Filed Pursuant to Rule 424(b)(5)
Registration Nos. 333-64806,
333-64806-01, 333-64806-02,
333-64806-03, 333-64806-04,
333-64806-05, 333-64806-06,
333-64806-07, 333-64806-08,
333-64806-09, 333-64806-11,
333-64806-12, 333-64806-13,
333-64806-14, 333-64806-15,
333-64806-16, 333-64806-17 and
333-64806-18
PROSPECTUS SUPPLEMENT
(TO PROSPECTUS DATED JULY 9, 2001)
$225,000,000
[QUEST DIAGNOSTICS LOGO]
1.75% CONTINGENT CONVERTIBLE DEBENTURES DUE 2021
------------------------------
We will pay interest on the debentures on May 31 and November 30 of each
year, beginning May 31, 2002.
We also will pay contingent interest during any specified six-month period
commencing December 1, 2004, if the average closing sale price of a debenture
for a measurement period preceding such six-month period equals 120% or more of
the principal amount of the debenture. The contingent interest payable per
debenture in respect of any six-month period will equal the greater of (1) 0.25%
of the average market price of a debenture for the measurement period and (2)
the sum of all regular cash dividends paid by us per share on our common stock
during that six-month period multiplied by the number of shares of common stock
issuable upon conversion of a debenture.
The debentures will be senior unsecured obligations of ours and will rank
equally with our other senior unsecured obligations. Each of our domestic wholly
owned subsidiaries that operate clinical laboratories in the United States will
guarantee the debentures. 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.
Each $1,000 principal amount of debentures is convertible initially into
approximately 11.429 shares of our common stock, which represents an initial
conversion price of $87.50 per share. The conversion price, and therefore the
conversion rate, may be adjusted for certain reasons as described in this
prospectus supplement. Holders may surrender the debentures for conversion into
shares of our common stock under any of the following circumstances:
- at any time during any fiscal quarter if the sale price of our common
stock is above 120% of the conversion price for at least 20 trading days
in the 30 consecutive trading days ending on the last trading day of the
preceding fiscal quarter;
- on any business day after July 1, 2021 if the sale price of our common
stock is above 120% of the conversion price for at least one trading day
after July 1, 2021;
- if the debentures have been called for redemption; or
- upon the occurrence of specified corporate transactions. See "Description
of the Debentures -- Conversion Rights."
The shares of our common stock trade on the New York Stock Exchange under
the symbol "DGX." The last reported sale price of the shares on November 16,
2001 was $62.50 per share.
We may redeem some or all of the debentures on or after November 30, 2004.
Holders may require us to purchase all or a portion of their debentures on
November 30, 2004, 2005, 2008, 2012 and 2016 or, subject to specified
exceptions, upon a change of control. In either event, we may choose to pay the
purchase price in cash or shares of our common stock or a combination of both.
Under the terms of the indenture, we and each holder of the debentures
agree, for United States federal income tax purposes, to treat the debentures as
indebtedness that is subject to the regulations governing contingent payment
debt instruments. See "United States Federal Income Tax Considerations."
INVESTING IN THE DEBENTURES INVOLVES RISKS THAT ARE DESCRIBED IN THE "RISK
FACTORS" SECTION BEGINNING ON PAGE S-9 OF THIS PROSPECTUS SUPPLEMENT AND ON PAGE
1 OF THE ACCOMPANYING PROSPECTUS.
------------------------------
<Table>
<Caption>
PER DEBENTURE TOTAL
------------- ------------
Public offering price(1).................................... 99.00% $222,750,000
Underwriting discount....................................... 1.00% 2,250,000
Proceeds, before expenses, to Quest Diagnostics............. 98.00% 220,500,000
</Table>
- ---------------
(1) Plus accrued interest from November 26, 2001, if settlement occurs after
that date.
The underwriters may also purchase up to an additional $25,000,000 aggregate
principal amount of debentures within 30 days from the date of this prospectus
supplement solely to cover over-allotments, if any.
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 debentures will be ready for delivery in book-entry form only through
The Depository Trust Company on or about November 26, 2001.
------------------------------
BANC OF AMERICA SECURITIES LLC
------------------------------
WACHOVIA SECURITIES CREDIT LYONNAIS SECURITIES (USA) INC.
------------------------------
The date of this prospectus supplement is November 19, 2001.
[INSIDE FRONT COVER]
[ARTWORK]
TABLE OF CONTENTS
<Table>
<Caption>
PAGE
----
PROSPECTUS SUPPLEMENT
Summary..................................................... S-2
Risk Factors................................................ S-9
Use of Proceeds............................................. S-12
Capitalization.............................................. S-13
Price Range of Common Stock................................. S-14
Dividend Policy............................................. S-14
Ratio of Earnings to Fixed Charges and Earnings to Combined S-15
Fixed Charges and Preferred Stock Dividends...............
Description of Other Indebtedness........................... S-16
Description of the Debentures............................... S-18
United States Federal Income Tax Considerations............. S-35
Underwriting................................................ S-41
Legal Matters............................................... S-43
Where You Can Find More Information......................... S-43
PROSPECTUS
About This Prospectus....................................... ii
Quest Diagnostics Incorporated.............................. ii
Risk Factors................................................ 1
Ratio of Earnings to Fixed Charges and Earnings to Combined 9
Fixed Charges and Preferred Stock Dividends...............
Use of Proceeds............................................. 9
Where You Can Find More Information......................... 10
Cautionary Statement for Purposes of the "Safe Harbor" 12
Provisions of the Private Securities Litigation Reform Act
of 1995...................................................
Securities We May Issue..................................... 15
Description of Senior Debt Securities....................... 19
Description of Subordinated Debt Securities................. 37
Description of the Preferred Stock and the Depositary Shares 50
Representing Fractional Shares of Preferred Stock.........
Description of Common Stock................................. 55
Selling Stockholder......................................... 57
Plan of Distribution........................................ 57
Validity of the Securities.................................. 58
Experts..................................................... 59
</Table>
------------------------------
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.
S-1
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 "debentures" refer to the 1.75% contingent
convertible debentures due 2021 unless otherwise specified. All references to
Adjusted EBITDA refer to our EBITDA adjusted as described under footnote (h) to
"Summary Selected Historical Financial Data." 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 $3.6 billion and $525 million, respectively, for the twelve month
period ended September 30, 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 for the twelve months ended September 30, 2001 revenues more
than sixty percent greater than 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 30 principal laboratories serving major metropolitan
areas throughout the United States, several of which are operated by our joint
ventures, 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.
RECENT DEVELOPMENTS
On June 27, 2001, we refinanced a majority of our long-term debt on a
senior unsecured basis to reduce overall interest costs and obtain less
restrictive covenants. Specifically, we completed a $550 million senior notes
offering and entered into a new $500 million senior unsecured credit facility,
which included a five-year $175 million amortizing term loan and a five-year
$325 million revolving credit facility. We used the net proceeds from the senior
notes offering and the new term loan, together with our cash on hand, to repay
all of the $584 million that was outstanding under our then existing senior
secured credit agreement, including the costs to settle existing interest rate
swap agreements and to consummate an approximately $160 million cash tender
offer and consent solicitation for our 10 3/4% senior subordinated notes due
2006. We incurred approximately $31 million of costs associated with this debt
refinancing. As of October 31, 2001, we repaid the term loan of $175 million in
full. We have called for redemption all of the approximately $2.5 million of our
outstanding 10 3/4% senior subordinated notes due 2006. The redemption date is
December 17, 2001.
S-2
THE OFFERING
The following is a summary of some of the terms of this offering. For a
more complete description of the terms of the debentures, see "Description of
Debentures" in this prospectus supplement.
Issuer........................ Quest Diagnostics Incorporated.
Debentures offered............ $225,000,000 aggregate principal amount of
1.75% contingent convertible debentures due
2021. We have granted the underwriters an
option to purchase up to $25,000,000 aggregate
principal amount of debentures to cover
over-allotments, if any.
Offering Price................ 99% of the principal amount of the debentures
plus accrued interest, if any, on the
debentures.
Maturity...................... November 30, 2021.
Interest...................... 1.75% per annum, payable in cash.
Interest payment dates........ May 31 and November 30 of each year, beginning
May 31, 2002.
Guarantees.................... The debentures will be fully and
unconditionally guaranteed, jointly and
severally, by each of our subsidiaries which,
as of the date of this prospectus supplement,
is a domestic wholly owned subsidiary that
operates a clinical laboratory in the United
States.
Ranking....................... The debentures will be our senior unsecured
obligations 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 debentures and the guarantees
effectively will rank junior to all liabilities
of our subsidiaries that are not guarantors.
The debentures 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 September 30, 2001, after giving pro
forma effect to this offering of debentures and
application of the net proceeds and the
repayment in October 2001 of the term loan
portion of our senior unsecured credit facility
in full, we and our subsidiary guarantors would
have had outstanding approximately $828 million
of long-term debt (including the current
portion thereof), of which $28 million would
have been secured. Any future borrowings under
our receivables credit facility also will be
secured.
Contingent interest........... We will pay contingent interest to the holders
of debentures during any six-month period from
June 1 to November 30 and from December 1 to
May 31, commencing December 1, 2004, if the
average closing sale price of a debenture for
the five trading days ending on the second
trading day immediately preceding the relevant
six-month period equals 120% or more of the
principal amount of the debenture.
Notwithstanding the above, if we declare a
dividend for which the record date falls prior
to the first day of a six-month period but the
payment date falls within such six-month
period, then the five trading day period for
determining the average market price of a
debenture will be the five trading days
S-3
ending on the second trading day immediately
preceding such record date.
The amount of contingent interest payable per
debenture in respect of any six-month period
will equal the greater of (1) 0.25% of the
average market price of a debenture for the
five trading day period referred to above and
(2) the sum of all regular cash dividends paid
by us per share on our common stock during that
six-month period multiplied by the number of
shares of common stock issuable upon conversion
of a debenture on each such payment date.
Contingent interest, if any, will accrue and be
payable to holders of debentures as of the 15th
day preceding the last day of the relevant
six-month period or, if we pay a regular cash
dividend on our common stock during the
relevant six-month period, to holders of
debentures as of the record date for the
related common stock dividend. Such payments
will be paid on the last day of the relevant
six-month period or, if we pay a regular cash
dividend on our common stock during the
relevant six-month period, on the payment date
of the related common stock dividend. Regular
cash interest will continue to accrue at the
rate of 1.75% per year on the principal amount
of the debentures whether or not contingent
interest is paid.
United States Federal Income
Tax Consequences.............. Pursuant to the indenture, we and each holder
of a debenture agree, for United States federal
income tax purposes, to treat the debentures as
debt instruments that are subject to U.S.
Treasury regulations that govern contingent
payment debt instruments. Under such
regulations, beneficial owners of the
debentures who are U.S. holders, as defined
below under "United States Federal Income Tax
Considerations-United States Holders," will be
required to accrue interest in excess of the
stated rate of noncontingent cash interest
payable on the debentures regardless of whether
such owner uses the cash or accrual method of
tax accounting. See "United States Federal
Income Tax Considerations."
Conversion rights............. Holders may convert their debentures prior to
stated maturity under any of the following
circumstances:
- at any time during any fiscal quarter if the
closing sale price of our common stock is
above 120% of the conversion price for at
least 20 trading days in the 30 consecutive
trading days ending on the last trading day
of the preceding fiscal quarter;
- on any business day after July 1, 2021 if the
closing sale price of our common stock is
above 120% of the conversion price for at
least one trading day after July 1, 2021;
- if we have called those debentures for
redemption;
- upon the occurrence of specified corporate
transactions described under "Description of
the Debentures -- Conversion Rights."
S-4
For each $1,000 principal amount of debenture
surrendered for conversion, a holder initially
will receive approximately 11.429 shares of our
common stock. This represents an initial
conversion price of $87.50 per share of common
stock. The conversion rate (and the conversion
price) may be adjusted for specified reasons
but will not be adjusted for accrued interest.
Upon conversion, holders will not receive any
cash payment representing accrued and unpaid
interest, including contingent interest, if
any, (except as described under "Description of
the Debentures -- Conversion
Rights -- Conversion Procedures"). Instead,
accrued interest will be deemed paid by the
common stock received by holders on conversion.
Debentures called for redemption may be
surrendered for conversion until the close of
business on the second business day prior to
the redemption date.
Sinking fund.................. None.
Optional redemption by Quest
Diagnostics................... We may not redeem the debentures prior to
November 30, 2004. We may redeem some or all of
the debentures at any time on or after November
30, 2004 at a redemption price equal to 100% of
the principal amount of the debentures to be
redeemed, plus any accrued and unpaid interest,
including contingent interest, if any, to the
redemption date.
Repurchase right of holders... Each holder of the debentures may require us to
repurchase all or a portion of the holder's
debentures on November 30, 2004, 2005, 2008,
2012 and 2016 at a price equal to the principal
amount of the debentures to be repurchased plus
any accrued and unpaid interest, including
contingent interest, if any, to the date of
repurchase. We may choose to pay the purchase
price in cash, common stock or a combination of
both. If we elect to pay all or a portion of
the purchase price in common stock, the shares
of common stock will be valued at 100% of the
average closing sale price for the five trading
days ending on the third day prior to the
repurchase date.
Change of control............. Upon a change of control of our company, each
holder may require us, subject to specified
exceptions, to repurchase all or a portion of
the holder's debentures. See "Description of
the Debentures -- Repurchase of Debentures at
the Option of Holders -- Change of Control
Put."
We will pay a purchase price equal to the
principal amount of such debentures plus any
accrued and unpaid interest, including
contingent interest, if any, to the purchase
date. We may choose to pay the purchase price
in cash, common stock or a combination of both.
If we elect to pay all or a portion of the
purchase price in common stock, the shares of
common stock will be valued at 100% of the
average closing sale price for the five trading
days ending on the third day prior to the
repurchase date.
Events of default............. If there is an event of default on the
debentures, the principal amount of the
debentures (and premium, if any), plus any
accrued and unpaid interest, including
contingent interest, if any, may be declared
immediately due and payable. These amounts
automati-
S-5
cally become due and payable in specified
circumstances described under "Description of
the Debentures -- Events of Default."
Use of proceeds............... We estimate that the net proceeds from this
offering of debentures will be approximately
$220 million, or $244 million if the
over-allotment option is exercised in full. We
intend to use these proceeds, together with
cash on hand, to repay all or substantially all
of the $256 million that is outstanding under
our receivables credit facility. After the
repayment, we will retain all of the secured
borrowing capacity under our receivables credit
facility, which will be available for working
capital and other general corporate purposes
and for the acquisition of businesses.
