; and
- repay all amounts outstanding under our existing senior secured credit
facility. At May 31, 2001, we had $584 million of borrowings outstanding
under our existing senior secured credit facility. As of May 31, 2001,
our existing senior secured credit facility bore interest at a weighted
average rate of approximately 8% per year and had a final maturity in
June 2006.
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CAPITALIZATION
The following table sets forth our cash and cash equivalents, debt, and
total capitalization at March 31, 2001 on an actual basis and as adjusted to
reflect the following transactions as if they had occurred on that date:
- completion of this $550 million offering of notes;
- completion of the $175 million term loan portion of our new senior
unsecured credit facility;
- repayment of our existing senior secured credit facility, including the
costs to settle our existing interest rate swap agreements; and
- completion of the cash tender offer and consent solicitation for our
10 3/4% senior subordinated notes due 2006, assuming all of those notes
were tendered.
This table should be read in conjunction with our consolidated financial
statements and the related notes incorporated by reference into this prospectus
supplement.
MARCH 31, 2001
-------------------------
ACTUAL AS ADJUSTED
---------- -----------
(IN THOUSANDS)
Cash and cash equivalents................................... $ 120,730 $ 72,600
========== ==========
Debt (including current maturities):
Short-term borrowings under receivables financing......... $ 256,000 $ 256,000
Existing revolving credit facility........................ -- --
Existing term loans....................................... 584,030 --
New revolving credit facility(1).......................... -- --
New term loan facility.................................... -- 175,000
6 3/4% Senior notes due 2006.............................. -- 275,000
7 1/2% Senior notes due 2011.............................. -- 275,000
10 3/4% Senior subordinated notes due 2006................ 150,000 --
Other debt................................................ 33,481 33,481
---------- ----------
Total debt........................................ 1,023,511 1,014,481
Preferred stock............................................. 1,000 1,000
Common stockholders' equity................................. 1,099,216 1,076,694(2)
---------- ----------
Total capitalization........................................ $2,123,727 $2,092,175
========== ==========
- ---------------
(1) After considering the amount of outstanding letters of credit (approximately
$13 million at March 31, 2001), the remaining balance of our new $325
million senior unsecured revolving credit facility is expected to be
available for borrowing after this offering.
(2) Reflects the after-tax estimated special charge to earnings, as of March 31,
2001, of up to $45 million (pre-tax) associated with the write-off of
deferred financing costs related to our existing senior secured credit
facility and 10 3/4% senior subordinated notes due 2006, the payments made
in connection with our cash tender offer premium and consent solicitation
for those notes, and costs to settle our existing interest rate swap
agreements.
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DESCRIPTION OF OTHER INDEBTEDNESS
RECEIVABLES CREDIT FACILITY
On July 21, 2000, we completed a $256 million receivables-backed financing
transaction. In connection with the receivables financing transaction, Quest
Diagnostics Receivables Inc. ("QDR"), a wholly owned subsidiary of ours, entered
into a secured revolving credit facility (the "receivables credit facility"), on
an uncommitted basis initially with Blue Ridge Asset Funding Corporation, a
commercial paper funding vehicle administered by Wachovia Bank, N.A. The
receivables credit facility has the benefit of a one-year back-up facility
provided on a committed basis initially by Wachovia Bank. We have received
commitments for a new one-year back-up facility from Wachovia, Lloyds TSB Bank
and Credit Lyonnais. In addition, Credit Lyonnais has agreed to extend a
receivables credit facility through their commercial paper funding vehicle and
the receivables credit facility currently being provided by Blue Ridge will be
reduced by an equivalent amount.
The receivables credit facility has an initial term of three years, unless
extended or terminated early as a result of the termination of liquidity
commitments to Blue Ridge. The borrowings outstanding under the receivables
credit facility are classified as a current liability on our consolidated
balance sheet, since the lender funds the borrowings through the issuance of
commercial paper which matures at various dates up to ninety days from the date
of issuance. Under the receivables credit facility, QDR incurs debt to Blue
Ridge and we incur debt to QDR. Our debt to QDR is in the form of demand
advances at market rates determined by QDR and us.
Interest on the receivables credit facility is based on rates which are
intended to approximate commercial paper rates for highly rated issuers. The
weighted average interest rate on borrowings outstanding at March 31, 2001 was
5.8%.
To secure the performance of its obligations under the receivables credit
facility, QDR has granted a security interest in the receivables and certain
related assets and the demand advances to Wachovia, as administrative agent for
the lenders.
QDR is not a guarantor of the existing senior secured credit facility and
will not guarantee the new senior unsecured credit facility or the notes offered
pursuant to this prospectus supplement.
THE NEW SENIOR UNSECURED CREDIT FACILITY
We have received commitments, subject to certain conditions, for a new $500
million senior unsecured credit facility from a group of banks led by Banc of
America Securities LLC and UBS Warburg. The terms, conditions and covenants of
the new senior unsecured credit facility are subject to the negotiation,
execution and delivery of definitive documentation and, as a result, certain of
the actual terms, conditions and covenants may differ from those discussed
below. The new senior unsecured credit facility consists of a five-year $325
million revolving credit facility and a five-year term loan facility of $175
million. Interest on the new senior unsecured credit facility is based on
certain published rates plus an applicable margin that will vary depending on
our debt ratings. At our option, we may elect to enter into LIBOR based interest
contracts for periods up to 180 days. Interest on any outstanding amounts not
covered under the LIBOR based interest rate contracts is based on an alternate
base rate which is calculated by reference to the prime rate or federal funds
rate (as those terms are defined in the new senior unsecured credit facility).
Additionally, we have the ability to borrow up to $200 million under the five
year $325 million revolving credit facility at rates determined by a competitive
bidding process among the lenders. The new senior unsecured credit facility will
be guaranteed by each of our subsidiaries that will guarantee the notes. The
closing of this offering of notes is conditioned on the closing of our new
senior unsecured credit facility. The tender offer and new senior unsecured
credit facility are a part of our plan to refinance a majority of our long-term
debt in order to reduce overall interest costs.
The new senior unsecured credit facility will contain various covenants and
conditions, including the maintenance of certain financial ratios and tests,
restrictions on the ability of our subsidiaries to, among other things, incur
additional indebtedness, and restrictions on our ability to, among other things,
repurchase shares of our outstanding common stock, make additional investments
and consummate acquisitions.
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SELECTED HISTORICAL FINANCIAL DATA
The following table summarizes selected historical financial data of our
company and our subsidiaries at the dates and for each of the periods presented.
We derived the selected historical financial data for the years 1996 through
2000 from the audited consolidated financial statements of our company. We
derived the selected historical financial data for the three months ended March
31, 2001 and 2000 from the unaudited interim consolidated financial statements
of our company. The unaudited interim consolidated financial statements reflect
all adjustments which, in the opinion of management, are necessary for a fair
statement of the financial condition and results of operations as of and for the
periods presented. Except as otherwise disclosed in the notes to the unaudited
interim consolidated financial statements, all such adjustments are of a normal
recurring nature. The interim consolidated financial statements have been
compiled without audit and are subject to year-end adjustments. Operating
results for the interim periods are not necessarily indicative of the results
that may be expected for the full year. The selected historical financial data
is only a summary and you should read it together with our historical
consolidated financial statements and related notes incorporated by reference
into this prospectus supplement and the accompanying prospectus.
THREE MONTHS
ENDED
MARCH 31, YEAR ENDED DECEMBER 31,
----------------------- ------------------------------------------------------------------
2001 2000 2000 1999(a) 1998 1997 1996
---------- ---------- ---------- ----------- ---------- ---------- ----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
OPERATIONS DATA:
Net revenues.............. $ 882,553 $ 857,479 $3,421,162 $ 2,205,243 $1,458,607 $1,528,695 $1,616,296
Costs and expenses:
Cost of services........ 529,065 529,037 2,056,237 1,379,989 896,793 962,935 1,044,423
Selling, general and
administrative........ 252,802 249,835 1,001,443 643,440 445,885 467,052 461,775
Interest, net........... 22,700 29,763 113,092 61,450 33,403 40,996 74,918
Amortization of
intangible assets..... 11,100 11,940 45,665 29,784 21,697 23,951 41,625
Provisions for
restructuring and
other special
charges............... -- -- 2,100(b) 73,385(c) -- 48,688(d) 668,544(e)
Minority share of
income................ 1,116 2,136 9,359 5,431 2,017 1,393 1,423
Other, net.............. 298 (428) (7,715) (2,620) 4,951 2,738 (210)
---------- ---------- ---------- ----------- ---------- ---------- ----------
Total............ 817,081 822,283 3,220,181 2,190,859 1,404,746 1,547,753 2,292,498
---------- ---------- ---------- ----------- ---------- ---------- ----------
Income (loss) before taxes
and extraordinary
loss.................... 65,472 35,196 200,981 14,384 53,861 (19,058) (676,202)
Income (loss) before
extraordinary loss...... 35,748 17,809 104,948(f) (1,274)(g) 26,885 (22,260) (625,960)
Net income (loss)......... 35,748 17,809 102,052(f) (3,413)(g) 26,885 (22,260) (625,960)
Basic net income (loss)
per common share:(h)(i)
Income (loss) before
extraordinary loss...... 0.39 0.20 1.17 (0.02) 0.45 (0.38) (10.86)
Net income (loss)......... 0.39 0.20 1.14 (0.05) 0.45 (0.38) (10.86)
Diluted net income (loss)
per common share:(h)(j)
Income (loss) before
extraordinary loss...... 0.37 0.19 1.11 (0.02) 0.44 (0.38) (10.86)
Net income (loss)......... 0.37 0.19 1.08 (0.05) 0.44 (0.38) (10.86)
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THREE MONTHS
ENDED
MARCH 31, YEAR ENDED DECEMBER 31,
----------------------- -----------------------------------------------------------------
2001 2000 2000 1999(a) 1998 1997 1996
---------- ---------- ---------- ----------- ---------- ---------- ----------
(IN THOUSANDS, EXCEPT RATIO DATA)
BALANCE SHEET DATA (AT END
OF PERIOD):
Cash and cash equivalents... $ 120,730 $ 28,487 $ 171,477 $ 27,284 $ 202,908 $ 161,661 $ 41,960
Accounts receivable, net.... 509,272 484,225 485,573 539,256 220,861 238,369 297,743
Total assets................ 2,903,235 2,838,635 2,864,536 2,878,481 1,360,240 1,400,928 1,395,066
Long-term debt.............. 758,481 1,157,899 760,705 1,171,442 413,426 482,161 515,008
Total debt.................. 1,023,511 1,205,628 1,026,113 1,216,877 464,870 514,809 535,793
Preferred stock............. 1,000 1,000 1,000 1,000 1,000 1,000 1,000
Common stockholders'
equity.................... 1,099,216 896,030 1,030,795 862,062 566,930 540,660 537,719
OTHER DATA:
Ratio of earnings to fixed
charges (k)............... 3.1x 2.0x 2.4x 1.2x 2.0x --(k) --(k)
Net cash provided by (used
in) operating
activities................ $ 40,731 $ 33,157 $ 369,455 $ 249,535 $ 141,382 $ 176,267 $ (88,486)(l)
Net cash used in investing
activities................ (90,268) (20,477) (48,015) (1,107,990) (39,720) (35,101) (63,674)
Net cash provided by (used
in) financing
activities................ (1,210) (11,477) (177,247) 682,831 (60,415) (21,465) 157,674
Bad debt expense............ 55,283 62,646 234,694 142,333 89,428 118,223(m) 111,238
Rent expense................ 19,950 19,259 76,515 59,073 46,259 47,940 49,713
Capital expenditures........ 43,615 17,613 116,450 76,029 39,575 30,836 70,396
Adjusted EBITDA(n).......... 122,438 98,144 459,380 237,038 158,609 153,800 166,358
- ---------------
(a) On August 16, 1999, we completed the acquisition of SBCL. Consolidated
operating results for 1999 include the results of operations of SBCL
subsequent to the closing of the acquisition. See Note 3 to the
consolidated financial statements, included in our Form 10-K for the year
ended December 31, 2000, which is incorporated by reference into this
prospectus supplement.
(b) During 2000, we recorded a net special charge of $2.1 million. This net
charge resulted from a $13.4 million charge related to the costs to cancel
certain contracts that we believed were not economically viable as a result
of the SBCL acquisition, and which were principally associated with the
cancellation of a co-marketing agreement for clinical trials testing
services, which charges were in large part offset by a reduction in
reserves attributable to a favorable resolution of outstanding claims for
reimbursements associated with billings of certain tests.
(c) During 1999, we recorded special charges principally incurred in
conjunction with the acquisition and planned integration of SBCL. See Note
7 to the consolidated financial statements, included in our Form 10-K for
the year ended December 31, 2000, which is incorporated by reference into
this prospectus supplement.
(d) These amounts include a charge of $16 million to write-down goodwill
reflecting the estimated impairment related to our consolidation plan
announced in 1997.
(e) These amounts include a charge of $445 million to reflect the impairment of
goodwill upon the adoption of a new accounting policy in 1996 for
evaluating the recoverability of goodwill and measuring possible impairment
under a fair value method. See Note 2 to the consolidated financial
statements, included in our Form 10-K for the year ended December 31, 2000,
which is incorporated by reference into this prospectus supplement. In
addition, we recorded special charges totaling $188 million to increase
reserves related to claims by the Department of Justice for certain
payments received by Damon Corporation, prior to its acquisition by Quest
Diagnostics, and other similar claims.
(f) During 2000, we prepaid $155.0 million of debt under our existing senior
secured credit facility. The extraordinary loss represented $4.8 million
($2.9 million, net of tax) of deferred financing costs which were
written-off in connection with the prepayment.
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(g) In conjunction with the acquisition of SBCL, we repaid the entire amount
outstanding under our then existing credit agreement. The extraordinary
loss recorded in 1999 represented $3.6 million ($2.1 million, net of tax)
of deferred financing costs which were written-off in connection with the
extinguishment of the credit agreement.
(h) On February 21, 2001, the Board of Directors approved a two-for-one stock
split of our common stock which was effected by the issuance on May 31,
2001, of a stock dividend of one new share of common stock for each share
of common stock held by stockholders of record on May 16, 2001. All
references to the number of common shares and per common share amounts,
including earnings per common share calculations, have been restated to
reflect the stock dividend.
(i) Historical earnings per share data for periods prior to 1997 have been
restated to reflect common shares outstanding as a result of Quest
Diagnostics' recapitalization in 1996. In December 1996, 57.6 million
common shares were issued to effectuate the Spin-Off Distribution and
establish Quest Diagnostics' employee stock ownership plan.
(j) Potentially dilutive common shares primarily include stock options and
restricted common shares granted under our Employee Equity Participation
Program. During periods in which net income available for common
stockholders is a loss, diluted weighted average common shares outstanding
will equal basic weighted average common shares outstanding, since under
these circumstances, the incremental shares would have an anti-dilutive
effect.
(k) For purposes of this calculation, earnings consist of pretax income plus
fixed charges. Fixed charges consist of interest expense and one-third of
rental expense, representing that portion of rental expense we deemed
representative of an appropriate interest factor. Earnings were
insufficient to cover fixed charges by the following amounts in the years
indicated:
YEAR ENDED DECEMBER 31,
--------------------------
1997 1996
---- ----
(IN THOUSANDS)
$16,468 $676,202
The pro forma ratio of earnings to fixed charges for the three months ended
March 31, 2001 and for the year ended December 31, 2000 was 3.7x and 2.7x,
respectively. The pro forma ratio of earnings to fixed charges was
calculated assuming that the anticipated net proceeds from this $550
million offering of notes and the $175 million term loan portion of our new
senior unsecured credit facility, and the repayment of our existing senior
secured credit facility in its entirety along with the repurchase of our
10 3/4% senior subordinated notes due 2006, assuming all of those notes
were tendered, were effected on the first day of the periods referred to
above.
(l) Cash flows used in operating activities for 1996 include the payment of
Damon Corporation and other billing related settlements totaling
approximately $144 million and the settlement of amounts owed to Corning
Incorporated of $45 million in connection with our spin-off from Corning in
1996.
(m) Bad debt expense for 1997 includes a charge of $5.3 million, which was part
of the $6.8 million charge in 1997, to increase the provision for doubtful
accounts to recognize the reduced recoverability of certain receivables from
accounts which will no longer be served as a result of our consolidation
plan announced in 1997.
(n) Adjusted EBITDA represents income (loss) before extraordinary loss, income
taxes, net interest expense, depreciation, amortization and special items.
Special items include the provisions for restructuring and other special
charges reflected in the selected historical financial data above, $8.9
million of costs related to the integration of SBCL which were included in
operating costs and expensed as incurred in 2000, a $3.0 million gain
related to the sale of an investment in 1999 and charges of $2.5 million
and $6.8 million recorded in selling, general and administrative expenses
in 1998 and 1997, respectively, related to the consolidation of our
laboratory network announced in 1997. Adjusted EBITDA is presented and
discussed because management believes that Adjusted EBITDA is a useful
adjunct to net income and other measurements under accounting principles
generally accepted in the United States since it is a meaningful measure of
a company's performance and ability to meet its future debt service
requirements, fund capital expenditures and meet working capital
requirements. Adjusted EBITDA is not a measure of financial performance
under accounting principles generally accepted in the United States and
should not be considered as an alternative to (1) net income (or any other
measure of performance under generally accepted accounting principles) as a
measure of performance or (2) cash flows from operating, investing or
financing activities as an indicator of cash flows or as a measure of
liquidity.
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MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
After nearly a decade of pressures to reduce reimbursement and reduce test
utilization, the underlying fundamentals of the diagnostics testing industry are
improving. During the early 1990s, the industry was negatively impacted by
significant government regulation and investigations into various billing
practices. In addition, the rapid growth of managed care, as a result of the
need to reduce overall healthcare costs, led to revenue and profit declines
within the laboratory testing industry, which in turn led to industry
consolidation, particularly among commercial laboratories. As a result of these
dynamics, fewer, but larger commercial laboratories have emerged that have
greater economies of scale, new and rigorous programs designed to assure
compliance with government billing regulations and other laws, and a more
disciplined approach to pricing services. These changes have resulted in
improved profitability and a reduced risk of non-compliance with complex
government regulations. At the same time, a slowdown in the growth of managed
care and decreasing influence of managed care organizations on ordering of
clinical testing by physicians has led to renewed growth in testing volumes and
further improvements in profitability during 2000. In addition, the following
factors are expected to continue to fuel growth in testing volume to the
industry:
- general aging of the United States population;
- increasing focus on early detection and prevention as a means to reduce
the overall cost of healthcare and development of more sophisticated and
specialized tests for early detection of disease and disease management;
- increasing volume of tests for diagnosis and monitoring of infectious
diseases such as AIDS and hepatitis C;
- research and development in the area of genomics, which is expected to
yield new genetic tests and techniques;
- increasing affordability of tests due to advances in technology and cost
efficiencies;
- increasing volume of tests as part of employer sponsored comprehensive
wellness programs; and
- increasing awareness by consumers of the value of clinical laboratory
testing and increasing willingness of consumers to pay for tests that may
not be covered by third party payers.
Quest Diagnostics, the largest clinical laboratory testing company with a
leading position in most of its geographic markets and service offerings, is
well positioned to benefit from the growth expected in the industry.
Payments for clinical laboratory services are made by the government,
managed care organizations, insurance companies, physicians, hospitals,
employers and patients. Physicians, hospitals and employers are typically billed
on a fee-for-service basis based on fee schedules which are typically
negotiated. Fees billed to patients and insurance companies are based on the
laboratory's patient fee schedule, which may be subject to limitations on fees
imposed by insurance companies or by physicians negotiating on behalf of their
patients. Medicare and Medicaid reimbursements are based on fee schedules set by
governmental authorities. Managed care organizations, which typically contract
with a limited number of clinical laboratories for their members, represent a
significant portion of our overall clinical laboratory testing volume. Larger
managed care organizations typically prefer to use large independent clinical
laboratories because they can provide services on a national or regional basis
and can manage networks of local or regional laboratories. While the number of
patients participating in managed care plans has slowed in recent years, over
the last decade, the managed care industry has been consolidating, resulting in
fewer but larger managed care organizations with significant bargaining power to
negotiate fee arrangements with healthcare providers, including clinical
laboratories. Managed care organizations frequently negotiate capitated payment
contracts for a portion of their business, which shift the risk and cost of
testing from
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the managed care organizations to the clinical laboratory. Under these capitated
payment contracts, Quest Diagnostics and managed care organizations agree to a
predetermined monthly contractual rate for each member of the managed care plan
regardless of the number or cost of services provided by us. Capitated
agreements with managed care organizations have been historically priced
aggressively, particularly for exclusive or semi-exclusive arrangements.
Recently, there has been a shift in the way major managed care organizations
contract with clinical laboratories. Managed care organizations have begun to
offer more freedom of choice to their affiliated physicians, including greater
freedom to determine which laboratory to use and which tests to order.
Accordingly, several agreements with major managed care organizations have been
renegotiated from exclusive contracts to nonexclusive contracts. As a result,
under these nonexclusive arrangements, physicians have more freedom of choice in
selecting laboratories, and laboratories are likely to compete more on the basis
of service and quality rather than price alone. As a result of this emphasis on
greater freedom of choice, our enhanced service network and capabilities, and
our focus on ensuring that overall arrangements are profitable, pricing of
managed care agreements has improved. Also, managed care organizations have been
recently giving patients greater freedom of choice and patients have been
increasingly selecting plans (such as preferred provider organizations) that
offer a greater choice of providers. Pricing for these preferred provider
organizations is typically negotiated on a fee-for-service basis, which
generally results in higher revenue per requisition than under a capitated fee
arrangement.
The clinical laboratory industry is subject to seasonal fluctuations in
operating results and cash flows. During the summer months, year-end holiday
periods and other major holidays, volume of testing declines, reducing net
revenues and resulting cash flows below annual averages. Testing volume is also
subject to declines in winter months due to inclement weather, which varies in
severity from year to year.
The clinical laboratory industry is labor intensive. Employee compensation
and benefits constitute approximately half of our total costs and expenses. Cost
of services consists principally of costs for obtaining, transporting and
testing specimens. Selling, general and administrative expenses consist
principally of the costs associated with our sales force, billing operations
(including bad debt expense), and general management and administrative support.
ACQUISITION OF SMITHKLINE BEECHAM'S CLINICAL LABORATORY TESTING BUSINESS
On August 16, 1999, we completed the acquisition of SBCL, which operated
the clinical laboratory business of SmithKline Beecham plc, or SmithKline
Beecham. The original purchase price of approximately $1.3 billion was paid
through the issuance of approximately 25.1 million shares of our common stock
and the payment of $1.025 billion in cash, including $20 million under a
non-competition agreement between Quest Diagnostics and SmithKline Beecham. At
the closing of the acquisition, we used existing cash and borrowings under a new
senior secured credit facility, to fund the cash purchase price and related
transaction costs of the acquisition, and to repay the entire amount outstanding
under our then existing credit agreement. The acquisition of SBCL was accounted
for under the purchase method of accounting. The historical financial statements
of Quest Diagnostics include the results of operations of SBCL subsequent to the
closing of the acquisition.
As of December 31, 2000 and 1999, Quest Diagnostics had recorded
approximately $820 million and $950 million, respectively, of goodwill in
conjunction with the SBCL acquisition, representing acquisition cost in excess
of the fair value of net tangible assets acquired, which is amortized on a
straight-line basis over forty years. The amount paid under the non-compete
agreement is amortized on a straight-line basis over five years.
The SBCL acquisition agreements included a provision for a reduction in the
purchase price paid by Quest Diagnostics in the event that the combined balance
sheet of SBCL indicated that the net assets acquired, as of the acquisition
date, were below a prescribed level. On October 11, 2000, the purchase price
adjustment was finalized with the result that SmithKline Beecham owed Quest
Diagnostics $98.6 million. This amount was offset by $3.6 million separately
owed by Quest Diagnostics to SmithKline Beecham, resulting in a net payment by
SmithKline Beecham of $95.0 million. The purchase price adjustment was recorded
in Quest Diagnostics' financial statements in the fourth quarter of 2000 as a
reduction in the amount of goodwill recorded in conjunction with the SBCL
acquisition.
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The remaining components of the purchase price allocation related to the
SBCL acquisition were finalized during the third quarter of 2000. The resulting
adjustments to the SBCL purchase price allocation primarily related to an
increase in deferred tax assets acquired, the sale of certain assets of SBCL at
fair value to unconsolidated joint ventures of Quest Diagnostics and an increase
in accrued liabilities for costs related to pre-acquisition periods. As a result
of these adjustments, Quest Diagnostics reduced the amount of goodwill recorded
in conjunction with the SBCL acquisition by approximately $35 million during the
third quarter of 2000.
INTEGRATION OF SBCL AND QUEST DIAGNOSTICS BUSINESSES
We expect to continue to realize significant benefits from combining our
existing laboratory network with that of SBCL. We have essentially completed the
process of reducing redundant facilities and infrastructure, including
laboratory consolidations in geographic markets served by more than one of our
laboratories, and redirecting testing volume within our national network to
provide more local testing and improve customer service. We have not exited any
geographic markets as a result of the plan. Employee groups to be impacted as a
result of these actions include those involved in the collection and testing of
specimens, as well as administrative and other support functions. During the
fourth quarter of 1999, we recorded the estimated costs associated with
executing the integration plan. The majority of these integration costs related
to employee severance, contractual obligations associated with leased facilities
and equipment, and the write-off of fixed assets, which management believes will
have no future economic benefit upon combining operations. Integration costs
related to planned activities affecting SBCL's operations and employees were
recorded as a cost of the acquisition. Integration costs associated with the
planned integration of SBCL affecting Quest Diagnostics' operations and
employees were recorded as a charge to earnings in the fourth quarter of 1999.
These costs are more fully described under "Provisions for Restructuring and
Other Special Charges." A full discussion and analysis of the reserves related
to the SBCL integration is contained in Note 4 to the consolidated financial
statements in our Form 10-K for the year ended December 31, 2000, and Note 2 to
the consolidated financial statements in our Form 10-Q for the quarter ended
March 31, 2001, each of which is incorporated by reference into this prospectus
supplement.
Through the end of March 2001, we had completed the transition of
approximately 96% of our business affected by the integration throughout our
national laboratory network, with approximately 98% transitioned by early April
2001. The remaining planned integration of Quest Diagnostics' principal
laboratories, provided for in accruals for integration costs as of December 31,
2000, will be completed during the second quarter of 2001. Other activities, for
which no accruals had been recorded as of December 31, 2000, including the
standardization of information systems, will continue beyond 2001.
We continue to expect that the SBCL integration will result in
approximately $150 million of annual synergies to be achieved by the end of
2002. During 2000, we estimate that we realized approximately $50 million of
these synergies, and at the end of 2000 we had achieved an annual rate of
synergies approaching $100 million. We expect that during 2001 we will realize
additional synergies driven by cost reductions, and we anticipate that by the
end of 2001 we will achieve an annual rate of synergies of $100 million to $120
million. During the first quarter of 2001, we estimate that we realized
approximately $25 million of these synergies, and at the end of the first
quarter of 2001 we had achieved an annual rate of synergies of approximately
$100 million.
Management anticipates that additional charges may be recorded in 2001
associated with further consolidation activities. Management cannot estimate the
amount of these charges at this time, but expects to fund these charges with
cash from operations.
During and after the integration process, we are committed to providing the
highest levels of customer service. Through a corporate project office, we track
and monitor key service and quality metrics. In the event that these key service
and quality metrics fail to remain at acceptable levels, we will adjust the pace
of the integration activities so that underlying causes are identified and
resolved in order to ensure that the highest levels of customer service are
maintained. While no significant service disruptions have occurred to
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date, the process of combining operations could cause an interruption of, or a
deterioration in, services which could result in a customer's decision to stop
using Quest Diagnostics for clinical laboratory testing. We believe that the
successful implementation of the SBCL integration plan and our value proposition
based on expanded patient access, our broad testing capabilities and most
importantly, the quality of the services we provide, will significantly mitigate
customer attrition.
RESULTS OF OPERATIONS
Three Months Ended March 31, 2001 Compared with Three Months Ended March
31, 2000
Net income for the three months ended March 31, 2001 increased to $35.7
million from $17.8 million for the three months ended March 31, 2000. The
increase in net income was primarily due to an improvement in average revenue
per requisition, the realization of synergies from the SBCL integration and a
reduction in net interest expense, partially offset by increases in employee
compensation costs and investments in our Six Sigma quality initiative,
information technology strategy and strategic growth opportunities.
Results for the three months ended March 31, 2000 included the effects of
testing performed by third parties under our laboratory network management
arrangements. As laboratory network manager, we included in our consolidated
revenues and expenses the cost of testing performed by third parties. This
treatment added $32.4 million to both reported revenues and cost of services for
the three months ended March 31, 2000. This treatment also serves to increase
cost of services as a percentage of net revenues and decrease selling, general
and administrative expenses as a percentage of net revenues. During the first
quarter of 2000, we terminated a laboratory network management arrangement with
Aetna USHealthcare, and entered into a new non-exclusive contract under which we
are no longer responsible for the cost of testing performed by third parties. In
addition, during the third quarter of 2000, we amended our laboratory network
management contract with Oxford Health to remove the financial risk associated
with testing performed by third parties. As a result of these contract
modifications, we are no longer required to include in our consolidated revenues
and expenses, the cost of testing performed by third parties. This impacts the
comparability of results between the periods presented and serves to reduce
reported net revenues during the three months ended March 31, 2001 by $32.4
million.
Net Revenues
Excluding the effect of testing performed by third parties under our
laboratory network management arrangements in 2000, net revenues for the three
months ended March 31, 2001 grew by 7%, compared to the prior year period,
primarily due to an increase in average revenue per requisition. The improvement
in average revenue per requisition was primarily attributable to improved
pricing on managed care business, a shift in test mix to higher value testing
and a shift in payer mix to fee-for-service reimbursement. Business contributed
to our unconsolidated joint ventures during 2000 in Phoenix, Indianapolis and
Dayton reduced our reported requisition volume by approximately 1.5% during the
first quarter of 2001, compared to the prior year period. After adjusting for
business contributed to unconsolidated joint ventures, clinical testing volume,
measured by the number of requisitions, for the first quarter of 2001 increased
approximately 1% over the prior year period. Contributing to this increase was
our acquisition of the assets of Clinical Laboratories of Colorado, LLC, which
increased volume by approximately 1%, and an increase in volume from our
principal customers, physicians and hospitals, of approximately 1.5%. Partially
offsetting these increases was a decline in testing volumes associated with our
drugs of abuse testing business, driven by a general slowing of the economy and
a corresponding slowdown in hiring, which reduced total company volume by about
1.5% during the first quarter of 2001, compared to the prior year period.
Overall, reported volumes decreased by approximately 1% during the first quarter
of 2001, compared to the prior year period.
Operating Costs and Expenses
Excluding the effect of testing performed by third parties under our
laboratory network management arrangements in 2000, total operating costs for
the three months ended March 31, 2001 increased
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approximately $35 million from the year earlier period, primarily due to
increases in employee compensation and supply costs partially offset by a
reduction in bad debt expense. While our cost structure has been favorably
impacted by the synergies realized as a result of the SBCL integration, we
continue to make investments to enhance our infrastructure to pursue our overall
business strategy. These investments include those related to:
- our Six Sigma quality initiative, which we believe will provide us with a
competitive advantage in the market place and ultimately serve to reduce
costs;
- skills training for all employees, which together with our competitive
pay and benefits, helps to increase employee satisfaction and
performance, enabling us to provide the best services to our customers;
- our information technology strategy; and
- our strategic growth opportunities such as direct-to-consumer testing.
The following discussion and analysis regarding cost of services, selling,
general and administrative expenses and bad debt expense exclude the effect of
testing performed by third parties under our laboratory network management
arrangements in 2000, which serve to increase cost of services as a percentage
of net revenues and reduce selling, general and administrative expenses as a
percentage of net revenues. Cost of services, which include the costs of
obtaining, transporting and testing specimens, decreased during the first
quarter of 2001 as a percentage of net revenues to 59.9% from 60.2% a year ago.
This decrease was primarily attributable to the improvement in average revenue
per requisition, partially offset by increases in employee compensation and
supply costs.
Selling, general and administrative expenses, which include the costs of
the sales force, billing operations, bad debt expense, general management and
administrative support, decreased during the first quarter of 2001 as a
percentage of net revenues to 28.6% from 30.3% in the prior year period. This
decrease was primarily due to improvements in average revenue per requisition
and bad debt expense, partially offset by an increase in employee compensation
costs. During the first quarter of 2001, bad debt expense was 6.3% of net
revenues, compared to 7.6% of net revenues in the first quarter of 2000. The
improvement in bad debt expense was principally attributable to the significant
progress that we have made to improve the overall collection experience of the
combined company through process improvements around the collection of
diagnosis, patient and insurance information necessary to effectively bill for
services performed. Based on prior experience as well as the continued sharing
of internal best practices in the billing functions, we believe that substantial
opportunities continue to exist to improve our overall collection experience.
Interest, Net
Net interest expense for the first quarter of 2001 decreased from the prior
year period by $7.1 million. This reduction was primarily due to an overall
reduction in debt levels, the favorable impact of our receivables credit
facility which has served to lower the weighted average borrowing rate on our
outstanding debt and lower interest rates on our variable rate debt.
Amortization of Intangible Assets
Amortization of intangible assets for the first quarter of 2001 decreased
from the prior year period by $0.8 million, principally as a result of
adjustments recorded in the third and fourth quarters of 2000 to reduce the
amount of goodwill associated with the SBCL acquisition by approximately $130
million.
Minority Share of Income
Minority share of income for the first quarter of 2001 decreased from the
prior year level, primarily due to start up losses associated with a new joint
venture in Oklahoma in which we hold a 51% interest.
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Other, Net
Other, net for the first quarter of 2001 increased from the prior year
level, primarily due to the write-down of an impaired asset partially offset by
an increase in equity earnings from our unconsolidated joint ventures.
Income Taxes
Our effective tax rate is significantly impacted by goodwill amortization,
the majority of which is not deductible for tax purposes, and which has the
overall impact of increasing the effective tax rate. The reduction in the
effective tax rate for the first quarter of 2001 was primarily due to pretax
earnings increasing at a faster rate than goodwill amortization and other
non-deductible items.