DTC Eligibility............... The debentures will be issued in book-entry
form and will be represented by one or more
permanent global securities, deposited with the
trustee as depositary for The Depository Trust
Company ("DTC") and registered in the name of
Cede & Co., DTC's nominee. Beneficial interests
in the global certificates will be shown on,
and any transfers will be effected only
through, records maintained by DTC and its
participants, and any such interest may not be
exchanged for definitive debentures except in
limited circumstances. See "Description of the
Debentures -- Book-Entry System."
NYSE symbol for our common
stock......................... Our common stock is traded on the New York
Stock Exchange under the symbol "DGX."
Trading....................... We have not applied and do not intend to apply
for the listing of debentures on any securities
exchange. The debentures will be a new issue of
securities for which there currently is no
public market.
Risk factors.................. See "Risk Factors" and the other information in
this prospectus supplement and the accompanying
prospectus for a discussion of factors you
should carefully consider before deciding to
invest in the debentures.
S-6
SUMMARY SELECTED HISTORICAL FINANCIAL DATA
<Table>
<Caption>
NINE MONTHS ENDED
SEPTEMBER 30, YEAR ENDED DECEMBER 31,
----------------------- -------------------------------------
2001 2000 2000 1999(A) 1998
---------- ---------- ---------- ----------- ----------
(IN THOUSANDS)
OPERATIONS DATA:
Net revenues.................... $2,717,331 $2,584,828 $3,421,162 $ 2,205,243 $1,458,607
Costs and expenses:
Cost of services.............. 1,614,020 1,554,216 2,056,237 1,379,989 896,793
Selling, general and
administrative............. 760,324 753,900 1,001,443 643,440 445,885
Interest, net................. 57,968 89,430 113,092 61,450 33,403
Amortization of intangible
assets..................... 34,681 35,380 45,665 29,784 21,697
Provisions for restructuring
and other special
charges.................... 5,997(b) 2,100(c) 2,100(c) 73,385(d) --
Minority share of income...... 6,843 7,486 9,359 5,431 2,017
Other, net.................... (3,571) (5,112) (7,715) (2,620) 4,951
---------- ---------- ---------- ----------- ----------
Total......................... 2,476,262 2,437,400 3,220,181 2,190,859 1,404,746
---------- ---------- ---------- ----------- ----------
Income before taxes and
extraordinary loss............ 241,069 147,428 200,981 14,384 53,861
Income (loss) before
extraordinary loss............ 132,974(e) 76,689 104,948(f) (1,274)(g) 26,885
Net income (loss)............... 111,365(e) 76,689 102,052(f) (3,413)(g) 26,885
BALANCE SHEET DATA (AT END OF
PERIOD):
Cash and cash equivalents....... $ 238,879 $ 161,786 $ 171,477 $ 27,284 $ 202,908
Accounts receivable, net........ 513,637 513,391 485,573 539,256 220,861
Total assets.................... 2,933,470 3,006,154 2,864,536 2,878,481 1,360,240
Long-term debt.................. 677,913 906,063 760,705 1,171,442 413,426
Total debt...................... 958,531 1,188,583 1,026,113 1,216,877 464,870
Preferred stock................. 1,000 1,000 1,000 1,000 1,000
Common stockholders' equity..... 1,242,922 985,637 1,030,795 862,062 566,930
OTHER DATA:
Net cash provided by operating
activities.................... $ 301,280 $ 246,454 $ 369,455 $ 249,535 $ 141,382
Net cash used in investing
activities.................... (152,584) (90,427) (48,015) (1,107,990) (39,720)
Net cash provided by (used in)
financing activities.......... (81,294) (21,525) (177,247) 682,831 (60,415)
Bad debt expense................ 165,670 181,646 234,694 142,333 89,428
Rent expense.................... 61,127 56,974 76,515 59,073 46,259
Capital expenditures............ 110,183 67,961 116,450 76,029 39,575
Adjusted EBITDA(h).............. 413,034 346,931 459,380 237,038 158,609
</Table>
- ---------------
(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.
S-7
(b) On June 27, 2001, we refinanced a majority of our debt. In conjunction with
the refinancing, we recorded a net special charge of $6.0 million resulting
from the termination of interest rate swap agreements on the debt that was
refinanced.
(c) During 2000, we recorded a net special charge of $2.1 million. This net
special 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.
(d) 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.
(e) In conjunction with our debt refinancing in 2001, we recorded an
extraordinary loss that represented $23.2 million ($13.9 million, net of
tax) of deferred financing costs, associated with the debt that was
refinanced, and $12.8 million ($7.7 million, net of tax) of payments related
primarily to the tender premium incurred in connection with our cash tender
offer for our 10 3/4% senior subordinated notes due 2006.
(f) During 2000, we prepaid $155.0 million of debt under our then existing
senior secured credit facility. The extraordinary loss represented $4.8
million ($2.9 million, net of tax) of deferred financing costs that were
written-off in connection with the prepayment.
(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 that were written-off in connection with the
extinguishment of the credit agreement.
(h) 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, $7.2
million of costs related to the integration of SBCL that were included in
operating costs and expensed as incurred in the nine months ended September
30, 2000, $8.9 million of costs related to the integration of SBCL that 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.
S-8
RISK FACTORS
You should carefully consider the risks described below, as well as the
risks relating to our business and our industry contained in the accompanying
prospectus, before making a decision to invest in the debentures. You should
also consider the other information contained or incorporated by reference in
this prospectus supplement and the accompanying prospectus before making a
decision to invest in the debentures.
RISKS RELATED TO OUR BUSINESS
Our business is affected by many factors that may cause our results in the
future to differ, possibly materially, from our current expectations or
forecasts. See "Cautionary Statement for Purposes of the "Safe Harbor"
Provisions of the Private Securities Litigation Reform Act of 1995" in the
accompanying prospectus for a description of these factors and for a cautionary
note regarding forward-looking statements and your reliance on them. A number of
the factors that may affect our future results also are discussed in the
accompanying prospectus under the heading "Risk Factors" and in our Form 10-K
for the year ended December 31, 2000, which is incorporated by reference into
this prospectus supplement, in particular in the sections captioned "Business,"
"Legal Proceedings" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
RISKS RELATED TO THE DEBENTURES AND THE OFFERING
YOU SHOULD CONSIDER THE UNITED STATES FEDERAL INCOME TAX CONSEQUENCES OF OWNING
DEBENTURES.
Under the indenture, we will agree, and beneficial owners of the
debentures, by their purchase of debentures, will be deemed to have agreed, to
treat the debentures for U.S. federal income tax purposes as indebtedness that
is subject to the regulations governing contingent payment debt instruments. The
discussion below, and the discussion under the heading "United States Federal
Income Tax Considerations," assume that the debentures will be so treated.
However, the U.S. federal income tax characterization of the debentures is
uncertain and, thus, no assurance can be given that the Internal Revenue Service
will not assert that the debentures should be treated in a different manner.
Such an alternative characterization could affect the amount, timing and
character of income, gain or loss in respect of an investment in the debentures.
In general, beneficial owners of the debentures who are U.S. holders, as
defined below under "United States Federal Income Tax Considerations -- United
States Holders," will be required to accrue interest income on the debentures in
the manner described in this prospectus supplement, regardless of whether such
owner uses the cash or accrual method of tax accounting. These beneficial owners
will be required, in general, to accrue interest based on the rate at which we
would issue a fixed rate nonconvertible debt instrument with terms and
conditions similar to the debentures (but in no event at a rate lower than the
applicable federal rate determined by the Secretary of the Treasury), rather
than at the lower rate at which noncontingent cash interest is paid.
Accordingly, these beneficial owners generally will be required to include
interest in taxable income in excess of the amount of non-contingent cash
interest that will be payable. Furthermore, upon a sale, exchange, conversion or
redemption of a debenture, each such beneficial owner will recognize gain or
loss equal to the difference between the amount realized by that beneficial
owner and that beneficial owner's adjusted tax basis in the debentures. In
general, the amount realized by the beneficial owner will include, in the case
of a conversion, the fair market value of the stock that the beneficial owner
receives. Any gain on a sale, exchange, conversion or redemption of a debenture
will be treated as ordinary interest income. Please consult your own tax
advisors as to the U.S. federal, state, local or other tax consequences of
acquiring, owning and disposing of the debentures. A summary of the U.S. federal
income tax consequences of ownership of the debentures is described in this
prospectus supplement under the heading "United States Federal Income Tax
Considerations."
S-9
WE EXPECT THAT THE TRADING VALUE OF THE DEBENTURES WILL BE SIGNIFICANTLY
AFFECTED BY THE PRICE OF OUR COMMON STOCK.
The market price of the debentures is expected to be significantly affected
by the market price of our common stock. This may result in greater volatility
in the trading value for the debentures than would be expected for
nonconvertible debt securities we issue. For a discussion of the factors that
may result in volatility in the market price of our common stock, see "Risk
Factors" in the accompanying prospectus.
WE MAY NOT HAVE THE FUNDS NECESSARY TO PURCHASE THE DEBENTURES AT THE OPTION OF
THE HOLDERS OR UPON A CHANGE OF CONTROL.
On November 30, 2004, 2005, 2008, 2012 and 2016, and upon the occurrence of
a change of control, each holder may require us to repurchase the holder's
debentures, as described in the prospectus supplement. Our ability to repurchase
the debentures for cash may be limited by restrictions on our ability to obtain
funds for such repurchase through dividends from our subsidiaries. In addition,
the occurrence of a change of control could cause an event of default under or
be prohibited or limited by the terms of our other senior debt. We cannot assure
you that we would have the financial resources, or would be able to arrange
financing, to pay the purchase price in cash for all the debentures that might
be delivered by holders of debentures seeking to exercise their repurchase
rights.
A DOWNGRADE, SUSPENSION OR WITHDRAWAL OF THE RATING ASSIGNED BY A RATING AGENCY
TO THE DEBENTURES, IF ANY, COULD CAUSE THE LIQUIDITY OR MARKET VALUE OF THE
DEBENTURES TO DECLINE SIGNIFICANTLY.
We have received ratings of the debentures by Standard & Poors and Moody's.
There can be no assurance that any rating so assigned will remain for any given
period of time or that a rating will not be lowered or withdrawn entirely by a
rating agency if in that rating agency's judgment future circumstances relating
to the basis of the rating, such as adverse changes in our company, so warrant.
THERE MAY BE NO PUBLIC MARKET FOR THE DEBENTURES.
Prior to this offering, there has been no trading market for the
debentures. Although the underwriters have advised us that they currently intend
to make a market in the debentures, they are not obligated to do so and may
discontinue their market-making activities at any time without notice.
Consequently, we cannot be sure that any market for the debentures will develop,
or if one does develop, that it will be maintained. If an active market for the
debentures fails to develop or be sustained, the trading price of the debentures
could decline. We do not intend to apply for listing of the debentures on any
securities exchange or any automated quotation system.
SECURED INDEBTEDNESS AND BORROWINGS BY SUBSIDIARIES THAT ARE NOT GUARANTORS WILL
BE EFFECTIVELY SENIOR TO THE DEBENTURES.
The debentures and the guarantees of our subsidiary guarantors 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 Senior Debt Securities -- Limitation on Liens"
in the accompanying prospectus. This covenant is subject to important exceptions
described under such heading. As of September 30, 2001, after giving pro forma
effect to this offering of debentures and application of the net proceeds from
this financing transaction, and the repayment of the term loan portion of our
senior unsecured credit facility, we and our subsidiary guarantors would have
had outstanding $28 million of secured long-term debt (including the current
portion thereof) and $256 million of secured borrowing capacity under our
receivables credit facility.
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
S-10
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 debentures. The debentures 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 (unless such subsidiaries are also
subsidiary guarantors), including claims with respect to trade payables. This
means that holders or our debentures as guaranteed by our subsidiary guarantors
will have a junior position to the claims of creditors of our direct and
indirect subsidiaries that 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 Senior Debt Securities -- Limitation of
Subsidiary Indebtedness and Preferred Stock" in the accompanying prospectus.
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 the
Debentures -- Guarantees" or may be avoided or subordinated in favor of the
subsidiary guarantors' other creditors as described in the accompanying
prospectus under the heading "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". As of September 30, 2001,
after giving pro forma effect to this offering of debentures and application of
the net proceeds from this financing transaction, our non-guarantor subsidiaries
would have had no outstanding debt, but would have had $256 million of secured
borrowing capacity under our receivables credit facility. For a more detailed
description of our receivables credit facility, see "Description of Other
Indebtedness -- Receivables Credit Facility."
FUTURE SALES OF OUR STOCK COULD ADVERSELY AFFECT OUR COMMON STOCK PRICE.
As of November 16, 2001, approximately 8.9 million shares of our common
stock are issuable upon exercise of outstanding stock options under our employee
stock option plans and non-employee director stock option plan, and an
additional approximately 8.9 million shares of our common stock are reserved for
the 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 22.1 million shares of our common stock or
about 23.1% of our outstanding common stock as of November 16, 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. Also,
SmithKline Beecham has its 3 million shares of our common stock registered in
our current shelf registration statement and may also sell shares pursuant to
Rule 144 under the Securities Act. SmithKline Beecham has not granted a lock-up
agreement to the underwriters in connection with this offering. See "Selling
Stockholder" in the accompanying prospectus.
Future sales of our common stock and instruments convertible or
exchangeable into our common stock and transactions involving equity derivatives
relating to our common stock, including sales or transactions by SmithKline
Beecham, or the perception that such sales or transactions could occur, could
adversely affect the market price of our common stock. This could, in turn, have
an adverse effect on the trading price of the debentures resulting from, among
other things, a delay in the ability of holders to convert their debentures into
our common stock.
S-11
USE OF PROCEEDS
We estimate that the net proceeds from this offering of debentures will be
approximately $220 million, or $244 million if the over-allotment option is
exercised in full. We intend to use these proceeds, together with cash on hand,
to repay all or substantially all of the $256 million that is outstanding under
our receivables credit facility. The weighted average interest rate on
borrowings outstanding under our receivables credit facility at September 30,
2001 was 3.58%. After the repayment, we will retain all of the secured borrowing
capacity under our receivables credit facility, which will be available for
working capital and other general corporate purposes and for the acquisition of
businesses.