Adjusted EBITDA
Adjusted EBITDA represents income (loss) before extraordinary loss, income
taxes, net interest expense, depreciation, amortization and special items. There
were no adjustments for extraordinary or special items during the first quarter
of 2001 and 2000. Adjusted EBITDA is presented and discussed because management
believes that Adjusted EBITDA is a useful adjunct to net income and other
measurements under accounting principles generally accepted in the United States
since it is a meaningful measure of a company's performance and ability to meet
its future debt service requirements, fund capital expenditures and meet working
capital requirements. Adjusted EBITDA is not a measure of financial performance
under accounting principles generally accepted in the United States and should
not be considered as an alternative to (1) net income (or any other measure of
performance under accounting principles generally accepted in the United States)
as a measure of performance or (2) cash flows from operating, investing or
financing activities as an indicator of cash flows or as a measure of liquidity.
Adjusted EBITDA for the first quarter of 2001 improved to $122.4 million,
or 13.9% of net revenues, from $98.1 million, or 11.4% of net revenues, in the
prior year period. The improvement in Adjusted EBITDA is primarily due to
improvements in the average revenue per requisition and cost synergies resulting
from the SBCL integration, partially offset by increases in employee
compensation costs and investments in our Six Sigma quality initiative,
information technology strategy and strategic growth opportunities.
Year Ended December 31, 2000 Compared with Year Ended December 31, 1999
Income before an extraordinary loss for the year ended December 31, 2000
increased to $104.9 million from a loss of $1.3 million for the prior year.
Extraordinary losses, net of taxes, of $2.9 million and $2.1 million were
recorded in 2000 and 1999, respectively, representing the write-off of deferred
financing costs associated with the prepayment of debt. Additionally, a number
of special items were recorded in 2000 and 1999 which consisted of the
provisions for restructuring and other special charges reflected on the face of
the statement of operations of $2.1 million and $73.4 million, respectively, and
a $3.0 million gain related to the sale of an investment in the fourth quarter
of 1999. Excluding the special items and the extraordinary loss, net income for
the year ended December 31, 2000 increased to $106.2 million, compared to $41.2
million for the prior year period. This increase was primarily due to the SBCL
acquisition and improved operating performance of Quest Diagnostics.
Results for the years ended December 31, 2000 and 1999 included the effects
of testing performed by third parties under our laboratory network management
arrangements. As laboratory network manager, we included in our consolidated
revenues and expenses the cost of testing performed by third parties. This
treatment added $48.8 million and $91.6 million to both reported revenues and
cost of services for the years ended December 31, 2000 and 1999, respectively.
This treatment also serves to increase cost of services as a percentage of net
revenues and decrease selling, general and administrative expenses as a
percentage of net revenues. During the first quarter of 2000, we terminated a
laboratory network management arrangement with Aetna USHealthcare, and entered
into a new non-exclusive contract under which we are no longer responsible for
the cost of testing performed by third parties. In addition, during
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the third quarter of 2000, we amended our laboratory network management contract
with Oxford Health to remove the financial risk associated with testing
performed by third parties. As such, we are no longer responsible for the cost
of testing performed by third parties under the contract with Oxford Health. On
a full year basis, these changes to the laboratory network management agreements
will reduce net revenues and cost of services by approximately $150 million.
Net Revenues
Net revenues for the year ended December 31, 2000 increased $1.2 billion
over the prior year period, primarily due to the acquisition of SBCL. Also
contributing to the increase were improvements in average revenue per
requisition and requisition volume.
Operating Costs and Expenses
Total operating costs for the year ended December 31, 2000 increased from
the prior year period, primarily due to the acquisition of SBCL. Operating costs
and expenses for the year ended December 31, 2000 included $8.9 million of costs
related to the integration of SBCL which were not chargeable against previously
established reserves for integration costs. These costs are primarily related to
equipment and employee relocation costs, professional and consulting fees,
company identification and signage costs and the amortization of stock-based
employee compensation related to the special recognition awards granted in the
fourth quarter of 1999. Management anticipates that during 2001, Quest
Diagnostics will incur similar costs of approximately $2 million to $4 million
relative to the integration plan, which will be expensed as incurred.
The following discussion and analysis regarding operating costs and
expenses exclude the effect of testing performed by third parties under our
laboratory network management arrangements, which serve to increase cost of
services as a percentage of net revenues and reduce selling, general and
administrative expenses as a percentage of net revenues.
Cost of services, which includes the costs of obtaining, transporting and
testing specimens, decreased during 2000, as a percentage of net revenues, to
59.5% from 61.0% in the prior year period. This decrease was primarily due to an
improvement in average revenue per requisition and the realization of synergies
associated with the integration of SBCL. These decreases were partially offset
by an increase in employee compensation and training costs.
Selling, general and administrative expenses, which includes the costs of
the sales force, billing operations, bad debt expense, general management and
administrative support, decreased during 2000, as a percentage of net revenues,
to 29.7% from 30.4% in the prior year period. This decrease was primarily
attributable to improvements in average revenue per requisition and the impact
of the SBCL acquisition which enabled us to leverage certain of our fixed costs
across a larger revenue base, partially offset by increases in employee
compensation and training costs, investments related to our information
technology strategy and bad debt expense. For the year ended December 31, 2000,
bad debt expense was 7.0% of net revenues, compared to 6.7% of net revenues in
the prior year period. The increase in bad debt expense was principally
attributable to SBCL's collection experience which is less favorable than Quest
Diagnostics' historical experience. A significant portion of the difference is
due to Quest Diagnostics' processes in the billing area, most notably the
processes around the collection of diagnosis, patient and insurance information
necessary to effectively bill for services performed. We have made significant
progress towards improving the overall bad debt experience of the combined
company with quarter to quarter improvements in bad debt expense throughout
2000. Based on prior experience as well as sharing of internal best practices in
the billing functions, we believe that substantial opportunities continue to
exist to improve our overall collection experience.
Interest, Net
Net interest expense increased from the prior year by $51.6 million. Net
interest expense for the year ended December 31, 1999 included $1.9 million of
interest income associated with a favorable state tax settlement. The remaining
increase was principally attributable to the amounts borrowed under our existing
senior secured credit facility in conjunction with the SBCL acquisition.
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Amortization of Intangible Assets
Amortization of intangible assets increased from the prior year by $15.9
million for the year ended December 31, 2000, principally as a result of the
SBCL acquisition.
Provisions for Restructuring and Other Special Charges
During the second quarter of 2000, we recorded a net special charge of $2.1
million. Of the special charge, $13.4 million represented the costs to cancel
certain contracts that we believed were not economically viable as a result of
the SBCL acquisition. These costs were principally associated with the
cancellation of a co-marketing agreement for clinical trials testing services.
These charges were in large part offset by a reduction in reserves attributable
to a favorable resolution of outstanding claims for reimbursements associated
with billings of certain tests.
During the third quarter of 2000, we reviewed our remaining restructuring
reserves initially recorded in the fourth quarter of 1999 and revised certain
estimates relative to integration activities, which resulted in a $2.1 million
reduction in accruals associated with planned restructuring activities affecting
Quest Diagnostics' operations and employees. These revisions were principally
associated with lower costs for employee severance and reduced costs to exit
certain leased facilities. This reduction in accruals was offset by a charge to
write-off fixed assets used in the operations of Quest Diagnostics, which we
believe will have no future economic benefit as a result of combining the
operations of SBCL and Quest Diagnostics.
The reduction in employee severance costs was primarily attributable to
higher than anticipated volume growth and higher than expected voluntary
turnover, which reduced the number of planned severances, principally in the New
York and Philadelphia metropolitan areas. The greater than anticipated volume
growth in these regions allowed Quest Diagnostics to reassign to other positions
individuals who would have otherwise been severed. The higher than expected
voluntary turnover was a result of delays in the Integration process which were
outside our control and stemmed from protracted contract renegotiations with a
major customer, and construction delays. These reductions were partially offset
by the elimination of certain senior management positions, which increased the
average cost of severance benefits per employee.
The reduction in costs to exit leased facilities is primarily related to
our New York metropolitan area operations to reflect revised assumptions related
to the costs to be paid to exit leased facilities.
While our original plan anticipated completion by the end of December 31,
2000, certain factors outside our control such as the protracted negotiations
related to contractual obligations and unexpected construction delays at two of
our laboratories have prevented us from completing our plans within a one-year
time frame. Management expects to substantially complete the planned integration
of Quest Diagnostics' principal laboratories early in the second quarter of 2001
in all major markets.
During the third and fourth quarters of 1999, we recorded provisions for
restructuring and other special charges totaling $30.3 million and $43.1
million, respectively, principally incurred in connection with the acquisition
and planned integration of SBCL.
Of the total special charge recorded in the third quarter of 1999, $19.8
million represented stock-based employee compensation of which $17.8 million
related to special one-time grants of our common stock to certain individuals of
the combined company, and $2.0 million related to the accelerated vesting, due
to the completion of the SBCL acquisition, of restricted stock grants made in
previous years. In addition, during the third quarter of 1999, we incurred $9.2
million of professional and consulting fees related to integration planning
activities. The remainder of the third quarter charge related to costs incurred
in conjunction with our planned offering of new senior subordinated notes, the
proceeds of which were expected to be used to repay our existing 10 3/4% senior
subordinated notes due 2006, or the Notes. During the third quarter of 1999, we
decided not to proceed with the offering due to unsatisfactory market
conditions.
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Of the total special charge recorded in the fourth quarter of 1999, $36.4
million represented costs related to planned integration activities affecting
Quest Diagnostics' operations and employees. Of those costs, $23.4 million
related to employee severance costs, $9.7 million related primarily to lease
obligations for facilities and equipment and $6.7 million was associated with
the write-off of assets that we plan to dispose of in conjunction with the
integration of SBCL. Offsetting these charges was the reversal of $3.4 million
of reserves associated with our consolidation plan announced in the fourth
quarter of 1997. Upon finalizing the initial integration plans for SBCL in the
fourth quarter of 1999, we determined that $3.4 million of the remaining
reserves associated with the December 1997 consolidation plan was no longer
necessary due to changes in the plan as a result of the SBCL integration. In
addition to the net charge of $36.4 million, we recorded $3.5 million of special
recognition awards granted in the fourth quarter of 1999 to certain employees
involved in the transaction and integration planning processes of the SBCL
acquisition. The remainder of the fourth quarter special charge was primarily
attributable to professional and consulting fees incurred in connection with
integration related planning activities.
Minority Share of Income
Minority share of income for the year ended December 31, 2000 increased
from the prior year period, primarily due to improved performance at our joint
ventures.
Other, Net
Other, net for the year ended December 31, 2000 decreased from the prior
year period, primarily due to an increase in equity earnings from unconsolidated
joint ventures, and to a lesser extent, the amortization of deferred gains
associated with certain investments.
Income Taxes
Our effective tax rate is significantly impacted by goodwill amortization,
the majority of which is not deductible for tax purposes, and which has the
overall impact of increasing the effective tax rate. The reduction in the
effective tax rate for 2000 was primarily due to pretax earnings increasing at a
faster rate than goodwill amortization and other non-deductible items.
Extraordinary Loss
Extraordinary losses were recorded in 2000 and 1999 representing the
write-off of deferred financing costs associated with debt which was prepaid
during the periods.
During the fourth quarter of 2000, we prepaid $155 million of term loans
under our existing senior secured credit facility. The extraordinary loss
recorded in the fourth quarter of 2000 in connection with this prepayment was
$4.8 million ($2.9 million, net of tax).
In conjunction with the acquisition of SBCL, we repaid the entire amount
outstanding under our then existing credit agreement. The extraordinary loss
recorded in the third quarter of 1999 in connection with this prepayment was
$3.6 million ($2.1 million, net of tax).
Adjusted EBITDA
Adjusted EBITDA represents income (loss) before extraordinary loss, income
taxes, net interest expense, depreciation, amortization and special items.
Special items for 2000 and 1999 included the provisions for restructuring and
other special charges reflected on the face of the statements of operations,
$8.9 million of costs related to the integration of SBCL, which were included in
operating costs and expensed as incurred in 2000, and a $3.0 million gain
related to the sale of an investment in the fourth quarter of 1999. Adjusted
EBITDA is presented and discussed because management believes that Adjusted
EBITDA is a useful adjunct to net income and other measurements under accounting
principles generally accepted in the United States since it is a meaningful
measure of a company's performance and ability to meet its future debt service
requirements, fund capital expenditures and meet working capital requirements.
Adjusted EBITDA is not a measure of financial performance under accounting
principles generally accepted in the United States and should not be considered
as an alternative to (1) net income (or any other measure of performance under
accounting principles generally accepted in the United
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States) as a measure of performance or (2) cash flows from operating, investing
or financing activities as an indicator of cash flows or as a measure of
liquidity.
Adjusted EBITDA for 2000 improved to $459.4 million, or 13.4% of net
revenues from $237.0 million, or 11.2% of net revenues, excluding the impact of
testing performed by third parties under our laboratory network management
arrangements, in the prior year period. The dollar increase in Adjusted EBITDA
was principally associated with the SBCL acquisition. The percentage improvement
in Adjusted EBITDA was primarily related to improvements in the operating
performance of Quest Diagnostics and synergies realized from the acquisition of
SBCL.
Year Ended December 31, 1999 Compared with Year Ended December 31, 1998
Income before an extraordinary loss, and special items incurred in
connection with the SBCL acquisition, increased to $41.2 million in 1999 from
$26.9 million in the prior year. Special items for 1999 consisted of the
provisions for restructuring and other special charges of $73.4 million and a
$3.0 million gain related to the sale of an investment in the fourth quarter of
1999. Special items for 1998 consisted of a $2.5 million charge recorded in
selling, general and administrative expenses that represented the final costs
associated with our consolidation plan announced in December 1997. Including
these items and an extraordinary loss, net of taxes, of $2.1 million incurred in
connection with the acquisition of SBCL, we reported a net loss for 1999 of $3.4
million, compared to net income of $26.9 million for 1998.
Results for the year ended December 31, 1999 included the effects of
testing performed by third parties under our laboratory network management
arrangements. As laboratory network manager, we included in our consolidated
revenues and expenses the cost of testing performed by third parties. This
impacts the comparability of revenues and expenses from year to year and served
to increase both reported revenues and cost of services by $91.6 million for the
year ended December 31, 1999. This treatment also serves to increase cost of
services as a percentage of net revenues and decrease selling, general and
administrative expenses as a percentage of net revenues.
Net Revenues
Excluding the effect of the testing performed by third parties under our
laboratory network management arrangements, net revenues for the year ended
December 31, 1999 increased $655.0 million over the prior year period. This
increase was primarily due to the acquisition of SBCL. Excluding the impact of
the SBCL acquisition and the third-party testing performed under our laboratory
network management arrangements, net revenues for the year ended December 31,
1999 increased 1.2% from the prior year level, principally due to an increase in
average revenue per requisition, partially offset by a volume decrease of 3.3%.
Exclusive of the SBCL acquisition, year-over-year volume comparisons improved
throughout the year, and in the fourth quarter reflected volume gains over the
prior year period.
Operating Costs and Expenses
Total operating costs for the year ended December 31, 1999, excluding the
effect of testing performed by third parties under our laboratory network
management arrangements, increased from the prior year period. The increase was
due primarily to the acquisition of SBCL. Operating costs and expenses for 1998
included a first quarter charge of $2.5 million in selling, general and
administrative expenses that represented the final costs associated with our
consolidation plan announced in the fourth quarter of 1997.
The following discussion and analysis regarding operating costs and
expenses excludes the effect of testing performed by third parties under our
laboratory network management arrangements, which serves to increase cost of
services as a percentage of net revenues and reduce selling, general and
administrative expenses as a percentage of net revenues. Cost of services, which
included the costs of obtaining, transporting and testing specimens, decreased
during 1999 as a percentage of net revenues to 61.0% from 61.5% a year ago. This
decrease was primarily attributable to an increase in average revenue per
requisition.
Selling, general and administrative expenses, which included the costs of
the sales force, billing operations, bad debt expense, general management and
administrative support, decreased during 1999 as a
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percentage of net revenues to 30.4% from 30.6% in the prior year. During 1999
bad debt expense increased to 6.7% of net revenues from 6.1% of net revenues in
the prior year. The increase in bad debt expense was principally attributable to
SBCL's collection experience, which is less favorable than Quest Diagnostics'
historical experience. A significant portion of the difference is due to Quest
Diagnostics' processes in the billing area, most notably the processes around
the collection of diagnosis, patient and insurance information necessary to
effectively bill for services performed. While the sharing of internal best
practices has begun in the billing functions, management believes that
additional opportunities exist in order to improve SBCL's historical collection
experience. The remaining overall decrease in selling, general and
administrative expenses as a percentage of net revenues was primarily
attributable to the impact of the SBCL acquisition, which enabled us to leverage
certain of our fixed costs across a larger revenue base. While selling, general
and administrative expenses decreased as a percentage of net revenues, we
experienced an increase in expenses in 1999 as compared to 1998 due to the
impact of the SBCL acquisition and from additional investments in information
technology and sales and marketing capabilities, litigation expenses and
employee compensation costs.
Interest, Net
Net interest expense in 1999 increased from the prior year by $28.0
million. Net interest expense for the year ended December 31, 1999 included $1.9
million of interest income associated with a favorable state tax settlement. The
increase in net interest expense is primarily attributable to the amounts
borrowed under our existing senior secured credit facility in conjunction with
the SBCL acquisition and a decrease in interest income resulting from lower
average cash balances in 1999 as compared to 1998.
Amortization of Intangible Assets
Amortization of intangible assets increased in 1999 from the prior year by
$8.1 million, principally as a result of the SBCL acquisition.
Provisions for Restructuring and Other Special Charges
During the third and fourth quarters of 1999, we recorded provisions for
restructuring and other special charges totaling $30.3 million and $43.1
million, respectively, principally incurred in connection with the acquisition
and planned integration of SBCL.
Of the total special charge recorded in the third quarter of 1999, $19.8
million represented stock-based employee compensation of which $17.8 million
related to special one-time grants of our common stock to certain individuals of
the combined company, and $2.0 million related to the accelerated vesting, due
to the completion of the SBCL acquisition, of restricted stock grants made in
previous years. In addition, during the third quarter of 1999, we incurred $9.2
million of professional and consulting fees related to integration planning
activities. The remainder of the third quarter charge related to costs incurred
in conjunction with our planned offering of new senior subordinated notes, the
proceeds of which were expected to be used to repay our 10 3/4% senior
subordinated notes due 2006. During the third quarter of 1999, we decided not to
proceed with the offering due to unsatisfactory market conditions.
Of the total special charge recorded in the fourth quarter of 1999, $36.4
million represented costs related to planned integration activities affecting
Quest Diagnostics' operations and employees. Of these costs, $23.4 million
related to employee severance costs, $9.7 million related primarily to lease
obligations for facilities and equipment and $6.7 million was associated with
the write-off of assets that we plan to dispose of in conjunction with the
integration of SBCL. Offsetting these charges was the reversal of $3.4 million
of reserves associated with our consolidation plan announced in the fourth
quarter of 1997. Upon finalizing the initial integration plans for SBCL in the
fourth quarter of 1999, we determined that $3.4 million of the remaining
reserves associated with the December 1997 consolidation plan was no longer
necessary due to changes in the plan as a result of the SBCL integration. In
addition to the net charge of $36.4 million, we recorded $3.5 million of special
recognition awards granted in the fourth quarter of 1999 to certain employees
involved in the transaction and integration planning processes of the SBCL
acquisition. The remainder of the fourth quarter special charge was primarily
attributable to professional and consulting fees incurred in connection with
integration related planning activities.
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Integration costs, including write-offs of fixed assets, totaling $55.5
million that are related to planned integration activities affecting SBCL
assets, liabilities and employees, were recorded in the fourth quarter of 1999
as a cost of the SBCL acquisition. Of these costs, $33.8 million related to
employee severance costs and $13.4 million related to contractual obligations,
including those related to facilities and equipment leases. The remaining
portion of the costs were associated with the write-off of assets that we plan
to dispose of in conjunction with the integration of SBCL.
Minority Share of Income
Minority share of income for 1999 increased from the prior year level,
primarily due to the contribution of our Pittsburgh, Pennsylvania and St. Louis,
Missouri businesses to two joint ventures formed in the fourth quarter of 1998.
During both 1999 and 1998, we maintained a 51% controlling ownership interest in
both of these affiliated companies.
Other, Net
Other, net for 1999 decreased from the prior year level, primarily due to a
gain of $3.0 million associated with the sale of an investment in the fourth
quarter of 1999 and a reduction in equity losses of $4.5 million primarily
associated with our joint venture in Arizona in which we hold a 49% interest.
Income Taxes
Our effective tax rate was significantly impacted by goodwill amortization,
the majority of which is not deductible for tax purposes, and which has the
overall impact of increasing the effective tax rate. Goodwill associated with
the SBCL acquisition further increased the effective tax rate for 1999 compared
to 1998.
Extraordinary Loss
In conjunction with the acquisition of SBCL, we repaid the entire amount
outstanding under our then existing credit agreement. The extraordinary loss
recorded in the third quarter of 1999 of $3.6 million ($2.1 million, net of
taxes) represented the write-off of deferred financing costs associated with the
credit agreement.
Adjusted EBITDA
Adjusted EBITDA represents income (loss) before extraordinary loss, income
taxes, net interest expense, depreciation, amortization and special items.
Special items included the provisions for restructuring and other special
charges for 1999 reflected on the face of the statements of operations, a $3.0
million gain related to the sale of an investment in the fourth quarter of 1999
and a charge of $2.5 million recorded in selling, general and administrative
expenses in 1998 related to the consolidation of our laboratory network
announced in the fourth quarter of 1997. Adjusted EBITDA is presented and
discussed because management believes that Adjusted EBITDA is a useful adjunct
to net income and other measurements under accounting principles generally
accepted in the United States since it is a meaningful measure of a company's
performance and ability to meet its future debt service requirements, fund
capital expenditures and meet working capital requirements. Adjusted EBITDA is
not a measure of financial performance under accounting principles generally
accepted in the United States and should not be considered as an alternative to
(1) net income (or any other measure of performance under accounting principles
generally accepted in the United States) as a measure of performance or (2) cash
flows from operating, investing or financing activities as an indicator of cash
flows or as a measure of liquidity.
Adjusted EBITDA for 1999 improved to $237.0 million, or 11.2% of net
revenues, excluding the impact of testing performed by third parties under our
laboratory network management arrangements, from $158.6 million, or 10.9% of net
revenues, in the prior year period. The dollar increase in Adjusted EBITDA was
principally associated with the SBCL acquisition. The percentage improvement in
Adjusted EBITDA was primarily related to improvements in Quest Diagnostics'
operating performance prior to the acquisition of SBCL.
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LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents at March 31, 2001 totaled $120.7 million, a
decrease of $50.7 million from December 31, 2000. Cash flows from operating
activities for the three months ended March 31, 2001 provided cash of $40.7
million, which was offset by investing and financing activities which required
cash of $91.5 million. Cash and cash equivalents at March 31, 2000 totaled $28.5
million, an increase of $1.2 million from December 31, 1999. Cash flows from
operating activities for the three months ended March 31, 2000 provided cash of
$33.2 million, which was offset by investing and financing activities which
required cash of $32.0 million.
Net cash from operating activities for the three months ended March 31,
2001 was $7.6 million higher than the 2000 level. The increase was primarily due
to improved operating performance offset by increases in spending associated
with the SBCL integration and employee incentive payments. Days sales
outstanding, a measure of billing and collection efficiency, improved to 51 days
at March 31, 2001 from 56 days at December 31, 2000.
Net cash used in investing activities for the three months ended March 31,
2001 was $90.3 million for the first quarter consisting primarily of the
acquisition and related transaction costs of $47.2 million to acquire the assets
of Clinical Laboratories of Colorado, LLC in Denver, and capital expenditures of
$43.6 million. Net cash used in investing activities for the three months ended
March 31, 2000 was $20.5 million consisting primarily of capital expenditures of
$17.6 million. The increase in capital spending above the prior year level was
primarily attributable to facility expansions and reconfigurations initiated as
part of our integration plans and information technology investments.
Net cash used in financing activities for the three months ended March 31,
2001 and 2000 was $1.2 million and $11.5 million, respectively, reflecting
scheduled repayments of debt and distributions to minority partners, offset by
proceeds from the exercise of stock options.
Cash and cash equivalents at December 31, 2000 totaled $171.5 million, an
increase of $144.2 million from December 31, 1999. Cash flows from operating
activities in 2000 provided cash of $369.5 million, which was partially offset
by investing and financing activities which required cash of $225.3 million. We
maintain zero-balance bank accounts for the majority of our cash disbursements.
Prior to the second quarter of 2000, we maintained our largest disbursement
accounts and primary concentration accounts at the same financial institution,
giving that financial institution the legal right of offset. As such, book
overdrafts related to the disbursement accounts were offset against cash
balances in the concentration accounts for reporting purposes. During the second
quarter of 2000, we moved our primary concentration account to another financial
institution such that no offset exists. As a result, book overdrafts in the
amount of $47.4 million at December 31, 2000, representing outstanding checks,
were classified as liabilities and not reflected as a reduction of cash at
December 31, 2000. Cash and cash equivalents at December 31, 1999 totaled $27.3
million, a decrease of $175.6 million from the prior year-end balance. The
decrease in cash and cash equivalents during 1999 was principally associated
with the acquisition and financing of the SBCL acquisition and the repayment of
the entire amount outstanding under our then existing senior secured credit
facility. Cash flows from operating and financing activities during 1999
provided cash of $249.5 million and $682.8 million, respectively, and were used
to fund investing activities which required cash of $1.1 billion.
Net cash from operating activities for 2000 was $119.9 million higher than
the 1999 level. Net cash from operating activities for 1999 was $108.2 million
higher than the 1998 level. Again, the increase was primarily due to the impact
of the SBCL acquisition. Excluding the impact of our laboratory network
management arrangements, days sales outstanding were 56 days at December 31,
2000, compared to 57 days at December 31, 1999.
Net cash used in investing activities in 2000 was primarily comprised of
capital expenditures and investments in two companies, one company that is
developing Internet-based disease management solutions for physicians and
managed care organizations, and another company that is developing Internet-
based solutions to provide electronic medical records products. These investing
activities in 2000 were partially offset by the receipt of $95 million from
SmithKline Beecham in conjunction with finalizing the
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purchase price adjustment provided for in the SBCL acquisition agreements.
Investing activities for 1999 were principally related to the acquisition of
SBCL, including transaction costs associated with the acquisition. In addition,
net cash used in investing activities for 1999 included capital expenditures,
investments to fund certain employee benefit plans, and contributions to our
joint venture in Arizona, offset by the proceeds from the sale of an investment
in the fourth quarter of 1999.
Net cash used in financing activities for 2000 was principally associated
with the repayment of debt under our credit agreement and distributions to
minority partners, partially offset by proceeds from the completion of a $256
million receivables-backed financing transaction, or the Receivables Credit
Facility, and proceeds from the exercise of stock options. On July 21, 2000, we
completed the Receivables Credit Facility, the proceeds of which were used to
pay down loans outstanding under the credit agreement. Approximately $48 million
was used to completely repay amounts outstanding under the capital markets loan,
with the remainder used to repay amounts outstanding under title term loans. In
addition, the repayment of the capital markets loan reduced the borrowing
spreads on all remaining term loans under the credit agreement. Management
estimates that this transaction will result in a reduction in annual borrowing
costs of approximately $5 million to $7 million. The borrowings outstanding
under the Receivables Credit Facility are classified as a current liability
since the lenders fund the borrowings through the issuance of commercial paper
that matures at various dates up to 90 days from the date of issuance. During
the fourth quarter of 2000, we prepaid $155 million of bank debt under the
credit agreement. Net cash provided by financing activities for 1999 primarily
consisted of borrowings under the credit agreement to fund the cash purchase
price and related transaction costs of the SBCL acquisition, repayments of debt,
the majority of which related to our then existing credit agreement at the
closing of the SBCL acquisition, and payments of financing costs associated with
our existing senior secured credit facility.
In 1998, our board of directors authorized a limited share purchase program
that permitted us to purchase up to $27 million of our outstanding common stock
through 1999. Cumulative purchases under the program through December 31, 1999
totaled $14.1 million. Shares purchased under the program were reissued in
connection with certain employee benefit plans. We suspended purchases of our
shares when we reached a preliminary understanding of the transaction with
SmithKline Beecham on January 15, 1999.
We estimate that we will invest approximately $140 million to $150 million
during 2001 for capital expenditures principally related to investments in
information technology, equipment, and facility upgrades and expansions. Other
than the reduction for outstanding letters of credit, which approximated $13
million at March 31, 2001, all of the revolving credit facility under our
existing senior secured credit facility was available for borrowing at March 31,
2001.
We have received commitments, subject to certain conditions, for a new $500
million senior unsecured credit facility from a group of banks led by Banc of
America and UBS Warburg. The terms, conditions and covenants of the new senior
unsecured credit facility are subject to the negotiation, execution and delivery
of definitive documentation and as a result, certain of the actual terms,
conditions and covenants may differ from those discussed below. The new senior
unsecured credit facility consists of a five-year $325 million revolving credit
facility and a five-year term loan facility of up to $175 million. The new
senior unsecured credit facility will be guaranteed by each of our subsidiaries
that will guarantee our notes. The new senior unsecured credit facility will
contain various covenants and conditions including the maintenance of certain
financial ratios and tests, restrictions on the ability of our subsidiaries to,
among other things, incur additional indebtedness and restrictions on our
ability to, among other things, repurchase shares of our outstanding common
stock, make additional investments and consummate acquisitions.
We believe that cash from operations and borrowings under the revolving
credit facility under our new senior unsecured credit facility, together with
the indemnifications by Corning Incorporated and SmithKline Beecham plc against
monetary fines, penalties or losses from outstanding government and other
related claims, will provide sufficient financial flexibility to integrate the
operations of Quest Diagnostics and SBCL, to meet seasonal working capital
requirements and to fund capital expenditures and additional growth
opportunities for the foreseeable future. Recent upgrades in our credit ratings
by
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both Standard & Poor's and Moody's Investor Services are expected to have a
favorable impact on Quest Diagnostics' cost of and access to capital.
Additionally, we believe that our improved financial performance should provide
us with access to additional financing, if necessary, to fund growth
opportunities which cannot be funded from existing sources.
We do not anticipate paying dividends on our common stock in the
foreseeable future.
On May 31, 2001, we effected a two-for-one stock split of our common stock
by means of a stock dividend of one new share of common stock for each share of
common stock held by stockholders of record on May 16, 2001.
On April 25, 2001, we signed a definitive agreement to acquire the
outstanding voting shares of MedPlus, Inc., or MedPlus, a leading developer and
integrator of clinical connectivity and data management solutions for healthcare
organizations and clinicians. The agreement calls for us to pay $2 per share in
cash for the remaining 82% of voting shares of MedPlus we do not currently own.
The closing of this transaction, which is also dependent on approval by MedPlus
shareholders, is expected to occur after the MedPlus annual meeting. At the
closing of the acquisition, we expect to use existing cash to fund the purchase
price (estimated at approximately $18 million) and related transaction costs of
the acquisition. The acquisition of MedPlus is expected to be accounted for
under the purchase method of accounting.
OUTLOOK
As discussed in the Overview, we believe that the underlying fundamentals
of the diagnostic testing industry are improving and will fuel growth for the
industry. As the leading national provider with the most extensive network of
laboratories and patient service centers throughout the United States, Quest
Diagnostics will be able to further enhance patient access and customer service.
We provide a broad range of benefits for customers, including: (1) continued
improvements in quality, convenience and accessibility, (2) a broad test menu,
and (3) a broad range of medical information products to help providers and
insurers better manage their patients' health. We plan to pursue profitable
growth opportunities, including: (1) direct contracting with employers for
laboratory services, (2) clinical trials testing for pharmaceutical companies,
(3) testing for hospitals, (4) genetic and other esoteric testing, and (5)
testing directly for consumers.
Finally, we believe that we have opportunities to achieve significant net
cost savings through the completion of the SBCL integration, which is estimated
to result in annual cost savings of approximately $150 million within three
years from the acquisition date. Management believes that the successful
integration of SBCL, along with the execution of our business strategy, will
enable us to achieve earnings growth, before special charges, in excess of 30%
annually over the next several years.
INFLATION
We believe that inflation generally does not have a material adverse effect
on its operations or financial condition because the majority of its contracts
are short term.
PRO FORMA COMPARISONS
For a detailed discussion and analysis comparing our historical results of
operations for the year ended December 31, 2000 to the pro forma combined
results of operations for the year ended December 31, 1999, see our Form 10-K
for the year ended December 31, 2000, which is incorporated by reference into
this prospectus supplement. The above referenced pro forma combined results of
operations for the year ended December 31, 1999 assumes that the SBCL
acquisition and borrowings under our existing senior secured credit facility
were effected on January 1, 1999 and does not contemplate the sale of the notes
offered pursuant to this prospectus supplement, the execution of our new senior
unsecured credit facility and the tender offer and consent solicitation for our
10 3/4% senior subordinated notes due 2006.
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BUSINESS
OVERVIEW
We are the nation's leading provider of diagnostic testing and related
services for the healthcare industry, with net revenues and Adjusted EBITDA of
approximately $3.4 billion and $484 million, respectively, for the twelve-month
period ended March 31, 2001. We offer a broad range of clinical laboratory
testing services used by physicians in the detection, diagnosis, evaluation,
monitoring and treatment of diseases and other medical conditions. We have a
more extensive national network of laboratories and patient service centers than
our competitors and revenues nearly double those of our nearest competitor. We
have the leading market share in clinical laboratory testing and esoteric
testing, including molecular diagnostics, as well as non-hospital based anatomic
pathology services and testing for drugs of abuse.
We currently process over 100 million requisitions each year. Each
requisition form accompanies a patient specimen, indicating the tests to be
performed and the party to be billed for the tests. Our customers include
physicians, hospitals, managed care organizations, employers, governmental
institutions and other independent clinical laboratories.
We have a network of principal laboratories located in approximately 30
major metropolitan areas throughout the United States, several joint venture
laboratories, approximately 150 smaller "rapid response" laboratories and
approximately 1,300 patient service centers. We also operate a leading esoteric
testing laboratory and development facility known as Nichols Institute located
in San Juan Capistrano, California as well as laboratory facilities in Mexico
City, Mexico and near London, England.
In addition to our laboratory testing business, our clinical trials
business is one of the leading providers of testing to support clinical trials
of new pharmaceuticals worldwide. We also collect and analyze laboratory,
pharmaceutical and other data through our Quest Informatics division in order to
help pharmaceutical companies with their marketing and disease management
efforts, as well as to help large healthcare customers better manage the health
of their patients.
On August 16, 1999, we completed the acquisition of SBCL. We estimate that
the successful execution of our business strategy, along with the expected
benefits of the SBCL acquisition, will yield an annual earnings growth rate
greater than 30% over the next several years, before special charges.