S-12
CAPITALIZATION
The following table sets forth our cash and cash equivalents, debt and
total capitalization at September 30, 2001 on an actual basis and as adjusted
basis to reflect the following transactions as if they had occurred on that
date:
- completion of this $250 million offering of the debentures (assuming the
underwriters exercise their over-allotment option);
- repayment of amounts outstanding under our receivables credit facility;
and
- the October 19, 2001 repayment of the $125 million balance of the term
loan portion of our senior unsecured credit facility.
This table should be read in conjunction with our consolidated financial
statements and the related notes incorporated by reference into this prospectus
supplement.
<Table>
<Caption>
SEPTEMBER 30, 2001
------------------------
ACTUAL AS ADJUSTED
---------- -----------
(IN THOUSANDS)
Cash and cash equivalents................................... $ 238,879 $ 100,798
========== ==========
Debt (including current maturities):
Short-term borrowings under receivables financing......... $ 256,000 --
10 3/4% Senior subordinated notes due 2006(1)............. 2,528 2,528
New revolving credit facility............................. -- --
Term loan facility........................................ 125,000 --
6 3/4% Senior notes due 2006.............................. 273,516 273,516
7 1/2% Senior notes due 2011.............................. 273,922 273,922
1.75% Contingent convertible debentures due 2021.......... -- 250,000
Other debt................................................ 27,565 27,565
---------- ----------
Total debt............................................. 958,531 827,531
Preferred stock............................................. 1,000 1,000
Common stockholders' equity................................. 1,242,922 1,242,922
---------- ----------
Total capitalization........................................ $2,202,453 $2,071,453
========== ==========
</Table>
- ---------------
(1) We have called for redemption all of the approximately $2.5 million of our
outstanding 10 3/4% senior subordinated notes due 2006. The redemption date
will be December 17, 2001.
S-13
PRICE RANGE OF COMMON STOCK
Our common stock, which trades under the symbol "DGX," is listed on the New
York Stock Exchange. The following table presents, for the periods indicated,
the high and low sales prices per share of our common stock as reported on the
New York Stock Exchange. The sales prices for all periods prior to May 31, 2001
have been restated to reflect our two-for-one stock split effected on that date.
<Table>
<Caption>
HIGH LOW
------ ------
FISCAL YEAR ENDED DECEMBER 31, 1999
First Quarter............................................. $11.41 $ 8.87
Second Quarter............................................ 13.75 10.75
Third Quarter............................................. 14.07 11.87
Fourth Quarter............................................ 16.47 11.28
FISCAL YEAR ENDED DECEMBER 31, 2000
First Quarter............................................. 20.19 14.57
Second Quarter............................................ 37.37 18.50
Third Quarter............................................. 70.50 36.63
Fourth Quarter............................................ 73.13 41.37
FISCAL YEAR ENDED DECEMBER 31, 2001
First Quarter............................................. 70.47 36.60
Second Quarter............................................ 75.75 42.15
Third Quarter............................................. 75.50 48.10
Fourth Quarter (through November 16, 2001)................ 70.90 55.02
</Table>
On November 16, 2001, the last reported sale price for our common stock on
the New York Stock Exchange was $62.50 per share.
As of October 31, 2001, there were 95,768,015 shares of common stock
outstanding held of record by approximately 6,400 stockholders.
DIVIDEND POLICY
We have never declared or paid cash dividends on our common stock and do
not anticipate paying any dividends in the foreseeable future. We currently
intend to retain all available funds and any future earnings to fund the
development and growth of our business.
S-14
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.
<Table>
<Caption>
NINE MONTHS
ENDED
SEPTEMBER 30, YEAR ENDED DECEMBER 31,
------------- --------------------------------
2001 2000 1999 1998 1997 1996
------------- ---- ---- ---- ---- ----
Ratio of earnings to fixed charges............... 3.9x 2.4x 1.2x 2.0x (a) (a)
Ratio of earnings to combined fixed charges and
preferred stock dividends...................... 3.9x 2.4x 1.3x 2.0x (a) (a)
</Table>
- ---------------
(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:
<Table>
<Caption>
YEAR ENDED DECEMBER 31,
- -----------------------
1997 1996
- ------- --------
(IN THOUSANDS)
$16,578 $676,202
</Table>
S-15
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 $256 million secured revolving credit facility (the "receivables credit
facility") on an uncommitted basis. This receivables credit facility is
currently being provided by Blue Ridge Asset Funding Corporation, a commercial
paper funding vehicle administered by Wachovia Bank, N.A., and Atlantic Asset
Securitization Corporation, a commercial funding vehicle administered by Credit
Lyonnais. The receivables credit facility has the benefit of one-year back-up
facilities, provided on a committed basis. The back-up facility that supports
the funding from Blue Ridge is provided by Wachovia Bank and Lloyds TSB Bank and
expires on July 19, 2002, and the back-up facility that supports the funding
from Atlantic is provided by Credit Lyonnais and expires on September 27, 2002.
The receivables credit facility has an initial term of three years, unless
extended. The receivables credit facility may be terminated early under certain
conditions, including the termination of the back-up facilities to Blue Ridge
and Atlantic. 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 Atlantic 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 that are
intended to approximate commercial paper rates for highly rated issuers. The
weighted average interest rate on borrowings outstanding at September 30, 2001
was 3.58%.
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 our senior unsecured credit facility or our
senior notes and will not guarantee the debentures offered pursuant to this
prospectus supplement.
We intend to use the proceeds from this offering, together with cash on
hand, to repay all or substantially all of the $256 million that is outstanding
under our receivables credit facility. After the repayment, we will retain all
of the secured borrowing capacity under our receivables credit facility, which
will be available for working capital and other general corporate purposes and
for the acquisition of businesses.
THE SENIOR UNSECURED CREDIT FACILITY
On June 27, 2001, we entered into a $500 million senior unsecured credit
facility with a group of banks. The senior unsecured credit facility initially
consisted of a five-year $325 million revolving credit facility and a five-year
term loan facility of $175 million. As of October 31, 2001, the term loan of
$175 million was repaid in full, and we had approximately $300 million of
availability under the $325 million revolving credit facility due to outstanding
letters of credit. Interest on the senior unsecured credit facility is based on
certain published rates plus an applicable margin that will vary depending on
our credit 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 that is calculated by reference to the prime rate or federal
funds rate (as those terms are defined in the 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. As of September 30, 2001, our
borrowing rate on LIBOR-based loans was LIBOR plus 1.3125%. The senior unsecured
credit facility is guaranteed by each of our subsidiaries that will guarantee
the debentures.
S-16
The senior unsecured credit facility contains various covenants and
conditions, including the maintenance of certain financial ratios, that could
affect our ability to, among other things, incur additional indebtedness,
repurchase shares of our outstanding common stock, make additional investments
and consummate acquisitions.
SENIOR NOTES
On June 27, 2001, we completed a public offering of our senior notes,
comprised of $275 million of 6 3/4% senior notes due 2006 and $275 million of
7 1/2% senior notes due 2011. The Bank of New York is the trustee for the senior
notes. The senior notes are fully and unconditionally guaranteed, jointly and
severally, by each of our subsidiaries which, as of the date of this prospectus
supplement, is a domestic wholly owned subsidiary that operates a clinical
laboratory in the United States. The debentures offered hereby will be
guaranteed as of their date of issuance by the same subsidiaries that guarantee
the senior notes.
The indenture governing the senior notes contains various covenants that
could affect our ability to, among other things, create liens, enter into sale
and leaseback transactions and incur indebtedness at our subsidiaries. The
senior notes are not entitled to the benefit of a sinking fund.
S-17
DESCRIPTION OF THE DEBENTURES
We will issue the debentures under our senior indenture, dated as of June
27, 2001 (the "Senior Indenture"), as supplemented as of June 27, 2001 and as
will be further supplemented as of November 26, 2001 in connection with this
offering (collectively, the "Indenture"), among Quest Diagnostics, as issuer,
the Subsidiary Guarantors, as guarantors, and The Bank of New York, as trustee.
The debentures will constitute senior debt securities under the Senior
Indenture. Initially, The Bank of New York will also act as paying agent,
conversion agent and bid solicitation agent for the debentures. The terms of the
debentures include those stated in the Indenture and those made a part of the
Indenture by reference to the Trust Indenture Act of 1939, as amended. A copy of
the Indenture is available for inspection at the office of the trustee.
This description of the terms of the debentures supplements the description
of the general terms and provisions of the senior 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 the Debentures to terms defined in the Indenture, such defined
terms are incorporated herein by reference. As used in this Description of the
Debentures, 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.
The following description is only a summary of the material provisions of
the debentures and the Indenture. We urge you to read these documents in their
entirety because they, and not this description, define your rights as holders
of these debentures.
GENERAL
The debentures will be limited to $225,000,000 aggregate principal amount
($250,000,000 aggregate principal amount if the underwriters exercise their
over-allotment option in full). The debentures will mature on November 30, 2021.
Interest on the debentures accrues at a rate of 1.75% per annum from the
date of original issuance, payable semiannually on May 31 and November 30 of
each year or, if such day is not a business day, on the next succeeding business
day, commencing on May 31, 2002. We will make each interest payment in cash to
the holders of record of the debentures at the close of business on each May 15
and November 15 immediately preceding the interest payment date.
Holders may present debentures for conversion at the office of the
conversion agent, which agent will initially be the trustee. Holders may present
debentures for registration of transfer at the office of the trustee.
The debentures are not subject to defeasance or covenant defeasance.
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 debentures. The guarantees of the debentures will be endorsed on the
debentures. 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 debentures will be required to guarantee
Quest Diagnostics' obligations under the debentures, 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
"Covenants -- Limitation on Subsidiary Indebtedness and Preferred Stock"
covenant described in the accompanying prospectus.
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.
S-18
Application of this clause could limit the amount which holders of debentures
may be entitled to collect under the guarantees. Holders, by their acceptance of
the debentures, 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" described in the accompanying prospectus.
The guarantees of the Subsidiary Guarantors with respect to the debentures
will remain in effect with respect to each Subsidiary Guarantor until the entire
amount of principal of, premium, and interest on the debentures 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 any Indebtedness of Quest Diagnostics the amount of which, excluding
any outstanding debentures to which any Subsidiary Guarantees of such Subsidiary
Guarantor apply, 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, at the time of
determination, 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 in the accompanying
prospectus measured at the time of the release and discharge as described in
this paragraph, or (b) 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) or (b) 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 debentures.
In accordance with Securities and Exchange Commission rules and
regulations, Quest Diagnostics presents, among other things, condensed financial
information with respect to in the Subsidiary Guarantors on a combined basis in
a footnote to its consolidated financial statements in lieu of providing
separate financial statements for each such subsidiary.
"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 senior debt securities issued under the Senior Indenture, including
the debentures offered hereby, provided that, in each case, such Initial
Subsidiary Guarantor or such other domestic Subsidiary continues to guarantee
the senior debt securities issued under the Senior Indenture, at such time.
"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.
On August 24, 2001, Quest Diagnostics Incorporated (OH) merged into Quest
Diagnostics of Pennsylvania Inc.
RANKING
The debentures will be our senior unsecured obligations 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 the
subsidiary guarantor.
The debentures and the guarantees will be effectively subordinated to any
secured obligations of ours 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 we can incur but does limit the amount
of secured indebtedness pursuant to the covenant described under the heading
"Description of Senior Debt
S-19
Securities -- Limitation on Liens" in the accompanying prospectus. This covenant
is subject to important exceptions described under such heading.
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 debentures. The
debentures 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 guarantor's subsidiaries
(unless such subsidiaries are also subsidiary guarantors), including claims with
respect to trade payables. This means that holders of the debentures as
guaranteed by the subsidiary guarantors will have a junior position to the
claims of creditors of our direct and indirect subsidiaries that are not
subsidiary guarantors on the assets and earnings of such subsidiaries.
As described above, the debentures are effectively subordinated to all
existing and future 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 -- Secured indebtedness and
borrowings by subsidiaries that are not guarantors will be effectively senior to
the debentures" in this prospectus supplement and "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" included
in the accompanying prospectus. In addition, a guarantee issued by any of our
subsidiary guarantors may be released under certain circumstances described
under "Guarantees."
INTEREST
The debentures will bear cash interest at a rate of 1.75% per annum from
November 26, 2001. We will also pay contingent interest on the debentures in the
circumstances described under "-- Contingent Interest." We will pay interest
semiannually on May 31 and November 30 of each year beginning May 31, 2002, to
the holders of record at the close of business on the preceding May 15 and
November 15, respectively. There are two exceptions to the preceding sentence:
- In general, we will not pay accrued and unpaid interest on any debentures
that are converted into our common stock. Instead, accrued interest will
be deemed paid by the common stock received by holders on conversion. If
a holder of debentures converts after a record date for an interest
payment but prior to the corresponding interest payment date, the holder
will receive on that interest payment date accrued and unpaid interest on
those debentures, notwithstanding the holder's conversion of those
debentures prior to that interest payment date, because that holder will
have been the holder of record on the corresponding record date. However,
at the time that holder surrenders debentures for conversion, the holder
must pay to us an amount equal to the interest that has accrued and that
will be paid on the related interest payment date. The preceding sentence
does not apply, however, to a holder that converts debentures that are
called by us for redemption after a record date for an interest payment
but prior to the corresponding interest payment date. Accordingly, if we
elect to redeem debentures on a date that is after a record date but
prior to the corresponding interest payment date, and prior to the
redemption date a holder of debentures selected for redemption chooses to
convert those debentures, the holder will not be required to pay us, at
the time that holder surrenders those debentures for conversion, the
amount of interest it will receive on the interest payment date.
- We will pay interest to a person other than the holder of record on the
record date if we elect to redeem, or holders elect to require us to
repurchase, the debentures on a date that is after a record date but on
or prior to the corresponding interest payment date. In this instance, we
will pay accrued and unpaid interest on the debentures being redeemed to,
but not including, the redemption or the
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repurchase date, as the case may be, date to the same person to whom we
will pay the principal of those debentures.
Except as provided below, we will pay interest on:
- global debentures to DTC in immediately available funds;
- any definitive debentures having an aggregate principal amount of
$5,000,000 or less by check mailed to the holders of those debentures;
and
- any definitive debentures having an aggregate principal amount of more
than $5,000,000 by wire transfer in immediately available funds if
requested by the holders of those debentures.
At maturity we will pay interest on any definitive debentures at our office
or agency in New York City, which initially will be the principal corporate
trust office of the trustee, The Bank of New York, presently located at 5 Penn
Plaza, 13th Floor, New York, NY 10001-1810.