THE UNITED STATES CLINICAL LABORATORY TESTING MARKET
Clinical laboratory testing is an essential element in the delivery of
quality healthcare services. Physicians use laboratory tests to assist in the
detection, diagnosis, evaluation, monitoring and treatment of diseases and other
medical conditions. Clinical laboratory testing is generally categorized as
clinical testing and anatomical pathology testing. Clinical testing is performed
on body fluids, such as blood and urine. Anatomical pathology testing is
performed on tissues and other samples, such as human cells. Most clinical
laboratory tests are considered routine and can be performed by most independent
clinical laboratories. Tests that are not routine and that require more
sophisticated equipment and personnel are considered esoteric tests. Esoteric
tests are generally referred to laboratories that specialize in performing those
tests.
We believe that the United States diagnostics testing industry had over $30
billion in annual revenues in 2000 and we expect it to grow for the next several
years. Most laboratory tests are performed by one of three types of
laboratories: independent clinical laboratories, hospital-affiliated
laboratories, and physician-office laboratories. In 2000, we believe that
hospital-affiliated laboratories performed over one-half of the clinical
laboratory tests in the United States, independent clinical laboratories
performed approximately one-third of those tests, and physician-office
laboratories performed the balance.
Over the last several years, the underlying fundamentals of the diagnostics
testing industry have been improving. During the early 1990s, the industry was
negatively impacted by significant government regulation and investigations into
various billing practices. In addition, significant industry overcapacity for
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testing combined with the rapid growth of managed care, as a result of the need
to reduce overall healthcare costs, led to revenue and profit declines within
the laboratory testing industry. This in turn led to industry consolidation,
particularly among commercial laboratories, and a reduction in testing capacity.
As a result of these dynamics, fewer but larger commercial laboratories have
emerged which have greater economies of scale, new and rigorous programs
designed to assure compliance with government billing regulations and other
laws, and a more disciplined approach to pricing services. These changes,
principally led by us, have resulted in improved profitability and reduced risk
of non-compliance with complex government regulations. At the same time, a
decline in the number of patients covered by capitated managed care plans and a
decreasing influence by managed care organizations on the ordering of clinical
testing by providers have contributed to renewed growth in testing and further
improvements in profitability during 2000.
We believe that during the next several years, the industry will continue
to experience growth in testing volume due to the following factors:
- general aging of the United States population;
- increasing focus on early detection and prevention as a means to reduce
the overall cost of healthcare and development of more sophisticated and
specialized tests for early detection of disease and disease management;
- increasing volume of tests for diagnosis and monitoring of infectious
diseases such as AIDS and hepatitis C;
- research and development in the area of genomics, which is expected to
yield new genetic tests and techniques;
- increasing affordability of tests due to advances in technology and cost
efficiencies;
- increasing volume of tests as part of employer sponsored comprehensive
wellness programs;
- increasing awareness by consumers of the value of clinical laboratory
testing and increasing willingness of consumers to pay for tests that may
not be covered by third party payers; and
- slowing growth of managed care and decreasing influence of managed care
organizations on the ordering of clinical testing by providers as managed
care organizations impose fewer controls on providers and patients.
BUSINESS STRATEGY
Our mission is to be recognized by our customers and employees as the best
provider of comprehensive and innovative diagnostic testing, information and
related services. The principal components of this strategy are to:
- CAPITALIZE ON OUR LEADING POSITION WITHIN THE LABORATORY TESTING
MARKET: We are the leader in our core clinical laboratory testing
business and we have the most extensive national clinical laboratory
testing network. Our network of approximately 1,300 patient service
centers, 150 rapid response laboratories and principal laboratories in
approximately 30 major metropolitan areas enables us to serve managed
care organizations, hospitals, physicians, employers and other healthcare
providers and their patients throughout the United States. We believe
that customers will increasingly seek to utilize laboratory testing
companies that have a nationwide presence and offer a comprehensive range
of services and that, as a result, we will be able to profitably enhance
our market position.
- BECOME A LEADING PROVIDER OF MEDICAL INFORMATION: We believe that we
have the largest private clinical laboratory results database in the
world. This database continues to grow as we perform tests related to
over 100 million requisitions each year. We believe that this database
has substantial value since a significant portion of all healthcare
decisions and spending are impacted by laboratory testing results. Large
customers of clinical laboratories are increasingly interested in
integrating our
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clinical laboratory data with other healthcare information to answer
quality, marketing and finance related questions. In addition,
pharmaceutical manufacturers are increasing their use of this type of
data to expand their marketing efforts, as well as to promote disease
management. In order to meet these emerging needs for medical
information, our Quest Informatics division has developed a portfolio of
information products, including Internet-based health and information
services, that provide customers secure access to our extensive database,
along with medical and analytical expertise. We also provide customized
services for pharmaceutical and health product companies to support the
development and implementation of their business strategies. We intend to
maintain the trust of patients and providers by ensuring the security and
confidentiality of individual patient results.
- COMPETE THROUGH PROVIDING THE HIGHEST QUALITY SERVICES: We intend to
become recognized as the quality leader in the healthcare services
industry. We are implementing a Six Sigma initiative throughout our
organization. Six Sigma is an approach to management that requires a
thorough understanding of customer needs and requirements, rigorous
tracking and measuring of services, and training of employees in
methodologies so that they can be held accountable for improving results.
During 2000, we provided training to our employees in the Six Sigma
methodology and introduced high-impact quality improvement projects
throughout our organization. Two of our laboratories and our diagnostics
kits facility have achieved ISO-9001 certification and three of our
laboratories have achieved ISO-9002 certification, international
standards for quality management systems. Our Nichols Institute was the
first clinical laboratory in North America to achieve ISO-9001
certification. Several additional regional laboratories are currently
pursuing ISO-9002 certification.
- CONTINUE TO LEAD INNOVATION: We intend to remain a leading innovator in
the clinical laboratory industry by continuing to introduce new tests,
technology and services. As the industry leader with the largest and
broadest network, we believe we are the best channel for developers of
new equipment and tests to introduce their products to the marketplace.
Through our relationship with the academic community and pharmaceutical
and biotechnology firms, we believe that we are one of the leaders in
transferring technical innovation to the market. For example, we recently
developed and introduced a HIV-genotyping test which predicts the drug
resistance of HIV-infected patients and will help commercialize
HIV-phenotyping tests developed by third parties, which tests help select
the most appropriate combination therapy for HIV-infected patients. We
intend to continue to collaborate with and invest in emerging medical
technology companies that develop and commercialize novel diagnostics,
pharmaceutical and device technologies. We also intend to continue to
introduce new tests that we develop at Nichols Institute, one of the
leading esoteric testing laboratories in the world and the largest
provider of molecular diagnostics testing in the United States. We
believe that, with the unveiling of the human genome, new genes and the
association of these genes with disease will continue to be discovered at
an accelerating pace, leading to research that will result in ever more
complex and thorough diagnostic testing. We believe that we are well
positioned to capture this growth.
- PURSUE STRATEGIC GROWTH OPPORTUNITIES: We intend to continue to leverage
our network in order to capitalize on targeted strategic growth
opportunities both inside and outside our core laboratory testing
business. These opportunities are more fully described under
"-- Strategic Growth Opportunities" and include continuing to make
selective regional acquisitions, capturing growth in the areas of
genomics and specialty testing, expanding into the direct-to-consumer
market by providing testing and medical information services directly to
consumers, leveraging our leading non-hospital based anatomic pathology
business into higher margin areas and expanding our clinical trials
testing and other services to the pharmaceutical and biotechnology
industries.
- LEVERAGE OUR SATISFACTION MODEL: Our business philosophy is that
satisfied employees lead to satisfied customers, which in turn benefits
our stockholders. We regularly survey our employees and customers and
follow up on their concerns. We emphasize skills training for all
employees and leadership training for our supervisory employees. Most
importantly, we are committed to treating each employee with dignity and
respect and trust them to treat our customers the same way. We
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believe that our management approach, together with our competitive pay
and benefits, help improve employee satisfaction and performance,
enabling us to provide superior services to our customers.
ACQUISITION AND INTEGRATION OF SBCL
On August 16, 1999, we completed the acquisition of SBCL, which operated
the clinical laboratory business of SmithKline Beecham. The original purchase
price consisted of $1.025 billion in cash and approximately 25.1 million shares
of our common stock, which represented approximately 29% of our then outstanding
common stock. However, the SBCL acquisition agreements included a provision for
a reduction in the purchase price paid by us in the event that the combined
balance sheet of SBCL indicated that the net assets acquired, as of the
acquisition date, were below a prescribed level. On October 11, 2000, the
purchase price adjustment was finalized with the result that SmithKline Beecham
owed us $98.6 million. This amount was offset by $3.6 million separately owed by
us to SmithKline Beecham, resulting in a net payment to us by SmithKline Beecham
of $95.0 million. The purchase price adjustment was recorded in the fourth
quarter of 2000 as a reduction in the amount of goodwill recorded in conjunction
with the SBCL acquisition. The remaining components of the purchase price
allocation related to the SBCL acquisition were finalized in conjunction with
the preparation of our quarterly report on Form 10-Q for the fiscal quarter
ended September 30, 2000.
We expect to continue to realize significant benefits from combining our
existing laboratory network with that of SBCL. We have essentially completed the
process of reducing redundant facilities and infrastructure, including
laboratory consolidations in geographic markets served by more than one of our
laboratories and redirecting testing volume within our national network to
provide more local testing and improve customer service. We have not exited any
geographic markets as a result of this process. As of March 31, 2001, we had
completed the transition of approximately 96% of our business affected by
integration throughout our national laboratory network with 98% transitioned by
early April 2001. Other activities, for which no accruals had been recorded as
of December 31, 2000, including standardization of information systems, will
continue beyond 2001.
During and after the integration process, we are committed to providing the
highest levels of customer service. Through a corporate project office, we track
and monitor key service and quality metrics and slow down the integration
process in the event that we experience significant declines in these metrics.
We have not experienced any significant service disruptions to date. Management
believes that the successful implementation of the SBCL integration plan and our
value proposition based on expanded patient access, our broad testing
capabilities and, most importantly, the quality of the services we provide, will
mitigate customer attrition.
We continue to expect that the SBCL integration will result in
approximately $150 million of annual synergies to be achieved by the end of
2002. During 2000, we estimate that we realized approximately $50 million of
these synergies, and at the end of 2000 we had achieved an annual rate of
synergies approaching $100 million. We expect that during 2001 we will realize
additional synergies driven by cost reductions, and we anticipate that by the
end of 2001 we will achieve an annual rate of synergies of $100 million to $120
million. During the first quarter of 2001, we estimate that we realized
approximately $25 million of these synergies, and at the end of the first
quarter of 2001, we had achieved an annual rate of synergies of approximately
$100 million. However, we may not continue to realize these synergies or we may
not realize any of the additional anticipated benefits, either at all or in a
timely manner.
OUR SERVICES
Our laboratory testing business consists of routine testing, esoteric
testing, and clinical trials testing. Routine testing generates approximately
83% of our net revenues, esoteric testing generates approximately 12% of our net
revenues and clinical trials testing generates less than 3% of our net revenues.
We derive the balance of our net revenues primarily from the manufacture and
sale of diagnostic test systems, and from fees charged to customers, such as
managed care organizations and pharmaceutical companies, for
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information products derived from clinical laboratory data. We derive
approximately 2% of our net revenues from foreign operations.
ROUTINE TESTING
Routine tests measure various important bodily health parameters such as
the functions of the kidney, heart, liver, thyroid and other organs. Commonly
ordered tests include:
- blood cholesterol level tests;
- complete blood cell counts;
- pap smears and ThinPrep(R) Pap Tests(TM);
- HIV-related tests;
- urinalyses;
- pregnancy and other prenatal tests; and
- alcohol and other substance-abuse tests.
We perform routine testing through our network of major laboratories, rapid
response laboratories, or "stat" labs, and patient service centers. We also
perform routine testing at the hospital laboratories that we manage. Major
laboratories offer a full line of routine clinical tests. Rapid response
laboratories are local facilities where we can quickly perform an abbreviated
line of routine tests for customers that require rapid turnaround. Patient
service centers are facilities at which specimens are collected. These centers
are typically located in or near a building for medical professionals.
We operate 24 hours a day, 365 days a year. We perform and report most
routine procedures within 24 hours. Most test results are delivered
electronically.
ESOTERIC TESTING
Esoteric tests are those tests that are performed less frequently than
routine tests and require more sophisticated equipment and materials,
professional "hands-on" attention and more highly skilled personnel. Because it
is not cost-effective for most clinical laboratories to perform the low volume
of esoteric tests in-house, they generally refer many esoteric tests to an
esoteric clinical testing laboratory. Esoteric tests are generally priced higher
than routine tests.
Our Nichols Institute is one of the leading esoteric clinical testing
laboratories in the world. In 1998, Nichols Institute, located in San Juan
Capistrano, California, became the first clinical laboratory in North America to
achieve ISO-9001 certification. As a result of the SBCL acquisition, we acquired
SBCL's National Esoteric Testing Center, located in Van Nuys, California. We
have transferred esoteric testing performed at the Van Nuys facility to Nichols
Institute.
Nichols Institute performs hundreds of esoteric tests that are not
routinely performed by our regional laboratories. These esoteric tests are
generally in the following fields:
- endocrinology (the study of glands, their hormone secretions and their
effects on body growth and metabolism);
- genetics (the study of chromosomes, genes, and their protein products and
effects);
- immunology (the study of the immune system including antibodies, immune
system cells and their effects);
- microbiology (the study of microscopic forms of life including bacteria,
viruses, fungi and other infectious agents);
- oncology (the study of abnormal cell growth including benign tumors and
cancer);
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- serology (a science dealing with the body fluids and their analysis,
including antibodies, proteins and other characteristics);
- special chemistry (more sophisticated testing requiring special expertise
and technology); and
- toxicology (the study of chemicals and drugs and their effects on the
body's metabolism).
Through our relationship with the academic community and pharmaceutical and
biotechnology firms, we believe that we are one of the leaders in transferring
technical innovation to the market. Nichols Institute was the first private
reference laboratory to introduce a number of new tests, including tests to
measure circulating hormone levels and tests to predict breast cancer. We
continue to develop new and more sophisticated testing to monitor the success of
therapy for cancer, AIDS and hepatitis C, and to detect other diseases and
disorders. In 2000, we introduced automatic reflex high-risk DNA human
papillomavirus testing for borderline ThinPrep(R) Pap Tests(TM), using the
original specimen. In addition, we introduced HCV DupliType(TM) testing to
provide subtyping for a broader range of hepatitis C viral isolates than was
previously available using other technologies.
We use complex technologies such as branched DNA and polymerase chain
reaction (PCR) to detect lower levels of HIV than can be measured using other
technologies. The concentration of HIV, also referred to as viral load, can also
be measured. The ability to measure the viral load permits healthcare providers
to better tailor drug therapies for HIV-infected patients.
We maintain a relationship with the academic community through our Academic
Associates program, under which academia and biotechnology firms work directly
with our staff scientists to monitor and consult on existing test procedures and
develop new esoteric test methods. In addition, we have entered into licensing
arrangements and co-development agreements with biotechnology companies and
academic medical centers.
CLINICAL TRIALS TESTING
We believe that, as a result of the acquisition of SBCL's clinical trials
business, we are one of the world's three largest providers of clinical
laboratory testing performed in connection with clinical research trials on new
drugs. Clinical research trials are required by the FDA to assess the safety and
efficacy of new drugs. We have clinical trials testing centers in the United
States and in England. We also provide clinical trials testing in Australia and
South Africa through arrangements with third parties. Clinical trials involving
new drugs are increasingly being performed both inside and outside the United
States. Approximately one-third of our net revenues from clinical trials testing
represents testing for SmithKline Beecham. Under a ten-year agreement, we are
the primary provider of clinical trials testing services for SmithKline Beecham
worldwide. We believe that this business will not be negatively impacted by the
merger of SmithKline Beecham with Glaxo Wellcome which was completed in December
2000.
MEDICAL INFORMATION
The demand for comprehensive medical information continues to grow. Using
our extensive database as well as our core medical and analytical expertise, our
Quest Informatics division has developed a portfolio of information products
that enable customers to access a wide range of information critical to
healthcare and patient care decision making. These products can be used by
managed care organizations and other payers as well as large pharmaceutical
companies. These products maintain patient confidentiality and require patient
consent if patient identified information is provided to a third party.
We continue to explore ways to capitalize on the enormous potential of
providing healthcare information through opportunities ranging from
Internet-based health and information services to direct-to-consumer services.
During the second quarter of 2000, we began to provide laboratory results and
testing information directly to consumers who request it over the Internet
through Caresoft's consumer web site, TheDailyApple.com, enabling consumers,
without payment of any fee, to download these results into a secured personal
medical record. We believe that by providing customers with an easy-to-use and
rapid way to comprehensively analyze medical information, our customers will
increasingly want to use our
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services as both a testing company and information provider. As more and more
clinical laboratory customers continue to use comprehensive medical information
in their decision making, we are not only positioned to become the information
provider of choice, but also to do so through the most technologically advanced
and customer friendly means.
OTHER SERVICES AND PRODUCTS
We manufacture and market diagnostic test kits and systems primarily for
esoteric testing under the Nichols Institute Diagnostics brand name. These are
sold principally to hospital and clinical laboratories, both domestically and
internationally.
PAYERS AND CUSTOMERS
We provide testing services to a broad range of healthcare providers. We
consider a "payer" the party that pays for the test. Depending on the billing
arrangement and applicable law, the payer may be (1) the physician or other
party (such as another laboratory or an employer) who referred the testing to
us, (2) the patient, or (3) a third party who pays the bill for the patient,
such as an insurance company, Medicare or Medicaid. Some states, including New
York, New Jersey and Rhode Island, prohibit us from billing physician clients.
We generally consider a "customer" to be the party who refers tests to us. We
also consider a managed care organization that contracts with us on an exclusive
or semi-exclusive basis on behalf of its patients as both the payer and our
customer with respect to such patients.
During 2000, no single customer or affiliated group of customers accounted
for more than 5% of our net revenues. We believe that the loss of any one of our
customers would not have a material adverse effect on our financial condition,
results of operations, or cash flow.
PAYERS
The following table shows current estimates of the breakdown of the
percentage of our total volume of requisitions and total clinical laboratory
revenues during 2000 applicable to each payer group:
REVENUE AS
REQUISITION % OF TOTAL
VOLUME AS CLINICAL
% OF TOTAL LABORATORY
VOLUME REVENUES
----------- ----------
Patients.................................................... 3% - 5% 5% - 10%
Medicare and Medicaid....................................... 10% - 15% 10% - 15%
Physicians, Hospitals, Employers and Other Monthly-Billed
Payers.................................................... 30% - 35% 25% - 30%
Third Party Fee-for-Service................................. 25% - 30% 40% - 45%
Managed Care-Capitated...................................... 20% - 25% 5% - 10%
CUSTOMERS
Physicians
Physicians requiring testing for patients whose tests are not covered by a
managed care contract are one of the primary sources of our clinical laboratory
testing volume. We typically bill physician accounts on a fee-for-service basis.
Fees billed to physicians are based on the laboratory's client fee schedule and
are typically negotiated. Fees billed to patients and third parties are based on
the laboratory's patient fee schedule, which may be subject to limitations on
fees imposed by third-party payers and negotiation by physicians on behalf of
their patients. Medicare and Medicaid reimbursements are based on fee schedules
set by governmental authorities.
Managed Care Organizations
Managed care organizations, which typically contract with a limited number
of clinical laboratories for their members, represent a substantial portion of
our business. Larger managed care organizations typically
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prefer to use large independent clinical laboratories because they can provide
services on a national or regional basis and can manage networks of local or
regional laboratories. In addition, larger laboratories are better able to
achieve the low-cost structures necessary to profitably service large managed
care organizations and can provide test utilization data across their various
plans.
Over the last decade, the number of patients participating in managed care
plans has grown significantly. In addition, the managed care industry has been
consolidating, resulting in fewer but larger managed care organizations with
significant bargaining power in negotiating fee arrangements with healthcare
providers, including clinical laboratories. Managed care organizations
frequently negotiate capitated payment contracts for a portion of their
business, which shift the risk and cost of testing from the managed care
organization to the clinical laboratory. Under a capitated payment contract, the
clinical laboratory and the managed care organization agree to a per member, per
month payment to cover all laboratory tests during the month, regardless of the
number or cost of the tests actually performed. Some services, such as various
esoteric tests, new technologies and anatomic pathology services, may be carved
out from a capitated rate and, if carved out, are charged on a fee-for-service
basis. Some capitated payment contracts include retroactive or future fee
adjustments if the number of tests performed for the managed care organization
exceeds or is less than the negotiated threshold levels. For their
fee-for-service testing, managed care organizations also typically negotiate
substantial discounts.
Capitated agreements with managed care organizations have historically been
priced aggressively, particularly for exclusive or semi-exclusive arrangements.
This practice was due to competitive pressures, significant industry
overcapacity, and the expectation that a laboratory could capture not only the
testing covered under the contract, but also additional higher priced
fee-for-service business from participating physicians. However, as the number
of patients covered under managed care organizations increased, more patients
were covered by capitated agreements and there was less fee-for-service
business, and therefore less profitable business to offset the lower margin
capitated managed care business. Furthermore, physicians became increasingly
affiliated with more than one managed care organization, and, therefore, a
clinical laboratory received little, if any, additional fee-for-service testing
from participating physicians.
Recently, there has been a shift in the way major managed care
organizations contract with clinical laboratories. Managed care organizations
have begun to offer more freedom of choice to their affiliated physicians,
including greater freedom to determine which laboratory to use and which tests
to order. Accordingly, several agreements with major managed care organizations
have been renegotiated from exclusive contracts to non-exclusive contracts. As a
result, under these non-exclusive arrangements, physicians have more freedom of
choice in selecting laboratories, and laboratories are likely to compete more on
the basis of service and quality rather than price alone. As a result of this
emphasis on greater freedom of choice as well as our enhanced service network
and capabilities, and our focus on ensuring that overall arrangements are
profitable, pricing of managed care agreements has improved. Also, managed care
organizations have been recently giving patients greater freedom of choice and
patients have been increasingly selecting plans (such as preferred provider
organizations) that offer a greater choice of providers. Pricing for these
preferred provider organizations is typically negotiated on a fee-for-service
basis, which generally results in higher revenue per requisition than under a
capitated fee arrangement.
During 2000, we renegotiated several arrangements with managed care
organizations under which we are no longer responsible for all the costs of
clinical laboratory services provided to the members of the managed care
organizations, including the charges for tests performed by other laboratory
providers. As a result, net revenues and cost of services will no longer include
the cost of testing performed by third parties under these network management
arrangements. While this has the immediate effect of reducing our net revenues,
it reduces our risks associated with being financially responsible for the costs
of tests performed by other laboratories. In addition, we still have some
arrangements under which we are responsible for forming and managing a network
of subcontracted laboratories for the benefit of a managed care organization.
Under these arrangements we receive fees for the clinical laboratory services
that we perform as well as a fee for managing the laboratory network.
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Hospitals
We provide services to hospitals throughout the United States that vary
from esoteric testing to laboratory management arrangements. We believe that we
are the industry's market leader in servicing hospitals. Testing for hospitals
accounts for approximately 11% of our net revenues. Hospitals generally maintain
an on-site laboratory to perform testing on patients and refer less frequently
needed and highly specialized procedures to outside laboratories, which
typically charge the hospitals on a negotiated fee-for-service basis. We believe
that most hospital laboratories perform approximately 95% to 97% of their
patients' clinical laboratory tests. Many hospitals compete with independent
clinical laboratories by encouraging community physicians to send their testing
to the hospital's laboratory. In addition, hospitals that have purchased
physicians' practices generally require their physicians to send their tests to
the hospital's affiliated laboratory. As a result, hospital-affiliated
laboratories can be both customers and competitors for independent clinical
laboratories.
We have joint venture arrangements with leading integrated health delivery
networks in several metropolitan areas. These joint venture arrangements, which
provide testing for hospitals as well as for unaffiliated physicians and other
healthcare providers in their geographic areas, serve as our principal
laboratory facilities in their service areas. Typically, we have either a
majority ownership interest in, or day-to-day management responsibilities for,
our hospital joint venture relationships. We also manage laboratories at a
number of other hospitals.
Employers, Governmental Institutions and Other Clinical Laboratories
We provide testing services to governmental agencies, including the
Department of Defense and state and federal prison systems, and large employers.
We believe we are the leader in the clinical laboratory industry in providing
testing to employers for substance abuse, occupational exposures, and
comprehensive wellness programs. Wellness programs enable employers to take an
active role in lowering their overall healthcare costs. Testing services for
employers account for approximately 6% of our net revenues. We also perform
esoteric testing services for other independent clinical laboratories that do
not have the full range of our testing capabilities. All of these customers are
charged on a fee-for-service basis.
SALES AND MARKETING
We market to and service our customers through our direct sales force sales
representatives, customer service and patient service representatives and
couriers.
Since 1996, we have focused our sales efforts on pursuing and keeping
profitable accounts that generate an acceptable return. We have an active
account management process to evaluate the profitability of all of our accounts.
Where appropriate, we change the service levels, terminate accounts that are not
profitable, or adjust pricing.
Most sales representatives market routine laboratory services primarily to
physicians and hospitals. The remaining sales representatives focus on
particular market segments or on testing niches. For example, some
representatives concentrate on market segments such as hospitals or managed care
organizations, and others concentrate on testing niches such as substance-abuse
testing.
Customer service representatives perform a number of services for patients
and customers. They monitor services, answer questions and help resolve
problems. Our couriers pick up specimens from most clients daily.
STRATEGIC GROWTH OPPORTUNITIES
In addition to expanding our core clinical laboratory business through
internal growth and pursuing our strategy to become a leading provider of
medical information, we intend to continue to leverage our network in order to
capitalize on targeted growth opportunities both inside and outside our core
laboratory testing business.
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- SELECTIVE REGIONAL ACQUISITIONS: The clinical laboratory industry is
still fragmented. Historically, regional acquisitions fueled our growth.
We expect to focus future clinical laboratory acquisition efforts on
laboratories that can be integrated into our existing laboratories
without impeding the integration of SBCL's operations such as our
acquisition of the assets of Clinical Laboratories of Colorado in
February 2001. This strategy will enable us to reduce costs and gain
other benefits from the elimination of redundant facilities and
equipment, and reductions in personnel. We may also consider acquisitions
of ancillary businesses as part of our overall growth strategy.
- GENOMICS AND SPECIALTY TESTING: We intend to remain a leading innovator
in the clinical laboratory industry by continuing to introduce new tests,
technology and services. We estimate that the current United States
market in gene based testing is approximately $1 billion per year. We
believe that we have the largest gene based testing business in the
United States, with more than $225 million in annual revenues, and that
this business will grow by at least 25% per year over the next several
years. We believe that, with the unveiling of the human genome, the
discovery of new genes and the association of these genes with disease
will result in more complex and thorough diagnostic testing. We believe
that we are well positioned to capture this growth. We intend to focus on
commercializing diagnostic applications of discoveries in the areas of
functional genomics, or the analysis of genes and their functions, and
proteomics, or the discovery of new proteins made possible by the human
genome project.
- MEDICAL INFORMATION: We believe that we have the largest private
clinical laboratory results database in the world. This database
continues to grow as we perform tests related to over 100 million
requisitions each year. We believe that this database has substantial
value since a significant portion of all healthcare decisions and
spending are impacted by laboratory testing results. Large customers of
clinical laboratories are increasingly interested in integrating our
clinical laboratory data with other healthcare information to answer
quality, marketing and finance related questions. In addition,
pharmaceutical manufacturers are increasing their use of this type of
data to expand their marketing efforts as well as to promote disease
management. In order to meet these emerging needs for medical
information, our Quest Informatics division has developed a portfolio of
information products, including Internet-based health and information
services, that provide customers secure access to our extensive database,
along with medical and analytical expertise. We also provide customized
services for pharmaceutical and health product companies to support the
development and implementation of their business strategies. We intend to
maintain the trust of patients and providers by ensuring the security and
confidentiality of individual patient results.
- CONSUMER HEALTH: Currently, almost all the testing we perform is ordered
directly by a physician, who then receives the test results. However,
consumers are becoming increasingly interested in managing their own
health and health records. We believe that consumers will increasingly
want to order clinical laboratory tests themselves, particularly tests
that measure levels of cholesterol, PSA (prostate specific antigen),
glucose, hemoglobin Alc (diabetes monitoring), and TSH (thyroid
disorders), even if they are responsible for paying for the tests
themselves. Instead of first having to go to their treating physician to
order a test, consumers could order testing services directly through the
Internet or our network of patient service centers, which already
services over 80,000 patients each day. We have initiated a pilot program
providing direct testing access to consumers in several test markets and
have recently expanded this program into additional test markets. A
consumer-focused web site will be integral to the awareness and delivery
of information content surrounding the testing services provided in our
facilities. Laws in a number of states restrict the ability of consumers
to order tests directly and permit test results to be provided only to
the ordering physician. In order to serve consumers in these states and
comply with applicable law, we are utilizing a physician network to
facilitate ordering of tests and reporting of results. We believe that
consumer demand may result, over time, in the re-examination of
regulatory restrictions on consumers' ability to order clinical tests and
to receive test results directly.
- ANATOMIC PATHOLOGY: While we are the leading provider of non-hospital
based anatomic pathology services in the United States, we have
traditionally been strongest in the less profitable segments of
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the business, such as pap smears. We intend to expand our anatomic
pathology business into higher profit margin areas. For example, we have
currently converted more than 50% of our pap smear business to
ThinPrep(R), a higher quality, higher margin product offering. We believe
that the current United States market for anatomic pathology services is
approximately $5 billion per year and that we perform approximately $300
million of such services each year, representing a market position
significantly less than our share of the entire clinical laboratory
market.
- PHARMACEUTICAL AND BIOTECHNOLOGY SERVICES: Among our strengths are our
service relationships with more than half of the physicians in the United
States, our processing of over 100 million requisitions each year and our
clinical laboratory results database, which we believe to be the largest
private database of its kind in the world. We believe that we can
leverage these strengths to assist the pharmaceutical and biotechnology
industries in the development and commercialization of their products.
Recently, the global pharmaceutical industry has invested approximately
$50 billion annually in research and development of new products and
additional amounts in support of their commercialization. This spending
is expected to grow about 10% per annum in support of the increasing need
for new, innovative pharmaceutical products. Beyond our existing clinical
trials business, profitable growth opportunities exist in the following
areas: post-marketing (Phase IV) research, patient recruitment, genomics
(drug discovery), over-the-counter drug testing and pharmaceutical sales
and product detailing.
INFORMATION SYSTEMS
Information systems are used in laboratory testing, billing, customer
service, logistics, management of medical data, and other aspects of our
business. We believe that efficient handling of information involving patients,
payers, customers, and other parties will be critical to our future success.
During the 1980s and early 1990s when we acquired many of our laboratory
facilities, regional laboratories were operated as local, decentralized units.
When the laboratories were acquired, we did not make significant changes in
their method of operations and we did not standardize their billing, laboratory,
and some of their other information systems. As a result, by the end of 1995 we
had many different information systems for billing, test results reporting, and
other transactions. Over time, the growth in the size and network of our
customers and the increasing complexity of billing demonstrated a greater need
for standardized systems.
Prior to the acquisition of SBCL, we had chosen our proprietary SYS system
as our standard billing system and our QuestLab system (which is licensed from a
third party) as our standard laboratory information system, and had begun to
convert our laboratories to these standard systems. SBCL had standardized
billing and laboratory information systems (which were different from our
existing systems) throughout its laboratory network. During 2001 we plan to
begin implementing an enhanced laboratory information system and an enhanced
billing system that combine the functionality of the existing systems of Quest
Diagnostics and SBCL. We expect that this standardization process will take
several years to complete and result in significantly more centralized systems
than we have today. We expect the integration of these systems will improve
operating efficiency and provide management with more timely and comprehensive
information with which to make management decisions.
We continue to invest in the development and improvement of our
connectivity products for customers and providers by developing differentiated
products that will provide friendlier, easier access to information. During the
second quarter of 2000 we introduced a new service offering physicians secure
access to their patients' confidential laboratory results via the Internet
through our own web site. During the fourth quarter of 2000 we introduced a new
service enabling physicians to order tests (as well as receive results) through
our web site. This new service will allow us to replace desktop products that we
currently provide to most physicians. During the second quarter of 2000, we
entered into an agreement with MedPlus to market MedPlus' ChartMaxx and E. Maxx
patient record systems, which support the creation and management of an
electronic patient record, by bringing together in one patient-centric view
information from various sources including the physician's records and
laboratory and hospital data. On
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April 25, 2001, we signed a definitive agreement to acquire the outstanding
voting shares of MedPlus for approximately $18 million. We intend to consider
other strategic arrangements that will enhance our ability to introduce
electronic services to a broader variety of customers across all spectrums.
BILLING
Billing for laboratory services is complicated. Laboratories must bill
various payers, such as patients, insurance companies, Medicare, Medicaid,
doctors and employer groups, all of which have different requirements.
Additionally, auditing for compliance with applicable laws and regulations as
well as internal compliance policies and procedures adds complexity to the
billing process.
Most of our bad debt expense is the result of issues that are not
credit-related, primarily missing or incorrect billing information on
requisitions. In general, we perform the requested tests and report test results
regardless of whether the billing information is incorrect or missing. We
subsequently attempt to obtain any missing information and rectify incorrect
billing information received from the healthcare provider. Missing or incorrect
information on requisitions adds complexity to and slows the billing process,
creates backlogs of unbilled requisitions, and generally increases the aging of
accounts receivable. When all issues relating to the missing or incorrect
information are not resolved in a timely manner, the related receivables are
written-off to the allowance for doubtful accounts.
Among many other factors that complicate billing are (1) pricing
differences between our fee schedules and those of the payers, (2) disputes with
payers as to which party is responsible for payment, and (3) disparity in
coverage among various payers. Adjustments impacting receivables as a result of
these billing related matters are generally accounted for as revenue adjustments
and not written-off to the allowance for doubtful accounts.
We have implemented "best practices" for billing that have significantly
reduced the percentage of requisitions with missing billing information from
approximately 16% at the beginning of 1996 to approximately 5.5% immediately
prior to the acquisition of SBCL. These initiatives, together with progress in
dealing with Medicare medical necessity documentation requirements and
standardizing billing systems, have significantly reduced bad debt expense since
1996. During the twelve months ended July 31, 1999 (immediately prior to the
acquisition of SBCL), our bad debt expense was about 6% of net revenues
(adjusted to exclude the effect of testing performed by third parties under our
laboratory network management arrangements), while SBCL, which had not
implemented procedures similar to ours, had bad debt expense of about 10% of net
revenues (adjusted to exclude the effect of testing performed by third parties
under SBCL's laboratory network management arrangements). Since the acquisition,
we have begun to implement our pre-acquisition billing practices at the former
SBCL facilities, which we believe should enable us to lower overall bad debt
expense (including that of SBCL) to or below the levels immediately prior to the
acquisition. As a result of implementing these billing practices, bad debt
expense improved to about 7% of net revenues during 2000, from about 8% of net
revenues (adjusted to exclude the effect of testing performed by third parties
under our laboratory network management arrangements) just after completion of
the SBCL acquisition. Bad debt expense continued to improve during the first
quarter of 2001, to 6.3% of net revenues for the period, compared with 7.6% of
net revenues in the first quarter of 2000.
COMPETITION
The clinical laboratory testing business is fragmented and highly
competitive. We compete with three types of providers: hospital-affiliated
laboratories, other independent clinical laboratories, and physician-office
laboratories. We are the leading clinical laboratory provider in the United
States, with net revenues of approximately $3.4 billion during 2000 and
facilities in substantially all of the country's major metropolitan areas. Our
largest competitor is Laboratory Corporation of America Holdings, or LabCorp,
which had net revenues of approximately $1.9 billion during 2000. In addition,
we compete with many smaller regional and local independent clinical
laboratories, as well as with laboratories owned by physicians and hospitals.
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We believe that healthcare providers often consider the following factors,
among others, in selecting a laboratory:
- service capability and quality;
- accuracy, timeliness and consistency in reporting test results;
- number and type of tests performed by the laboratory;
- number, convenience and geographic coverage of patient service centers;
- reputation in the medical community; and
- pricing.
We believe that we compete favorably in each of these areas.
We believe that large independent clinical laboratories may be able to
increase their share of the overall clinical laboratory testing market due to
their large service networks and lower cost structures. These advantages should
enable larger clinical laboratories to serve large managed care organizations
more effectively and better deal with Medicare reimbursement reductions and
utilization controls, if any. In addition, we believe that consolidation in the
clinical laboratory testing business will continue.
QUALITY ASSURANCE
Our goal is to continually improve the processes for collection, storage
and transportation of patient specimens, as well as the precision and accuracy
of analysis and result reporting. Our quality assurance efforts focus on
proficiency testing, process audits, statistical process control and personnel
training for all of our laboratories and patient service centers. We are
implementing a Six Sigma process to help achieve our goal of becoming recognized
as the undisputed quality leader in the healthcare services industry.
INTERNAL PROFICIENCY TESTING, QUALITY CONTROL AND AUDITS. Quality control
samples are processed in parallel with the analysis of patient specimens. The
results of tests on quality control samples are then monitored to identify
drift, shift or imprecision in the analytical processes. In addition, we
administer an internal proficiency testing program, where proficiency testing
samples are processed and reported through our systems as routine patient
samples. We also perform internal process audits as part of our comprehensive
quality assurance program.
EXTERNAL PROFICIENCY TESTING AND ACCREDITATION. All our laboratories
participate in various quality surveillance programs conducted externally. These
programs supplement all other quality assurance procedures. They include
proficiency testing programs administered by the College of American
Pathologists, or CAP, as well as some state agencies.
CAP is an independent non-governmental organization of board certified
pathologists. CAP is approved by the Health Care Financing Administration to
inspect clinical laboratories to determine compliance with the standards
required by CLIA. CAP offers an accreditation program to which laboratories may
voluntarily subscribe. All of our major regional laboratories are accredited by
the CAP. Accreditation includes on-site inspections and participation in the CAP
(or equivalent) proficiency testing program.
REGULATION OF CLINICAL LABORATORY OPERATIONS
The clinical laboratory industry is subject to significant federal and
state regulation, including inspections and audits by governmental agencies. For
a detailed description of federal and state regulation of the clinical
laboratory industry, see our Form 10-K for the year ended December 31, 2000,
which is incorporated by reference into this prospectus supplement. Governmental
authorities may impose fines or criminal penalties or take other enforcement
actions to enforce laws and regulations, including revoking a clinical
laboratory's right to conduct business. Changes in regulation may increase the
costs of performing clinical laboratory tests or increase the administrative
requirements of claims.
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CONFIDENTIALITY OF HEALTH INFORMATION
See "Risk Factors -- The final privacy regulations that will take effect in
2003 and proposed federal security regulations under the Health Insurance
Portability and Accountability Act of 1996 will increase our costs and could
limit our ability to provide medical information."
REGULATION OF REIMBURSEMENT FOR CLINICAL LABORATORY SERVICES
Our annual report on Form 10-K for the fiscal year ended December 31, 2000,
which is incorporated by reference into this prospectus supplement, contains a
detailed description of the regulations on reimbursement for clinical laboratory
services.
GOVERNMENT INVESTIGATIONS AND RELATED CLAIMS
Our annual report on Form 10-K for the fiscal year ended December 31, 2000,
which is incorporated by reference into this prospectus supplement, contains a
detailed description of our government investigations and related claims.
COMPLIANCE PROGRAM
Compliance with all government rules and regulations has become a
significant concern throughout the clinical laboratory industry because of
evolving interpretations of regulations and the national debate over healthcare.
We began a compliance program early in 1993.
We emphasize the development of training programs intended to ensure the
strict implementation and observance of all applicable laws, regulations and
company policies. Further, we conduct in-depth reviews of procedures, personnel
and facilities to assure regulatory compliance throughout our operations. The
quality, safety and compliance committee of the board of directors requires
periodic reporting of compliance operations from management. Government
officials have publicly cited our compliance program as a model for the
industry.
In October 1996, we signed a five-year corporate integrity agreement with
the Office of the Inspector General (OIG). Under the agreement, we agreed to
take steps to demonstrate our integrity as a provider of services to federally
sponsored healthcare programs. These include steps to:
- maintain our corporate compliance program;
- adopt pricing guidelines;
- audit laboratory operations; and
- investigate and report instances of noncompliance, including any
corrective actions and disciplinary steps.
This agreement also gives us the opportunity to seek clearer guidance on
matters of compliance and to resolve compliance issues directly with the OIG.
SBCL also entered into a five-year corporate integrity agreement with the OIG
that became effective in 1997. As a result of our acquisition of SBCL, SBCL is
now covered under our corporate integrity agreement.
None of the undertakings included in our corporate integrity agreement are
expected to have any material adverse effect on our business, financial
condition, results of operations, cash flow, and prospects. We believe we comply
in all material respects with all applicable statutes and regulations. However,
we cannot assure you that no statutes or regulations will be interpreted or
applied by a prosecutorial, regulatory or judicial authority in a manner that
would adversely affect us. Potential sanctions for violation of these statutes
include significant damages, penalties, and fines, exclusion from participation
in governmental healthcare programs and the loss of various licenses,
certificates and authorization necessary to operate some or all of our business.
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INSURANCE
We maintain various liability and property insurance programs (subject to
maximum limits and self-insured retentions) for claims that could result from
providing or failing to provide clinical laboratory testing services, including
inaccurate testing results and other exposures. Management believes that present
insurance coverage and reserves are sufficient to cover currently estimated
exposures, but we cannot assure you that we will not incur liabilities in excess
of the policy limits. Similarly, although we believe that we will be able to
obtain adequate insurance coverage in the future at acceptable costs, we cannot
assure you that we will be able to do so.
EMPLOYEES
At both December 31, 2000 and 1999, we employed approximately 27,000
people. Approximately 25,000 of our employees were full-time at December 31,
2000. These totals exclude employees of the joint ventures in which we do not
have a majority interest. We have no collective bargaining agreements with any
unions, and we believe that our overall relations with our employees are good.
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DESCRIPTION OF NOTES
Each of the 6 3/4% senior notes due 2006 (the "Notes due 2006"), and the
7 1/2% senior notes due 2011 (the "Notes due 2011" and, together with the Notes
due 2006, the "Notes") are a separate issue of Debt Securities described in the
accompanying prospectus and will be issued under an indenture to be dated as of
June 27, 2001 and a supplemental indenture, to be dated as of June 27, 2001
(collectively, the "Indenture"), each among Quest Diagnostics, as issuer, the
Initial Subsidiary Guarantors, as guarantors, and the Bank of New York, as
trustee. The terms of the Notes include those stated in the Indenture and those
made part of the Indenture by reference to the Trust Indenture Act of 1939. A
copy of the Indenture is available for inspection at the office of the trustee.
This description of the terms of the Notes supplements the description of
the general terms and provisions of the Debt Securities in the accompanying
prospectus. If this summary differs in any way from that in the prospectus, you
should rely on this summary. Whenever we refer in this Description of Notes to
terms defined in the Indenture below, such defined terms are incorporated herein
by reference. As used in this Description of Notes, the terms "we," "our," "us,"
and "Quest Diagnostics" do not include any current or future subsidiary of Quest
Diagnostics Incorporated, unless the context indicates otherwise.
GENERAL
The Notes due 2006 will be initially limited to $275,000,000 aggregate
principal amount and will mature and become due and payable, together with any
accrued and unpaid interest thereon, on July 12, 2006. The Notes due 2011 will
be initially limited to $275,000,000 aggregate principal amount and will mature
and become due and payable, together with any accrued and unpaid interest
thereon on July 12, 2011.
Quest Diagnostics, may from time to time, without the consent of the
holders of Notes of either series, issue additional Notes of either series
having the same ranking and the same interest rate, maturity and other terms as
the Notes of that series. Any additional Notes of either series and the Notes of
that series will constitute a single series under the Indenture. This type of
offering is often referred to as a "reopening."
Each Note of either series will bear interest at the annual rate noted on
the cover page of this prospectus supplement. Interest will be payable
semiannually on January 12 and July 12 of each year, beginning January 12, 2002.
Interest on the Notes will be paid to holders of record on the January 1 or July
1 immediately before the interest payment date.
The Notes do not provide for any sinking fund.
GUARANTEES
Each Subsidiary Guarantor will fully and unconditionally guarantee, on a
joint and several basis, the payment of the principal of, premium and interest
on the Notes. The guarantees of the Notes will be endorsed on the Notes. In
addition, each future domestic Subsidiary of Quest Diagnostics or any Subsidiary
Guarantor which has been released and discharged from its obligations under the
guarantee of the Notes will be required to guarantee Quest Diagnostics'
obligations under the Notes, if such Subsidiary:
- guarantees any Indebtedness of Quest Diagnostics when the amount of
such Indebtedness, together with any other outstanding Indebtedness of
Quest Diagnostics guaranteed by its Subsidiaries that are not
Subsidiary Guarantors, exceeds $50 million in the aggregate at any
time; or
- incurs Indebtedness, unless such Indebtedness is permitted under the
"-- Limitation on Subsidiary Indebtedness and Preferred Stock"
covenant described below.
The Indenture provides that the obligations of each Subsidiary Guarantor
under its guarantee will be limited so as to not constitute a fraudulent
conveyance under any United States federal or state laws. Application of this
clause could limit the amount which holders of Notes may be entitled to collect
under
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the guarantees. Holders, by their acceptance of the Notes, will have agreed to
such limitations. See "Risk Factors -- Federal and state laws permit a court to
void a guarantee issued by any of our subsidiaries if the court finds the
guarantee to constitute a fraudulent conveyance."
The guarantees of the Subsidiary Guarantors with respect to the Notes of
either series will remain in effect with respect to each Subsidiary Guarantor
until the entire amount of principal of, premium, and interest on the Notes of
that series shall have been paid in full or otherwise discharged in accordance
with the provisions of the Indenture; provided, however, that if (a) a
Subsidiary Guarantor does not guarantee Indebtedness of Quest Diagnostics the
amount of which, when added together with any other outstanding Indebtedness of
Quest Diagnostics guaranteed by its Subsidiaries that are not Subsidiary
Guarantors, would exceed $50 million in the aggregate, excluding the Notes of
that series, and all outstanding Indebtedness of such Subsidiary Guarantor would
have been permitted to be incurred under the "-- Limitation on Subsidiary
Indebtedness and Preferred Stock" covenant described below measured at the time
of the release and discharge as described in this paragraph, (b) the Notes of
that series are defeased and discharged as described under "-- Application of
Defeasance Provision" or (c) all or substantially all of the assets of such
Subsidiary Guarantor or all of the capital stock of such Subsidiary Guarantor is
sold (including by issuance, merger, consolidation or otherwise) by Quest
Diagnostics or any of its Subsidiaries, then in each case of (a), (b) or (c)
above, such Subsidiary Guarantor or the corporation acquiring such assets (in
the event of a sale or other disposition of all or substantially all of the
assets or capital stock of such Subsidiary Guarantor) shall be released and
discharged from its obligations under its guarantee of the Notes of that series.
The subsidiaries of Quest Diagnostics which are the Initial Subsidiary
Guarantors on these Notes are the same subsidiaries that guaranteed Quest
Diagnostics' 10 3/4% senior subordinated notes due 2006. In accordance with
Securities and Exchange Commission rules and regulations, Quest Diagnostics
presents, among other things, condensed financial information with respect to
such subsidiaries on a combined basis in a footnote to its consolidated
financial statements in lieu of providing separate financial statements for each
such subsidiary.
SENIORITY; RANKING
The Notes will be senior unsecured obligations of Quest Diagnostics and
will rank equally with the other senior unsecured obligations of Quest
Diagnostics. Each guarantee will be a senior unsecured obligation of the
Subsidiary Guarantor issuing such guarantee and will rank equally with the other
senior unsecured obligations of such Subsidiary Guarantor. As of March 31, 2001,
after giving pro forma effect to this offering of Notes, the closing of the new
senior unsecured credit facility, and the application of the proceeds from these
two financing transactions, Quest Diagnostics and the Subsidiary Guarantors
would have had outstanding $758 million of long-term debt (including the current
portion thereof).
The Notes and the guarantees will be effectively subordinated to any
secured obligations of Quest Diagnostics or Subsidiary Guarantors, as the case
may be, to the extent of the value of the assets securing such obligations. The
Indenture does not limit the amount of indebtedness that Quest Diagnostics can
incur, but does limit the amount of secured indebtedness pursuant to the
covenant described under the heading "-- Limitation on Liens." This covenant is
subject to important exceptions described under such heading. As of March 31,
2001, after giving pro forma effect to this offering of notes, the closing of
the new senior unsecured credit facility, and application of the net proceeds
from these two financing transactions, Quest Diagnostics and the Subsidiary
Guarantors would have had outstanding $33 million of secured long-term debt
(including the current portion thereof).
Quest Diagnostics conducts its operations through subsidiaries, which
generate a substantial portion of its operating income and cash flow. As a
result, distributions or advances from subsidiaries of Quest Diagnostics are a
major source of funds necessary to meet its debt service and other obligations.
Contractual provisions, laws or regulations, as well as any subsidiary's
financial condition and operating requirements, may limit the ability of Quest
Diagnostics to obtain cash required to pay Quest Diagnostics' debt service
obligations, including payments on the Notes. The Notes will be structurally
subordinated to
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all existing and future obligations of Quest Diagnostics' subsidiaries (unless
such subsidiaries are Subsidiary Guarantors), including claims with respect to
trade payables. In addition, the guarantees of our Subsidiary Guarantors will be
structurally subordinated to all existing and future obligations of the
Subsidiary Guarantor's subsidiaries (unless such subsidiaries are also
Subsidiary Guarantors), including claims with respect to trade payables. This
means that holders of the Notes as guaranteed by the Subsidiary Guarantors will
have a junior position to the claims of creditors of the direct and indirect
subsidiaries of Quest Diagnostics which are not Subsidiary Guarantors on the
assets and earnings of such subsidiaries. The non-guarantor subsidiaries of
Quest Diagnostics are limited in the amount of Indebtedness they are permitted
to incur pursuant to the covenant described under "-- Limitation of Subsidiary
Indebtedness and Preferred Stock." This covenant is subject to important
exceptions described under such heading. In addition, the guarantees of the
Subsidiary Guarantors may be released in certain circumstances, which are
described under the heading "-- Guarantees." As of March 31, 2001, after giving
pro forma effect to this offering of notes, the closing of the new senior
unsecured credit facility, and application of the net proceeds from these two
financing transactions, the non-guarantor subsidiaries of Quest Diagnostics
would have had outstanding $256 million of debt (including the current portion
thereof) all of which was comprised of the Existing Receivables Credit Facility.
For a more detailed description of our Existing Receivables Credit Facility, see
"Description of Other Indebtedness -- Receivables Credit Facility."
OPTIONAL REDEMPTION
At any time and from time to time, the Notes of either series will be
redeemable, as a whole or in part, at the option of Quest Diagnostics, on at
least 30 days, but not more than 60 days, prior notice mailed to the registered
address of each holder of the Notes of that series, at a redemption price equal
to the greater of:
- 100% of principal amount of the Notes to be redeemed, and
- the sum of the present values of the Remaining Scheduled Payments (as
defined below) discounted, on a semiannual basis, assuming a 360-day year
consisting of twelve 30-day months, at the Treasury Rate (as defined
below) plus:
30 basis points for the 6 3/4% senior notes due 2006, or
35 basis points for the 7 1/2% senior notes due 2011.
plus, in each case, accrued interest to the date of redemption which has not
been paid.
On and after the redemption date for the Notes of either series, interest
will cease to accrue on the Notes of that series or any portion thereof called
for redemption, unless Quest Diagnostics defaults in the payment of the
redemption price and accrued interest. On or before the redemption date for the
Notes of either series, Quest Diagnostics shall deposit with a paying agent, or
the trustee, funds sufficient to pay the redemption price of and accrued
interest on the Notes of that series to be redeemed on such date. If less than
all of the Notes due 2006 or the Notes due 2011, as the case may be, are to be
redeemed, the Notes of either series to be redeemed shall be selected by the
trustee by such method as the trustee shall deem fair and appropriate.
"Remaining Scheduled Payments" means, with respect to the Notes of either
series to be redeemed, the remaining scheduled payments of the principal thereof
and interest thereon that would be due after the related redemption date but for
such redemption; provided, however, that, if such redemption date is not an
interest payment date with respect to the Notes of that series, the amount of
the next succeeding scheduled interest payment thereon will be deemed to be
reduced by the amount of interest accrued thereon to such redemption date.
"Treasury Rate" means, with respect to any redemption date for the Notes of
either series:
- the yield, which represents the average for the immediately preceding
week, appearing in the most recently published statistical release
designated "H.15(519)" or any successor publication which is
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published weekly by the Board of Governors of the Federal Reserve System
and which establishes yields on actively traded United States Treasury
securities adjusted to constant maturity under the caption "Treasury
Constant Maturities," for the maturity corresponding to the Comparable
Treasury Issue; provided that if no maturity is within three months
before or after the maturity date for the Notes of that series, yields
for the two published maturities most closely corresponding to the
Comparable Treasury Issue will be determined and the Treasury Rate will
be interpolated or extrapolated from those yields on a straight line
basis, rounding to the nearest month; or
- if that release, or any successor release, is not published during the
week preceding the calculation date or does not contain such yields, the
rate per annum equal to the semiannual equivalent yield to maturity of
the Comparable Treasury Issue, calculated using a price for the
Comparable Treasury Issue (expressed as a percentage of its principal
amount) equal to the Comparable Treasury Price for that redemption date.
The Treasury Rate will be calculated on the third business day preceding
the redemption date.
"Comparable Treasury Issue" means the United States Treasury security
selected by an Independent Investment Banker as having a maturity comparable to
the remaining term of the Notes due 2006 or the Notes due 2011, as the case may
be, to be redeemed that would be utilized, at the time of selection and in
accordance with customary financial practice, in pricing new issues of corporate
debt securities of comparable maturity to the remaining term of the Notes of the
relevant series.
"Independent Investment Banker" means one of the Reference Treasury
Dealers, to be appointed by Quest Diagnostics.
"Comparable Treasury Price" means, with respect to any redemption date for
the Notes:
- the average of four Reference Treasury Dealer Quotations for that
redemption date, after excluding the highest and lowest of such Reference
Treasury Dealer Quotations; or
- if the trustee obtains fewer than four Reference Treasury Dealer
Quotations, the average of all quotations obtained by the trustee.
"Reference Treasury Dealer Quotations" means, with respect to each
Reference Treasury Dealer and any redemption date, the average, as determined by
the trustee, of the bid and asked prices for the Comparable Treasury Issue,
expressed in each case as a percentage of its principal amount, quoted in
writing to the trustee by such Reference Treasury Dealer at 3:30 p.m., New York
City time, on the third business day preceding such redemption date.
"Reference Treasury Dealer" means a primary U.S. Government securities
dealer, which we refer to as "Primary Treasury Dealer," selected by Quest
Diagnostics.
SINKING FUND
The Notes will not be entitled to the benefit of any sinking fund.
LIMITATION ON LIENS
Other than as provided under "-- Exempted Liens and Sale and Leaseback
Transactions," Quest Diagnostics will not, and will not permit any Restricted
Subsidiary to, create or assume any Indebtedness secured by any Lien on any
Principal Property or shares of stock or Indebtedness of any Restricted
Subsidiary, unless: (1) in the case of Quest Diagnostics, the Notes are secured
by such Lien equally and ratably with, or prior to, the Indebtedness secured by
such Lien, or (2) in the case of any Subsidiary Guarantor, such Subsidiary
Guarantor's guarantee of the Notes is secured by such Lien equally and
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ratably with, or prior to, the Indebtedness secured by such Lien. The
restrictions do not apply to Indebtedness that is secured by:
- Liens existing on the date of the issuance of the Notes;
- Liens securing only the Notes;
- Liens in favor of only Quest Diagnostics or any Restricted Subsidiary;
- Liens on property or shares of stock or indebtedness of a Person existing
at the time such Person becomes a Restricted Subsidiary or is merged into
or consolidated with, or its assets are acquired by, Quest Diagnostics or
any Restricted Subsidiary (provided that such Lien was not incurred in
anticipation of such transaction and was in existence prior to such
transaction) so long as such Lien does not extend to any other property
and the Indebtedness so secured is not increased;
- Liens on property existing immediately prior to the acquisition thereof
(provided that such Lien was not incurred in anticipation of such
transaction and was in existence prior to such transaction) so long as
such Lien does not extend to any other property and the Indebtedness so
secured is not increased;
- Liens to secure Indebtedness incurred for the purpose of financing all or
any part of a property's purchase price or cost of construction or
additions, repairs, alterations, or other improvements; provided that (1)
the principal amount of any Indebtedness secured by such Lien does not
exceed 100% of such property's purchase price or cost, (2) such Lien does
not extend to or cover any other property other than the property so
purchased, constructed or on which such additions, repairs, alterations
or other improvements were so made, and (3) such Lien is incurred prior
to or within 270 days after the acquisition of such property or the
completion of construction or such additions, repairs, alterations or
other improvements and the full operation of such property thereafter;
- Liens in favor of the United States or any state thereof, or any
instrumentality of either, to secure certain payments pursuant to any
contract or statute;
- Liens for taxes or assessments or other governmental charges or levies
which are being contested in good faith and for which adequate reserves
are being maintained, to the extent required by generally accepted
accounting principles;
- title exceptions, easements and other similar Liens that are not
consensual and that do not materially impair the use of the property
subject thereto;
- Liens to secure obligations under workmen's compensation laws,
unemployment compensation, old-age pensions and other social security
benefits or similar legislation, including Liens with respect to
judgments which are not currently dischargeable;
- Liens arising out of legal proceedings, including Liens arising out of
judgments or awards;
- warehousemen's, materialmen's and other similar Liens for sums being
contested in good faith and for which adequate reserves are being
maintained, to the extent required by generally accepted accounting
principles;
- Liens incurred to secure the performance of statutory obligations, surety
or appeal bonds, performance or return-of-money bonds or other
obligations of a like nature incurred in the ordinary course of business;
or
- Liens to secure any extension, renewal, refinancing or refunding (or
successive extensions, renewals, refinancings or refundings), in whole or
in part, of any Indebtedness secured by Liens referred to in the
foregoing bullets or liens created in connection with any amendment,
consent or waiver relating to such Indebtedness, so long as such Lien
does not extend to any other property and the Indebtedness so secured
does not exceed the fair market value (as determined by our board of
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directors) of the assets subject to such Liens at the time of such
extension, renewal, refinancing or refunding, or such amendment, consent
or waiver, as the case may be.
LIMITATION ON SALE AND LEASEBACK TRANSACTIONS
Other than as provided under "-- Exempted Liens and Sale and Leaseback
Transactions," Quest Diagnostics will not, and will not permit any Restricted
Subsidiary to, enter into any Sale and Leaseback Transaction with respect to any
Principal Property unless:
- the Sale and Leaseback Transaction is solely with Quest Diagnostics or a
Subsidiary Guarantor; or
- the lease is for a period not in excess of five years, including renewal
rights; or
- Quest Diagnostics or the Restricted Subsidiary, prior to or within 270
days after the sale of such Principal Property in connection with the
Sale and Leaseback Transaction is completed, applies the net cash
proceeds of the sale of the Principal Property leased to:
(1) the retirement of the Notes or debt ranking equally with the
Notes of Quest Diagnostics or any Restricted Subsidiary, or
(2) the acquisition of different property, facilities or equipment
or the expansion of Quest Diagnostics' existing business,
including the acquisition of other businesses.
EXEMPTED LIENS AND SALE AND LEASEBACK TRANSACTIONS
Notwithstanding the restrictions described under the headings
"-- Limitation on Liens" or "-- Limitation on Sale and Leaseback Transactions,"
Quest Diagnostics or any Restricted Subsidiary may create or assume any Liens or
enter into any Sale and Leaseback Transactions not otherwise permitted as
described above, if the sum of the following does not exceed 5% of Consolidated
Total Assets:
- the outstanding Indebtedness secured by such Liens (not including any
Liens permitted under "-- Limitation on Liens" which amount does not
include any Liens permitted under the provisions of this "-- Exempted
Liens and Sale and Leaseback Transactions"); plus
- all Attributable Debt in respect of such Sale and Leaseback Transaction
entered into (not including any Sale and Leaseback Transactions permitted
under "-- Limitation on Sale and Leaseback Transactions" which amount
does not include any Sale and Leaseback Transactions permitted under the
provisions of this "-- Exempted Liens and Sale and Leaseback
Transactions"),
measured, in each case, at the time such Lien is incurred or any such Sale and
Leaseback Transaction is entered into by Quest Diagnostics or the Restricted
Subsidiary.
LIMITATION ON SUBSIDIARY INDEBTEDNESS AND PREFERRED STOCK
None of the Subsidiaries of Quest Diagnostics other than the Subsidiary
Guarantors may, directly or indirectly, create, incur, issue, assume or extend
the maturity of any Indebtedness (including Acquired Indebtedness) or Preferred
Stock except for the following, provided that, for purposes of this covenant,
any Acquired Indebtedness shall not be deemed to have been incurred until 270
days from the date (1) the Person obligated on such Acquired Indebtedness
becomes a Subsidiary of Quest Diagnostics or (2) the acquisition of assets, in
connection with which such Acquired Indebtedness was assumed, is consummated:
- Indebtedness outstanding on the date of the Indenture;
- Indebtedness representing the assumption by one Subsidiary of
Indebtedness of another Subsidiary;
- Indebtedness outstanding under any Receivables Credit Facility;
- Indebtedness secured by a Lien incurred for the purpose of financing all
or any part of a property's purchase price or cost of construction or
additions, repairs, alterations or other improvements, provided that such
Indebtedness and Lien is incurred prior to or within 270 days after the
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acquisition of such property or the completion of construction or such
additions, repairs, alterations or other improvements and the full
operation of such property thereafter;
- Indebtedness of any Subsidiary of Quest Diagnostics, the proceeds of
which are used to renew, extend, refinance or refund outstanding
Indebtedness of such Subsidiary; provided that such Indebtedness is
scheduled to mature no earlier than the Indebtedness being renewed,
extended, refinanced or refunded; provided further that such Indebtedness
shall be permitted hereunder only to the extent that the aggregate
principal amount of such Indebtedness (or, if such Indebtedness is issued
at a price less than the principal amount thereof, the aggregate amount
of gross proceeds therefrom) does not exceed the aggregate principal
amount then outstanding under the Indebtedness being renewed, extended,
refinanced or refunded (or if the Indebtedness being renewed, extended,
refinanced or refunded, was issued at a price less than the principal
amount thereof, then not in excess of the amount of liability in respect
thereof determined in accordance with generally accepted accounting
principles) plus the lesser of (A) the stated amount of any premium or
other payment required to be paid in connection with such a refinancing
pursuant to the terms of the Indebtedness being refinanced or (B) the
amount of premium or other payment actually paid at such time to
refinance the Indebtedness, plus, in either case, the amount of expenses
of such Subsidiary incurred in connection with such refinancing;
- Indebtedness of a Subsidiary of Quest Diagnostics to Quest Diagnostics or
to another Subsidiary of Quest Diagnostics;
- any Indebtedness resulting from a Sale and Leaseback Transaction which is
permitted by the "-- Limitation on Sale and Leaseback Transactions"
covenant (but not including any Sale and Leaseback Transaction which is
permitted by the "-- Exempted Liens and Sale and Leaseback Transactions"
provisions relating thereto);
- any Permitted Acquired Indebtedness;
- Preferred Stock to the extent that the aggregate liquidation preference
of Preferred Stock, outstanding at any one time, does not exceed 5% of
Consolidated Total Assets; or
- any Indebtedness, including any Acquired Indebtedness that is not
Permitted Acquired Indebtedness, the outstanding aggregate principal
amount of which does not at any one time exceed the greater of (1) 10% of
Consolidated Total Assets or (2) $200 million, measured in each case at
the time such Indebtedness is incurred.
MERGER, CONSOLIDATION OR SALE OF ASSETS
Quest Diagnostics may merge or consolidate with another Person and may
sell, transfer or lease all or substantially all of its assets to another Person
if all the following conditions are met:
- The merger, consolidation or sale of assets must not cause an event of
default. See "-- Events of Default." An event of default for this purpose
would also include any event that would be an event of default if the
notice or time requirements were disregarded;
- If Quest Diagnostics is not the surviving entity, the Person we would
merge or consolidate with, or sell all or substantially all of our assets
to, must be organized under the laws of the United States or any state
thereof;
- If Quest Diagnostics is not the surviving entity, the Person we would
merge or consolidate with, or sell all or substantially all of our assets
to, must expressly assume by supplemental indenture all of our
obligations under the Notes and the Indenture; and
- Quest Diagnostics must deliver specified certificates and documents to
the trustee.
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EVENTS OF DEFAULT
The term "Event of Default" in respect of the Notes of either series means
any of the following:
- Quest Diagnostics or any Subsidiary Guarantor does not pay the principal
of or any premium on the Notes of that series on its due date;
- Quest Diagnostics or any Subsidiary Guarantor does not pay interest on
the Notes of that series within 30 days of its due date whether at
maturity, upon redemption or upon acceleration;
- Quest Diagnostics or any Subsidiary Guarantor remains in breach of a
covenant in respect of the Notes of that series for 60 days after it
receives a written notice of default stating it is in breach and
requiring that it remedy the breach. The notice must be sent by either
the trustee or holders of 25% of the aggregate principal amount of the
Notes of that series;
- An event of default under any indenture or instrument evidencing or under
which Quest Diagnostics or any Subsidiary Guarantor then has outstanding
any Indebtedness shall occur and be continuing and either:
(1) such event of default results from the failure to pay the
principal of such Indebtedness in excess of $50 million at final
maturity of such Indebtedness, individually or in the aggregate; or
(2) as a result of such event of default the maturity of such
Indebtedness shall have been accelerated so that the same shall be or
become due and payable prior to the date on which the same would
otherwise have become due and payable and the principal amount of such
Indebtedness, together with the principal of any other Indebtedness of
Quest Diagnostics or such Subsidiary Guarantor in default, or the
maturity of which has been accelerated, aggregates at least $50 million,
individually or in the aggregate;
- Any Subsidiary Guarantor repudiates its obligations under its guarantee
of the Notes of that series or, other than by reason of the termination
of the Indenture or the release of any such guarantee in accordance with
the Indenture, any such guarantee ceases to be in full force and effect
or is declared null and void and such condition shall have continued for
a period of 30 days after written notice of such failure requiring Quest
Diagnostics or the Subsidiary Guarantor to remedy the same shall have
been given to Quest Diagnostics by the trustee or to Quest Diagnostics
and the trustee by the holders of 25% in aggregate principal amount of
the Notes of that series then outstanding; or
- Quest Diagnostics or any Subsidiary Guarantor files for bankruptcy or
certain other events of bankruptcy, insolvency or reorganization occur.
The trustee may withhold notice to the holders of Notes of any default
(except in the payment of principal or interest) if it considers such
withholding of notice to be in the best interests of the holders.
If an event of default with respect to the Notes of either series has
occurred and has not been cured, the trustee or the holders of 25% in aggregate
principal amount of the Notes of that series may declare the entire principal
amount (and premium, if any) of, and all the accrued interest on the Notes of
that series to be due and immediately payable. This is called a declaration of
acceleration of maturity. If an event of default with respect to the Notes of
either series occurs because of certain events in bankruptcy, insolvency or
reorganization, the principal amount of the Notes of that series will be
automatically accelerated, without any action by the trustee or any holder.
Holders of a majority in principal amount of the Notes of either series may also
waive certain past defaults under the Indenture on behalf of all of the holders
of the Notes of that series. A declaration of acceleration of maturity with
respect to the Notes of either series may be canceled, under specified
circumstances, by the holders of at least a majority in principal amount of the
Notes of that series.
Except in cases of default, where the trustee has some special duties, the
trustee is not required to take any action under the Indenture at the request of
any of the holders unless the holders offer the Trustee reasonable protection
from expenses and liability called an "indemnity." If reasonable indemnity is
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provided, the holders of a majority in principal amount of the Notes of either
series may, with respect to the Notes of that series, direct the time, method
and place of conducting any lawsuit or other formal legal action seeking any
remedy available to the trustee. The trustee may refuse to follow those
directions in certain circumstances. No delay or omission in exercising any
right or remedy will be treated as a waiver of the right, remedy or event of
default.
Before you are allowed to bypass the trustee and bring a lawsuit or other
formal legal action or take other steps to enforce your rights or protect your
interests relating to the Notes of either series, the following must occur:
- You must give the trustee written notice that an event of default has
occurred and remains uncured;
- The holders of at least 25% in principal amount of the outstanding Notes
of that series must make a written request that the trustee take action
because of the default and must offer the trustee indemnity against the
cost and other liabilities of taking that action;
- The trustee must not have taken action for 60 days after receipt of the
above notice and offer of indemnity; and
- Holders of a majority in principal amount of the Notes of that series
must not have given the trustee a direction inconsistent with the above
notice.