We will pay principal on:
- global debentures to DTC in immediately available funds; and
- any definitive debentures at our office or agency in New York City, which
initially will be the principal corporate trust office of the trustee,
The Bank of New York, presently located at 20 Broad Street, New York, NY
10005.
Interest generally will be computed on the basis of a 360-day year
comprised of twelve 30-day months.
CONTINGENT INTEREST
Subject to the accrual and record date provisions described below, we will
pay contingent interest to the holders of debentures during any six-month period
from June 1 to November 30 and from December 1 to May 31, commencing December 1,
2004, if the average closing sale price of a debenture for the five trading days
ending on the second trading day immediately preceding the relevant six-month
period equals 120% or more of the principal amount of the debenture.
Notwithstanding the above, if we declare a dividend for which the record date
falls prior to the first day of a six-month period but the payment date falls
within such six-month period, then the five trading day period for determining
the average market price of a debenture will be the five trading days ending on
the second trading day immediately preceding such record date.
The amount of contingent interest payable per debenture in respect of any
six-month period will equal the greater of (1) 0.25% of the average market price
of a debenture for the five trading day period referred to above and (2) the sum
of all regular cash dividends paid by us per share on our common stock during
that six-month period multiplied by the number of shares of common stock
issuable upon conversion of a debenture on each such payment date.
Contingent interest, if any, will accrue and be payable to holders of
debentures as of the 15th day preceding the last day of the relevant six-month
period or, if we pay a regular cash dividend on our common stock during the
relevant six-month period, to holders of debentures as of the record date for
the related common stock dividend. Such payments will be paid on the last day of
the relevant six-month period or, if we pay a regular cash dividend on our
common stock during the relevant six-month period, on the payment date of the
related common stock dividend. Regular cash interest will continue to accrue at
the rate of 1.75% per year on the principal amount of the debentures whether or
not contingent interest is paid.
Regular cash dividends are quarterly or other periodic cash dividends on
our common stock as declared by our board of directors as part of its cash
dividend payment practices and that are not designated by them as extraordinary
or special or other nonrecurring dividends. We have never declared or paid cash
dividends on our common stock and do not anticipate paying any dividends in the
foreseeable future. We currently intend to retain all available funds and any
future earnings to fund the development and growth of our business.
The market price of a debenture on any date of determination means the
average of the secondary market bid quotations per debenture obtained by the bid
solicitation agent for $10 million principal amount of
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debentures at approximately 4:00 p.m., New York City time, on such determination
date from three unaffiliated securities dealers, which may include the
underwriters in this offering, we select, provided that if:
- at least three such bids are not obtained by the bid solicitation agent,
or
- in our reasonable judgment, the bid quotations are not indicative of the
secondary market value of the debentures,
then the market price of the debentures will equal (a) the then applicable
conversion rate of the debentures multiplied by (b) the average closing sale
price of our common stock on the five trading days ending on such determination
date, appropriately adjusted.
The "sale price" of our common stock on any date means the closing per
share sale price (or if no closing sale price is reported, the average of the
bid and ask prices or, if more than one in either case, the average of the
average bid and the average ask prices) on that date as reported on the New York
Stock Exchange or, if our common stock is not listed on the New York Stock
Exchange, then as reported on the principal U.S. securities exchange in which
our common stock is traded or by the Nasdaq system, as the case may be.
The bid solicitation agent will initially be The Bank of New York. We may
change the bid solicitation agent, but the bid solicitation agent will not be
our affiliate. The bid solicitation agent will solicit bids from securities
dealers that are believed by us to be willing to bid for the debentures.
Upon determination that holders of debentures will be entitled to receive
contingent interest which may become payable during a relevant six-month period,
on or prior to the start of such six-month period, we will issue a press release
and publish such information on our web site on the World Wide Web or through
such other public medium as we may use at that time.
We will make the payments of contingent interest, if any, in the same
manner as we will make the payments of interest described above under
"-- Interest," and your obligations in respect of the payment of contingent
interest in connection with the conversion of any debentures also will be the
same as described above under "-- Interest."
CONVERSION RIGHTS
GENERAL
You may convert any outstanding debentures (or portions of outstanding
debentures) as described below into our common stock, initially at the
conversion price of $87.50 per share (equal to a conversion rate of
approximately 11.429 shares per $1,000 principal amount of debentures). The
conversion price is subject to adjustment as described below. We will not issue
fractional shares of common stock upon conversion of debentures. Instead, we
will pay a cash adjustment based upon the sale price of our common stock on the
business day immediately preceding the conversion date. You may convert
debentures only in denominations of $1,000 and integral multiples of $1,000.
You may surrender debentures for conversion into our common stock prior to
the stated maturity only under the following circumstances:
- at any time during any fiscal quarter if the sale price of our common
stock is above 120% of the conversion price for at least 20 trading days
in the 30 consecutive trading days ending on the last trading day of the
preceding fiscal quarter;
- on any business day after July 1, 2021 if the sale price of our common
stock is above 120% of the conversion price for at least one trading day
after July 1, 2021;
- if we have called the debentures for redemption; or
- upon the occurrence of the specified corporate transactions discussed
below.
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If you have exercised your right to require us to repurchase your
debentures as described under "-- Repurchase of Debentures at the Option of
Holders," you may convert your debentures into our common stock only if you
withdraw your notice of exercise and convert your debentures prior to the close
of business on the business day immediately preceding the applicable repurchase
date.
CONVERSION UPON SATISFACTION OF MARKET PRICE CONDITION
You may surrender any of your debentures for conversion into our common
stock prior to maturity at any time during any fiscal quarter if the sale price
of our common stock is above 120% of the conversion price for at least 20
trading days in the 30 consecutive trading days ending on the last trading day
of the preceding fiscal quarter. Commencing on July 1, 2021, you may surrender
any of your debentures for conversion into our common stock on any business day
if the sale price of our common stock is above 120% of the conversion price for
at least one trading day after July 1, 2021.
CONVERSION UPON NOTICE OF REDEMPTION
You may surrender for conversion any debentures we call for redemption at
any time prior to the close of business on the day that is two business days
prior to the redemption date, even if the debentures are not otherwise
convertible at that time. If a holder already has delivered a purchase notice or
a change of control purchase notice with respect to a debenture, however, the
holder may not surrender that debenture for conversion until the holder has
withdrawn the notice in accordance with the Indenture.
CONVERSION UPON SPECIFIED CORPORATE TRANSACTIONS
Even if none of the other conditions described above have occurred, if:
- we distribute to all holders of our common stock certain rights entitling
them to purchase, for a period expiring within 60 days, common stock at
less than the sale price of the common stock at the time of the
announcement of such distribution, or
- we elect to distribute to all holders of our common stock cash or other
assets, debt securities or certain rights to purchase our securities,
which distribution has a per share value exceeding 15% of the sale price
of the common stock on the business day preceding the declaration date
for the distribution,
we must notify the holders of debentures at least 20 days prior to the
ex-dividend date for the distribution. Once we have given that notice, holders
may surrender their debentures for conversion at any time until the earlier of
the close of business on the business day prior to the ex-dividend date or our
announcement that the distribution will not take place. In the case of a
distribution, no adjustment to the ability of a holder of debentures to convert
will be made if the holder will otherwise participate in the distribution
without conversion.
In addition, if we are a party to a consolidation, merger or binding share
exchange pursuant to which our common stock would be converted into cash,
securities or other property, a holder may surrender debentures for conversion
at any time from and after the date that is 15 days prior to the anticipated
effective date of the transaction until 15 days after the actual effective date
of the transaction. Once the effective date of such transaction occurs, if we
are a party to a consolidation, merger or binding share exchange pursuant to
which our common stock is converted into cash, securities or other property,
then at the effective time of the transaction, the right to convert a debenture
into common stock will be changed into a right to convert the debentures into
the kind and amount of cash, securities or other property that the holder would
have received if the holder had converted such debentures immediately prior to
the transaction. If the transaction also constitutes a "change of control," as
defined below, the holder can require us to repurchase all or a portion of its
debentures as described under "-- Repurchase of Debentures at the Option of
Holders -- Change of Control Put."
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CONVERSION PROCEDURES
To convert interests in a global debenture, you must deliver to DTC the
appropriate instruction form for conversion pursuant to DTC's conversion
program. To convert a definitive debenture, you must:
- complete the conversion notice on the back of the debentures (or a
facsimile thereof);
- deliver the completed conversion notice and the debentures to be
converted to the specified office of the conversion agent;
- pay all funds required, if any, relating to interest on the debentures to
be converted to which you are not entitled, as described in "-- Interest"
and "Contingent Interest"; and
- pay all taxes or duties, if any, as described in the following paragraph.
You will not be required to pay any taxes or duties relating to the
issuance or delivery of our common stock if you exercise your conversion rights,
but you will be required to pay any tax or duty that may be payable relating to
any transfer involved in the issuance or delivery of the common stock in a name
other than your own. Certificates representing shares of common stock will be
issued or delivered only after all applicable taxes and duties, if any, payable
by you have been paid.
The conversion date will be the date on which all of the foregoing
requirements have been satisfied. The debentures will be deemed to have been
converted immediately prior to the close of business on the conversion date. A
certificate for the number of shares of common stock into which the debentures
are converted (and cash in lieu of any fractional shares) will be delivered as
soon as practicable on or after the conversion date.
CONVERSION PRICE ADJUSTMENTS
We will adjust the initial conversion price for certain events, including:
- issuances of our common stock as a dividend or distribution to all
holders of our common stock;
- certain subdivisions and combinations of our common stock;
- issuances to all holders of our common stock of certain rights or
warrants to purchase our common stock (or securities convertible into our
common stock) at less than (or having a conversion price per share less
than) the current market price of our common stock at the time of the
announcement of such issuance, provided that no adjustment will be made
if holders of the debentures may participate in the transaction on a
basis and with notice that our board of directors determines to be fair
and appropriate or in some other cases;
- distributions to all holders of our common stock of shares of our capital
stock (other than our common stock), evidences of our indebtedness or
assets, including securities, but excluding:
- the rights and warrants referred to in the immediately preceding bullet
point,
- any dividends and distributions in connection with a reclassification,
change, consolidation, merger, combination, sale or conveyance resulting
in a change in the conversion consideration, or
- any dividends or distributions paid exclusively in cash;
provided that no adjustment will be made if all holders of the debentures
may participate in the distributions;
- distributions consisting exclusively of cash to all holders of our common
stock to the extent that those distributions, combined together with:
- all other all-cash distributions made within the preceding 12 months for
which no adjustment has been made, plus
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- any cash and the fair market value of other consideration paid for in
any tender offer by us or any of our subsidiaries for our common stock
concluded within the preceding 12 months for which no adjustment has
been made,
exceeds 15% of our market capitalization on the record date for that
distribution; our "market capitalization" as of any date is the product of
the current market price of our common stock on such date times the number
of shares of our common stock then outstanding; and
- purchases of our common stock pursuant to a tender offer made by us or
any of our subsidiaries to the extent that the same involves an aggregate
consideration that, together with:
- any cash and the fair market value of any other consideration paid in
any other tender offer by us or any of our subsidiaries for our common
stock concluded within the 12 months preceding the expiration of the
tender offer for which no adjustment has been made, plus
- the aggregate amount of any all-cash distributions within the 12 months
preceding the expiration of the tender offer for which no adjustment has
been made,
exceeds 15% of our market capitalization on the expiration of the tender
offer.
The specific adjustment to the conversion price for each of the events
described above is set forth in the Indenture.
With respect to our rights issued pursuant to our shareholder rights plan,
if holders of debentures exercising the right of conversion attaching thereto
after the date the rights separate from the underlying common stock are not
entitled to receive the rights that would otherwise be attributable (but for the
date of conversion) to the shares of common stock received upon conversion, the
conversion price will be adjusted as though the rights were being distributed to
holders of common stock on the date of such separation. If such an adjustment is
made and the rights are later redeemed, invalidated or terminated, then a
corresponding reversing adjustment will be made to the conversion price on an
equitable basis.
We will not make an adjustment in the conversion price unless the
adjustment would require a change of at least 1% in the conversion price in
effect at that time. We will carry forward and take into account in any
subsequent adjustment any adjustment that would otherwise be required to be made
but for its failure to exceed the percentage threshold.
If we:
- reclassify or change our common stock (other than changes resulting from
a subdivision or combination); or
- consolidate or combine with or merge into or are a party to a binding
share exchange with any person or sell or convey to another person all or
substantially all of our property and assets,
and the holders of our common stock receive (or the common stock is converted
into) stock, other securities or other property or assets (including cash or any
combination thereof) with respect to or in exchange for their common stock,
then, at the effective time of the transaction the holders of the debentures may
convert the debentures into the consideration they would have received if they
had converted their debentures immediately prior to the reclassification,
change, consolidation, combination, merger, sale or conveyance. We may not
become a party to any such transaction unless its terms are consistent with the
foregoing.
In the event that we distribute to holders of our common stock shares of
capital stock of a subsidiary of ours, the conversion price will be adjusted, if
at all, based on the market value of the subsidiary stock so distributed
relative to the market value of our common stock, in each case measured over a
specified five day period following the distribution.
In the event we elect to make a distribution described in the third or
fourth bullet of the first paragraph of this subsection "-- Conversion Price
Adjustments," which, in the case of the fourth bullet, has a per share value
equal to more than 15% of the sale price of our shares of common stock on the
day preceding the declaration date for the distribution, then, if the
distribution would also trigger a conversion right under
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"--Conversion Upon Specified Corporate Transactions," or if the debentures are
otherwise convertible, we will be required to give notice to the holders of
debentures at least 20 days prior to the ex-dividend date for the distribution
and, upon the giving of notice, the debentures may be surrendered for conversion
at any time until the close of business on the business day prior to the
ex-dividend date or until we announce that the distribution will not take place.
No adjustment to the conversion price or the ability of a holder of a debenture
to convert will be made if the holder will otherwise participate in the
distribution without conversion.
If a taxable distribution to holders of our common stock or other
transaction occurs that results in any adjustment of the conversion price, you
may in certain circumstances be deemed to have received a distribution subject
to United States federal income tax as a dividend. In certain other
circumstances, the absence of an adjustment may result in a taxable dividend to
the holders of our common stock. See "United States Federal Income Tax
Considerations -- United States Holders -- Constructive Dividends."
To the extent permitted by law, from time to time we may reduce the
conversion price of the debentures by any amount for any period of at least 20
days. In that case, we will give at least 10 days notice of the reduction. We
may also reduce the conversion price, as our board of directors deems advisable,
to avoid or diminish any income tax to holders of our common stock resulting
from any dividend or distribution of stock (or rights to acquire stock) or from
any event treated as such for income tax purposes.
OPTIONAL REDEMPTION BY QUEST DIAGNOSTICS
Prior to November 30, 2004, the debentures will not be redeemable at our
option. Beginning on November 30, 2004, we may redeem the debentures for cash at
any time as a whole, or from time to time in part, at a redemption price equal
to 100% of the principal amount of the debentures to be redeemed, plus accrued
and unpaid interest, including contingent interest, if any, to the redemption
date.
We will give at least 30 days but not more than 60 days notice of
redemption by mail or e-mail to holders of debentures or by publication.
Debentures or portions of debentures called for redemption will be convertible
by the holder until the close of business on the second business day prior to
the redemption date.
If we do not redeem all of the debentures, the trustee will select the
debentures to be redeemed in principal amounts of $1,000 or integral multiples
of $1,000 by lot, on a pro rata basis or such other method as the trustee will
deem fair and appropriate. If any debentures are to be redeemed in part only, we
will issue a new debenture or debentures in principal amount equal to the
unredeemed principal portion thereof. If a portion of your debentures is
selected for partial redemption and you convert a portion of your debentures,
the converted portion will be deemed to be taken from the portion selected for
redemption.
Any debentures called for redemption, unless surrendered for conversion
before the close of business on the second business day prior to the redemption
date, may at our option be deemed to be purchased from the holders of such
debentures at an amount not less than the redemption price, by one or more
investment bankers or other purchasers who may agree with us to purchase such
debentures from the holders of debentures, to convert them into our common stock
and to make payment for such debentures to the paying agent in trust for such
holders.
REPURCHASE OF DEBENTURES AT THE OPTION OF HOLDERS
OPTIONAL PUT
On November 30, 2004, 2005, 2008, 2012, and 2016, holders may require us to
repurchase any outstanding debentures for which the holder has properly
delivered and not withdrawn a written repurchase notice, subject to certain
additional conditions, at a purchase price equal to 100% of the principal amount
of the debentures to be repurchased, plus any accrued and unpaid interest,
including contingent interest, if any, on those debentures to the repurchase
date. Holders may submit their debentures for repurchase to the paying agent at
any time from the opening of business on the date that is 20 business days prior
to the repurchase date until the close of business on the third business day
prior to the repurchase date.
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Instead of paying the purchase price in cash, we may pay the purchase price
in common stock, cash or a combination of common stock and cash, at our option.
The number of shares of common stock a holder will receive will equal the
relevant amount of the purchase price divided by 100% of the average of the
closing sale prices of our common stock for the five trading days immediately
preceding and including the third day prior to the repurchase date. Because the
sale price of our common stock will be determined prior to the applicable
repurchase date, holders of debentures bear the market risk that our common
stock will decline in value between the dates used to calculate the sale price
and the repurchase date. However, we may not pay the purchase price in common
stock or a combination of common stock and cash unless we satisfy certain
conditions prior to the repurchase date as provided in the Indenture, including:
- registration of the shares of our common stock to be issued upon
repurchase under the Securities Act and the Exchange Act, if required;
- qualification of the shares of our common stock to be issued upon
repurchase under applicable state securities laws, if necessary, or the
availability of an exemption therefrom; and
- listing of our common stock on a United States national securities
exchange or quotation thereof in an inter-dealer quotation system of any
registered United States national securities association.
We will be required to give notice at least 20 days prior to each
repurchase date to all holders at their addresses shown in the register of the
registrar and to beneficial owners as required by applicable law stating among
other things, the procedures that holders must follow to require us to
repurchase their debentures as described below and whether the purchase price
will be paid in cash or common stock, or a combination with a portion payable in
cash or common stock. However, if we do not give such notice, we will pay 100%
of the purchase price in cash.
The repurchase notice given by each holder electing to require us to
repurchase debentures shall be given so as to be received by the paying agent no
later than the close of business on the third business day prior to the
repurchase date and must state:
- the certificate numbers of the holder's debentures to be delivered for
repurchase;
- the portion of the principal amount of debentures to be repurchased,
which must be $1,000 or an integral multiple of $1,000; and
- that the debentures are to be repurchased by us pursuant to the
applicable provisions of the debentures.
A holder may withdraw any repurchase notice by delivering a written notice
of withdrawal to the paying agent prior to the close of business on the
repurchase date. The notice of withdrawal shall state:
- the principal amount of debentures being withdrawn;
- the certificate numbers of the debentures being withdrawn; and
- the principal amount, if any, of the debentures that remain subject to
the repurchase notice.
In connection with any repurchase we will, to the extent applicable:
- comply with the provisions of Rule 13e-4, Rule 14e-1 and any other tender
offer rules under the Exchange Act that may then be applicable; and
- file Schedule TO or any other required schedule under the Exchange Act.
Our obligation to pay the purchase price for debentures for which a
repurchase notice has been delivered and not validly withdrawn is conditioned
upon the holder delivering the debentures, together with necessary endorsements,
to the paying agent at any time after delivery of the repurchase notice. We will
cause the purchase price for the debentures to be paid promptly following the
later of the repurchase date or the time of delivery of the debentures, together
with such endorsements.
If the paying agent holds money or common stock sufficient to pay the
purchase price of the debentures for which a repurchase notice has been given on
the business day following the repurchase date in accordance
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with the terms of the Indenture, then, immediately after the repurchase date,
the debentures will cease to be outstanding and interest, including contingent
interest, if any, on the debentures will cease to accrue, whether or not the
debentures are delivered to the paying agent. Thereafter all other rights of the
holder shall terminate, other than the right to receive the purchase price upon
delivery of the debentures.
Our ability to repurchase debentures for cash may be limited by
restrictions on the ability of Quest Diagnostics to obtain funds for such
repurchase through dividends from its subsidiaries and the terms of our then
existing borrowing agreements.
CHANGE OF CONTROL PUT
If a change of control, as described below, occurs, you will have the right
(subject to certain exceptions set forth below) to require us to repurchase all
of your debentures not previously called for redemption, or any portion of those
debentures, that is equal to $1,000 in principal amount or a whole multiple of
$1,000 at a purchase price equal to 100% of the principal amount of all
debentures you require us to repurchase plus any accrued and unpaid interest,
including contingent interest, if any, on those debentures to the repurchase
date. Notwithstanding the foregoing, we may be required to offer to repurchase
our other senior debt on a pro rata basis with the debentures, upon a change of
control, if similar change of control offers are or will be required by our
other senior debt.
Instead of paying the purchase price in cash, we may pay the purchase price
in our common stock or, in the case of a merger in which we are not the
surviving corporation, common stock, ordinary shares, American Depositary Shares
or analogous securities of the surviving corporation or its direct or indirect
parent corporation, cash or a combination of the applicable securities and cash,
at our option. The number of shares of the applicable common stock or securities
a holder will receive will equal the relevant amount of the purchase price
divided by 100% of the average of the closing sale prices of the applicable
common stock or securities for the five trading days immediately preceding and
including the third day prior to the repurchase date. Because the sale price of
the applicable common stock or securities will be determined prior to the
applicable repurchase date, holders of debentures bear the market risk that the
applicable common stock or securities will decline in value between the dates
used to calculate the sale price and the repurchase date.
However, we may not pay the purchase price in the applicable common stock
or securities or a combination of the applicable common stock or securities and
cash, unless we satisfy certain conditions prior to the repurchase date as
provided in the Indenture, including:
- registration of the shares of the applicable common stock or securities
to be issued upon repurchase under the Securities Act and the Exchange
Act, if required;
- qualification of the shares of the applicable common stock or securities
to be issued upon repurchase under applicable state securities laws, if
necessary, or the availability of an exemption therefrom; and
- listing of the applicable common stock or securities on a United States
national securities exchange or quotation thereof in an inter-dealer
quotation system of any registered United States national securities
association.
Within 30 days after the occurrence of a change of control, we are required
to give you notice of the occurrence of the change of control and of your
resulting repurchase right and whether the purchase price will be paid in cash,
the applicable common stock or securities, or a combination with a portion
payable in cash or the applicable common stock or securities. The repurchase
date will be 30 days after the date we give notice of a change of control to the
paying agent. To exercise the repurchase right, you must deliver prior to the
close of business on the business day immediately preceding the repurchase date,
written notice to the paying agent of your exercise of your repurchase right,
together with the debentures with respect to which your right is being
exercised. You may withdraw this notice by delivering to the paying agent a
notice of withdrawal prior to the close of business on the business day
immediately preceding the repurchase date.
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A "change of control" will be deemed to have occurred at such time after
the original issuance of the debentures when any of the following has occurred:
- the acquisition by any person, including any syndicate or group deemed to
be a "person" under Section 13(d)(3) of the Exchange Act of beneficial
ownership, directly or indirectly through a purchase, merger or other
acquisition transaction or series of purchase, merger or other
acquisition transactions, of shares of our capital stock entitling that
person to exercise 50% or more of the total voting power of all shares of
our capital stock entitled to vote generally in elections of directors,
other than any acquisition by us, any of our subsidiaries, any of our
employee benefit plans (except that any of those persons shall be deemed
to have beneficial ownership of all securities it has the right to
acquire, whether the right is currently exercisable or is exercisable
only upon the occurrence of a subsequent condition) or any underwriter
temporarily holding securities pursuant to an offering of such
securities; or
- the first day on which a majority of the members of the board of
directors of Quest Diagnostics are not continuing directors; or
- our consolidation or merger with or into any other person, any merger of
another person into us or any conveyance, transfer, sale, lease or other
disposition of all or substantially all of our properties and assets to
another person, other than:
- any transaction:
(a) that does not result in any reclassification, conversion,
exchange or cancellation of outstanding shares of our capital stock; and
(b) pursuant to which holders of our capital stock immediately
prior to the transaction have the entitlement to exercise, directly or
indirectly, 50% or more of the total voting power of all shares of
capital stock entitled to vote generally in elections of directors of
the continuing or surviving person immediately after giving effect to
such transaction; and
- any merger, share exchange, transfer of assets or similar transaction
solely for the purpose of changing our jurisdiction of incorporation and
resulting in a reclassification, conversion or exchange of outstanding
shares of common stock, if at all, solely into shares of common stock,
ordinary shares, American Depositary Shares or analogous securities of
the surviving entity or a direct or indirect parent of the surviving
corporation.
A "continuing director" shall mean (1) an individual who was a member of
our board of directors first elected by the stockholders or by our board of
directors prior to the closing date of this offering or prior to the time after
such date that any person (other than SmithKline Beecham plc) becomes the holder
of record of in excess of 20% of our capital stock entitled to vote in the
election of directors; or (2) an individual designated (before such
individuals's initial election as a director) as a continuing director by a
majority of the then continuing directors.
However, notwithstanding the foregoing, you will not have the right to
require us to repurchase your debentures if:
- the closing sale price per share of our common stock for any five trading
days within:
- the period of 10 consecutive trading days ending immediately after the
later of the change of control or the public announcement of the change
of control, in the case of a change of control under the first or second
bullet point of the definition of change of control, or
- the period of 10 consecutive trading days ending immediately before the
change of control, in the case of a change of control under the third
bullet point of the definition of change of control,
equals or exceeds 120% of the conversion price of the debentures in effect
on each of those five trading days; or
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- 100% of the consideration in the transaction or transactions (other than
cash payments for fractional shares and cash payments made in respect of
dissenters' appraisal rights) constituting a change of control consists
of shares of common stock, ordinary shares, American Depositary Shares or
analogous securities traded or to be traded immediately following a
change of control on a national securities exchange or the Nasdaq
National Market, and, as a result of the transaction or transactions, the
debentures become convertible into that common stock, ordinary shares,
American Depositary Shares or such analogous securities (and any rights
attached thereto).
Beneficial ownership shall be determined in accordance with Rule 13d-3
promulgated by the SEC under the Exchange Act. The term "person" includes any
syndicate or group that would be deemed to be a "person" under Section 13(d)(3)
of the Exchange Act.
Rule 13e-4 under the Exchange Act requires the dissemination of certain
information to security holders if an issuer tender offer occurs and may apply
if the repurchase option becomes available to holders of the debentures. We will
comply with this rule and file Schedule TO (or any similar schedule) to the
extent applicable at that time.
The definition of change of control includes a phrase relating to the
conveyance, transfer, sale, lease or disposition of "all or substantially all"
of our assets. There is no precise, established definition of the phrase
"substantially all" under applicable law. Accordingly, your ability to require
us to repurchase your debentures as a result of a conveyance, transfer, sale,
lease or other disposition of less than all our assets may be uncertain.
If the paying agent holds money or common stock sufficient to pay the
purchase price of the debentures that holders have elected to require us to
repurchase on the business day following the repurchase date in accordance with
the terms of the Indenture, then, immediately after the repurchase date, those
debentures will cease to be outstanding and interest on the debentures will
cease to accrue, whether or not the debentures are delivered to the paying
agent. Thereafter all other rights of the holder shall terminate, other than the
right to receive the purchase price upon delivery of the debentures.
The foregoing provisions would not necessarily protect holders of the
debentures if highly leveraged or other transactions involving us occur that may
affect holders adversely. We could, in the future, enter into certain
transactions, including certain recapitalizations, that would not constitute a
change of control with respect to the change of control purchase feature of the
debentures but that would increase the amount of our (or our subsidiaries')
outstanding indebtedness.
Our ability to repurchase debentures for cash upon the occurrence of a
change of control is subject to important limitations. Our ability to repurchase
the debentures for cash may be limited by restrictions on the ability of Quest
Diagnostics to obtain funds for such repurchase through dividends from its
subsidiaries. In addition, the occurrence of a change of control could cause an
event of default under or be prohibited or limited by the terms of our other
senior debt. We cannot assure you that we would have the financial resources, or
would be able to arrange financing, to pay the purchase price in cash for all
the debentures that might be delivered by holders of debentures seeking to
exercise the repurchase right.
The change of control purchase feature of the debentures may in certain
circumstances make more difficult or discourage a takeover of our company,
particularly for cash.