However, you are entitled at any time to bring a lawsuit for the payment of
money due on your Notes on or after the due date.
APPLICATION OF DEFEASANCE PROVISION
In the accompanying prospectus, there is a section called "Description of
Debt Securities -- Defeasance." This section describes provisions for the full
defeasance and covenant defeasance of securities held under the senior
indenture. These provisions will apply to the Notes.
BOOK ENTRY, DELIVERY AND FORM
The Notes of each series will be issued in one or more fully registered
global securities (the "Global Securities") which will be deposited with, or on
behalf of, The Depository Trust Company, New York, New York (the "Depository")
and registered in the name of Cede & Co., the Depository's nominee. Quest
Diagnostics will not issue Notes in certificated form. Beneficial interests in
the Global Securities will be represented through book-entry accounts of
financial institutions acting on behalf of beneficial owners as direct and
indirect participants in the Depository. Investors may elect to hold interests
in the Global Securities through the Depository. Beneficial interests in the
Global Securities will be held in denominations of $1,000 and integral multiples
thereof. Except as set forth below or in the accompanying prospectus, the Global
Securities may be transferred, in whole and not in part, only to another nominee
of the Depository or to a successor of the Depository or its nominee.
DEFINITIONS
The following definitions are applicable to this Description of Notes:
"Acquired Indebtedness" means Indebtedness of a Person (1) existing at the
time such Person becomes a Restricted Subsidiary or (2) assumed in connection
with the acquisition of assets by such Person, in each case, other than
Indebtedness incurred in connection with, or in contemplation of, such Person
becoming a Restricted Subsidiary or such acquisition, as the case may be.
"Attributable Debt" means, with respect to a Sale and Leaseback
Transaction, an amount equal to the lesser of: (1) the fair market value of the
property (as determined in good faith by our board of directors); and (2) the
present value of the total net amount of rent payments to be made under the
lease during its remaining term, discounted at the rate of interest set forth or
implicit in the terms of the lease,
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compounded semi-annually. The calculation of the present value of the total net
amount of rent payments is subject to adjustments specified in the Indenture.
"Capitalized Lease" means any obligation of a Person to pay rent or other
amounts incurred with respect to real property or equipment acquired or leased
by such Person and used in its business that is required to be recorded as a
capital lease in accordance with generally accepted accounting principles.
"Consolidated Total Assets" means, with respect to any Person as of any
date, the amount of total assets as shown on the consolidated balance sheet of
such Person for the most recent fiscal quarter for which financial statements
have been filed with the Securities and Exchange Commission, prepared in
accordance with accounting principles generally accepted in the United States.
"Existing Receivables Credit Facility" means the receivables-backed
financing transaction pursuant to (1) the Receivables Sales Agreement, dated as
of July 21, 2000 between Quest Diagnostics and each of its direct and indirect
wholly owned Subsidiaries that is a seller thereunder, and Quest Diagnostics
Receivables Inc., as the buyer, (2) the Credit and Security Agreement, dated as
of July 21, 2000 among Quest Diagnostics Receivables Inc., as borrower, Quest
Diagnostics, as initial servicer, each of the lenders from time to time party
thereto, and Wachovia Bank, N.A., as administrative agent, and (3) the various
related ancillary documents.
"Indebtedness" of any Person means, without duplication (1) any obligation
of such Person for money borrowed, (2) any obligation of such Person evidenced
by bonds, debentures, notes or other similar instruments, (3) any reimbursement
obligation of such Person in respect of letters of credit or other similar
instruments which support financial obligations which would otherwise become
Indebtedness, and (4) any obligation of such Person under Capitalized Leases;
provided, however, that "Indebtedness" of such Person shall not include any
obligation of such Person to any Subsidiary of such Person or to any Person with
respect to which such Person is a Subsidiary.
"Initial Subsidiary Guarantors" means each of Quest Diagnostics Holdings
Incorporated, Quest Diagnostics Clinical Laboratories, Inc., Quest Diagnostics
Incorporated (CA), Quest Diagnostics Incorporated (MD), Quest Diagnostics LLC,
Quest Diagnostics Incorporated (MI), Quest Diagnostics Incorporated (CT), Quest
Diagnostics Incorporated (MA), Quest Diagnostics of Pennsylvania Inc., Quest
Diagnostics Incorporated (OH), Metwest Inc., Nichols Institute Diagnostics, DPD
Holdings, Inc., Diagnostics Reference Services Inc., Laboratory Holdings
Incorporated, Pathology Building Partnership, Quest Diagnostics Investments
Incorporated and Quest Diagnostics Finance Incorporated.
"Lien" means any pledge, mortgage, lien, encumbrance or other security
interest.
"Officer's Certificate" means a certificate signed by any Officer of Quest
Diagnostics or any Subsidiary Guarantor, as the case may be, in his or her
capacity as such Officer and delivered to the trustee.
"Permitted Acquired Indebtedness" means any Acquired Indebtedness that
remains outstanding following the expiration of a good faith offer by Quest
Diagnostics or the Subsidiary of Quest Diagnostics obligated under such Acquired
Indebtedness to acquire such Acquired Indebtedness, including, without
limitation, an offer to exchange such Acquired Indebtedness for debt securities
of Quest Diagnostics, on terms, which in the opinion of an independent
investment banking firm of national reputation and standing, are consistent with
market practices in existence at the time for offers of a similar nature;
provided that the initial expiration date of any such offer shall be not later
than the expiration of the 270-day period referred to in the first paragraph of
the "Limitation on Subsidiary Indebtedness and Preferred Stock" covenant;
provided further, that the amount of Acquired Indebtedness that shall constitute
"Permitted Acquired Indebtedness" shall only be equal to the amount of Acquired
Indebtedness that Quest Diagnostics or such Subsidiary has made an offer to
acquire in accordance with the foregoing.
"Person" means any individual, corporation, limited liability company,
partnership, joint venture, association, joint stock company, trust,
unincorporated organization or government or any agency or political subdivision
thereof or other similar entity.
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"Preferred Stock" means, with respect to any Person, any and all shares of
preferred stock (however designated) issued by such Person, that is entitled to
preference or priority over one or more series or classes of capital stock
issued by such Person upon any distribution of such Person's property and
assets, whether by dividend or on liquidation, whether now outstanding, or
issued after the date that the Notes are issued.
"Principal Property" means any real property and any related buildings,
fixtures or other improvements located in the United States owned by Quest
Diagnostics or its Subsidiaries (1) on or in which one of its 30 largest
domestic clinical laboratories conducts operations, as determined by net
revenues for the four most recent fiscal quarters for which financial statements
have been filed with the Securities and Exchange Commission, or (2) the net book
value of which at the time of the determination exceeds 1% of the Consolidated
Total Assets of Quest Diagnostics. As of the date of this prospectus supplement,
Quest Diagnostics and its Subsidiaries owned 13 of the 30 largest domestic
clinical laboratories operated by Quest Diagnostics and its Subsidiaries. These
13 owned domestic clinical laboratories and Quest Diagnostic's administrative
office located in Collegeville, Pennsylvania are "Principal Properties" under
the above definition.
"Receivables Credit Facility" means any receivables-backed financing
transaction including the Existing Receivables Credit Facility, in each case as
such transaction may be amended or otherwise modified from time to time or
refinanced or replaced with respect to all or any portion of the indebtedness
under such transaction.
"Restricted Subsidiary" means any Subsidiary of Quest Diagnostics that owns
a Principal Property.
"Sale and Leaseback Transaction" means any arrangement with any person
providing for the leasing by Quest Diagnostics or any Restricted Subsidiary of
any Principal Property that has been or is to be sold or transferred by Quest
Diagnostics or any Restricted Subsidiary to such person, as the case may be.
"Subsidiary" of any Person means (1) a corporation, a majority of the
outstanding voting stock of which is, at the time, directly or indirectly, owned
by such Person by one or more Subsidiaries of such Person, or by such Person and
one or more Subsidiaries thereof or (2) any other Person (other than a
corporation), including, without limitation, a partnership or joint venture, in
which such Person, one or more Subsidiaries thereof or such Person and one or
more Subsidiaries thereof, directly or indirectly, at the date of determination
thereof, has at least majority ownership interest entitled to vote in the
election of directors, managers or trustees thereof (or other Person performing
similar functions).
"Subsidiary Guarantors" means, at any time, (1) each Initial Subsidiary
Guarantor and (2) each existing and future domestic Subsidiary of Quest
Diagnostics which is required to guarantee the obligations of Quest Diagnostics
under the Notes, provided that, in each case, such Initial Subsidiary Guarantor
or such other domestic Subsidiary continues to guarantee the Notes at such time.
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UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS
The following discussion is a summary of the material United States federal
income tax consequences relevant to the purchase, ownership and disposition of
the Notes, but does not purport to be a complete analysis of all potential tax
effects. The discussion is based upon the Internal Revenue Code of 1986, as
amended (the "Code"), United States Treasury Regulations issued thereunder,
Internal Revenue Service ("IRS") rulings and pronouncements and judicial
decisions now in effect, all of which are subject to change at any time. Any
such change may be applied retroactively in a manner that could adversely affect
a holder of the Notes. This discussion does not address all of the United States
federal income tax consequences that may be relevant to a holder in light of
such holder's particular circumstances or to holders subject to special rules,
such as certain financial institutions, U.S. expatriates, insurance companies,
dealers in securities or currencies, traders in securities, "United States
Holders" (as defined below) whose functional currency is not the U.S. dollar,
tax-exempt organizations and persons holding the notes as part of a "straddle,"
"hedge," "conversion transaction" or other integrated transaction. In addition,
this discussion is limited to persons purchasing the Notes for cash at original
issue and at their "issue price" within the meaning of Section 1273 of the Code.
Moreover, the effect of any applicable state, local or foreign tax laws is not
discussed. The discussion deals only with notes held as "capital assets" within
the meaning of Section 1221 of the Code.
As used in this prospectus supplement, "United States Holder" means a
beneficial owner of the Notes that is:
- a citizen or resident alien individual of the United States;
- a corporation, partnership or other entity taxable as a corporation
created or organized in or under the laws of the United States or
political subdivision thereof;
- an estate the income of which is subject to United States federal income
tax regardless of its source; or
- a trust, if a United States court can exercise primary supervision over
the administration of the trust and one or more United States persons can
control all substantial trust decisions, or if the trust was in existence
on August 20, 1996 and has elected to continue to be treated as a United
States person.
A non-United States Holder is a beneficial owner of Notes other than a
United States Holder.
PROSPECTIVE INVESTORS SHOULD CONSULT THEIR OWN TAX ADVISORS WITH REGARD TO
THE APPLICATION OF THE TAX CONSEQUENCES DISCUSSED BELOW TO THEIR PARTICULAR
SITUATIONS AS WELL AS THE APPLICATION OF ANY STATE, LOCAL, FOREIGN OR OTHER TAX
LAWS, INCLUDING GIFT AND ESTATE TAX LAWS.
UNITED STATES HOLDERS
Interest
Payments of stated interest on the Notes generally will be taxable to a
United States Holder as ordinary income at the time that such payments are
received or accrued, in accordance with such United States Holder's method of
accounting for United States federal income tax purposes.
Sale or Other Taxable Disposition of the Notes
A United States Holder will recognize gain or loss on the sale, exchange,
redemption, retirement or other taxable disposition of a Note equal to the
difference between the amount realized upon the disposition (less any portion
allocable to any accrued and unpaid interest not previously included in gross
income, which will be taxable as ordinary income) and the United States Holder's
adjusted tax basis in the Note. Such gain or loss generally will be a capital
gain or loss, and will be a long-term capital gain or loss if the United States
Holder has held the Note for more than one year. A United States Holder's
adjusted basis in a Note generally will be the cost of the Note, less any
principal payments received by such holder.
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Backup Withholding
A United States Holder may be subject to backup withholding tax, currently
at a 31% rate, when such holder receives interest and principal payments on the
Notes, or upon the proceeds received from the sale or other disposition of such
Notes. Certain United States Holders (including, among others, corporations and
certain tax-exempt organizations) generally are exempt from backup withholding.
A non-exempt United States Holder will be subject to this backup withholding tax
if such holder:
- fails to furnish its taxpayer identification number ("TIN"), which, for
an individual, ordinarily is his or her social security number;
- furnishes an incorrect TIN;
- is notified by the IRS that it has failed to properly report payments of
interest or dividends; or
- fails to certify, under penalties of perjury, that it has furnished a
correct TIN and that the IRS has not notified the United States Holder
that it is subject to backup withholding.
United States Holders should consult their personal tax advisors regarding
their qualification for an exemption from backup withholding and the procedures
for obtaining such an exemption, if applicable. The backup withholding tax is
not an additional tax and United States Holders may use amounts withheld as a
refund or credit against their United States federal income tax liability so
long as the requisite information is furnished to the IRS.
NON-UNITED STATES HOLDERS
Interest Payments and Gains from Dispositions
Interest paid to a non-United States Holder generally will not be subject
to United States federal income tax, and United States federal withholding tax
of 30% (or, if applicable, a lower treaty rate) will not apply, provided:
- such holder does not directly or indirectly, actually or constructively,
own 10% or more of our voting stock;
- such holder is not a controlled foreign corporation that is related to us
through stock ownership and is not a bank that received such Notes on an
extension of credit made pursuant to a loan agreement entered into in the
ordinary course of its trade or business;
- such interest is not effectively connected with a trade or business
conducted by the non-United States Holder within the United States; and
- either (1) the non-United States Holder certifies to us or our paying
agent, under penalties of perjury, that it is not a "United States
person" within the meaning of the Code and provides its name and address,
or (2) a securities clearing organization, bank or other financial
institution that holds customers' securities in the ordinary course of
its trade or business and holds the Notes on behalf of the non-United
States Holder certifies to us or our paying agent under penalties of
perjury that it, or the financial institution between it and the
non-United States Holder, has received from the non-United States Holder
a statement, under penalties of perjury, that such non-United States
Holder is not a "United States person" and provides us or our paying
agent with a copy of this statement.
The certification requirement described above may require a non-United
States Holder that provides an IRS form, and that claims the benefit of an
income tax treaty, to also provide its TIN. The applicable Treasury Regulations
also generally require, in the case of a Note held by a foreign partnership,
that:
- the certification described above be provided by the partners; and
- the partnership provide certain information, including a TIN.
Further, a look-through rule will apply in the case of tiered partnerships.
Prospective investors should consult their tax advisors regarding the
certification requirements for non-United States Holders.
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A non-United States Holder generally will not be subject to United States
federal income or withholding tax on gain recognized on the sale, exchange,
redemption, retirement or other disposition of a Note unless (1) such gain is
effectively connected with a trade or business conducted by the non-United
States Holder within the United States or (2) such holder is an individual who
was present in the United States for 183 days or more in the taxable year of the
disposition and certain other conditions are met.
If interest on the Notes or gain from a disposition of the Notes is
effectively connected with a non-United States Holder's conduct of a United
States trade or business (and, if an income tax treaty applies, the non-United
States Holder maintains a United States "permanent establishment" to which the
interest or gain is attributable), the non-United States Holder generally will
be subject to United States federal income tax on the interest or gain on a net
basis in the same manner as United States Holders. If interest income received
with respect to the Notes is taxable on a net basis, the 30% withholding tax
described above will not apply (assuming an appropriate certification is
provided). A foreign corporation that is a holder of a Note also may be subject
to a branch profits tax equal to 30% of its effectively connected earnings and
profits for the taxable year, subject to certain adjustments, unless it
qualifies for a lower rate under an applicable income tax treaty.
Backup Withholding and Information Reporting
Backup withholding and information reporting generally will not apply to
payments made by us or our paying agents, in their capacities as such, to a
non-United States Holder of a Note if the holder has provided the required
certification that it is not a United States person as described above, provided
that neither we nor our paying agent has actual knowledge that the holder is a
United States person. Payments of the proceeds from a disposition by a
non-United States Holder of a Note made to or through a foreign office of a
broker will likely not be subject to information reporting or backup
withholding, except that information reporting will apply to those payments if
the broker is:
- a United States person;
- a controlled foreign corporation for United States federal income tax
purposes;
- a foreign person 50% or more of whose gross income is effectively
connected with a United States trade or business for a specified
three-year period; or
- a foreign partnership, if at any time during its tax year, one or more of
its partners are United States persons, as defined in Treasury
regulations, who in the aggregate hold more than 50% of the income or
capital interest in the partnership or if, at any time during its tax
year, the foreign partnership is engaged in a United States trade or
business;
unless such broker has documentary evidence in its files of the holder's foreign
status and has no knowledge to the contrary, or the owner otherwise establishes
an exemption.
Payment of the proceeds from a disposition by a non-United States Holder of
a Note made to or through the United States office of a broker will be subject
to information reporting and backup withholding unless the holder or beneficial
owner certifies that it is not a "United States person" or otherwise establishes
an exemption from information reporting and backup withholding.
Non-United States Holders should consult their own tax advisors regarding
application of backup withholding in their particular circumstance and the
availability of and procedure for obtaining an exemption from backup withholding
under current Treasury Regulations. Any amounts withheld under the backup
withholding rules from a payment to a non-United States Holder will be allowed
as a refund or a credit against the holder's United States federal income tax
liability, provided the required information is furnished to the IRS.
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UNDERWRITING
We intend to offer the notes through the underwriters. Merrill Lynch,
Pierce, Fenner & Smith Incorporated, Credit Suisse First Boston Corporation,
Banc of America Securities LLC, UBS Warburg LLC, Wachovia Securities, Inc. and
BNY Capital Markets, Inc. are acting as underwriters. Subject to the terms and
conditions contained in a purchase agreement between us and the underwriters, we
have agreed to sell to the underwriters, and the underwriters severally have
agreed to purchase from us, the principal amount of the notes listed opposite
their names below.
PRINCIPAL PRINCIPAL
AMOUNT AMOUNT
OF 6 3/4% SENIOR OF 7 1/2% SENIOR
UNDERWRITER NOTES DUE 2006 NOTES DUE 2011
----------- ---------------- ----------------
Merrill Lynch, Pierce, Fenner & Smith Incorporated..... $106,564,000 $106,564,000
Credit Suisse First Boston Corporation................. 75,625,000 75,625,000
Banc of America Securities LLC......................... 32,656,000 32,656,000
UBS Warburg LLC........................................ 30,937,000 30,937,000
Wachovia Securities, Inc. ............................. 17,187,000 17,187,000
BNY Capital Markets, Inc. ............................. 12,031,000 12,031,000
------------ ------------
Total..................................... $275,000,000 $275,000,000
============ ============
The underwriters have agreed to purchase all of the notes sold pursuant to
the purchase agreement if any of these notes are purchased. If an underwriter
defaults, the purchase agreement provides that the purchase commitments of the
nondefaulting underwriters may be increased or the purchase agreement may be
terminated.
We have agreed to indemnify the underwriters against certain liabilities,
including liabilities under the Securities Act, or to contribute to payments the
underwriters may be required to make in respect of those liabilities.
The underwriters are offering the notes, subject to prior sale, when, as
and if issued to and accepted by them, subject to approval of legal matters by
their counsel, including the validity of the notes, and other conditions
contained in the purchase agreement, such as the receipt by the underwriters of
officer's certificates and legal opinions. The underwriters reserve the right to
withdraw, cancel or modify offers to the public and to reject orders in whole or
in part.
COMMISSIONS AND DISCOUNTS
The underwriters have advised us that they propose initially to offer the
6 3/4% senior notes due 2006 to the public at the public offering price on the
cover page of this prospectus supplement, and to dealers at that price less a
concession not in excess of .35% of the principal amount of the notes. The
underwriters may allow, and the dealers may reallow, a discount not in excess of
.25% of the principal amount of the notes to other dealers. After the initial
public offering, the public offering price, concession and discount may be
changed.
The underwriters have advised us that they propose initially to offer the
7 1/2% senior notes due 2011 to the public at the public offering price on the
cover page of this prospectus supplement, and to dealers at that price less a
concession not in excess of .4% of the principal amount of the notes. The
underwriters may allow, and the dealers may reallow, a discount not in excess of
.25% of the principal amount of the notes to other dealers. After the initial
public offering, the public offering price, concession and discount may be
changed.
The expenses of the offering, not including the underwriting discount, are
estimated to be approximately $2 million and are payable by us.
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NEW ISSUE OF NOTES
The notes are a new issue of securities with no established trading market.
We do not intend to apply for listing of the notes on any national securities
exchange or for quotation of the notes on any automated dealer quotation system.
We have been advised by the underwriters that they presently intend to make a
market in the notes after completion of the offering. However, they are under no
obligation to do so and may discontinue any market-making activities at any time
without any notice. We cannot assure the liquidity of the trading market for the
notes or that an active public market for the notes will develop. If an active
public trading market for the notes does not develop, the market price and
liquidity of the notes may be adversely affected.
NASD REGULATION
Because more than ten percent of the net proceeds of the offering may be
paid to members or affiliates of members of the National Association of
Securities Dealers, Inc. participating in the offering, the offering will be
conducted in accordance with NASD Conduct Rule 2710(c)(8). See "-- Other
Relationships" below.
PRICE STABILIZATION AND SHORT POSITIONS
In connection with the offering, the underwriters are permitted to engage
in transactions that stabilize the market price of the notes. Such transactions
consist of bids or purchases to peg, fix or maintain the price of the notes. If
the underwriters create a short position in the notes in connection with the
offering, i.e., if they sell more notes than are on the cover page of this
prospectus supplement, the underwriters may reduce that short position by
purchasing notes in the open market. Purchases of a security to stabilize the
price or to reduce a short position could cause the price of the security to be
higher than it might be in the absence of such purchases.
Neither we nor any of the underwriters makes any representation or
prediction as to the direction or magnitude of any effect that the transactions
described above may have on the price of the notes. In addition, neither we nor
any of the underwriters makes any representation that the underwriters will
engage in these transactions or that these transactions, once commenced, will
not be discontinued without notice.
OTHER RELATIONSHIPS
Some of the underwriters and their affiliates have engaged in, and may in
the future engage in, investment banking and other commercial dealings in the
ordinary course of business with us. They have received customary fees and
commissions for these transactions.
Affiliates of Merrill Lynch, Pierce, Fenner & Smith Incorporated, Banc of
America Securities LLC and BNY Capital Markets, Inc. are lenders under our
existing senior secured credit facility and will receive their proportionate
share of the repayment by us of amounts outstanding under our existing senior
secured credit facility from the net proceeds of this offering. See "Use of
Proceeds."
Affiliates of each of the underwriters of this offering of notes are
expected to be lenders under our new senior unsecured credit facility.
NOTICE TO CANADIAN RESIDENTS
RESALE RESTRICTIONS
The distribution of the notes in Canada is being made only on a private
placement basis exempt from the requirement that we prepare and file a
prospectus with the securities regulatory authorities in each province where
trades of notes are made. Any resale of the notes in Canada must be made under
applicable securities laws which will vary depending on the relevant
jurisdiction, and which may require resales to be made under available statutory
exemptions or under a discretionary exemption granted by the applicable Canadian
securities regulatory authority. Purchasers are advised to seek legal advice
prior to any resale of the notes.
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REPRESENTATIONS OF PURCHASERS
By purchasing notes in Canada and accepting a purchase confirmation a
purchaser is representing to us and the dealer from whom the purchase
confirmation is received that:
- the purchaser is entitled under applicable provincial securities laws to
purchase the notes without the benefit of a prospectus qualified under
those securities laws;
- where required by law, that the purchaser is purchasing as principal and
not as agent; and
- the purchaser has reviewed the text above under "-- Resale Restrictions."
RIGHTS OF ACTION (ONTARIO PURCHASERS)
The securities being offered are those of a foreign issuer and Ontario
purchasers will not receive the contractual right of action prescribed by
Ontario securities law. As a result, Ontario purchasers must rely on other
remedies that may be available, including common law rights of action for
damages or rescission or rights of action under the civil liability provisions
of the U.S. federal securities laws.
ENFORCEMENT OF LEGAL RIGHTS
All of the issuer's directors and officers as well as the experts named
herein may be located outside of Canada and, as a result, it may not be possible
for Canadian purchasers to effect service of process within Canada upon the
issuer or such persons. All or a substantial portion of the assets of the issuer
and such persons may be located outside of Canada and, as a result, it may not
be possible to satisfy a judgment against the issuer or such persons in Canada
or to enforce a judgment obtained in Canadian courts against such issuer or
persons outside of Canada.
NOTICE TO BRITISH COLUMBIA RESIDENTS
A purchaser of notes to whom the Securities Act (British Columbia) applies
is advised that the purchaser is required to file with the British Columbia
Securities Commission a report within ten days of the sale of any notes acquired
by the purchaser in this offering. The report must be in the form attached to
British Columbia Securities Commission Blanket Order BOR #95/17, a copy of which
may be obtained from us. Only one report must be filed for notes acquired on the
same date and under the same prospectus exemption.
TAXATION AND ELIGIBILITY FOR INVESTMENT
Canadian purchasers of notes should consult their own legal and tax
advisors with respect to the tax consequences of an investment in the notes in
their particular circumstances and about the eligibility of the notes for
investment by the purchaser under relevant Canadian legislation.
LEGAL MATTERS
Certain legal matters in connection with the notes offered hereby will be
passed upon for Quest Diagnostics by Leo C. Farrenkopf, Jr., Vice President,
Secretary and Deputy General Counsel of Quest Diagnostics, and by Shearman &
Sterling, New York, New York. Certain legal matters in connection with the notes
offered hereby will be passed upon for the underwriters by Fried, Frank, Harris,
Shriver & Jacobson (a partnership including professional corporations), New
York, New York.
EXPERTS
The consolidated financial statements of Quest Diagnostics Incorporated and
subsidiaries as of December 31, 2000 and 1999, and for each of the years in the
three-year period ended December 31, 2000, have been incorporated by reference
into this prospectus supplement in reliance upon the report of
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PricewaterhouseCoopers LLP, independent accountants, given upon the authority of
said firm as experts in accounting and auditing.
The combined balance sheets at December 31, 1998 and 1997 and the related
combined statements of operations, changes in parent's equity and cash flows for
each of the three years ended December 31, 1998, of SmithKline Beecham Clinical
Laboratories, Inc. and Certain Related Affiliates have been incorporated by
reference into this prospectus supplement in reliance upon the report of
PricewaterhouseCoopers LLP, independent accountants, given upon the authority of
said firm as experts in accounting and auditing.
WHERE YOU CAN FIND MORE INFORMATION
We file annual, quarterly and special reports, proxy statements and other
information with the SEC. You may read and copy any reports, statements or other
information we file with the SEC at its public reference rooms at 450 Fifth
Street, N.W., Washington, D.C. 20549, 7 World Trade Center, Suite 1300, New
York, New York 10048 and 500 West Madison Street, Suite 1400, Chicago, Illinois
60661. Please call the SEC at 1-800-SEC-0330 for further information on the
public reference rooms. Our filings are also available to the public on the
Internet, through a database maintained by the SEC at http://www.sec.gov. In
addition, you can inspect and copy our reports, proxy statements and other
information at the offices of the New York Stock Exchange, Inc., 20 Broad
Street, New York, New York 10005.
We filed a registration statement on Form S-3 to register with the SEC the
securities described in this prospectus supplement. This prospectus supplement
is part of that registration statement. As permitted by SEC rules, this
prospectus supplement does not contain all the information contained in the
registration statement or the exhibits to the registration statement. You may
refer to the registration statement and accompanying exhibits for more
information about us and our securities.
The SEC allows us to incorporate by reference into this document the
information we filed with it. This means that we can disclose important
business, financial and other information to you by referring you to other
documents separately filed with the SEC. All information incorporated by
reference is part of this document, unless and until that information is updated
and superseded by the information contained in this document or any information
incorporated later.
We incorporate by reference the documents listed below:
1. Our current reports on Form 8-K, filed on October 31, 2000 and June
1, 2001;
2. Our annual report on Form 10-K for the fiscal year ended December
31, 2000; and
3. Our quarterly report on Form 10-Q for the fiscal quarter ended
March 31, 2001.
You may request a copy of these filings, at no cost, by writing or
telephoning our Corporate Secretary at the following address:
Quest Diagnostics Incorporated
One Malcolm Avenue
Teterboro, New Jersey 07608
Attention: Corporate Secretary
(201) 393-5000
We also incorporate by reference all future filings we make with the SEC
under Sections 13(a), 13(c), 14 or 15(d) of the Securities Exchange Act of 1934
on or after the date of the effectiveness of such registration statement and
prior to the termination of the offering made hereby.
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PROSPECTUS
QUEST DIAGNOSTICS INCORPORATED
DEBT SECURITIES
GUARANTEES OF DEBT SECURITIES
PREFERRED STOCK
COMMON STOCK
[QUEST DIAGNOSTICS LOGO]
We may offer and sell, from time to time, in one or more offerings, up to
$600,000,000 of any combination of the debt and equity securities we describe in
this prospectus. If we decide to offer and sell our common stock, SmithKline
Beecham plc may also use this prospectus to offer and sell up to 3 million
shares of our common stock owned by it. We will not receive any proceeds from
the sale of our common stock by SmithKline Beecham plc.
Our debt securities may be fully and unconditionally guaranteed on an
unsecured basis by our subsidiaries as described in "Description of Debt
Securities -- Guarantees."
We will provide the specific terms of these securities in supplements to
this prospectus. This prospectus may not be used to sell securities unless
accompanied by a prospectus supplement. WE URGE YOU TO READ CAREFULLY THIS
PROSPECTUS AND THE ACCOMPANYING PROSPECTUS SUPPLEMENT, WHICH WILL DESCRIBE THE
SPECIFIC TERMS OF THE SECURITIES OFFERED, BEFORE YOU MAKE YOUR INVESTMENT
DECISION.
Our common stock trades on the New York Stock Exchange under the symbol
"DGX."
INVESTING IN OUR COMMON STOCK, PREFERRED STOCK OR DEBT SECURITIES INVOLVES
RISKS, SEE "RISK FACTORS" BEGINNING ON PAGE 1.
------------------------
Neither the Securities and Exchange Commission nor any other regulatory
body has approved or disapproved of these securities or passed upon the adequacy
or accuracy of this prospectus. Any representation to the contrary is a criminal
offense.
------------------------
The date of this prospectus is June 1, 2001
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TABLE OF CONTENTS
PAGE
----
About this Prospectus....................................... ii
Quest Diagnostics Incorporated.............................. ii
Risk Factors................................................ 1
Ratio of Earnings to Fixed Charges and Earnings to Combined
Fixed Charges and Preferred Stock Dividends............... 9
Use of Proceeds............................................. 9
Where You Can Find More Information......................... 10
Forward-Looking Statements.................................. 11
Securities We May Issue..................................... 12
Description of Debt Securities.............................. 16
Description of the Preferred Stock and the Depositary Shares
Representing Fractional Shares of Preferred Stock......... 28
Description of Common Stock................................. 33
Selling Stockholder......................................... 36
Plan of Distribution........................................ 37
Validity of the Securities.................................. 38
Independent Accountants..................................... 38
------------------------
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ABOUT THIS PROSPECTUS
This prospectus is part of a registration statement that we filed with the
Securities and Exchange Commission (the "SEC") using the SEC's shelf
registration rules. Under the shelf registration rules, using this prospectus,
together with a prospectus supplement, we may sell from time to time, in one or
more offerings, up to $600,000,000 of any of the securities described in this
prospectus. SmithKline Beecham may use this prospectus to offer and sell our
common stock that it owns as described in "Selling Stockholder" only as part of
an underwritten public offering. In December 2000, Glaxo Wellcome and SmithKline
Beecham merged to form GlaxoSmithKline plc.
In this prospectus we use the terms "Quest Diagnostics," "we," "us," and
"our" to refer to Quest Diagnostics Incorporated, a Delaware corporation.
This prospectus provides you with a general description of the securities
we may sell and the common stock that SmithKline Beecham may sell. Each time we
sell securities under this prospectus, we will provide a prospectus supplement
that will contain specific information about the terms of that offering. The
prospectus supplement may also add, update or change information contained in
this prospectus. You should read this prospectus, the applicable prospectus
supplement and the additional information described below under "Where You Can
Find More Information."
QUEST DIAGNOSTICS INCORPORATED
We are the nation's leading provider of diagnostic testing and related
services for the healthcare industry. We offer a broad range of clinical
laboratory testing services to physicians, hospitals, managed care
organizations, employers, governmental institutions and other independent
clinical laboratories. We have the leading market share in clinical laboratory
testing and esoteric testing, including molecular diagnostics, as well as
anatomic pathology services and testing for drugs of abuse. Esoteric tests are
those tests that are performed less frequently than routine tests and require
more sophisticated equipment and materials, professional "hands-on" attention
and more highly skilled personnel to perform and analyze results.
We currently process over 100 million requisitions each year. Each
requisition form accompanies a patient specimen, indicating the tests to be
performed and the party to be billed for the tests. Our national network of
laboratories and patient service centers is more extensive than those of our
competitors, with principal laboratories located in approximately 30 major
metropolitan areas throughout the United States, several joint venture
laboratories, approximately 150 smaller "rapid response" laboratories and
approximately 1,300 patient service centers. We also operate a leading esoteric
testing laboratory and development facility known as Nichols Institute located
in San Juan Capistrano, California as well as laboratory facilities in Mexico
City, Mexico and near London, England.
In addition to our laboratory testing business, our clinical trials
business is one of the leading providers of testing to support clinical trials
of new pharmaceuticals worldwide. We also collect and analyze laboratory,
pharmaceutical and other data through our Quest Informatics division in order to
help pharmaceutical companies with their marketing and disease management
efforts, as well as to help healthcare customers better manage the health of
their patients.
Our company is a Delaware corporation. Our principal executive offices are
located at One Malcolm Avenue, Teterboro, New Jersey 07608, and our telephone
number is (201) 393-5000.
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RISK FACTORS
You should carefully consider the risks described below before making a
decision to invest in our securities. Some of the following factors relate
principally to our business and the industry in which we operate. Other factors
relate principally to your investment in our securities. The risks and
uncertainties described below are not the only ones facing our company.
Additional risks and uncertainties not presently known to us or that we
currently deem immaterial may also adversely affect our business and operations.
If any of the matters included in the following risks were to occur, our
business, financial condition, results of operations, cash flows or prospects
could be materially adversely affected. In such case, the trading price of our
common stock could decline and you could lose all or part of your investment.
INTEGRATING OUR BUSINESS OPERATIONS WITH THOSE BUSINESSES THAT WE HAVE ACQUIRED
OR MAY ACQUIRE IN THE FUTURE MAY BE DIFFICULT AND MAY HAVE A MATERIAL ADVERSE
IMPACT ON OUR BUSINESS.
We are in the process of integrating into our company the operations of
SmithKline Beecham Clinical Laboratories, Inc., or SBCL, which we acquired in
August 1999. While we have substantially completed the transition of our
business affected by this integration, including consolidation of redundant
facilities and infrastructure and administrative and other duplicative
functions, certain other activities, such as standardization of information
systems, will continue beyond 2001. Given the large size of SBCL's operations
and the complexity of the clinical laboratory testing business, we expect that
it will take as long as three years from the date of this prospectus before we
fully complete the process. In addition, in February 2001 we acquired the assets
of Clinical Laboratories of Colorado. We may also acquire additional clinical
laboratories in the future as part of our growth strategy. Each of these
acquisitions involves the integration of separate companies that have previously
operated independently and have different corporate cultures. The process of
combining such companies may be disruptive to their businesses and may cause an
interruption of, or a loss of momentum in, such businesses as a result of the
following difficulties, among others:
- loss of key customers or employees;
- inconsistencies in standards, controls, procedures and policies among the
companies being combined make it more difficult to implement and
harmonize company-wide financial, accounting, billing, information and
other systems;
- failure to maintain the quality of services that such companies have
historically provided;
- coordination of geographically diverse organizations; and
- diversion of management's attention from the day-to-day business of our
company as a result of the need to deal with the above disruptions and
difficulties and the added costs of dealing with such disruptions.
In particular, since most of our clinical laboratory testing is performed under
arrangements that are terminable at will or on short notice, any such
interruption of or deterioration in our services may result in a customer's
decision to stop using us for clinical laboratory testing.
OUR ACQUISITIONS MAY NOT PRODUCE THE ANTICIPATED BENEFITS.
Even if we are able to successfully integrate the operations of SBCL into
our company, or the operations of other companies or businesses we may acquire
in the future, we may not be able to realize the full benefits that we currently
expect to result from such integration, either at all or in a timely manner.
Overall, we expect that the integration of SBCL will result in approximately
$150 million in annual synergies, to be achieved by the end of 2002. For the
year ended December 3l, 2000, we estimated that we achieved approximately $50
million of these synergies. However, we may not continue to realize these
synergies or we may not realize any of the additional anticipated benefits,
either at all or in a timely manner.
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FAILURE TO TIMELY OR ACCURATELY BILL FOR OUR SERVICES COULD HAVE A MATERIAL
ADVERSE IMPACT ON OUR NET REVENUES AND BAD DEBT EXPENSE.
Billing for laboratory services is extremely complicated. Laboratories must
bill various payers, such as patients, insurance companies, Medicare, Medicaid,
physicians and employer groups, all of which have different billing
requirements. In addition, auditing for compliance with applicable laws and
regulations as well as internal compliance policies and procedures adds further
complexity to the billing process. Among many other factors complicating billing
are:
- pricing differences between our fee schedules and the reimbursement rates
of the payers;
- disputes with payers as to which party is responsible for payment; and
- disparity in coverage among various carriers.
We believe that most of our bad debt expense, which was 7% of our net
revenues in 2000, is the result of several non-credit-related issues, primarily
missing or incorrect billing information on requisitions received from
healthcare providers. In general, we perform the requested tests and report test
results regardless of whether the billing information is incorrect or missing.
We subsequently attempt to contact the provider to obtain any missing
information or rectify incorrect billing information. Missing or incorrect
information on requisitions adds complexity to and slows the billing process,
creates backlogs of unbilled requisitions, and generally increases the aging of
accounts receivable. When all issues relating to the missing or incorrect
information are not resolved in a timely manner, the related receivables are
written-off to the allowance for doubtful accounts.
FAILURE IN OUR INFORMATION TECHNOLOGY SYSTEMS, INCLUDING FAILURES RESULTING FROM
OUR SYSTEMS CONVERSIONS, COULD SIGNIFICANTLY INCREASE TURN-AROUND TIME AND
OTHERWISE DISRUPT OUR OPERATIONS, WHICH COULD REDUCE OUR CUSTOMER BASE AND
RESULT IN LOST NET REVENUES.
Our success depends, in part, on the continued and uninterrupted
performance of our information technology, or IT, systems. Our computer systems
are vulnerable to damage from a variety of sources, including telecommunications
failures, malicious human acts and natural disasters. Moreover, despite network
security measures, some of our servers are potentially vulnerable to physical or
electronic break-ins, computer viruses and similar disruptive problems. Despite
the precautions we have taken, unanticipated problems affecting our systems
could cause failures in our IT systems. Sustained or repeated system failures
that interrupt our ability to process test orders, deliver test results or
perform tests in a timely manner would adversely affect our reputation and
result in a loss of customers and net revenues.
In addition, we are in the process of standardizing our systems as a result
of the SBCL acquisition, which process is difficult and will take several years
to complete. SBCL had standardized billing and laboratory information systems
throughout its laboratory network, which are different from our existing
systems. We plan to begin to develop and implement a new laboratory information
system and a new billing system that combine the functionality of the existing
systems of Quest Diagnostics and SBCL. We expect that the development and
implementation of the new systems will take several years. During systems
conversions of this type, workflow may be temporarily interrupted, which may
cause backlogs. In addition, the implementation process, including the
transferring of databases and master files to new data centers, presents
significant conversion risks which could cause failures in our IT systems and
disrupt our operations.
THE DEVELOPMENT OF NEW, MORE COST-EFFECTIVE TESTS THAT CAN BE PERFORMED BY
PHYSICIANS IN THEIR OFFICES OR BY PATIENTS COULD NEGATIVELY IMPACT OUR TESTING
VOLUME AND NET REVENUES.
The diagnostics testing industry is faced with changing technology and new
product introductions. Advances in technology may lead to the development of
more cost-effective tests that can be performed outside of an independent
clinical laboratory such as (1) point-of-care tests that can be performed by
physicians in their offices and (2) home testing that can be performed by
patients. Development of such technology and its use by our customers would
reduce the demand for our laboratory testing services and
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negatively impact our revenues. Currently, most clinical laboratory testing is
categorized as "high" or "moderate" complexity, and thereby subject to extensive
and costly regulation, under the Clinical Laboratory Improvement Amendments of
1988, or CLIA. The cost of compliance with CLIA makes it not cost effective for
most physicians to operate clinical laboratories in their offices; other laws
limit the ability of physicians to have ownership in a laboratory and refer
tests to such laboratory. However, manufacturers of laboratory equipment and
test kits could seek to increase their sales by marketing point of care
laboratory equipment to physicians and by selling test kits approved for home
use to both physicians and patients. Over-the-counter diagnostics tests are
automatically deemed to be "waived" tests under CLIA, which may then be
performed in physician office laboratories as well as by patients in their homes
with minimal regulatory oversight. The Food and Drug Administration, or FDA, has
regulatory responsibility over instruments, test kits, reagents and other
devices used by clinical laboratories and recently has taken responsibility from
Center for Disease Control, or CDC, for test classification. Increased approval
of home test kits could lead to increased testing by physicians in their
offices, which could affect our market for laboratory testing services and
negatively impact our revenues.
EFFORTS BY THIRD PARTY PAYERS, INCLUDING THE GOVERNMENT, TO REDUCE UTILIZATION
AND PRICING COULD HAVE A MATERIAL ADVERSE IMPACT ON OUR NET REVENUES AND
PROFITABILITY.
Government payers, such as Medicare and Medicaid, as well as private
payers, including managed care organizations, have taken steps and may continue
to take steps to control the cost, utilization and delivery of healthcare
services, including clinical laboratory services. Primarily as a result of
recent reimbursement rate reductions and utilization controls implemented by
government regulations, the percentage of our aggregate net revenues derived
from Medicare programs declined from 20% in 1995 to 13% in 2000. For a more
detailed description of the developments in government regulations, we urge
investors to read carefully our most recent annual report on Form 10-K filed
with the SEC and incorporated by reference into this prospectus.
In addition to changes in government reimbursement programs, private
payers, including managed care organizations, are demanding discounted fee
structures or the assumption by clinical laboratory service providers of all or
a portion of the financial risk through capitated payment contracts. Under
capitated payment contracts, clinical laboratories receive a fixed monthly fee
per individual enrolled with the managed care organization for all laboratory
tests performed during the month. In particular, managed care organizations,
which have significant bargaining power, frequently negotiate for capitated
payment contracts. In 2000, we derived approximately 9% of our revenues from
capitated payment contracts with managed care organizations. As the number of
patients covered by managed care organizations increased, more patients were
covered under capitated payment contracts, which resulted in reduced
opportunities for higher priced fee-for-service business and adversely affected
our profit margin.
We expect efforts to impose reduced reimbursements and more stringent cost
controls by government and other payers to continue. If we cannot offset
additional reductions in the payments we receive for our services by reducing
costs, increasing test volume and/or introducing new procedures, it could have a
material adverse impact on our net revenues and profitability.
FAILURE TO PROVIDE A HIGHER QUALITY OF SERVICE THAN THAT OF OUR COMPETITORS
COULD HAVE A MATERIAL ADVERSE IMPACT ON OUR NET REVENUES.
While there has been significant consolidation in the clinical laboratory
testing business in recent years, it remains a fragmented and highly competitive
industry. We compete with three types of laboratory providers:
hospital-affiliated laboratories, other independent clinical laboratories and
physician-office laboratories. Most physicians have admitting privileges or
other relationships with hospitals as part of their medical practice. Almost all
hospitals maintain an on-site laboratory to perform routine clinical testing on
their in-patients and out-patients. Many hospitals leverage their relationships
with community physicians and encourage the physicians to send their outreach
(non-hospital patients) testing to the hospital's laboratory. In addition,
hospitals that own physician practices generally require the physicians to refer
tests to the hospital's affiliated laboratories. As a result of this affiliation
between hospitals and community
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physicians, we compete against hospital-affiliated laboratories primarily based
on quality of service. Our failure to provide service superior to
hospital-affiliated laboratories and other laboratories could have a material
adverse impact on our net revenues.
IF WE FAIL TO COMPLY WITH EXTENSIVE LAWS AND REGULATIONS, WE COULD SUFFER
PENALTIES OR BE REQUIRED TO MAKE SIGNIFICANT CHANGES TO OUR OPERATIONS.
We are subject to extensive and frequently changing federal, state and
local laws and regulations. We believe that, based on our experience with
government settlements and public announcements by various government officials,
the federal government's position on healthcare fraud continues to harden. In
addition, legislative provisions relating to healthcare fraud and abuse give
federal enforcement personnel substantially increased funding, powers and
remedies to pursue suspected fraud and abuse. While we believe that we are in
material compliance with all applicable laws, many of the regulations applicable
to us, including those relating to billing and reimbursement of tests and those
relating to relationships with physicians and hospitals, are vague or indefinite
and have not been interpreted by the courts. They may be interpreted or applied
by a prosecutorial, regulatory or judicial authority in a manner that could
require us to make changes in our operations, including our billing practices.
If we fail to comply with applicable laws and regulations, we could suffer civil
and criminal penalties, including the loss of licenses or our ability to
participate in Medicare, Medicaid and other federal and state healthcare
programs.
During the mid-1990s, Quest Diagnostics and SBCL settled government claims
that primarily involved industry-wide billing and marketing practices that both
companies believed to be lawful. The aggregate amount of the settlements for
these claims exceeded $500 million. The federal or state governments may bring
additional claims based on new theories as to our practices that we believe to
be in compliance with law. The federal government has substantial leverage in
negotiating settlements since the amount of potential fines far exceeds the
rates at which we are reimbursed and the government has the remedy of excluding
a non-compliant provider from participation in the Medicare program, which
represented approximately 13% of our consolidated net revenues during 2000.
There remain pending against Quest Diagnostics and SBCL private claims
arising out of the settlement of the government claims, including several class
actions brought against SBCL. We believe that our reserves with respect to such
claims are adequate. However, we understand that there may be pending qui tam,
or "whistle blower," claims brought by former employees or others as to which we
have not been provided with a copy of the complaint and accordingly cannot
determine the extent of any potential liability. Liabilities with respect to the
claims that we know are pending against SBCL are generally covered by an
indemnification from SmithKline Beecham. The indemnities we obtained from
SmithKline Beecham in connection with liabilities from government investigations
do not cover governmental claims that arise after the closing date of the SBCL
acquisition, private claims unrelated to the governmental claims or
investigations subject to SBCL indemnification, and any consequential or
incidental damages relating to the billing claims, including losses of revenues
and profits as a consequence of exclusion from participation in federal or state
health care programs. For additional information, see our most recent annual
report on Form 10-K and quarterly reports on Form 10-Q filed with the Commission
and incorporated by reference into this prospectus.
THE FINAL PRIVACY REGULATIONS THAT WILL TAKE EFFECT IN 2003 AND PROPOSED FEDERAL
SECURITY REGULATIONS UNDER THE HEALTH INSURANCE PORTABILITY AND ACCOUNTABILITY
ACT OF 1996 WILL INCREASE OUR COSTS AND COULD LIMIT OUR ABILITY TO PROVIDE
MEDICAL INFORMATION.
Pursuant to the Health Insurance Portability and Accountability Act of
1996, or HIPAA, on December 28, 2000, the Secretary of the Department of Health
and Human Services, or HHS, issued final regulations that established
comprehensive federal standards with respect to the use and disclosure of
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protected health information by health plans, healthcare providers and
healthcare data clearinghouses. The regulations establish a complex regulatory
framework on a variety of subjects, including:
- the circumstances under which disclosures and uses of protected health
information require a general patient consent, specific authorization by
the patient, or no patient consent or authorization;
- the content of notices of privacy practices for protected health
information;
- patients' rights to access, amend, and receive an accounting of the
disclosures and uses of protected health information; and
- administrative, technical and physical safeguards required of entities
that use or receive protected health information.
The regulations establish a "floor" and do not supersede state laws that
are more stringent. Therefore, we are required to comply with both federal
privacy standards and varying state privacy laws. In addition, for healthcare
data transfers relating to citizens of other countries, we will need to comply
with the laws of other countries. The federal privacy regulations became
effective in April 2001 for healthcare providers, but healthcare providers have
until April 2003 to comply with the regulations. In addition, final standards
for electronic transactions were issued in August 2000 and will become effective
in October 2002. These regulations provide uniform standards for code sets
(codes representing medical procedures and laboratory tests and diagnosis codes
which are used, among others, in connection with the identification and billing
of medical procedures and laboratory tests), electronic claims, remittance
advice, enrollment, eligibility and other electronic transactions. Finally, the
proposed security and electronic signature regulations issued by the Secretary
of HHS in August 1998 pursuant to HIPAA are expected to be finalized this year.
HIPAA provides for significant fines and other penalties for wrongful disclosure
of protected health information. Compliance with the HIPAA requirements, when
finalized, will require significant capital and personnel resources from all
healthcare organizations, including ours. However, we will not be able to
estimate the cost of complying with all of these regulations, which we expect to
be significant, until after all the regulations are finalized. These
regulations, when finalized and effective, could also restrict our ability to
use our laboratory database to provide medical information for purposes other
than payment, treatment or healthcare operations, except for information that
does not identify a patient.
OUR TESTS AND BUSINESS PROCESSES MAY INFRINGE ON THE INTELLECTUAL PROPERTY
RIGHTS OF OTHERS, WHICH COULD CAUSE US TO ENGAGE IN COSTLY LITIGATION, PAY
SUBSTANTIAL DAMAGES OR PROHIBIT US FROM SELLING OUR TESTS.
Other companies or individuals, including our competitors, may obtain
patents or other property rights that would prevent, limit or interfere with our
ability to develop, perform or sell our tests or operate our business. As a
result, we may be involved in intellectual property litigation and we may be
found to infringe on the proprietary rights of others, which could force us to
do one or more of the following:
- cease developing, performing or selling products or services that
incorporate the challenged intellectual property;
- obtain and pay for licenses from the holder of the infringed intellectual
property right;
- redesign or reengineer our tests;
- change our business processes; or
- pay substantial damages, court costs and attorneys' fees, including
potentially increased damages for any infringement held to be willful.
Patents generally are not issued until several years after an application
is filed. The fact that, before a patent is issued to a third party, we may be
performing a test or other activity covered by the patent is not a defense to an
infringement claim. Thus, tests that we develop could become the subject of
infringement claims if a third party obtains a patent covering those tests.
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Infringement and other intellectual property claims, whether with or
without merit, can be expensive and time-consuming to litigate. In addition, any
requirement to reengineer our tests or change our business processes could
substantially increase our costs, force us to interrupt product sales or delay
new test releases. In the past, we have settled several disputes regarding our
alleged infringement of intellectual property of third parties. We are currently
involved in settling several additional disputes. We do not believe that
resolution of these disputes will have a material adverse effect on our
operations or financial condition. However, infringement claims could arise in
the future as patents could be issued on tests or processes that we may be
performing, particularly in such emerging areas as gene based testing and other
specialty testing.
PROFESSIONAL LIABILITY LITIGATION COULD HAVE AN ADVERSE IMPACT ON OUR CLIENT
BASE AND REPUTATION.
As a general matter, providers of clinical laboratory testing services may
be subject to lawsuits alleging negligence or other similar legal claims. These
suits could involve claims for substantial damages. Any professional liability
litigation could also have an adverse impact on our client base and reputation.
We maintain liability insurance for professional liability claims, subject to
maximum limits and self-insured retention. Our management believes that the
levels of coverage are adequate to cover currently estimated exposures.
FEDERAL AND STATE LAWS PERMIT A COURT TO VOID A GUARANTEE ISSUED BY ANY OF OUR
SUBSIDIARIES IF THE COURT FINDS THE GUARANTEE TO CONSTITUTE A FRAUDULENT
CONVEYANCE.
Our obligations under the debt securities may be guaranteed to the extent
described in this prospectus, and as further described in any prospectus
supplement, by our subsidiaries. These guarantees are subject to attack under
various federal and state fraudulent conveyance laws enacted for the protection
of creditors.
The issuance of a guarantee by any of our subsidiaries will constitute a
fraudulent conveyance if
- the guarantee was incurred by the subsidiary with the intent to hinder,
delay or defraud any present or future creditor; or
- the subsidiary did not receive fair consideration for issuing the
guarantee and such subsidiary (1) was insolvent or rendered insolvent by
reason of the issuance of the guarantee, (2) was engaged or about to
engage in a business or transaction for which the remaining assets of the
subsidiary constituted unreasonably small capital to carry on its
business or (3) intended to incur debts beyond its ability to pay such
debts as they matured.
Generally, an entity will be considered insolvent if:
- the sum of its debts is greater than the fair value of its property,
- the present fair value of its assets is less than the amount that it will
be required to pay on its existing debts as they become due, or
- it cannot pay its debts as they become due.
If a court finds a guarantee issued by a subsidiary of ours to constitute a
fraudulent conveyance, the court could give a lower priority to, or subordinate,
the claims of our debt securities against this subsidiary to the claims of other
creditors of this subsidiary. In addition, a court could avoid all or part of
the guarantee. To the extent the guarantee issued by a subsidiary of ours was
voided as a fraudulent conveyance, the holders of our debt securities would
cease to have any claim against the subsidiary and would be creditors solely of
Quest Diagnostics and any other subsidiary guarantor which was not found to have
made a fraudulent conveyance. See "Description of Debt
Securities -- Guarantees."
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OUR SUBSTANTIAL DEBT MAY IMPAIR OUR FINANCIAL AND OPERATING FLEXIBILITY.
We have a significant amount of debt. As of March 31, 2001, we had
approximately $1 billion of debt outstanding. As of March 31, 2001, the
aggregate amount of principal and interest payment obligations in respect of our
debt, including capital leases, for each of the next five years are as follows:
TWELVE MONTHS ENDED DECEMBER 31, PRINCIPAL INTEREST TOTAL
- -------------------------------- --------- -------- --------
(IN THOUSANDS)
2001.......................... $265,408 $98,147 $363,555
2002.......................... 7,337 95,465 102,802
2003.......................... 32,434 90,584 123,018
2004.......................... 6,666 88,875 95,541
2005.......................... 6,706 88,091 94,797
We determined the interest payment amounts in the table above using actual
interest expense for the three months ended March 31, 2001, and for subsequent
periods, the interest rates in effect as of March 31, 2001, after considering
the impact of our interest rate swap agreements on amounts of interest payable
on our debt carrying variable interest rates.
At March 31, 2001, we had approximately $848 million of variable interest
rate debt outstanding. Our credit agreement requires us to mitigate the risk of
changes in interest rates associated with a portion of our debt carrying
variable interest rates through the use of interest rate swap agreements. Under
such arrangements, we convert the variable interest rates on a portion of our
debt to fixed interest rates. As of March 31, 2001, we have entered into
interest rate swap agreements pursuant to which we have effectively converted
$410 million of our variable interest rate debt into fixed interest rate debt.
These agreements, which relate to different amounts of variable interest rate
debt, mature at various dates through November 2002.
Based on our net exposure to interest rate changes, an assumed 10% increase
in interest rates would result in an increase between $3 million and $5 million
in annual interest payments during the next five twelve month periods ending
December 31, 2005, after considering the impact of our interest rate swap
agreements on amounts of interest payable on our debt carrying variable interest
rates. The primary interest rate exposures on our debt carrying variable
interest rates are with respect to interest rates on United States dollars as
quoted in the London interbank market.
Our debt agreements contain various restrictive covenants. All these
restrictions, together with our high level of debt, could:
- limit our ability to use operating cash flow in other areas of our
business, because we must use a portion of these funds to make principal
and interest payments on our debt; and
- increase our vulnerability to interest-rate fluctuations because the debt
under our credit facility is at variable interest rates.
Our ability to make principal and interest payments on our debt and to
satisfy our other debt obligations will depend upon our ability to generate cash
in the future. If we do not generate sufficient cash flow to meet our debt
service requirements, we may need to seek additional financing. This may make it
more difficult for us to obtain financing on terms that are acceptable to us, or
at all. For additional information regarding our debt, including interest rates
and related payment obligations, see "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and Note 12 to our consolidated
financial statements included in our annual report on Form 10-K for the year
ended December 31, 2000 filed with the SEC and "Management's Discussion and
Analysis of Financial Condition and Results of Operations" included in our
quarterly report on Form 10-Q for the quarter ended March 31, 2001 filed with
the SEC.
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FUTURE SALES BY OUR STOCKHOLDERS COULD ADVERSELY AFFECT OUR COMMON STOCK PRICE.
As of June 1, 2001, in addition to the shares of our common stock that may
be offered by this prospectus, approximately 10.4 million shares of our common
stock are issuable upon exercise of outstanding stock options under our employee
stock options plan and non-employee director stock option plan and an additional
approximately 9.1 million shares of our common stock are reserved for issuance
of additional options and shares under these plans. We also issue shares of our
common stock under our employee stock purchase plan, employee stock ownership
plan and supplemental deferred compensation plan. In addition, SmithKline
Beecham, which owns about 22.2 million shares of our common stock or about 23.5%
of our outstanding common stock as of June 1, 2001, is entitled to demand up to
four times that we register its shares of our common stock and to participate in
registered offerings initiated by us or a third party. Sale of a substantial
number of our common stock in the market could adversely affect the price of our
common stock.
CERTAIN PROVISIONS OF OUR CHARTER, BY-LAWS AND DELAWARE LAW MAY DELAY OR PREVENT
A CHANGE OF CONTROL OF OUR COMPANY.
Our corporate documents and Delaware law contain provisions that may enable
our management to resist a change of control of our company. These provisions
include a staggered board of directors, limitations on persons authorized to
call a special meeting of stockholders and advance notice procedures required
for stockholders to make nominations of candidates for election as directors or
to bring matters before an annual meeting of stockholders. We also have a rights
plan designed to make it more costly and thus more difficult to gain control of
our company. These anti-takeover defenses might discourage, delay or prevent a
change of control. These provisions could also discourage proxy contests and
make it more difficult for you and other stockholders to elect directors and
cause us to take other corporate actions. In addition, the existence of these
provisions, together with Delaware law, might hinder or delay an attempted
takeover other than through negotiations with our board of directors.
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RATIO OF EARNINGS TO FIXED CHARGES AND EARNINGS TO
COMBINED FIXED CHARGES AND PREFERRED STOCK DIVIDENDS
Set forth below is information concerning our ratios of earnings to fixed
charges and earnings to combined fixed charges and preferred stock dividends.
These ratios show the extent to which our business generates enough earnings
after the payment of all expenses other than interest and preferred stock
dividends to make required interest and dividend payments on our debt and
preferred stock.
For this purpose, earnings consist of pretax income plus fixed charges.
Fixed charges consist of interest expense and one-third of rental expense,
representing that portion of rental expense we deemed representative of an
appropriate interest factor. Preferred stock dividends consist of the amount of
pretax earnings required to pay the dividends on outstanding preference
securities.
THREE
MONTHS
ENDED
MARCH 31, YEAR ENDED DECEMBER 31,
------------ ------------------------------------
2001 2000 1999 1998 1997 1996
------------ ---- ---- ---- ---- ----
Ratio of earnings to fixed charges........... 3.1x 2.4x 1.2x 2.0x (a) (a)
Ratio of earnings to combined fixed charges
and preferred stock dividends.............. 3.1x 2.4x 1.3x 2.0x (a) (a)
- ---------------
(a) Earnings were insufficient to cover fixed charges and combined fixed charges
and preferred stock dividend requirements by the following amounts in the
years indicated:
YEAR ENDED DECEMBER 31,
-----------------------
1997 1996
--------- ----------
(IN THOUSANDS)
$16,578 $676,202
USE OF PROCEEDS
Unless indicated otherwise in the applicable prospectus supplement, we
expect to use the net proceeds from the sale of our securities for general
corporate purposes, including, but not limited to, repayment or refinancing of
borrowings, working capital, capital expenditures and acquisitions. Additional
information on the use of net proceeds from the sale of securities offered by
this prospectus may be set forth in the prospectus supplement relating to such
offering. We will not receive any proceeds from the sale of our common stock by
SmithKline Beecham pursuant to the registration statement of which this
prospectus is a part.
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WHERE YOU CAN FIND MORE INFORMATION
We file annual, quarterly and special reports, proxy statements and other
information with the SEC. You may read and copy any reports, statements or other
information we file with the SEC at its public reference rooms at 450 Fifth
Street, N.W., Washington, D.C. 20549, 7 World Trade Center, Suite 1300, New
York, New York 10048 and 500 West Madison Street, Suite 1400, Chicago, Illinois
60661. Please call the SEC at 1-800-SEC-0330 for further information on the
public reference rooms. Our filings are also available to the public on the
Internet, through a database maintained by the SEC at http://www.sec.gov. In
addition, you can inspect and copy our reports, proxy statements and other
information at the offices of the New York Stock Exchange, Inc., 20 Broad
Street, New York, New York 10005.
Our subsidiary guarantors do not file separate financial statements with
the SEC and do not independently publish their financial statements. Instead,
our subsidiary guarantors' financial condition, results of operation and cash
flows are consolidated into our financial statements.
We filed a registration statement on Form S-3 to register with the SEC the
securities described in this prospectus. This prospectus is part of that
registration statement. As permitted by SEC rules, this prospectus does not
contain all the information contained in the registration statement or the
exhibits to the registration statement. You may refer to the registration
statement and accompanying exhibits for more information about us and our
securities.
The SEC allows us to incorporate by reference into this document the
information we filed with it. This means that we can disclose important
business, financial and other information to you by referring you to other
documents separately filed with the SEC. All information incorporated by
reference is part of this document, unless and until that information is updated
and superseded by the information contained in this document or any information
incorporated later.
We incorporate by reference the documents listed below:
1. Our current report on Form 8-K filed on October 31, 2000;
2. Our annual report on Form 10-K for the fiscal year ended December 31,
2000;
3. Our quarterly report on Form 10-Q for the fiscal quarter ended March 31,
2001;
4. Our current report on Form 8-K filed on June 1, 2001; and
5. The description of our common stock contained in our registration
statement on Form 10, filed pursuant to Section 12(b) of the Securities
Exchange Act of 1934 on September 23, 1996, as amended by Amendment No.
1 on Form 10/A, filed on November 6, 1996, Amendment No. 2 on Form 10/A,
filed on November 19, 1996, Amendment No. 3 on Form 10/A filed on
November 25, 1996 and Amendment No. 4 on Form 10/A filed on November 26,
1996.
You may request a copy of these filings, at no cost, by writing or
telephoning our Corporate Secretary at the following address:
Quest Diagnostics Incorporated
One Malcolm Avenue
Teterboro, New Jersey 07608
Attention: Corporate Secretary
(201) 393-5000
We also incorporate by reference all future filings we make with the SEC
under Section 13(a), 13(c), 14 or 15(d) of the Securities and Exchange Act of
1934 on or (i) after the date of the filing of the registration statement
containing this prospectus and prior to the effectiveness of such registration
statement and (ii) after the date of this prospectus and prior to the
termination of the offering made hereby.
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You should rely only on the information contained or incorporated by
reference in this prospectus and any prospectus supplement. We have not
authorized any other person to provide you with different information. If anyone
provides you with different or inconsistent information, you should not rely on
it. We are not making an offer to sell these securities in any jurisdiction
where the offer and sale is not permitted. You should assume that the
information appearing in this prospectus and information incorporated by
reference into this prospectus, is accurate only as of the date of the documents
containing the information. Our business, financial condition, results of
operation and prospects may have changed since that date.
FORWARD-LOOKING STATEMENTS
This prospectus and other materials we have filed or may file with the SEC,
as well as information included in other written statements made, or to be made,
by us, contain, or will contain, disclosures which are "forward-looking
statements." Forward-looking statements include all statements that do not
relate solely to historical or current facts, and can be identified by the use
of words such as "may," "believe," "will," "expect," "project," "estimate,"
"anticipate," "plan" or "continue." These forward-looking statements address,
among other things, our strategic objectives, the benefits of and potential cost
savings from our acquisition of SmithKline Beecham Clinical Laboratories, Inc.
These forward-looking statements are based on the current plans and expectations
of our management and are subject to a number of uncertainties and risks that
could significantly affect our current plans and expectations and future
financial condition and results, including, but not limited to, the risks
described in our Annual Report on Form 10-K and under "Risk Factors" in this
prospectus and the applicable prospectus supplement.
As a consequence, current plans, anticipated actions and future financial
conditions and results may differ significantly from those expressed in any
forward-looking statements made by or on behalf of our company.
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SECURITIES WE MAY ISSUE
OVERVIEW
This prospectus describes the securities we may issue from time to time.
The remainder of this section provides some background information about the
manner in which the securities may be held, then describes the terms of the
three basic categories of securities:
- our debt securities, which may be senior or subordinated;
- our preferred stock, which may be issued in the form of depositary shares
representing fractions of shares of preferred stock; and
- our common stock.
PROSPECTUS SUPPLEMENTS
This prospectus provides you with a general description of the securities
we may offer. Each time we sell securities, we will provide a prospectus
supplement that will contain specific information about the terms of that
offering. The prospectus supplement may also add to or change information
contained in this prospectus. If so, the prospectus supplement should be read as
superseding this prospectus. You should read both this prospectus and any
prospectus supplement together with additional information described under the
heading "Where You Can Find More Information."
The prospectus supplement to be attached to the front of this prospectus
will describe the terms of any securities that we offer and any initial offering
price to the public in that offering, the purchase price and net proceeds that
we will receive and the other specific terms related to our offering of the
securities. For more details on the terms of the securities, you should read the
exhibits filed with our registration statement, of which this prospectus is a
part.
LEGAL OWNERSHIP OF SECURITIES
HOLDERS OF SECURITIES
BOOK-ENTRY HOLDERS. We will issue debt securities in book-entry form only,
unless we specify otherwise in the applicable prospectus supplement. We may
issue shares of common stock and shares of preferred stock in book-entry form.
If securities are issued in book-entry form, this means the securities will be
represented by one or more global securities registered in the name of a
financial institution that holds them as depositary on behalf of other financial
institutions that participate in the depositary's book-entry system. These
participating institutions, in turn, hold beneficial interests in the securities
on behalf of themselves or their customers.
We will only recognize the person in whose name a security is registered as
the holder of that security. Consequently, for securities issued in global form,
we will recognize only the depositary as the holder of the securities and all
payments on the securities will be made to the depositary. The depositary passes
along the payments it receives to its participants, which in turn pass the
payments along to their customers who are the beneficial owners. The depositary
and its participants do so under agreements they have made with one another or
with their customers; they are not obligated to do so under the terms of the
securities.
As a result, investors will not own securities directly. Instead, they will
own beneficial interests in a global security, through a bank, broker or other
financial institution that participates in the depositary's book-entry system or
holds an interest through a participant. As long as the securities are issued in
global form, investors will be indirect holders, and not holders, of the
securities.
STREET NAME HOLDERS. In the future, we may terminate a global security or
issue securities initially in non-global form. In these cases, investors may
choose to hold their securities in their own names or in "street name."
Securities held by an investor in street name would be registered in the name of
a bank, broker or other financial institution that the investor chooses, and the
investor would hold only a beneficial interest in those securities through an
account he or she maintains at that institution.
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For securities held in street name, we will recognize only the intermediary
banks, brokers and other financial institutions in whose names the securities
are registered as the holders of those securities and all payments on those
securities will be made to them. These institutions pass along the payments they
receive to their customers who are the beneficial owners, but only because they
agree to do so in their customer agreements or because they are legally required
to do so. Investors who hold securities in street name will be indirect holders,
not holders, of those securities.
LEGAL HOLDERS. We, and any third parties employed by us or acting on your
behalf, such as trustees, depositories and transfer agents, are obligated only
to the legal holders of the securities. We do not have obligations to investors
who hold beneficial interests in global securities, in street name or by any
other indirect means. This will be the case whether an investor chooses to be an
indirect holder of a security or has no choice because we are issuing the
securities only in global form.
For example, once we make a payment or give a notice to the legal holder,
we have no further responsibility for the payment or notice even if that legal
holder is required, under agreements with depositary participants or customers
or by law, to pass it along to the indirect holders but does not do so.
Similarly, if we want to obtain the approval of the holders for any purpose (for
example, to amend an indenture or to relieve ourselves of the consequences of a
default or of our obligation to comply with a particular provision of the
indenture), we would seek the approval only from the legal holders, and not the
indirect holders, of the securities. Whether and how the legal holders contact
the indirect holders is up to the legal holders.
When we refer to you, we mean those who invest in the securities being
offered by this prospectus, whether they are the legal holders or only indirect
holders of those securities. When we refer to your securities, we mean the
securities in which you hold a direct or indirect interest.
SPECIAL CONSIDERATIONS FOR INDIRECT HOLDERS. If you hold securities
through a bank, broker or other financial institution, either in book-entry form
or in street name, you should check with your own institution to find out:
- how it handles securities payments and notices;
- whether it imposes fees or charges;
- how it would handle a request for the holders' consent, if ever required;
- whether and how you can instruct it to send you securities registered in
your own name so you can be a legal holder, if that is permitted in the
future;
- how it would exercise rights under the securities if there were a default
or other event triggering the need for holders to act to protect their
interests; and
- if the securities are in book-entry form, how the depositary's rules and
procedures will affect these matters.