EVENTS OF DEFAULT
The term "Event of Default" in respect of the debentures means any of the
following:
- failure to pay the principal of or any premium on the debentures on its
due date, including failure to redeem the debentures after we have
exercised our redemption option, failure to convert debentures into
shares of our common stock upon exercise of a holders' conversion right
(unless such failure is cured within five days after written notice of
default is given to us by the trustee), and failure to repurchase
debentures at the option of holders;
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- failure to pay interest, including contingent interest, if any, on the
debentures within 30 days of its due date whether at maturity, upon
redemption or upon acceleration;
- if we or any Subsidiary Guarantor remains in breach of a covenant in
respect of the debentures 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 debentures;
- an event of default under any indenture or instrument evidencing or under
which we 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
ours or such Subsidiary Guarantor in default, or the maturity of which
has been accelerated, aggregates at least $50 million, individually or
in the aggregate;
- if any Subsidiary Guarantor repudiates its obligations under its
guarantee of the debentures 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 us or
the Subsidiary Guarantor to remedy the same shall have been given to us
by the trustee or to us and the trustee by the holders of 25% in
aggregate principal amount of the debentures then outstanding; or
- if we 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 debentures 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 debentures has occurred and has
not been cured, the trustee or the holders of not less than 25% in principal
amount of the outstanding debentures may declare the entire principal amount
(and premium, if any) of, and accrued and unpaid interest on, all the debentures
to be due and immediately payable. This is called a declaration of acceleration
of maturity. If an event of default with respect to the debentures occurs
because of certain events in bankruptcy, insolvency or reorganization, the
principal amount of the debentures will be automatically accelerated, without
any action by the trustee or any holder. Holders of a majority in principal
amount of the debentures may also waive certain past defaults under the
Indenture on behalf of all of the holders of the debentures. A declaration of
acceleration of maturity with respect to the debentures may be canceled, under
specified circumstances, by the holders of at least a majority in principal
amount of the debentures.
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 protection reasonably
satisfactory to it from expenses and liability called an "indemnity." If such
indemnity is provided, the holders of a majority in principal amount of the
debentures 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 the
right, remedy or event of default.
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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 debentures, 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
debentures 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 debentures 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 debentures on or after the due date.
BOOK-ENTRY SYSTEM
Upon issuance, the debentures will be represented by a global security or
securities (each a "Global Security"). Each Global Security will be deposited
with, or on behalf of, DTC, which will act as the depositary (the "Depositary").
Upon the issuance of any such Global Security, the Depositary or its nominee
will credit the accounts of persons holding it with the principal or face
amounts of the debentures represented by any such Global Security. Ownership of
beneficial interests in any such Global Security will be limited to participants
that have accounts with the Depositary or persons that may hold interest through
participants. Ownership of beneficial interests by participants in any such
Global Security will be shown on, and the transfer of that ownership will be
effected only through, records maintained by the Depositary. Ownership of
beneficial interest in any such Global Security by persons that hold through
participants will be shown on, and the transfer of that ownership interest
within such participant will be effected only through, records maintained by
such participant. The laws of some jurisdictions require that certain purchasers
of securities take physical delivery of the securities in definitive form. Such
limits and such laws may impair the ability to acquire or transfer beneficial
interests in a Global Security.
Payment of principal or premium, if any, and/or interest, if any, on, or
shares of common stock in exchange for, the debentures will be made to the
Depositary or its nominee, as the sole registered owner and holder of the Global
Security for such series for all purposes under the indenture. Neither we, the
trustee nor any of our agents or the trustee's agent will have any
responsibility or liability for any aspect of the Depositary's records relating
to or payments made on account of beneficial ownership interests in any such
Global Security or for maintaining, supervising or reviewing any of the
Depositary's records relating to such beneficial ownership interests.
We have been advised by the Depositary that upon receipt of any payment of
principal of, or interest on, any Global Security, the Depositary will
immediately credit, on its book-entry registration and transfer system, the
accounts of participants with payments in amounts proportionate to their
respective beneficial interests in the principal or face amount of such Global
Security as shown on the records of the Depositary. Payments by participants to
owners of beneficial interests in such Global Security held through such
participants will be governed by standing instructions and customary practices
as is now the case with securities held for customer accounts registered in
"street name" and will be the sole responsibility of such participants.
No Global Security may be transferred except as a whole by the Depositary
to a nominee of the Depositary. Each Global Security is exchangeable for
definitive debentures only if:
- the Depositary notifies us that it is unwilling or unable to continue as
Depositary for such Global Security or if at any time the Depositary
ceases to be a clearing agency registered under the Securities Exchange
Act of 1934 and we fail within 90 days thereafter to appoint a successor,
- we in our sole discretion determine that such Global Security shall be
exchangeable, or
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- there shall have occurred and be continuing an event of default with
respect to the debentures under the Indenture.
So long as the Depositary, or its nominee, is the registered owner of a
Global Security, such Depositary or such nominee, as the case may be, will be
considered the sole owner or holder of the debentures represented by such Global
Security for the purposes of receiving payment on such debentures, receiving
notices and for all other purposes under the Indenture and such debentures.
Beneficial interests in the debentures will be evidenced only by, and transfer
thereof will be effected only through, records maintained by the Depositary and
its participants. Except as provided herein, owners of beneficial interests in
any Global Security will not be entitled to such Global Security and will not be
considered the holders of such Global Security for any purposes under the
Indenture. Accordingly, each person owning a beneficial interest in such Global
Security must rely on the procedures of the Depositary, and, if such person is
not a participant, on the procedures of the participant through which such
person owns its interest, to exercise any rights of a holder under the
Indenture. The Depositary will not consent or vote with respect to the Global
Security representing the debentures. Under its usual procedures, the Depositary
mails an Omnibus Proxy to us as soon as possible after the applicable record
date. The Omnibus Proxy assigns Cede & Co.'s (the Depositary's partnership
nominee) consenting or voting rights to those participants to whose accounts the
debentures are credited on the applicable record date (identified in a listing
attached to the Omnibus Proxy).
The Depositary has advised us that it is a limited-purpose trust company
organized under the New York Banking law, a "banking organization" within the
meaning of the New York Banking Law, a member of the Federal Reserve System, a
"clearing corporation" within the meaning of the New York Uniform Commercial
code and a "clearing agency" registered under the Securities Exchange Act of
1934. The Depositary was created to hold the securities of its participants and
to facilitate the clearance and settlement of securities transactions among its
participants through electronic book-entry changes in accounts of the
participants, thereby eliminating the need for physical movement of securities
certificates. The Depositary's participants include securities brokers and
dealers, banks, trust companies, clearing corporations and certain other
organizations some of whom (and/or their representatives) own the Depositary.
Access to the Depositary's book-entry system is also available to others, such
as banks, brokers, dealers and trust companies that clear through or maintain a
custodial relationship with a participant, either directly or indirectly. The
rules applicable to the Depositary and its participants are on file with the
Securities and Exchange Commission.
SAME-DAY SETTLEMENT AND PAYMENT FOR DEBENTURES
Settlement for the debentures will be made by the underwriters in
immediately available funds. All cash payments of principal and interest will be
made by us in immediately available funds.
The debentures will trade in DTC's same-day funds settlement system until
maturity or until such debentures are issued in definitive form, and secondary
market trading activity in such debentures will therefore be required by DTC to
settle in immediately available funds. No assurance can be given as to the
effect, if any, of settlement in immediately available funds on trading activity
in such debentures.
GOVERNING LAW
The Indenture and the debentures will be governed by, and construed in
accordance with, the laws of the State of New York.
THE TRUSTEE
The Bank of New York, as trustee under the Indenture, has been appointed by
us as paying agent, conversion agent, bid solicitation agent, registrar and
custodian with regard to the debentures. The trustee or its affiliates may from
time to time in the future provide banking and other services to us in exchange
for a fee.
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CALCULATIONS IN RESPECT OF DEBENTURES
We or our agents will be responsible for making all calculations called for
under the debentures. These calculations include, but are not limited to,
determination of the market prices of the debentures and of our common stock and
amounts of interest and contingent payments, if any, on the debentures. We or
our agents will make all these calculations in good faith and, absent manifest
error, our and their calculations will be final and binding on holders of
debentures. We or our agents will provide a schedule of these calculations to
the trustee, and the trustee is entitled to conclusively rely upon the accuracy
of these calculations without independent verification.
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UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS
The following discussion is a summary of the material U.S. federal income
tax consequences of owning the debentures that are being offered pursuant to
this prospectus supplement based on the opinion of Shearman & Sterling, special
tax counsel to Quest Diagnostics. This summary applies to you only if you
acquire your debenture in this offering at the initial issue price, and you hold
your debenture as a capital asset for U.S. federal income tax purposes. This
summary does not apply to you if you are a member of a class of holders subject
to special rules, such as:
- a dealer in securities or currencies,
- a trader in securities that elects to use a mark-to-market method of
accounting for your securities holdings,
- a bank or other financial institution,
- an insurance company,
- a tax-exempt organization,
- a partnership or other pass-through entity,
- a person that owns debentures that are a hedge or that are hedged against
interest rate risks,
- a person that owns debentures as part of a straddle or conversion
transaction for U.S. federal income tax purposes, or
- a U.S. Holder (as defined below) whose functional currency for tax
purposes is not the U.S. dollar.
This summary is based on the Internal Revenue Code of 1986, as amended (the
"Code"), its legislative history, existing and proposed Treasury regulations,
published rulings of the Internal Revenue Service ("IRS") and court decisions,
all as currently in effect. These laws are subject to change, possibly on a
retroactive basis, and to differing interpretations.
No statutory, administrative or judicial authority directly addresses the
treatment of the debentures or instruments similar to the debentures for U.S.
federal income tax purposes. No rulings have been sought or are expected to be
sought from the IRS with respect to any of the U.S. federal income tax
consequences discussed below, and no assurance can be given that the IRS will
not take contrary positions. As a result, no assurance can be given that the IRS
will agree with the U.S. federal income tax characterization of the debentures
and the U.S. federal income tax consequences of the ownership of the debentures
described below.
We urge prospective investors in the debentures to consult their own tax
advisors with respect to the tax consequences to them of the purchase, ownership
and disposition of the debentures and the common stock in light of their own
particular circumstances, including the tax consequences under state, local,
foreign and other tax laws and the possible effects of changes in U.S. federal
income or other tax laws.
CLASSIFICATION OF THE DEBENTURES
Pursuant to the terms of the indenture, we and each holder of a debenture
agree, for U.S. federal income tax purposes, to treat the debentures as
indebtedness that is subject to the regulations governing contingent payment
debt instruments, and the remainder of this discussion assumes that the
debentures will be so treated. However, because the tax characterization of the
debentures is uncertain, no assurance can be given that the IRS will not assert
that the debentures should be treated in a different manner. Such an alternative
characterization could affect the amount, timing and character of income, gain
or loss in respect of an investment in the debentures.
UNITED STATES HOLDERS
This section applies to U.S. Holders. You are a U.S. Holder if you are a
beneficial owner of a debenture and you are:
- an individual who is a citizen or resident of the U.S.,
- a corporation organized under the laws of the U.S. or any political
subdivision thereof,
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- an estate whose income is subject to U.S. federal income tax regardless
of its source, or
- a trust if a U.S. court can exercise primary supervision over the trust's
administration and one or more U.S. persons are authorized to control all
substantial decisions of the trust.
A beneficial owner of a debenture that is a non-U.S. Holder (as defined in
"-- Non-U.S. Holders" below) should see "-- Non-U.S. Holders" below.
PAYMENTS MADE WITH RESPECT TO THE DEBENTURES
Under the rules governing contingent payment debt obligations, you will be
required to accrue interest income on the debentures, in the amounts described
below, regardless of whether you use the cash or accrual method of tax
accounting. Accordingly, you generally will be required to include interest in
taxable income in excess of the amount of non-contingent cash interest that will
be payable.
You must accrue an amount of ordinary interest income, as original issue
discount for U.S. federal income tax purposes, for each accrual period prior to
and including the maturity date of a debenture that equals:
- the product of (i) the adjusted issue price (as defined below) of the
debenture as of the beginning of the accrual period; and (ii) the
comparable yield to maturity (as defined below) of the debenture,
adjusted for the length of the accrual period;
- divided by the number of days in the accrual period; and
- multiplied by the number of days during the accrual period that you held
the debenture.
The issue price of a debenture is the first price at which a substantial
amount of the debentures is sold to the public, excluding bond houses, brokers
or similar persons or organizations acting in the capacity of underwriters,
placement agents or wholesalers. The adjusted issue price of a debenture is its
issue price increased by any interest income previously accrued, determined
without regard to any adjustments to interest accruals described below, and
decreased by the projected amounts of any payments that were scheduled to have
been made in accordance with our schedule of projected payments, described below
(whether or not such payments were actually made in the scheduled amounts).
The term "comparable yield" means the annual yield that we would pay, as of
the initial issue date, on a fixed rate nonconvertible debt security with no
contingent payments, but with terms and conditions otherwise comparable to those
of the debentures (including the amount of discount, if any). We intend to take
the position that the comparable yield for the debentures is 7.00%, compounded
semiannually. However, the comparable yield may not be less than the "applicable
federal rate" determined by the Secretary of the Treasury. The applicable
federal rate for November 2001 is 4.09% for mid-term instruments and 5.24% for
long-term instruments, compounded semiannually.
We are required to provide to you, solely for U.S. federal income tax
purposes, a schedule of the projected amounts of payments on the debentures.
This projected payment schedule must produce the comparable yield. The projected
payment schedule includes payments of non-contingent cash interest, estimates
for payments of contingent interest and an estimate for a payment at maturity
taking into account the conversion feature. The projected payment schedule will
be available from Quest Diagnostics by submitting a written request for such
information to: Quest Diagnostics, One Malcolm Avenue, Teterboro, New Jersey
07608, Attention: Investor Relations.
For U.S. federal income tax purposes, you must use the comparable yield and
projected payment schedule in determining your interest accruals, and the
adjustments thereto described below, in respect of the debentures, unless you
timely disclose and justify the use of other estimates to the IRS. If you
determine your own comparable yield or projected payment schedule, you must also
establish that our comparable yield or projected payment schedule is
unreasonable. You should consult your own tax advisor if you intend to use a
comparable yield or projected payment schedule different from our comparable
yield or projected payment schedule.
THE COMPARABLE YIELD AND PROJECTED PAYMENT SCHEDULE ARE NOT DETERMINED FOR
ANY PURPOSE OTHER THAN FOR THE DETERMINATION OF YOUR INTEREST
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ACCRUALS AND ADJUSTMENTS THEREOF IN RESPECT OF THE DEBENTURES FOR U.S.
FEDERAL INCOME TAX PURPOSES AND DO NOT CONSTITUTE A PROJECTION OR
REPRESENTATION REGARDING THE ACTUAL AMOUNTS PAYABLE TO HOLDERS OF THE
DEBENTURES.