GLOBAL SECURITIES
WHAT IS A GLOBAL SECURITY? A global security represents one or any other
number of individual securities. Generally, all securities represented by the
same global securities will have the same terms. We may, however, issue a global
security that represents multiple securities that have different terms and are
issued at different times. We call this kind of global security a master global
security.
Each security issued in book-entry form will be represented by a global
security that we deposit with and register in the name of a financial
institution that we select or its nominee. The financial institution that is
selected for this purpose is called the depositary. Unless we specify otherwise
in the applicable prospectus supplement, The Depository Trust Company, New York,
New York, known as DTC, will be the depositary for all securities issued in
book-entry form.
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A global security may not be transferred to or registered in the name of
anyone other than the depositary or its nominee, unless special termination
situations arise or as otherwise described in the prospectus supplement. We
describe those situations below under "-- Special Situations When a Global
Security Will Be Terminated." As a result of these arrangements, the depositary,
or its nominee, will be the sole registered owner and holder of all securities
represented by a global security, and investors will be permitted to own only
beneficial interests in a global security. Beneficial interests must be held by
means of an account with a broker, bank or other financial institution that in
turn has an account with the depositary or with another institution that does.
Thus, an investor whose security is represented by a global security will not be
a holder of the security, but only an indirect holder of a beneficial interest
in the global security.
SPECIAL CONSIDERATIONS FOR GLOBAL SECURITIES. As an indirect holder, an
investor's rights relating to a global security will be governed by the account
rules of the investor's financial institution and of the depositary, as well as
general laws relating to securities transfers. We do not recognize this type of
investor as a holder of securities and instead will deal only with the
depositary that holds the global security.
If securities are issued only in the form of a global security, an investor
should be aware of the following:
- An investor cannot cause the securities to be registered in his or her
name, and cannot obtain physical certificates for his or her interest in
the securities, except in the special situations we describe below.
- An investor will be an indirect holder and must look to his or her own
bank or broker for payments on the securities and protection of his or
her legal rights relating to the securities, as we describe under
"-- Holders of Securities" above.
- An investor may not be able to sell interests in the securities to some
insurance companies and to other institutions that are required by law to
own their securities in non-book-entry form.
- An investor may not be able to pledge his or her interest in a global
security in circumstances where certificates representing the securities
must be delivered to the lender or other beneficiary of the pledge in
order for the pledge to be effective.
- The depositary's policies, which may change from time to time, will
govern payments, transfers, exchanges and other matters relating to an
investor's interest in a global security. Neither we nor any third
parties employed by us or acting on your behalf, such as trustees and
transfer agents, have any responsibility for any aspect of the
depositary's actions or for its records of ownership interests in a
global security. We and the trustee do not supervise the depositary in
any way.
- DTC requires that those who purchase and sell interests in a global
security within its book-entry system use immediately available funds and
your broker or bank may require you to do so as well.
- Financial institutions that participate in the depositary's book-entry
system, and through which an investor holds its interest in a global
security, may also have their own policies affecting payments, notices
and other matters relating to the security. There may be more than one
financial intermediary in the chain of ownership for an investor. We do
not monitor and are not responsible for the actions of any of those
intermediaries.
SPECIAL SITUATIONS WHEN A GLOBAL SECURITY WILL BE TERMINATED. In a few
special situations described below, a global security will be terminated and
interests in it will be exchanged for certificates in non-global form
representing the securities it represented. After that exchange, the choice of
whether to hold the securities directly or in street name will be up to the
investor. Investors must consult their own banks or brokers to find out how to
have their interests in a global security transferred on termination to their
own names, so that they will be holders. We have described the rights of holders
and street name investors above under "-- Legal Ownership of
Securities -- Holders of Securities."
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The special situations for termination of a global security are as follows:
- if the depositary notifies us that it is unwilling, unable or no longer
qualified to continue as depositary for that global security and we do
not appoint another institution to act as depositary within a specified
time period;
- if we elect to terminate that global security; or
- if an event of default has occurred with regard to securities represented
by that global security and it has not been cured or waived.
The prospectus supplement may also list additional situations for
terminating a global security that would apply to a particular series of
securities covered by the prospectus supplement. If a global security is
terminated, only the depositary is responsible for deciding the names of the
institutions in whose names the securities represented by the global security
will be registered and, therefore, who will be the holders of those securities.
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DESCRIPTION OF DEBT SECURITIES
We may issue debt securities from time to time in one or more distinct
series. This section summarizes the material terms of our senior or subordinated
debt securities that are common to all series. Most of the financial and other
terms of any series of debt securities that we offer will be described in the
prospectus supplement to be attached to the front of this prospectus.
As required by U.S. federal law for all bonds and notes of companies that
are publicly offered, the debt securities will be governed by a document called
an "indenture." An indenture is a contract between us and a financial
institution, in this case, The Bank of New York, acting as trustee on your
behalf. The indenture will be subject to and governed by the Trust Indenture Act
of 1939. The trustee has two main roles:
- First, subject to some limitations, the trustee can enforce your rights
against us if we default.
- Second, the trustee performs certain administrative duties for us, which
include sending you interest payments and notices.
Because we may issue both senior debt securities and subordinated debt
securities, our references to the indenture are to each of the senior indenture
and the subordinated indenture, unless the context requires otherwise. In this
section, we refer to these indentures collectively as the "indentures." In
addition, because our debt securities may or may not be guaranteed by our
subsidiary guarantors, our references to subsidiary guarantors are applicable
only if the prospectus supplement indicates that the debt securities will be
guaranteed by our subsidiary guarantors.
Because this section is a summary of the material terms of the indentures,
it does not describe every aspect of the debt securities. We urge you to read
the indentures because they, and not this description, define your rights as a
holder of debt securities. Some of the definitions are repeated in this
prospectus, but for the rest you will need to read the indentures. We have filed
the forms of the indentures as exhibits to a registration statement that we have
filed with the SEC, of which this prospectus is a part. See "Where You Can Find
More Information," for information on how to obtain copies of the indentures.
GENERAL
The debt securities will be unsecured obligations of our company. The
senior debt securities will rank equally with all of our other unsecured and
unsubordinated indebtedness. The subordinated debt securities will be
subordinate and junior in right of payment to all our existing and future senior
indebtedness, as defined below.
To the extent that our debt securities are guaranteed, the debt securities
described in this prospectus may be fully and unconditionally guaranteed on a
joint and several basis by any of the following wholly-owned subsidiaries: Quest
Diagnostics Holdings Incorporated, Quest Diagnostics Clinical Laboratories,
Inc., Quest Diagnostics Incorporated (CA), Quest Diagnostics Incorporated (MD),
Quest Diagnostics LLC, Quest Diagnostics Incorporated (MI), Quest Diagnostics
Incorporated (CT), Quest Diagnostics Incorporated (MA), Quest Diagnostics of
Pennsylvania Inc., Quest Diagnostics Incorporated (OH), Metwest Inc., Nichols
Institute Diagnostics, DPD Holdings, Inc., Diagnostics Reference Services Inc.,
Pathology Building Partnership, Quest Diagnostics Investments Incorporated,
Quest Diagnostics Finance Incorporated and Laboratory Holdings Incorporated.
Guarantees of our senior debt securities will be unsecured senior obligations of
our subsidiary guarantors and will rank equally with all other unsecured and
unsubordinated obligations of such subsidiary guarantors. Guarantees of our
subordinated debt securities will be unsecured subordinated obligations of our
subsidiary guarantors and will be subordinate in right of payment to the prior
payment in full of all guarantees by our subsidiary guarantors of our senior
indebtedness.
Our debt securities are effectively subordinated to all existing and future
indebtedness and other liabilities (including trade payables and capital lease
obligations) of any of our subsidiaries not giving a guarantee, and would be so
subordinated if a guarantee issued by any of our subsidiary guarantors were
avoided or subordinated in favor of the subsidiary guarantor's other creditors.
See "Risk Factors -- Federal
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and state laws permit a court to void a guarantee issued by any of our
subsidiaries if the court finds the guarantee to constitute a fraudulent
conveyance."
You should read the prospectus supplement for the following terms of the
series of debt securities offered by the prospectus supplement:
- The title of the debt securities and whether the debt securities will be
senior debt securities or subordinated debt securities.
- The aggregate principal amount of the debt securities, the percentage of
their principal amount at which the debt securities will be issued and
the date or dates when the principal of the debt securities will be
payable or how those dates will be determined.
- The interest rate or rates, which may be fixed or variable, that the debt
securities will bear, if any, and how the rate or rates will be
determined.
- The date or dates from which any interest will accrue or how the date or
dates will be determined, the date or dates on which any interest will be
payable, any regular record dates for these payments or how these dates
will be determined and the basis on which any interest will be
calculated, if other than on the basis of a 360-day year of twelve 30-day
months.
- The place or places, if any, other than or in addition to New York City,
of payment, transfer, conversion and exchange of the debt securities and
where notices or demands to or upon us in respect of the debt securities
may be served.
- Any optional redemption provisions.
- Any sinking fund or other provisions that would obligate us to repurchase
or redeem the debt securities.
- Whether the amount of payments of principal of, or premium, if any, or
interest on the debt securities will be determined with reference to an
index, formula or other method, which could be based on one or more
commodities, equity indices or other indices, and how these amounts will
be determined.
- Any changes or additions to the events of default under the applicable
indenture or our covenants, including additions of any restrictive
covenants, with respect to the debt securities.
- If not the principal amount of the debt securities, the portion of the
principal amount that will be payable upon acceleration of the maturity
of the debt securities or how that portion will be determined.
- Any changes or additions to the provisions concerning defeasance and
covenant defeasance contained in the indenture that will be applicable to
the debt securities.
- Any provisions granting special rights to the holders of the debt
securities upon the occurrence of specified events.
- If other than the trustee, the name of any paying agent, security
registrar and transfer agent for the debt securities.
- If the debt securities are not to be issued in book-entry form only and
held by The Depositary Trust Company, as depositary, the form of such
debt securities, including whether such debt securities are to be
issuable in permanent or temporary global form, as registered securities,
bearer securities or both, any restrictions on the offer, sale or
delivery of bearer securities and the terms, if any, upon which bearer
securities of the series may be exchanged for registered securities of
the series and vice versa, if permitted by applicable law and
regulations.
- If other than US dollars, the currency or currencies of such debt
securities.
- The person to whom any interest in a debt security will be payable, if
other than the registered holder at the close of business on the regular
record date.
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- The denomination or denominations that the debt securities will be
issued, if other than denominations of $1,000 or any integral multiples
in the case of the registered securities and $5,000 or any integral
multiples in the case of the bearer securities.
- Whether such debt securities will be convertible into or exchangeable for
any other securities and, if so, the terms and conditions upon which such
debt securities will be so convertible or exchangeable.
- A discussion of federal income tax, accounting and other special
considerations, procedures and limitations with respect to the debt
securities.
- Whether and under what circumstances we will pay additional amounts to
holders in respect of any tax assessment or government charge, and, if
so, whether we will have the option to redeem the debt securities rather
than pay such additional amounts.
- Whether payment of any amounts due under the applicable indenture will be
guaranteed by one or more of our subsidiaries.
- Any other terms of the debt securities that are consistent with the
provisions of the indenture.
For purposes of this prospectus, any reference to the payment of principal
of, premium or interest, if any, on debt securities will include additional
amounts if required by the terms of such debt securities.
The indentures do not limit the amount of debt securities that we are
authorized to issue from time to time. The indentures also provide that there
may be more than one trustee thereunder, each for one or more series of debt
securities. At a time when two or more trustees are acting under the indenture,
each with respect to only certain series, the term "debt securities" means the
series of debt securities for which each respective trustee is acting. If there
is more than one trustee under the indenture, the powers and trust obligations
of each trustee will apply only to the debt securities for which it is trustee.
If two or more trustees are acting under the indenture, then the debt securities
for which each trustee is acting would be treated as if issued under separate
indentures.
We may issue debt securities with terms different from those of debt
securities that may already have been issued. Without the consent of the holders
thereof, we may reopen a previous issue of a series of debt securities and issue
additional debt securities of that series unless the reopening was restricted
when that series was created.
There is no requirement that we issue debt securities in the future under
any indenture, and we may use other indentures or documentation, containing
different provisions in connection with future issues of other debt securities.
We may issue the debt securities as original issue discount securities,
which are debt securities, including any zero-coupon debt securities, that are
issued and sold at a discount from their stated principal amount. Original issue
discount securities provide that, upon acceleration of their maturity, an amount
less than their principal amount will become due and payable. We will describe
the U.S. federal income tax consequences and other considerations applicable to
original issue discount securities in any prospectus supplement relating to
them.
GUARANTEES
Each of our subsidiaries may fully and unconditionally guarantee the
payment of the principal of, premium and interest on our debt securities. The
guarantees of the debt securities will be endorsed on the debt securities and
will be unsecured obligations of our subsidiary guarantors. Guarantees of our
senior debt securities will be unsecured senior obligations of our subsidiary
guarantors. The guarantees of a particular subsidiary guarantor will rank
equally with all other unsecured and unsubordinated obligations of that
subsidiary guarantor. Guarantees of our subordinated debt securities will be
unsecured subordinated obligations of our subsidiary guarantors. The guarantees
of a particular subsidiary guarantor will be subordinate in right of payment to
the prior payment in full of all guarantees by that subsidiary guarantor of our
senior indebtedness and will rank equally with all other unsecured and
subordinated obligations of that subsidiary guarantor.
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Our wholly-owned subsidiaries that may from time to time guarantee our debt
securities are the following: Quest Diagnostics Holdings Incorporated, Quest
Diagnostics Clinical Laboratories, Inc., Quest Diagnostics Incorporated (CA),
Quest Diagnostics Incorporated (MD), Quest Diagnostics LLC, Quest Diagnostics
Incorporated (MI), Quest Diagnostics Incorporated (CT), Quest Diagnostics
Incorporated (MA), Quest Diagnostics of Pennsylvania Inc., Quest Diagnostics
Incorporated (OH), Metwest Inc., Nichols Institute Diagnostics, DPD Holdings,
Inc., Diagnostics Reference Services Inc., Pathology Building Partnership, Quest
Diagnostics Investments Incorporated, Quest Diagnostics Finance Incorporated and
Laboratory Holdings Incorporated. Together, these subsidiaries operate
substantially all of our business.
Applicable indentures will provide that the obligations of each subsidiary
guarantor under its guarantee will be limited so as not to constitute a
fraudulent conveyance under applicable United States federal or state laws.
Application of this clause could limit the amount that holders of debt
securities may be entitled to collect under the guarantees. Holders, by their
acceptance of our debt securities, will have agreed to such limitations. See
"Risk Factors -- Federal and state laws permit a court to void a guarantee
issued by any of our subsidiaries if the court finds the guarantee to constitute
a fraudulent conveyance."
CONVERSION AND EXCHANGE
If any debt securities are convertible into or exchangeable for other
securities, the prospectus supplement will explain the terms and conditions of
such conversion or exchange, including:
- the conversion price or exchange ratio, or the calculation method for
such price or ratio;
- the conversion or exchange period, or how such period will be determined;
- if conversion or exchange will be mandatory or at the option of the
holder or our company;
- provisions for adjustment of the conversion price or the exchange ratio;
and
- provisions affecting conversion or exchange in the event of the
redemption of the debt securities.
Such terms may also include provisions under which the number or amount of
other securities to be received by the holders of such debt securities upon
conversion or exchange would be calculated according to the market price of such
other securities as of a time stated in the prospectus supplement.
ADDITIONAL MECHANICS
FORM, EXCHANGE AND TRANSFER
The debt securities will be issued:
- as registered securities; or
- as bearer securities (unless otherwise stated in the prospectus
supplement, with interest coupons attached); or
- in global form, see "Securities We May Issue -- Global Securities;" or
- in denominations that are even multiples of $1,000, in the case of
registered securities, and in even multiples of $5,000, in the case of
bearer securities.
You may have your registered securities divided into registered securities
of smaller denominations or combined into registered securities of larger
denominations, as long as the total principal amount is not changed. This is
called an "exchange."
You may exchange or transfer registered securities of a series at the
office of the trustee in New York City. That office is currently located at The
Bank of New York, 101 Barclay Street, Floor 21W, New York, New York 10286, Attn:
Corporate Trust -- Trustee Administration. The trustee maintains the list of
registered holders and acts as our agent for registering debt securities in the
names of holders and transferring debt securities. However, we may appoint
another trustee to act as our agent or act as our own agent. If provided in the
prospectus supplement, you may exchange your bearer securities for registered
securities of the same series so long as the total principal amount is not
changed. Unless otherwise specified in the prospectus supplement, bearer
securities will not be issued in exchange for registered securities.
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You will not be required to pay a service charge to transfer or exchange
debt securities, but you may be required to pay for any tax or other
governmental charge associated with the exchange or transfer. The transfer or
exchange will only be made if the transfer agent is satisfied with your proof of
ownership.
If we designate additional transfer agents, they will be named in the
prospectus supplement. We may cancel the designation of any particular transfer
agent. We may also approve a change in the office through which any transfer
agent acts.
If the debt securities are redeemable and we redeem less than all of the
debt securities of a particular series, we may block the transfer or exchange of
debt securities for 15 days before the day we mail the notice of redemption or
publish such notice (in the case of bearer securities) and ending on the day of
that mailing or publication in order to freeze the list of holders to prepare
the mailing. At our option, we may mail or publish such notice of redemption
through an electronic medium. We may also refuse to register transfers or
exchanges of debt securities selected for redemption, except that we will
continue to permit transfers and exchanges of the unredeemed portion of any debt
security being partially redeemed.
PAYING AND PAYING AGENTS
If you are a holder of registered securities, we will pay interest to you
if you are a direct holder in the list of registered holders at the close of
business on a particular day in advance of each due date for interest, even if
you no longer own the security on the interest due date. That particular time
and day, usually about two weeks in advance of the interest due date, is called
the "Regular Record Date" and is stated in the prospectus supplement. Holders
buying and selling debt securities must work out between them how to compensate
for the fact that we will pay all the interest for an interest period to the one
who is the registered holder on the Regular Record Date. The most common manner
is to adjust the sales price of the debt securities to prorate interest fairly
between buyer and seller. This prorated interest amount is called "accrued
interest."
With respect to registered securities, we will pay interest, principal and
any other money due on the debt securities at the corporate trust office of the
trustee in New York City. That office is currently located at The Bank of New
York, 101 Barclay Street, Floor 21 West, New York, New York 10286, Attn:
Corporate Trust Administration. You must make arrangements to have your payments
picked up at or wired from that office. We may also choose to pay interest by
mailing checks or making wire transfers.
"STREET NAME" AND OTHER INDIRECT HOLDERS SHOULD CONSULT THEIR BANKS OR
BROKERS FOR INFORMATION ON HOW THEY WILL RECEIVE PAYMENTS.
If bearer securities are issued, unless otherwise provided in the
prospectus supplement, we will maintain an office or agency outside the United
States for the payment of all amounts due on the bearer securities. If debt
securities are listed on the Luxembourg Stock Exchange or any other stock
exchange located outside the United States, we will maintain an office or agency
for such debt securities in any city located outside the United States required
by such stock exchange. The initial locations of such offices and agencies will
be specified in the prospectus supplement. Unless otherwise provided in the
prospectus supplement, payment of interest on any bearer securities on or before
maturity will be made only against surrender of coupons for such interest
installments as they mature. Unless otherwise provided in the prospectus
supplement, no payment with respect to any bearer security will be made at any
office or agency of our company in the United States or by check mailed to any
address in the United States or by transfer to an account maintained with a bank
located in the United States. Notwithstanding the foregoing, payments of
principal, premium and interest, if any, on bearer securities payable in US
dollars will be made at the office of our paying agent in The City of New York
if (but only if) payment of the full amount in US dollars at all offices or
agencies outside the United States is illegal or effectively precluded by
exchange controls or other similar restrictions.
Regardless of who acts as the paying agent, all money paid by us to a
paying agent that remains unclaimed at the end of two years after the amount is
due to registered holders will be repaid to us. After that two-year period, you
may look only to us for payment and not to the trustee, any other paying agent
or anyone else.
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We may also arrange for additional payment offices, and may cancel or
change these offices, including our use of the trustee's corporate trust office.
We may also choose to act as our own paying agent. We must notify you of changes
in identities of the paying agents for any particular series of debt securities.
NOTICES
With respect to registered securities, we and the trustee will send notices
regarding the debt securities only to registered holders, using their addresses
as listed in the list of registered holders. With respect to bearer securities,
we and the trustee will give notice by publication in a newspaper of general
circulation in the City of New York or in such other cities that may be
specified in a prospectus supplement. At our option, we may send or publish
notices through an electronic medium as specified in the applicable prospectus
supplement.
EVENTS OF DEFAULT
You will have special rights if an event of default occurs in respect of
the debt securities of your series and is not cured, as described later in this
subsection.
WHAT IS AN EVENT OF DEFAULT? The term "event of default" in respect of the
debt securities of your series means any of the following:
- We and any of our subsidiary guarantors do not pay the principal of or
any premium on a debt security of such series on its due date.
- We and any of our subsidiary guarantors do not pay interest on a debt
security of such series within 30 days of its due date whether at
maturity, upon redemption or upon acceleration.
- We do not deposit any sinking fund payment in respect of debt securities
of such series on its due date.
- We or any of our subsidiary guarantors remains in breach of a covenant in
respect of debt securities of such series for 60 days after we receive a
written notice of default stating we are in breach and requiring that we
remedy the breach. The notice must be sent by either the trustee or
holders of 25% of the principal amount of debt securities of such series.
- We or any of our subsidiary guarantors files for bankruptcy or certain
other events in bankruptcy, insolvency or reorganization occur.
- Any of our of subsidiary guarantors repudiates its obligations under any
subsidiary guarantee or, except to the extent contemplated by the related
indenture, any subsidiary guarantee is determined to be unenforceable or
invalid or shall for any reasons cease to be in full force and effect.
- Any other event of default in respect of debt securities of such series
described in the prospectus supplement occurs.
The events of default described above may be modified as described in the
applicable prospectus supplement. An event of default for a particular series of
debt securities does not necessarily constitute an event of default for any
other series of debt securities issued under an indenture. The trustee may
withhold notice to the holders of debt securities of any default (except in the
payment of principal or interest) if it considers such withholding of notice to
be in the best interests of the holders.
REMEDIES IF AN EVENT OF DEFAULT OCCURS. If an event of default has
occurred and has not been cured, the trustee or the holders of 25% in principal
amount of the debt securities of the affected series may declare the entire
principal amount of all the debt securities of that series to be due and
immediately payable. This is called a declaration of acceleration of maturity.
If an event of default occurs because of certain events in bankruptcy,
insolvency or reorganization, the principal amount of all the debt securities of
that series will be automatically accelerated, without any action by the trustee
or any holder. There are special notice and timing rules which apply to the
acceleration of subordinated debt securities which are designed to protect the
interests of holders of senior debt. A declaration of acceleration of maturity
may be cancelled by the holders of at least a majority in principal amount of
the debt securities of the affected series if (1) all existing events of
default, other than the nonpayment of principal of or premium or
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interest, if any, on the debt securities of such series which have become due
solely because of the acceleration, have been cured or waived and (2) the
rescission would not conflict with any judgment or decree of a court of
competent jurisdiction.
Except in cases of default, where the trustee has some special duties, the
trustee is not required to take any action under the indenture at the request of
the holders unless the holders offer the trustee reasonable protection from
expenses and liability, called an "indemnity". If reasonable indemnity is
provided, the holders of a majority in principal amount of the outstanding debt
securities of the relevant series may direct the time, method and place of
conducting any lawsuit or other formal legal action seeking any remedy available
to the trustee. The trustee may refuse to follow those directions in certain
circumstances. No delay or omission in exercising any right or remedy will be
treated as a waiver of such right, remedy or event of default.
Before you are allowed to bypass the trustee and bring your own lawsuit or
other formal legal action or take other steps to enforce your rights or protect
your interests relating to the debt securities, the following must occur:
- You must give the trustee written notice that an event of default has
occurred and remains uncured.
- The holders of not less than 25% in principal amount of all outstanding
debt securities of the relevant series must make a written request that
the trustee take action because of the default and must offer reasonable
indemnity to the trustee against the cost and other liabilities of taking
that action.
- The trustee must not have taken action for 60 days after receipt of the
above notice and offer of indemnity.
- The holders of a majority in principal amount of the debt securities must
not have given the trustee a direction inconsistent with the above notice
during the 60-day period.
However, you are entitled at any time to bring a lawsuit for the payment of
money due on your debt securities on or after the due date.
Holders of a majority in principal amount of the debt securities of the
affected series may waive any past defaults other than (1) the payment of
principal, any premium or interest or (2) in respect of a covenant or other
provision that cannot be modified or amended without the consent of each holder.
"STREET NAME" AND OTHER INDIRECT HOLDERS SHOULD CONSULT THEIR BANKS OR
BROKERS FOR INFORMATION ON HOW TO GIVE NOTICE OR DIRECTION OR TO MAKE A REQUEST
OF THE TRUSTEE AND TO MAKE OR CANCEL A DECLARATION OF ACCELERATION.
Each year, we will furnish to the trustee a written statement of certain of
our officers certifying that to their knowledge we are in compliance with the
indentures and the debt securities, or else specifying any default.
MERGER OR CONSOLIDATION
Under the terms of the indentures, we are generally permitted to
consolidate or merge with another entity. We are also permitted to sell all or
substantially all of our assets to another entity. However, we may not take any
of these actions unless all the following conditions are met:
- either we will be the surviving corporation or, if we merge out of
existence or sell assets, the entity into which we merge or to which we
sell assets must agree to be legally responsible for the debt securities;
- immediately after the merger or transfer of assets, no default on the
debt securities can exist. A default for this purpose includes any event
that would be an event of default if the requirements for giving a
default notice or of having the default exist for a specific period of
time were disregarded;
- we must deliver certain certificates and documents to the trustee; and
- we must satisfy any other requirements specified in the prospectus
supplement.
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MODIFICATION OR WAIVER
There are three types of changes we can make to the indentures and the debt
securities.
CHANGES REQUIRING YOUR APPROVAL. First, there are changes that cannot be
made to your debt securities without your specific approval. Following is a list
of those types of changes:
- changing the stated maturity of the principal of or interest on a debt
security;
- reducing any amounts due on a debt security or payable upon acceleration
of the maturity of a security following a default;
- adversely affecting any right of repayment at the holder's option;
- changing the place (except as otherwise described in this prospectus) or
currency of payment on a debt security;
- impairing your right to sue for payment or to convert or exchange a
security;
- in the case of subordinated debt securities, modifying the subordination
provisions in a manner that is adverse to holders of the subordinated
debt securities;
- in the case of senior debt securities, modifying the securities to
subordinate the securities to other indebtedness;
- reducing the percentage of holders of debt securities whose consent is
needed to modify or amend the indenture;
- reducing the percentage of holders of debt securities whose consent is
needed to waive compliance with certain provisions of the indenture or to
waive certain defaults;
- reducing the requirements for quorum or voting with respect to the debt
securities;
- modifying any other aspect of the provisions of the indenture dealing
with modification and waiver except to increase the voting requirements;
- change in any of our obligations to pay additional amounts which are
required to be paid to holders with respect to taxes imposed on such
holders in certain circumstances; and
- other provisions specified in the prospectus supplement.
CHANGES REQUIRING A MAJORITY VOTE. The second type of change to the
indenture and the outstanding debt securities is the kind that requires a vote
in favor by holders of outstanding debt securities owning a majority of the
principal amount of the particular series affected. Separate votes will be
needed for each series even if they are affected in the same way. Most changes
fall into this category, except for clarifying changes and certain other changes
that would not adversely affect holders of the outstanding debt securities in
any material respect. The same vote would be required for us and our subsidiary
guarantors to obtain a waiver of all or part of certain covenants in the
applicable indenture, or a waiver of a past default. However, we and our
subsidiary guarantors cannot obtain a waiver of a payment default or any other
aspect of the indentures or the outstanding debt securities listed in the first
category described previously under "-- Changes Requiring Your Approval" unless
we and our subsidiary guarantors obtain your individual consent to the waiver.
CHANGES NOT REQUIRING APPROVAL. The third type of change does not require
any vote by holders of outstanding debt securities. This type is limited to
clarifications; curing ambiguities, defects or inconsistencies and certain other
changes that would not adversely affect holders of the outstanding debt
securities in any material respect. Qualifying or maintaining the qualification
of the indentures under the Trust Indenture Act do not require any vote by
holders of debt securities.
FURTHER DETAILS CONCERNING VOTING. When taking a vote, we will use the
following rules to decide how much principal amount to attribute to a debt
security:
- for original issue discount securities, we will use the principal amount
that would be due and payable on the voting date if the maturity of the
debt securities were accelerated to that date because of a default; and
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- for debt securities whose principal amount is not known (for example,
because it is based on an index), we will use a special rule for that
debt security described in the prospectus supplement.
Debt securities will not be considered outstanding, and therefore not
eligible to vote, if we have deposited or set aside in trust for you money for
their payment or redemption. Debt securities will also not be eligible to vote
if they have been fully defeased as described later under "Defeasance -- Full
Defeasance."
We will generally be entitled to set any day as a record date for the
purpose of determining the holders of outstanding indenture securities that are
entitled to vote or take other action under the indentures.
We are not required to set a record date. If we set a record date for a
vote or other action to be taken by holders of a particular series, that vote or
action may be taken only by persons who are holders of outstanding securities of
that series on the record date and must be taken within 180 days following the
record date or another period that we may specify. We may shorten or lengthen
this period from time to time.
"STREET NAME" AND OTHER INDIRECT HOLDERS SHOULD CONSULT THEIR BANKS OR
BROKERS FOR INFORMATION ON HOW APPROVAL MAY BE GRANTED OR DENIED IF WE SEEK TO
CHANGE THE INDENTURE OR THE DEBT SECURITIES OR REQUEST A WAIVER.
SATISFACTION AND DISCHARGE
The indentures will cease to be of further effect, and we and our
subsidiary guarantors will be deemed to have satisfied and discharged the
indentures with respect to a particular series of debt securities, when the
following conditions have been satisfied:
- all debt securities of that series not previously delivered to the
trustee for cancellation have become due and payable or will become due
and payable at their stated maturity or on a redemption date within one
year,
- we deposit with the trustee, in trust, funds sufficient to pay the entire
indebtedness on the debt securities of that series that had not been
previously delivered for cancellation, for the principal and interest to
the date of the deposit (for debt securities that have become due and
payable) or to the stated maturity or the redemption date, as the case
may be (for debt securities that have not become due and payable),
- we have paid or caused to be paid all other sums payable under the
indentures in respect of that series, and
- we have delivered to the trustee an officer's certificate and opinion of
counsel, each stating that all these conditions have been complied with.
We will remain obligated to provide for registration of transfer and
exchange and to provide notices of redemption.
DEFEASANCE
The following discussion of full defeasance and covenant defeasance will be
applicable to your series of debt securities only if we choose to have them
apply to that series. If we choose to do so, we will state that in the
applicable prospectus supplement and describe any changes to these provisions.
FULL DEFEASANCE. If there is a change in federal tax law, as described
below, we can legally release ourselves and our subsidiary guarantors from any
payment or other obligations on the debt securities, called "full defeasance",
if we put in place the following other arrangements for you to be repaid:
- We must deposit in trust for your benefit and the benefit of all other
registered holders of the debt securities a combination of money and U.S.
government or U.S. government agency notes or bonds that will generate
enough cash to make interest, principal and any other payments on the
debt securities on their various due dates including, possibly, their
earliest redemption date.
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- Under current federal tax law, the deposit and our legal release from the
debt securities would likely be treated as though you surrendered your
debt securities in exchange for your share of the cash and notes or bonds
deposited in trust. In that event, you could recognize gain or loss on
the debt securities you surrendered. In order for us to effect a full
defeasance, we must deliver to the trustee a legal opinion confirming
that you will not recognize income gain or loss for federal income tax
purposes as a result of the defeasance and that you will not be taxed on
the debt securities any differently than if we did not make the deposit
and just repaid the debt securities ourselves.
- We must comply with any additional provisions set forth in the prospectus
supplement.
If we accomplish a full defeasance, as described above, you would have to
rely solely on the trust deposit for repayment on the debt securities. You could
not look to us or our subsidiary guarantors for repayment in the unlikely event
of any shortfall. Conversely, the trust deposit would most likely be protected
from claims of our lenders and other creditors if we ever become bankrupt or
insolvent. You would also be released from any applicable subordination
provisions on the subordinated debt securities described below under
"-- Subordination."
COVENANT DEFEASANCE. Under current federal tax law, we can make the same
type of deposit described above and be released and cause our subsidiary
guarantors to be released, from the restrictive covenants in the debt
securities, if any. This is called "covenant defeasance." In that event, you
would lose the protection of those restrictive covenants but would gain the
protection of having money and securities set aside in trust to repay the debt
securities, and you would be released from any applicable subordination
provisions on the subordinated debt securities described later under
"-- Subordination." In order to achieve covenant defeasance, we must do the
following:
- We must deposit in trust for your benefit and the benefit of all other
registered holders of the debt securities a combination of money and U.S.
government or U.S. government agency notes or bonds that will generate
enough cash to make interest, principal and any other payments on the
debt securities on their various due dates.
- We must deliver to the trustee a legal opinion confirming that under
current federal income tax law we may make the above deposit without
causing you to be taxed on the debt securities any differently than if we
did not make the deposit and just repaid the debt securities ourselves.
- We must comply with any additional provisions set forth in the prospectus
supplement.
If we accomplish covenant defeasance, the following provisions of the
indenture and the debt securities would no longer apply unless otherwise
specified:
- any promises of our subsidiary guarantors relating to their guarantees,
the conduct of their business and any other covenants applicable to the
series of debt securities that will be described in the prospectus
supplement;
- our promises regarding conduct of our business and other matters and any
other covenants applicable to the series of debt securities that will be
described in the prospectus supplement; and
- the definition of an event of default as a breach of such covenants that
may be specified in the prospectus supplement.
If we accomplish covenant defeasance, you can still look to us and our
subsidiary guarantors for repayment of the debt securities if there were a
shortfall in the trust deposit. In fact, if one of the remaining events of
default occurred (such as our bankruptcy) and the debt securities become
immediately due and payable, there may be such a shortfall. Depending on the
event causing the default, of course, you may not be able to obtain payment of
the shortfall.
In order to exercise either full defeasance or covenant defeasance, we must
comply with certain conditions, and no event or condition can exist that would
prevent us and our subsidiary guarantors from making payments of principal,
premium, and interest, if any, on the senior debt securities or subordinated
debt securities of such series on the date the irrevocable deposit is made or at
any time during the period ending on the 91st day after the deposit date.
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RANKING
Unless provided otherwise in the applicable prospectus supplement, the debt
securities are not secured by any of our property or assets. Accordingly, your
ownership of debt securities means you are one of our unsecured creditors. The
senior debt securities are not subordinated to any of our other debt obligations
and therefore they rank equally with all our other unsecured and unsubordinated
indebtedness. The subordinated debt securities are subordinated to some of our
existing and future debt and other liabilities. See "-- Subordination" for
additional information on how subordination limits your ability to receive
payment or pursue other rights if we default or have certain other financial
difficulties. In addition, the senior and subordinated debt securities, if they
are not guaranteed by our subsidiaries, will be effectively subordinated to the
indebtedness of our subsidiaries.
SUBORDINATION
Unless the prospectus supplement provides otherwise, the following
provisions will apply to the subordinated debt securities:
The payment of principal, any premium and interest on the subordinated debt
securities is subordinated in right of payment to the prior payment in full of
all of our senior indebtedness. This means that in certain circumstances where
we may not be making payments on all of our debt obligations as they become due,
the holders of all of our senior indebtedness will be entitled to receive
payment in full of all amounts that are due or will become due on the senior
indebtedness before you and the other holders of subordinated debt securities
will be entitled to receive any payment or distribution (other than in the form
of subordinated securities) on the subordinated debt securities. These
circumstances include the following circumstances:
- We make a payment or distribute assets to creditors upon any liquidation,
dissolution, winding up or reorganization of our company, or as part of
an assignment or marshalling of our assets for the benefit of our
creditors.
- We file for bankruptcy or certain other events in bankruptcy, insolvency
or similar proceedings occur.
- The maturity of the subordinated debt securities is accelerated. For
example, the entire principal amount of a series of subordinated debt
securities may be declared to be due and payable and immediately payable
or may be automatically accelerated due to an event of default as
described under "-- Events of Default."
In addition, we are generally not permitted to make payments of principal,
any premium or interest on the subordinated debt securities if we default in our
obligation to make payments on our senior indebtedness and do not cure such
default. We are also prohibited from making payments on subordinated debt
securities if an event of default (other than a payment default) that permits
the holders of senior indebtedness to accelerate the maturity of the senior
indebtedness occurs and we and the trustee have received a notice of such event
of default. However, unless the senior indebtedness has been accelerated because
of that event of default, this payment blockage notice cannot last more than 179
days.
These subordination provisions mean that if we are insolvent a holder of
senior indebtedness is likely to ultimately receive out of our assets more than
a holder of the same amount of our subordinated debt securities, and a creditor
of our company that is owed a specific amount but who owns neither our senior
indebtedness nor our subordinated debt securities may ultimately receive less
than a holder of the same amount of senior indebtedness and more than a holder
of subordinated debt securities.
The subordinated indenture does not limit the amount of senior indebtedness
we are permitted to have and we may in the future incur additional senior
indebtedness.
"Senior indebtedness" is defined in the subordinated indenture as the
principal of, and premium, if any, and unpaid interest on
- indebtedness of Quest Diagnostics whether outstanding on the date of the
subordinated indenture or thereafter created, incurred, assumed or
guaranteed, for money borrowed, unless in the instrument creating or
evidencing the same or pursuant to which the same is outstanding it is
provided that
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such indebtedness is not senior or prior in right of payment to the
subordinated debt securities. This includes the indebtedness of others
guaranteed by Quest Diagnostics but excludes the debt securities Quest
Diagnostics issued under the subordinated indenture and the 10 3/4%
senior subordinated notes due 2006 of Quest Diagnostics, and
- renewals, extensions, modifications and refunding of any such
indebtedness.
If this prospectus is being delivered in connection with a series of
subordinated securities, the accompanying prospectus supplement or the
information incorporated by reference will set forth the approximate amount of
senior indebtedness outstanding as of a recent date.
THE TRUSTEE
The initial trustee under each indenture will be The Bank of New York. The
Bank of New York will also be the initial paying agent and registrar for the
debt securities. The Bank of New York is also the trustee and note registrar for
our 10 3/4% senior subordinated notes due 2006.
Each indenture provides that, except during the continuance of an event of
default under the indenture, the trustee under the indenture will perform only
such duties as are specifically set forth in the indenture. Under the indenture,
the holders of a majority in outstanding principal amount of the debt securities
will have the right to direct the time, method and place of conducting any
proceeding or exercising any remedy available to the trustee under the
indenture, subject to certain exceptions. If an event of default has occurred
and is continuing, the trustee under the indenture will exercise such rights and
powers vested in it under the indenture and use the same degree of care and
skill in its exercise as a prudent person would exercise under the circumstances
in the conduct of such person's own affairs.
Each indenture and provisions of the Trust Indenture Act incorporated by
reference in the indenture contain limitations on the rights of the trustee
under such indenture, should it become a creditor of our company, to obtain
payment of claims in certain cases or to realize on certain property received by
it in respect of any such claims, as security or otherwise. The trustee under
the indenture is permitted to engage in other transactions. However, if the
trustee under the indenture acquires any prohibited conflicting interest, it
must eliminate the conflict or resign.
Each trustee may resign or be removed with respect to one or more series of
securities and a successor trustee may be appointed to act with respect to such
series. In the event that two or more persons are acting as Trustee with respect
to different series of securities under one of the indentures, each such trustee
shall be a trustee of a trust separate and apart from the trust administered by
any other such trustee and any action described herein to be taken by the
"trustee" may then be taken by each such trustee with respect to, and only with
respect to, the one or more series of securities for which it is trustee.
GOVERNING LAW
The indentures and the debt securities will be governed by, and construed
in accordance with, the laws of the State of New York.
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DESCRIPTION OF THE PREFERRED STOCK
AND THE DEPOSITARY SHARES REPRESENTING
FRACTIONAL SHARES OF PREFERRED STOCK
This section describes the general terms and provisions of the preferred
stock that we may offer by this prospectus. The applicable prospectus supplement
will describe the specific terms of the series of preferred stock then offered,
and the terms and provisions described in this section will apply only to the
extent not superseded by the terms of the applicable prospectus supplement.
This section is only a summary of the preferred stock that we may offer. We
urge you to read carefully our certificate of incorporation and the certificate
of designation we will file in relation to an issue of any particular series of
preferred stock before you buy any preferred stock.
BOOK-ENTRY SECURITIES
The preferred stock may be issued in whole or in part in the form of one or
more global securities. See "Securities We May Issue" for additional information
about your limited rights as the beneficial owner of a global security.
OUR SERIES OF PREFERRED STOCK
Our certificate of incorporation permits us to issue, without prior
permission from our stockholders, up to 10,000,000 shares of preferred stock. As
of June 1, 2001, we had previously authorized:
- 1,000 shares of voting cumulative preferred stock, par value $1.00 per
share, all of which are issued and outstanding; and
- 1,300,000 shares of series A preferred stock par value $1.00 per share,
none of which are expected to be issued nor are any outstanding; series A
preferred stock will be issued pursuant to our rights agreement as
described under "Description of Common Stock -- Rights Agreement."
VOTING CUMULATIVE PREFERRED STOCK
We have 1,000 outstanding shares of voting cumulative preferred stock, all
of which are owned by Corning Incorporated. The shares of our voting cumulative
preferred stock rank senior to our common stock and series A preferred stock;
they have a liquidation preference of $1,000 per share over the shares of our
common stock and receive quarterly dividends payable in cash at the greater of
(1) 10% per annum or (2) the yield to maturity of our 10 3/4% notes expressed as
a percentage plus 1%. The voting cumulative preferred stock has one vote per
share and votes together with our common stock as a single class. The voting
cumulative preferred stock also votes as a separate class on any amendment to
our certificate of incorporation that adversely affects the rights of such
preferred stock, subject to certain exceptions. We may redeem all the shares of
our voting cumulative preferred stock beginning on January 1, 2003. The initial
redemption price is 106% of the liquidation preference per share, plus accrued
and unpaid dividends. The redemption price will decline each year after 2003 and
will be 100% of the liquidation preference, plus accrued and unpaid dividends,
on or after January 1, 2006. On January 1, 2022, we must redeem all of the then
outstanding shares of voting cumulative preferred stock at a redemption price
equal to the liquidation preference.
TERMS OF FUTURE SERIES OF PREFERRED STOCK
Our board of directors may, without further action of the stockholders,
issue undesignated preferred stock in one or more classes or series. Any
undesignated preferred stock issued by us may:
- rank prior to our common stock as to dividend rights, liquidation
preference or both;
- have full or limited voting rights; and
- be convertible into shares of common stock or other securities.
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The powers, designations, preferences and relative, participating, optional
or other special rights, and qualifications, limitations or restrictions,
including dividend rights, voting rights, conversion rights, terms of redemption
and liquidation preferences, of the preferred stock of each series will be fixed
or designated by our board of directors pursuant to a certificate of
designation. We will describe in the applicable prospectus supplement the
specific terms of a particular series of preferred stock, which may include the
following:
- the maximum number of shares in the series;
- the designation of the series;
- the terms of any voting rights of the series;
- the dividend rate, if any, on the shares of such series, the conditions
and dates upon which such dividends shall be payable, the preference or
relation which such dividends shall bear to the dividends payable on any
other class or classes or on any other series of capital stock, and
whether such dividends shall be cumulative or non-cumulative;
- whether the shares of such series shall be redeemable by us and, if so,
the times, prices and other terms and conditions of such redemption;
- the rights of the holders of shares of such series upon the liquidation,
dissolution or winding up of our company;
- whether or not the shares of such series shall be subject to the
operation of a retirement or sinking fund and, if so, the extent to and
manner in which any such retirement or sinking fund shall be applied to
the purchase or redemption of the shares of such series for retirement or
to other corporate purposes and the terms and provisions relative to the
operation thereof;
- whether or not the shares of such series shall be convertible into, or
exchangeable for, (a) our debt securities, (b) shares of any other class
or classes of stock of our company, or of any other series of the same or
different class of stock, or (c) shares of any class or series of stock
of any other corporation, and if so convertible or exchangeable, the
price or prices or the rate or rates of conversion or exchange and the
method, if any, of adjusting the same;
- the limitations and restrictions, if any, to be effective while any
shares of such series are outstanding upon the payment of dividends or
making of other distributions on, and upon the purchase, redemption or
other acquisition by our company of, our common stock, or any other class
or classes of stock of our company ranking junior to the shares of such
series either as to dividends or upon liquidation;
- the conditions or restrictions, if any, upon the creation of indebtedness
of our company or upon the issue of any additional stock, including
additional shares of such series or of any other series or of any other
class, ranking on a parity with or prior to the shares of such series as
to dividends or distribution of assets on liquidation, dissolution or
winding up;
- whether fractional interests in shares of the series will be offered in
the form of depositary shares as described below under "-- Depositary
Shares";
- any other preference or provision and relative, participating, optional
or other special rights or qualifications, limitations or restrictions
thereof; and
- our ability to modify the rights of holders otherwise than by a vote of a
majority or more of the series outstanding.
The preferred stock will, when issued, be fully paid and nonassessable. We
will select the transfer agent, registrar and dividend disbursement agent for a
series of preferred stock and will describe its selection in the applicable
prospectus supplement. The registrar for shares of preferred stock will send
notices to stockholders of any meetings at which holders of the preferred stock
have the right to elect directors of our company or to vote on any other matter
of our company.
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DEPOSITARY SHARES
This section describes the general terms and provisions of the depositary
shares we may offer. The applicable prospectus supplement will describe the
specific terms of the depositary shares offered through that prospectus
supplement, including, but not limited to, the title of the depositary shares
and the deposited security, the amount of deposited securities represented by
one depositary share, and any general terms outlined in this section that will
not apply to those depositary shares.
We have summarized certain terms and provisions of the depositary
agreement, the depositary shares and the depositary receipts in this section.
The summary is not complete. We will file the form of depositary agreement,
including the form of depositary receipt, as an exhibit to the registration
statement, of which this prospectus is a part. You should read the forms of
depositary agreement and depositary receipt relating to a series of preferred
stock for additional information before you buy any depositary shares that
represent preferred stock of such series.
GENERAL. We may offer fractional interests in preferred stock rather than
full shares of preferred stock. If this occurs, we will provide for the issuance
by a depositary to the public of receipts for depositary shares, each of which
will represent a fractional interest in a share of a particular series of
preferred stock.
The stock of any series of preferred stock underlying the depositary shares
will be deposited under a separate depositary agreement between us and a
depositary. For these purposes, the depositary will be a bank or trust company
having its principal office in the United States and having a combined capital
and surplus of at least $50 million. We will name the depositary and give the
address of its principal executive office in the applicable prospectus
supplement. Subject to the terms of the depositary agreement, each owner of a
depositary share will have a fractional interest in all the rights and
preferences of the preferred stock underlying such depositary shares. Those
rights include any dividend, voting, redemption, conversion and liquidation
rights.
The depositary shares will be evidenced by depositary receipts issued under
the depositary agreement. If you purchase fractional interests in shares of the
related series of preferred stock, you will receive depositary receipts as
described in the applicable prospectus supplement. While the final depositary
receipts are being prepared, we may order the depositary to issue temporary
depositary receipts substantially identical to the final depositary receipts in
final form. The holders of the temporary depositary receipts will be entitled to
the same rights as if they held the depositary receipts although not in final
form. Holders of the temporary depositary receipts can exchange them for the
final depositary receipts at our expense.
If you surrender depositary receipts at the principal office of the
depositary, unless the related depositary shares have previously been called for
redemption, you are entitled to receive at such office the number of shares of
preferred stock and any money or other property represented by such depositary
shares. We will not issue partial shares of preferred stock. If you deliver
depositary receipts evidencing a number of depositary shares that represent more
than a whole number of shares of preferred stock, the depositary will issue you
a new depositary receipt evidencing such excess number of depositary shares at
the same time that the shares of preferred stock are withdrawn. Holders of
preferred stock received in exchange for depositary shares will no longer be
entitled to deposit such shares under the depositary agreement or to receive
depositary shares in exchange for such preferred stock.
DIVIDENDS AND OTHER DISTRIBUTIONS. The depositary will distribute all cash
dividends or other distributions received with respect to the preferred stock to
the record holders of depositary shares representing the preferred stock in
proportion to the number of depositary shares owned by the holders on the
relevant record date. The depositary will distribute only the amount that can be
distributed without attributing to any holder of depositary shares a fraction of
one cent. THE BALANCE NOT DISTRIBUTED WILL BE ADDED TO AND TREATED AS PART OF
THE NEXT SUM RECEIVED BY THE DEPOSITARY FOR DISTRIBUTION TO RECORD HOLDERS OF
DEPOSITARY SHARES.
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If there is a distribution other than in cash, the depositary will
distribute property to the holders of depositary shares, unless the depositary
determines that it is not feasible to make such distribution. If this occurs,
the depositary may, with our approval, sell the property and distribute the net
proceeds from the sale to the holders of depositary shares.
The depositary agreement will also contain provisions relating to how any
subscription or similar rights offered by us to the holders of the preferred
stock will be made available to the holders of depositary shares.
CONVERSION AND EXCHANGE. If any series of preferred stock underlying the
depositary shares is subject to conversion or exchange, the applicable
prospectus supplement will describe the rights or obligations of each record
holder of depositary receipts to convert or exchange the depositary shares.
REDEMPTION OF DEPOSITARY SHARES. If the series of the preferred stock
underlying the depositary shares is subject to redemption, the depositary shares
will be redeemed from the redemption proceeds, in whole or in part, of such
series of the preferred stock held by the depositary. The depositary will mail
notice of redemption between 30 to 60 days prior to the date fixed for
redemption to the record holders of the depositary shares to be redeemed at
their addresses appearing in the depositary's records. The redemption price per
depositary share will bear the same relationship to the redemption price per
share of preferred stock that the depositary share bears to the underlying
preferred share. Whenever we redeem preferred stock held by the depositary, the
depositary will redeem, as of the same redemption date, the number of depositary
shares representing the preferred stock redeemed. If less than all the
depositary shares are to be redeemed, the depositary shares to be redeemed will
be selected by lot or pro rata as determined by the depositary.
After the date fixed for redemption, the depositary shares called for
redemption will no longer be outstanding. When the depositary shares are no
longer outstanding, all rights of the holders will cease, except the right to
receive money or other property that the holders of the depositary shares were
entitled to receive upon such redemption. Such payments will be made when
holders surrender their depositary receipts to the depositary.
VOTING THE PREFERRED STOCK. Upon receipt of notice of any meeting at which
the holders of the preferred stock are entitled to vote, the depositary will
mail information about the meeting contained in the notice to the record holders
of the depositary shares relating to such preferred stock. Each record holder of
such depositary shares on the record date, which will be the same date as the
record date for the preferred stock, will be entitled to instruct the depositary
as to how the preferred stock underlying the holder's depositary shares should
be voted.
The depositary will try, if practical, to vote the number of shares of
preferred stock underlying the depositary shares according to the instructions
received. We will agree to take all action requested and deemed necessary by the
depositary in order to enable the depositary to vote the preferred stock in that
manner. The depositary will not vote any preferred stock for which it does not
receive specific instructions from the holder of the depositary shares relating
to such preferred stock.
TAXATION. Provided that each obligation in the depositary agreement and
any related agreement is performed in accordance with its terms, owners of
depositary shares will be treated for federal income tax purposes as if they
were owners of the shares of preferred stock represented by the depositary
shares. Accordingly, for federal income tax purposes they will have the income
and deductions to which they would be entitled if they were holders of the
preferred stock. In addition:
- No gain or loss will be recognized for federal income tax purposes upon
withdrawal of preferred stock in exchange for depositary shares as
provided in the depositary agreement.
- The tax basis of each share of preferred stock to an exchanging owner of
depositary shares will, upon the exchange, be the same as the aggregate
tax basis of the depositary shares exchanged for such preferred stock.
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- The holding period for the preferred stock, in the hands of an exchanging
owner of depositary shares who held the depositary shares as a capital
asset at the time of the exchange, will include the period that the owner
held such depositary shares.
AMENDMENT AND TERMINATION OF THE DEPOSITARY AGREEMENT. The form of
depositary receipt evidencing the depositary shares and any provision of the
depositary agreement may be amended by agreement between our company and the
depositary at any time. However, any amendment that materially and adversely
alters the rights of the existing holders of depositary shares will not be
effective unless approved by the record holders of at least a majority of the
depositary shares then outstanding. A depositary agreement may be terminated by
us or the depositary only if:
- All outstanding depositary shares relating to the depositary agreement
have been redeemed.
- There has been a final distribution on the preferred stock of the
relevant series in connection with the liquidation, dissolution or
winding up of the business and the distribution has been distributed to
the holders of the related depositary shares.
CHARGES OF DEPOSITARY. We will pay all transfer and other taxes and
governmental charges arising solely from the existence of the depositary
arrangements. We will pay associated charges of the depositary for the initial
deposit of the preferred stock and any redemption of the preferred stock.
Holders of depositary shares will pay transfer and other taxes and governmental
charges and any other charges that are stated to be their responsibility in the
depositary agreement.
MISCELLANEOUS. We will forward to the holders of depositary shares all
reports and communications that it must furnish to the holders of the preferred
stock.
Neither the depositary nor we will be liable if the depositary is prevented
or delayed by law or any circumstance beyond its control in performing its
obligations under the depositary agreement. Our obligations and the depositary's
obligations under the depositary agreement will be limited to performance in
good faith of duties set forth in the depositary agreement. Neither the
depositary nor we will be obligated to prosecute or defend any legal proceeding
connected with any depositary shares or preferred stock unless satisfactory
indemnity is furnished to us or the depositary. We and the depositary may rely
upon written advice of counsel or accountants, or information provided by
persons presenting preferred stock for deposit, holders of depositary shares or
other persons believed to be competent and on documents believed to be genuine.
RESIGNATION AND REMOVAL OF DEPOSITARY. The depositary may resign at any
time by delivering notice to us. We may also remove the depositary at any time.
Resignations or removals will take effect upon the appointment of a successor
depositary and its acceptance of the appointment. The successor depositary must
be appointed within 60 days after delivery of the notice of resignation or
removal and must be a bank or trust company having its principal office in the
United States and having a combined capital and surplus of at least $50 million.
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DESCRIPTION OF COMMON STOCK
Our authorized capital stock consists of 300,000,000 shares of common
stock, par value $0.01 per share, and 10,000,000 shares of preferred stock, par
value $1.00 per share. As of June 1, 2001, there were 94,316,052 shares of
common stock outstanding held of record by approximately 6,800 stockholders, and
1,000 shares of preferred stock outstanding held of record by Corning
Incorporated. The following description of our common stock and provisions of
our certificate of incorporation and bylaws are only summaries and we encourage
you to review complete copies of our certificate of incorporation and bylaws,
which we have previously filed with the SEC.
COMMON STOCK
Holders of our common stock are entitled to receive, as, when and if
declared by our board of directors, dividends and other distributions in cash,
stock or property from our assets or funds legally available for those purposes
subject to any dividend preferences that may be attributable to preferred stock.
Holders of common stock are entitled to one vote for each share held of record
on all matters on which stockholders may vote. Holders of common stock are not
entitled to cumulative voting for the election of directors. There are no
preemptive, conversion, redemption or sinking fund provisions applicable to our
common stock. All outstanding shares of our common stock are fully paid and
non-assessable. In the event of our liquidation, dissolution or winding up,
holders of common stock are entitled to share ratably in the assets available
for distribution, subject to any prior rights of any holders of preferred stock
then outstanding.
Our common stock is traded on the New York Stock Exchange under the symbol
"DGX."
DELAWARE LAW AND OUR CERTIFICATE OF INCORPORATION AND BYLAW PROVISIONS MAY HAVE
AN ANTI-TAKEOVER EFFECT
Provisions in our certificate of incorporation, bylaws and Delaware law
could make it harder for someone to acquire us through a tender offer, proxy
contest or otherwise. We are governed by the provisions of Section 203 of the
Delaware General Corporate Law, which provides that a person who owns (or within
three years, did own) 15% or more of a company's voting stock is an "interested
stockholder." Section 203 prohibits a public Delaware corporation from engaging
in a business combination with an interested stockholder for a period commencing
three years from the date in which the person became an interested stockholder
unless:
- the board of directors approved the transaction which resulted in the
stockholder becoming an interested stockholder;
- upon consummation of the transaction which resulted in the stockholder
becoming an interested stockholder, the interested stockholder owns at
least 85% of the voting stock of the corporation (excluding shares owned
by officers, directors, or certain employee stock purchase plans); or
- at or subsequent to the time the transaction is approved by the board of
directors, there is an affirmative vote of at least 66.67% of the
outstanding voting stock.
Section 203 could prohibit or delay mergers or other takeover attempts
against us, and accordingly, may discourage attempts to acquire us through
tender offer, proxy contest or otherwise.
Our certificate of incorporation and bylaws include certain restrictions on
who may call a special meeting of stockholders and prohibit certain actions by
written consent of the holders of common stock. These provisions could delay,
deter or prevent a future takeover or acquisition of us unless such takeover or
acquisition is approved by the board of directors. We have a staggered board of
directors, so that it would take three successive annual meetings to replace all
directors. Our certificate of incorporation also requires the approval of
holders of at least 80% of the voting power of the outstanding capital stock of
our company entitled to vote generally in the election of directors as a
condition for mergers and certain other business combinations with any
beneficial owner of more than 10% of such voting power or an interested
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stockholder, unless (1) the transaction is approved by at least a majority of
directors which are not affiliated or associated with the interested stockholder
with whom we are seeking a business combination or (2) certain minimum price,
form of consideration and procedural requirements are met.
RIGHTS AGREEMENT
On December 31, 1996, we adopted a shareholder rights agreement. As with
most shareholder rights agreements, the terms of our rights agreement are
complex and not easily summarized. This summary may not contain all of the
information that is important to you. Accordingly, you should carefully read our
rights agreement, as amended, that is incorporated by reference as an exhibit to
the registration statement of which this prospectus is a part.
Our rights agreement provides that each of our common shares will have the
right to purchase a unit consisting of one-hundredth of our series A preferred
stock at a purchase price of $250. Each share of series A preferred stock is
entitled to 100 votes per share and votes together with our common stock as a
single class. The series A preferred stock is not redeemable. Holders of rights
will have no rights as our stockholders, including the right to vote or receive
dividends, simply by virtue of holding the rights.
Initially, the rights under our rights agreement are attached to
outstanding certificates representing our common shares and no separate
certificates representing the rights will be distributed. The rights will
separate from our common shares and be represented by separate certificates
approximately 10 days after someone acquires or commences a tender or exchange
offer for 20% of our outstanding common stock except in the case of SmithKline
Beecham and its affiliates, who may acquire up to 29.5% of our outstanding
common stock without triggering the separation of the rights from our common
stock.
After the rights separate from our common shares, certificates representing
the rights will be mailed to record holders of our common shares. Once
distributed, the rights certificates alone will represent the rights. All of our
common shares issued prior to the date the rights separate from the common
shares will be issued with the rights attached. The rights are not exercisable
until the date the rights separate from the common shares. The rights will
expire on December 31, 2006 unless earlier redeemed or exchanged by us.
If a person or group obtains or has the right to obtain 20% or more of our
common shares, then each holder of a right shall be entitled to receive common
stock in lieu of the series A preferred stock upon exercise of the right and
payment of the purchase price. The number of shares of common stock the holder
of the right shall be entitled to receive shall have a value equal to two times
the purchase price paid by such holder upon exercise of the right, unless our
board of directors exercises its option pursuant to the rights agreement to
exchange all or part of the outstanding rights for common stock at an exchange
ratio of one common stock per right prior to a person or group beneficially
owning 50% or more of our common shares. If our company is acquired in a merger,
consolidation or other business combination or more than 50% of our assets is
sold or transferred, each right will thereafter entitle the holder thereof to
receive, upon the exercise of such right, common stock of the acquiring
corporation having a value equal to two times the purchase price of such right.
Our rights agreement may have anti-takeover effects. The rights may cause
substantial dilution to a person or group that attempts to acquire us.
Accordingly, the existence of the rights may deter acquirors from making
takeover proposals or tender offers. However, the rights are not intended to
prevent a takeover, but rather are designed to enhance the ability of our board
to negotiate with an acquiror on behalf of all the stockholders. In addition,
the rights should not interfere with a proxy contest.
LIMITATIONS ON LIABILITY AND INDEMNIFICATION OF OFFICERS AND DIRECTORS
Our certificate of incorporation limits the liability of directors to the
fullest extent permitted by Delaware law. Delaware law provides that directors
of a corporation will not be personally liable for
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monetary damages for breach of their fiduciary duties as directors, including,
without limitation, directors serving on committees of our board of directors.
Directors remain liable for:
- any breach of the director's duty of loyalty to our or its stockholders;
- any act or omission not in good faith or which involves intentional
misconduct or a knowing violation of the law;
- any violation of Section 174 of the DGCL, which proscribes the payment of
dividends and stock purchases or redemptions under certain circumstances;
and
- any transaction from which the directors derive an improper personal
benefit.
This provision, however, has no effect on the availability of equitable
remedies such as an injunction or rescission. Additionally, this provision will
not limit liability under state or federal securities laws.
The certificate of incorporation provides that we shall indemnify our
officers and directors to the fullest extent permitted by such law. We believe
that these provisions will assist us in attracting and retaining qualified
individuals to serve as directors.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for our common stock is Computershare
Investors Services LLC, 2 North LaSalle Street, Chicago, Illinois 60602, and its
telephone number at this location is (312) 588-4991.
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SELLING STOCKHOLDER
We have registered 3,000,000 shares of our common stock that may be offered
by SmithKline Beecham in the registration statement of which this prospectus is
a part. As of June 1, 2001, these shares represented 3.2% of the outstanding
shares of our common stock and SmithKline Beecham held 22,128,672 shares of our
common stock, representing approximately 23.5% of the outstanding shares of our
common stock.
In a letter agreement dated as of January 22, 2001, SmithKline Beecham has
agreed that (1) it will not offer or sell any shares of common stock pursuant to
such registration statement other than as part of an underwritten public
offering; (2) the maximum number of shares of common stock that it will sell
pursuant to such registration statement will equal the lesser of (a) 3,000,000
shares of common stock or (b) such number of shares of common stock having an
aggregate offering price of $225 million; and (3) it will not make more than one
offering of common stock pursuant to such registration statement. Since
SmithKline Beecham may sell all or some of its shares of common stock that have
been registered pursuant to such registration statement, no estimate can be made
of the aggregate number of shares of common stock that will be owned by
SmithKline Beecham upon completion of any such sale.
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PLAN OF DISTRIBUTION
We may sell the securities and SmithKline Beecham may sell shares of our
common stock that it owns to one or more underwriters for public offering or to
investors directly or through agents. The name of any such underwriter or agent
involved in the offer and sale of the securities, the amounts underwritten and
the nature of its obligation to take the securities will be named in the
applicable prospectus supplement. We have reserved the right to sell the
securities, and SmithKline Beecham has reserved the right to sell shares of our
common stock that it owns, directly to investors on our own behalf in those
jurisdictions where we are authorized to do so. The sale of the securities may
be effected in transactions (a) on any national or international securities
exchange or quotation service on which the securities may be listed or quoted at
the time of sale, (b) in the over-the-counter market, (c) in transactions
otherwise than on such exchanges or in the over-the-counter market or (d)
through the writing of options. In a letter agreement dated as of January 22,
2001, SmithKline Beecham has agreed that it will not offer or sell any common
stock pursuant to this prospectus other than as part of an underwritten public
offering.
Underwriters may offer and sell the securities at a fixed price or prices
that may be changed, at market prices prevailing at the time of sale, at prices
related to such prevailing market prices or at negotiated prices. They may offer
the securities on an exchange, which will be disclosed in the applicable
prospectus supplement. We and SmithKline Beecham also may, from time to time,
authorize dealers, acting as our agents, to offer and sell the securities, and
in the case of SmithKline Beecham, our common stock, upon such terms and
conditions as set forth in the applicable prospectus supplement. In connection
with the sale of the securities, underwriters may receive compensation from us
and SmithKline Beecham in the form of underwriting discounts or commissions and
may also receive commissions from purchasers of the securities for whom they may
act as agent. Underwriters may sell the securities to or through dealers, and
such dealers may receive compensation in the form of discounts, concessions or
commissions from the underwriters or commissions (which may be changed from time
to time) from the purchasers for whom they may act as agents.
Any underwriting compensation paid by our company and SmithKline Beecham to
underwriters or agents in connection with the offering of the securities, and
any discounts, concessions or commissions allowed by underwriters to
participating dealers, will be set forth in the applicable prospectus
supplement. SmithKline Beecham, dealers and agents participating in the
distribution of the securities may be deemed to be underwriters, and any
discounts and commissions received by them and any profit realized by them on
resale of the securities may be deemed to be underwriting discounts and
commissions under the Securities Act. Underwriters, dealers and agents may be
entitled, under agreements entered into with our company and SmithKline Beecham,
to indemnification against and contribution towards certain civil liabilities,
including any liabilities under the Securities Act.
Until the distribution of the securities is completed, rules of the SEC may
limit the ability of the underwriters to bid for and purchase the securities. As
an exception to these rules, the underwriters are permitted to engage in certain
transactions that stabilize the price of the securities. Such transactions
consist of bids or purchases for the purpose of pegging, fixing or maintaining
the price of the securities. If the underwriters create a short position in the
securities in connection with the offering, i.e., if they sell more securities
than are set forth on the cover page of the applicable prospectus supplement,
the underwriters may reduce that short position by purchasing securities in the
open market. The underwriters may also impose a penalty bid on certain
underwriters. This means that if the underwriters purchase the securities in the
open market to reduce the underwriters' short position or to stabilize the price
of the securities, they may reclaim the amount of the selling concession from
the underwriters who sold those securities as part of the offering. In general,
purchases of a security for the purpose of stabilization or to reduce a short
position could cause the price of the security to be higher than it might be in
the absence of such purchases. The imposition of a penalty bid might also have
an effect on the price of a security to the extent that it were to discourage
resales of the security.
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118
Any securities other than our common stock issued hereunder may be new
issues of securities with no established trading market. Any underwriters or
agents to or through whom such securities are sold for public offering and sale
may make a market in such securities, but such underwriters or agents will not
be obligated to do so and may discontinue any market making at any time without
notice. No assurance can be given as to the liquidity of the trading market for
any such securities. The amount of expenses expected to be incurred by us in
connection with any issuance of securities will be set forth in the prospectus
supplement. Certain of the underwriters, dealers or agents and their associates
may engage in transactions with, and perform services for, our company,
SmithKline Beecham and certain of our affiliates and SmithKline Beecham's
affiliate's in the ordinary course.
VALIDITY OF THE SECURITIES
The validity of any securities issued hereunder will be passed upon for our
company by Shearman & Sterling, New York, New York. Unless otherwise indicated
in the applicable prospectus supplement, the validity of any securities issued
hereunder will be passed upon for any agents or underwriters by Fried, Frank,
Harris, Shriver & Jacobson (a partnership including professional corporations),
New York, New York.
INDEPENDENT ACCOUNTANTS
The consolidated financial statements of Quest Diagnostics Incorporated and
subsidiaries as of December 31, 2000 and 1999, and for each of the years in the
three-year period ended December 31, 2000, have been incorporated by reference
into this prospectus in reliance upon the report of PricewaterhouseCoopers LLP,
independent accountants, given upon the authority of said firm as experts in
accounting and auditing.
The combined balance sheets at December 31, 1998 and 1997 and the related
combined statements of operations, changes in parent's equity and cash flows for
each of the three years ended December 31, 1998, of SmithKline Beecham Clinical
Laboratories, Inc. and Certain Related Affiliates' have been incorporated by
reference into this prospectus in reliance upon the report of
PricewaterhouseCoopers LLP, independent accountants, given upon the authority of
said firm as experts in accounting and auditing.
38
119
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$550,000,000
[QUEST DIAGNOSTICS LOGO]
$275,000,000 6 3/4% SENIOR NOTES DUE 2006
$275,000,000 7 1/2% SENIOR NOTES DUE 2011
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PROSPECTUS SUPPLEMENT
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MERRILL LYNCH & CO.
CREDIT SUISSE FIRST BOSTON
BANC OF AMERICA SECURITIES LLC
UBS WARBURG
WACHOVIA SECURITIES, INC.
BNY CAPITAL MARKETS, INC.
JUNE 20, 2001
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