ADJUSTMENTS TO INTEREST ACCRUALS ON THE DEBENTURES
If you receive actual payments with respect to a debenture in a taxable
year that in the aggregate exceed the total amount of the projected payments for
that taxable year, you would incur a "net positive adjustment" equal to the
amount of such excess. You would treat the "net positive adjustment" as
additional interest income for the taxable year. For this purpose, the payments
in a taxable year include the fair market value of property (including our
common stock) received with respect to a debenture in that year.
If you receive actual payments with respect to a debenture in a taxable
year that in the aggregate were less than the amount of the projected payments
for that taxable year, you would incur a "net negative adjustment" equal to the
amount of such deficit. This adjustment will (a) reduce your interest income on
the debentures for that taxable year, and (b) to the extent of any excess after
the application of (a), give rise to an ordinary loss to the extent of your
interest income on the debenture during prior taxable years, reduced to the
extent such interest was offset by prior net negative adjustments.
SALE, EXCHANGE, CONVERSION OR REDEMPTION OF THE DEBENTURES
Generally, the sale, exchange or conversion of a debenture, or the
redemption of a debenture for cash, will result in taxable gain or loss to you.
As described above, our calculation of the comparable yield and the projected
payment schedule for the debentures includes the receipt of stock upon
conversion as a contingent payment with respect to the debentures. Accordingly,
we intend to treat the receipt of our common stock by you upon the conversion of
a debenture, or upon the redemption of a debenture where we elect to pay in
common stock, as a contingent payment. Under this treatment, a conversion or
redemption will also result in taxable gain or loss to you. The amount of gain
or loss on a taxable sale, exchange, conversion or redemption will be equal to
the difference between (a) the amount of cash plus the fair market value of any
other property received by you, including the fair market value of any common
stock received, and (b) your adjusted tax basis in the debenture. Your adjusted
tax basis in a debenture generally will be equal to your original purchase price
for the debenture, increased by any interest income previously accrued by you
(determined without regard to any adjustments to interest accruals described
above), and decreased by the amount of any projected payments previously
scheduled to be made on the debenture to you (without regard to the actual
amount paid). Gain recognized upon a sale, exchange, conversion or redemption of
a debenture will generally be treated a ordinary interest income; any loss will
be ordinary loss to the extent of interest previously included in income, and
thereafter, capital loss (which will be long-term if the debenture is held for
more than one year). The deductibility of net capital losses by individuals and
corporations is subject to limitations.
Your tax basis in our common stock received upon a conversion of a
debenture or upon your exercise of a put right that we elect to pay in common
stock will equal the then current fair market value of such common stock. Your
holding period for the common stock received may commence on the day immediately
following the date of conversion or repurchase of a debenture. However, the
matter is not entirely certain and you may be entitled to include your holding
period for the debenture as part of your holding period for the common stock
received upon conversion or repurchase with respect to some or all of the
shares. You should consult your own tax advisor regarding the proper application
of the holding period rules to your situation.
CONSTRUCTIVE DIVIDENDS
If at any time we make a distribution of property to our stockholders that
would be taxable to the stockholders as a dividend for U.S. federal income tax
purposes and, in accordance with the anti-dilution provisions of the debentures,
the conversion rate of the debentures is increased, such increase may be deemed
to be the payment of a taxable dividend to you.
For example, an increase in the conversion rate in the event of
distribution of our evidence of indebtedness or our assets or an increase in the
event of an extraordinary cash dividend will generally result
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in deemed dividend treatment to you, but generally an increase in the event of
stock dividends or the distribution of rights to subscribe for common stock will
not be so treated.
NON-U.S. HOLDERS
This section describes the U.S. federal income tax consequences of the
ownership of debentures by a non-U.S. Holder. You are a non-U.S. Holder if you
are the beneficial owner of a debenture and are, for U.S. federal income tax
purposes:
- a nonresident alien individual,
- a foreign corporation, or
- an estate or trust that, in either case, is not subject to U.S. federal
income tax on a net income basis on income or gain from a debenture.
If you are a U.S. Holder, this section does not apply to you.
PAYMENTS MADE WITH RESPECT TO THE DEBENTURES
Under U.S. federal income tax law, and subject to the discussions of backup
withholding below, if you are a non-U.S. Holder:
- If an amount of contingent interest is "determined by reference" to any
dividend paid by us, payment of such an amount will be subject to U.S.
federal withholding tax at a rate of 30%, subject to reduction by an
applicable treaty or upon the receipt of a Form W-8ECI from you claiming
that the payments are effectively connected with the conduct of a U.S.
trade or business. However, it is unclear whether a payment of contingent
interest would be subject to this rule in a situation where we have not
paid a dividend, and the amount of contingent interest per debenture
actually equals 0.25% of the average market price of the debenture for
the measurement period. Absent further guidance from the IRS, the
relevant withholding agent may take the view that even in this situation,
the payment would be subject to withholding tax. A non-U.S. Holder that
receives a payment of contingent interest should consult its own tax
advisor regarding the application of the U.S. withholding tax rules to
such a payment, including the availability of a refund for amounts
withheld (if any) or a portion thereof.
- All other payments on the debentures made to a non-U.S. Holder, including
a payment in our actively traded common stock upon conversion of the
debentures, and any gain realized on a sale or exchange of a debenture
(other than gain attributable to accrued contingent interest payments),
will not be subject to U.S. federal income or withholding tax, provided
that:
1. you do not actually or constructively own 10% or more of the total
combined voting power of all classes of or stock entitled to vote,
2. you are not a controlled foreign corporation that is related to us
through stock ownership, and
3. we or another U.S. payor does not have actual knowledge or reason
to know that you are a U.S. person and:
(a) you have furnished to us or another U.S. payor an IRS Form
W-8BEN or an acceptable substitute form upon which you
certify, under penalties of perjury, that you are a non-U.S.
person,
(b) the U.S. payor has received a withholding certificate
(furnished on an appropriate IRS Form W-8IMY or an acceptable
substitute form) from a person claiming to be:
(i) a withholding foreign partnership (generally a foreign
partnership that has entered into an agreement with the
IRS to assume primary withholding responsibility with
respect to distributions and guaranteed payments it makes
to its partners),
(ii) a qualified intermediary (generally a non-U.S. financial
institution or clearing organization or a non-U.S. branch
or office of a U.S. financial institution or clearing
organization that is a party to a withholding agreement
with the IRS), or
S-38
(iii) a U.S. branch of a non-U.S. bank or of a non-U.S.
insurance company,
and the withholding foreign partnership, qualified intermediary or
U.S. branch has received documentation upon which it may rely to
treat the payment as made to a non-U.S. person in accordance with
U.S. Treasury regulations (or, in the case of a qualified
intermediary, in accordance with its agreement with the IRS), or
(c) the U.S. payor receives a statement from a securities clearing
organization, bank or other financial institution that holds
customers' securities in the ordinary course of its trade or
business,
(i) certifying to the U.S. payor under penalties of perjury
that an IRS Form W-8BEN or an acceptable substitute form
has been received from you by it or by a similar financial
institution between it and you, and
(ii) to which is attached a copy of the IRS Form W-8BEN or
acceptable substitute form.
- If interest paid to you is "effectively connected" with your conduct of a
trade or business within the U.S. (and, if required by an applicable tax
treaty, the interest is attributable to a permanent establishment that
you maintain in the U.S.) we and other payors generally are not required
to deduct U.S. federal withholding tax from the interest, provided that
you have furnished to us or another payor a valid IRS Form W-8ECI or an
acceptable substitute form upon which you represent, under penalties of
perjury, that:
1. you are a non-U.S. person, and
2. the interest is effectively connected with your conduct of a trade
or business within the U.S. and is includible in your gross
income.
"Effectively connected" interest and gains will be taxed at rates
applicable to U.S. citizens, resident aliens and domestic corporations. In
addition, a non-U.S. Holder that is a corporation may be subject to a
branch profits tax equal to 30% (or a lower applicable tax treaty rate) of
its effectively connected earnings and profits, subject to certain
adjustments.
BACKUP WITHHOLDING AND INFORMATION REPORTING
U.S. Holders
In general, if you are a noncorporate U.S. Holder, we and other payors are
required to report to the IRS all payments of principal and interest on and any
constructive distribution with respect to your debenture, including amounts
accruing under the rules for contingent payment debt instruments. In addition,
we and other payors are required to report to the IRS any payment of proceeds of
the sale of your debentures before maturity within the U.S. Additionally, backup
withholding will apply to any payments, if you fail to provide an accurate
taxpayer identification number, or you are notified by the IRS that you have
failed to report all interest and dividends required to be shown on your federal
income tax returns.
You generally may obtain a refund of any amounts withheld under the backup
withholding rules that exceed your U.S. federal income tax liability by filing a
refund claim with the IRS.
Non-U.S. Holders
In general, payments of principal and interest made by us and other payors
to you will not be subject to backup withholding and information reporting,
provided that the certification requirements described above under "Non-U.S.
Holders -- Payments Made With Respect to the Debentures" are satisfied or you
otherwise establish an exemption.
S-39
In general, payment of the proceeds from the sale of debentures effected at
a U.S. office of a broker is subject to both U.S. backup withholding and
information reporting. If, however, you are a non-U.S. Holder, you will not be
subject to backup withholding and information reporting on such a sale provided
that:
- the broker does not have actual knowledge or reason to know that you are
a U.S. person and you have furnished to the broker:
1. an appropriate IRS Form W-8BEN or an acceptable substitute form
upon which you certify, under penalties of perjury, that you
are a non-U.S. person, or
2. other documentation upon which it may rely to treat the payment
as made to a non-U.S. person in accordance with U.S. Treasury
regulations, or
- you otherwise establish an exemption.
If you fail to establish an exemption and the broker does not possess
adequate documentation of your status as a non-U.S. person, the payments may be
subject to information reporting and backup withholding. However, backup
withholding will not apply with respect to payments made outside the U.S. to an
offshore account maintained by you unless the payor has actual knowledge that
you are a U.S. person. We and other payors are required to report payments of
interest and constructive distributions on your debentures on IRS Form 1042-S
even if the payments are not otherwise subject to information reporting
requirements.
In general, payment of the proceeds from the sale of debentures effected at
a foreign office of a broker will not be subject to information reporting or
backup withholding. However, a sale effected at a foreign office of a broker
will be subject to information reporting and backup withholding if:
- the proceeds are transferred to an account maintained by you in the U.S.,
- the payment of proceeds or the confirmation of the sale is mailed to you
at a U.S. address, or
- the sale has some other specified connection with the U.S. as provided in
U.S. Treasury regulations,
unless the broker does not have actual knowledge or reason to know that you are
a U.S. person and the documentation requirements described above (relating to a
sale of debentures or common stock effected at a U.S. office of a broker) are
met or you otherwise establish an exemption.
In addition, payment of the proceeds from the sale of debentures effected
at a foreign office of a broker will be subject to information reporting if the
sale is effected at a foreign office of a broker that is:
- a U.S. person,
- a controlled foreign corporation for U.S. federal income tax purposes,
- a foreign person 50% or more of whose gross income is effectively
connected with the conduct of a U.S. trade or business for a specified
three-year period, or
- a foreign partnership, if at any time during its tax year:
1. one or more of its partners are "U.S. persons", as defined in
U.S. Treasury regulations, who in the aggregate hold more than
50% of the income or capital interest in the partnership, or
2. such foreign partnership is engaged in the conduct of a U.S.
trade or business, unless the broker does not have actual
knowledge or reason to know that you are a U.S. person and the
documentation requirements described above (relating to a sale
of debentures effected at a U.S. office of a broker) are met or
you otherwise establish an exemption. Backup withholding will
apply if the sale is subject to information reporting and the
broker has actual knowledge that you are a U.S. person.
S-40
UNDERWRITING
We intend to offer the debentures through the underwriters. Banc of America
Securities LLC, First Union Securities, Inc. and Credit Lyonnais Securities
(USA) Inc. are acting as underwriters. Subject to the terms and conditions
contained in an underwriting 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 debentures listed opposite
their names below.
<Table>
<Caption>
PRINCIPAL AMOUNT OF
1.75% CONTINGENT CONVERTIBLE
UNDERWRITER DEBENTURES DUE 2021
- ----------- ----------------------------
Banc of America Securities LLC.............................. $198,000,000
First Union Securities, Inc................................. $ 18,000,000
Credit Lyonnais Securities (USA) Inc........................ $ 9,000,000
------------
Total............................................. $225,000,000
============
</Table>
The underwriters have agreed to purchase all of the debentures sold
pursuant to the underwriting agreement if any of these debentures are purchased.
If an underwriter defaults, the underwriting agreement provides that the
purchase commitments of the nondefaulting underwriter may be increased or the
underwriting agreement may be terminated.
We have granted to the underwriters an option exercisable within 30 days of
the date of this prospectus supplement to purchase up to an additional
$25,000,000 principal amount of the debentures.
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 debentures, 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 debentures, and other conditions
contained in the underwriting 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.
We have agreed, except as contemplated by this offering and subject to
certain exceptions, not to offer, pledge, sell, contract to sell or otherwise
dispose of any shares of our common stock or any debt securities or any
securities convertible into or exchangeable for, our common stock or any of our
debt securities or enter into any swap or other arrangement that transfers to
another, in whole or in part, any of the economic consequences of ownership of
the debentures, the common stock or any such substantially similar securities,
for a period of 60 days from the date of this prospectus supplement without the
prior written consent of the underwriters. The foregoing restriction on sales
does not apply to our ability to file a registration statement, to sell
debentures to the underwriters pursuant to the underwriting agreement or to
issue shares of our common stock upon conversion of the debentures as well as
our ability to issue securities pursuant to employment or strategic arrangements
or stock option and employee benefit plans or to issue securities in
acquisitions in an amount not greater than 2% of the total outstanding common
stock on a fully diluted basis. Certain of our executive officers and directors
have agreed pursuant to lock-up agreements that, without the prior written
consent of the underwriters, they will not, except in certain limited
circumstances, directly or indirectly, offer, pledge, sell, contract to sell or
otherwise dispose of any shares of our common stock or any securities
convertible into or exchangeable for, our common stock or enter into any swap or
other arrangement that transfers to another, in whole or in part, the economic
consequences of ownership of the common stock or any securities convertible into
or exchangeable for our common stock, for a period of 60 days from the date of
this prospectus supplement, except that they may offer, pledge, sell, and
dispose up to 5% of the aggregate number of shares of common stock held directly
or indirectly by them.
S-41
COMMISSIONS AND DISCOUNTS
The underwriters have advised us that they propose initially to offer the
1.75% contingent convertible debentures due 2021 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 0.6% of the principal amount of
the debentures. The underwriters may allow, and the dealers may reallow, a
discount not in excess of 0.4% of the principal amount of the debentures 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 $1 million and are payable by us.
NEW ISSUE OF DEBENTURES
The debentures are a new issue of securities with no established trading
market. We do not intend to apply for listing of the debentures on any national
securities exchange or for quotation of the debentures on any automated dealer
quotation system. We have been advised by the underwriters that they presently
intend to make a market in the debentures 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 debentures or that an active public
market for the debentures will develop. If an active public trading market for
the debentures does not develop, the market price and liquidity of the
debentures 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 debentures. Such
transactions consist of bids or purchases to peg, fix or maintain the price of
the debentures. If the underwriters create a short position in the debentures in
connection with the offering, i.e., if they sell more debentures than are on the
cover page of this prospectus supplement, the underwriters may reduce that short
position by purchasing debentures 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 debentures. 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. The underwriters have received customary
fees and commissions for these transactions.
First Union Securities, Inc., one of the underwriters, is an indirect,
wholly owned subsidiary of Wachovia Corporation. Wachovia Corporation conducts
its investment banking, institutional, and capital markets businesses through
its various bank, broker-dealer and nonbank subsidiaries (including First Union
Securities, Inc.) under the trade name of Wachovia Securities. Any references to
Wachovia Securities in this prospectus supplement, however, do not include
Wachovia Securities, Inc., member NASD/SIPC and a separate broker-dealer
subsidiary of Wachovia Corporation and an affiliate of First Union Securities,
Inc., which may or may not be participating as a selling dealer in the
distribution of the securities offered by this prospectus supplement.
S-42
Affiliates of Banc of America Securities LLC are lenders under our senior
unsecured credit facility. Affiliates of First Union Securities, Inc. and Credit
Lyonnais Securities (USA) Inc. are lenders under our receivables credit facility
all or substantially all of which will be repaid from the proceeds of this
offering.
LEGAL MATTERS
Certain legal matters in connection with the debentures 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
debentures offered hereby will be passed upon for the underwriters by Fried,
Frank, Harris, Shriver & Jacobson (a partnership including professional
corporations), New York, New York.
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, 233 Broadway, New York, New York 10279 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, June
1, 2001 and July 3, 2001;
2. Our annual report on Form 10-K for the fiscal year ended December
31, 2000;
3. Our quarterly reports on Form l0-Q for the fiscal quarters ended
March 31, 2001, June 30, 2001 and September 30, 2001; and
4. The section entitled "Executive Compensation" in our proxy
statement filed on April 12, 2001.
You may request a copy of these filings, at no cost, by writing or
telephoning our Investor Relations department at the following address:
Quest Diagnostics Incorporated
One Malcolm Avenue
Teterboro, New Jersey 07608
Attention: Investor Relations (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.
S-43
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
$650,000,000 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 Senior Debt
Securities" and "Description of Subordinated Debt Securities."
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 July 9, 2001
TABLE OF CONTENTS
<Table>
<Caption>
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
Cautionary Statement for Purposes of the "Safe Harbor"
Provisions of the Private Securities Litigation Reform Act
of 1995................................................... 12
Securities We May Issue..................................... 15
Description of Senior Debt Securities....................... 19
Description of Subordinated Debt Securities................. 37
Description of the Preferred Stock and the Depositary Shares
Representing Fractional Shares of Preferred Stock......... 50
Description of Common Stock................................. 55
Selling Stockholder......................................... 57
Plan of Distribution........................................ 57
Validity of the Securities.................................. 58
Experts..................................................... 59
</Table>
---------------------
i
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 $650,000,000 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 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.
As of June 20, 2001, 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.
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.
ii
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, 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 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
1
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 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 that 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 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 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
2
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 most recent annual report on Form 10-K
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 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.
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 inpatients and outpatients. 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
3
affiliated laboratories. As a result of this affiliation 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.
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 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
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
4
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 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.
5
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 our debt securities may be guaranteed by our
subsidiaries to the extent described in this prospectus, and as further
described in any 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 our debt securities 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 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 Senior Debt Securities" and
"Description of Subordinated Debt Securities."
OUR SUBSTANTIAL DEBT MAY IMPAIR OUR FINANCIAL AND OPERATING FLEXIBILITY.
On June 27, 2001, we completed a refinancing of a majority of our long-term
debt. Specifically, we completed a $550 million senior notes offering and
entered into a new $500 million senior unsecured credit
6
facility which included a $175 million term loan. We used the net proceeds from
the senior notes offering and the new term loan, together with our cash on hand,
to repay all of the $584 million which was outstanding under our existing senior
secured facility, including the costs to settle existing interest rate swap
agreements, and to consummate our cash tender offer and consent solicitation for
our 10 3/4% senior subordinated notes due 2006. For more information, see our
Current Report on Form 8-K filed on July 3, 2001, which is incorporated by
reference into this prospectus.
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 and
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 our $550 million
offering of notes, the incurrence of $175 million of term loans under our new
senior unsecured credit facility 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. As of the expiration of the cash tender
offer, approximately $147 million in aggregate principal amount, or 98% of the
$150 million of outstanding 10 3/4% senior subordinated notes due 2006 had been
validly tendered and not withdrawn. These calculations also reflect the
termination of the interest rate swap agreements which related to our
outstanding variable rate debt and assume that we did not enter into any new
interest rate swap agreements.
<Table>
<Caption>
TWELVE MONTHS
ENDED DECEMBER 31, PRINCIPAL INTEREST TOTAL
- ------------------ --------- -------- --------
(IN THOUSANDS)
2001................................................... $26,670 $77,558 $104,228
2002................................................... $59,431 $68,453 $127,884
2003................................................... $35,530 $64,364 $ 99,894
2004................................................... $35,400 $62,190 $ 97,590
2005................................................... $41,963 $59,800 $101,763
</Table>
The above table excludes our principal payment obligations with respect to
our 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.
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.
7
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 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.
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.
8
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.
<Table>
<Caption>
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)
</Table>
- ---------------
(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:
<Table>
<Caption>
YEAR ENDED DECEMBER 31,
------------------------
1997 1996
--------- ----------
(DOLLARS IN THOUSANDS)
$16,578 $676,202
</Table>
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 any sale of our common stock by
SmithKline Beecham.
9
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 reports on Form 8-K filed on October 31, 2000, June 1,
2001, and July 3, 2001;
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; and
4. 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 101A 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 Sections 13(a), 13(c), 14 or 15(d) of the Securities and Exchange Act of
1934 on or (1) after the date of the filing of the registration statement
containing this prospectus and prior to the effectiveness of such registration
statement and (2) after the date of this prospectus and prior to the termination
of the offering made hereby.
10
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.
11
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, including 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, including 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" in our Form 10-K for the year ended December 31,
2000, which is incorporated by reference into this prospectus.
(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 -- Managed Care Organizations" in our
Form 10-K for the year ended December 31, 2000, which is incorporated by
reference into this prospectus.
(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 -- 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.
(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 among the different local carriers
administering Medicare; and
- proposed changes to the ABN form by HCFA.
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.
(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;
12
- 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;
- 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 of SBCL Operations" in our Form
10-K for the year ended December 31, 2000, which is incorporated by
reference into this prospectus.
(h) Inability to obtain professional liability insurance coverage or a
material increase in premiums for such coverage. See
"Business -- Insurance" in our Form 10-K for the year ended December 31,
2000, which is incorporated by reference into this prospectus.
(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" in our Form 10-K
for the year ended December 31, 2000, which is incorporated by reference
into this prospectus.
(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" in our Form 10-K for the
year ended December 31, 2000, which is incorporated by reference into this
prospectus.
(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" in our Form 10-K for the
year ended December 31, 2000, which is incorporated by reference into this
prospectus.
(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 competitor, 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.
(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
13
"Risk Factors" and see "Business -- Confidentiality of Health Information"
in our Form 10-K for the year ended December 31, 2000, which is
incorporated by reference into this prospectus.
(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 and we advise investors to review the forward looking statements
in light of the disclosure contained under "Risk Factors."
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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
15
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.
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 fights 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."
17
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.
18
DESCRIPTION OF SENIOR DEBT SECURITIES
We may issue senior debt securities from time to time in one or more
distinct series. This section summarizes the material terms of our senior debt
securities and these provisions will apply unless otherwise specified in a
prospectus supplement. Some of the financial and other terms of any series of
senior 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 senior 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 this section is a summary of the material terms of the indenture,
it does not describe every aspect of the senior debt securities. We urge you to
read the indenture because it, and not this description, defines your rights as
a holder of senior debt securities. Some of the definitions are repeated in this
prospectus, but for the rest you will need to read the indenture. We have filed
the indenture as an exhibit to our Securities Act and Exchange Act reports that
we have filed with the SEC. See "Where You Can Find More Information," for
information on how to obtain a copy of the indenture.
Whenever we refer in this Description of Senior Debt Securities to terms
defined in the indenture below, such defined terms are incorporated herein by
reference. As used in this Description of Senior Debt Securities, 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.
The senior debt securities will be issued under an indenture dated as of
June 27, 2001 as supplemented by a first supplemental indenture, 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. On June 27, 2001, Quest Diagnostics completed a $550 million
senior notes offering under the Indenture. The Indenture for the senior debt
securities may also be modified by future supplemental indentures. The terms of
the senior debt securities 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.
GENERAL
The senior debt securities will be unsecured obligations of our company.
The senior debt securities will be guaranteed by the Subsidiary Guarantors.
Quest Diagnostics may, from time to time, without the consent of the
holders of senior debt securities, issue additional senior debt securities
having the same ranking and the same interest rate, maturity and other terms as
the senior debt securities of that series. Any additional senior debt securities
and the senior debt securities of that series will constitute a single series
under the Indenture. This type of offering is often referred to as a
"reopening."
Senior debt securities will bear interest at the annual rate noted on the
cover page of a prospectus supplement. Interest will be payable semiannually
each year. Interest on the senior debt securities will be paid to holders of
record immediately before the interest payment date.
The senior debt securities do not provide for any sinking fund.
19
You should read the prospectus supplement for the following terms of the
series of senior debt securities offered by the prospectus supplement:
- The title of the senior debt securities.
- The aggregate principal amount of the senior debt securities, the
percentage of their principal amount at which the senior debt securities
will be issued and the date or dates when the principal of the senior
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
senior 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 senior debt
securities may be served.
- Any optional redemption provisions.
- Whether the amount of payments of principal of, or premium, if any, or
interest on the senior 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.
- If other than the trustee, the name of any paying agent, security
registrar and transfer agent for the senior debt securities.
- If the senior 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 senior debt securities, including whether such senior 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.
- The denomination or denominations that the senior 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.
- Any changes or additions to the provisions concerning defeasance and
covenant defeasance contained in the indenture that will be applicable to
the senior debt securities.
- Any provisions granting special rights to the holders of the senior debt
securities upon the occurrence of specified events.
- If other than US dollars, the currency or currencies of such senior debt
securities.
- The person to whom any interest in a senior debt security will be
payable, if other than the registered holder at the close of business on
the regular record date.
- Whether such senior debt securities will be convertible into or
exchangeable for any other securities and, if so, the terms and
conditions upon which such senior 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 senior
debt securities.
20
- 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 senior debt securities
rather than pay such additional amounts.
- Any other terms of the senior debt securities that are consistent with
the provisions of the indenture.
You should also read the prospectus supplement, in which we will describe
material changes, if any, to the following terms of the senior debt securities:
- Any sinking fund or other provisions that would obligate us to repurchase
or redeem the senior debt securities.
- Any change or additions to the events of default under the applicable
indenture or our covenants, including additions of any restrictive
covenants, with respect to the senior debt securities.
- If not the entire principal amount of the senior debt securities, the
portion of the principal amount that will be payable upon acceleration of
the maturity of the senior debt securities or how that portion will be
determined.
- Whether payment of any amounts due under the applicable indenture will be
guaranteed by one or more of our subsidiaries.
For purposes of this prospectus, any reference to the payment of principal
of, premium or interest, if any, on senior debt securities will include
additional amounts if required by the terms of such senior debt securities.
The indenture does not limit the amount of senior debt securities that we
are authorized to issue from time to time. The indenture also provides that
there may be more than one trustee thereunder, each for one or more series of
senior 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 senior 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 senior debt securities
for which it is trustee. If two or more trustees are acting under the indenture,
then the senior debt securities for which each trustee is acting would be
treated as if issued under separate indentures.
We may issue senior debt securities with terms different from those of
senior 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 senior debt
securities and issue additional senior debt securities of that series unless the
reopening was restricted when that series was created.
There is no requirement that we issue senior debt securities in the future
under the indenture, and we may use other indentures or documentation,
containing different provisions in connection with future issues of other senior
debt securities.
We may issue the senior debt securities as original issue discount
securities, which are senior debt securities, including any zero-coupon senior
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 Subsidiary Guarantor will fully and unconditionally guarantee, on a
joint and several basis, the payment of the principal of, premium and interest
on the senior debt securities. The guarantees of the senior debt securities will
be endorsed on the senior debt securities. In addition, each future domestic
Subsidiary of Quest Diagnostics or any Subsidiary Guarantor which has been
released and discharged from its obligations
21
under the guarantee of the senior debt securities will be required to guarantee
Quest Diagnostics' obligations under the senior debt securities, 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 senior debt securities may be
entitled to collect under the guarantees. Holders, by their acceptance of the
senior 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."
The guarantees of the Subsidiary Guarantors with respect to the senior debt
securities of a series will remain in effect with respect to each Subsidiary
Guarantor until the entire amount of principal of, premium, and interest on the
senior debt securities 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 any Indebtedness
of Quest Diagnostics the amount of which, excluding any outstanding securities
of the series to which any Subsidiary Guarantees of such Subsidiary Guarantor
apply, 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, at the time of determination, 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 senior debt securities of that
series are defeased and discharged as described under "Defeasance" 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 senior debt securities of that series.
In accordance with Securities and Exchange Commission rules and
regulations, Quest Diagnostics presents, among other things, condensed financial
information with respect to in the Initial Subsidiary Guarantors on a combined
basis in a footnote to its consolidated financial statements in lieu of
providing separate financial statements for each such subsidiary.
RANKING
The senior debt securities 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.
The senior debt securities 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.
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
22
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 senior debt securities. The
senior debt securities will be structurally subordinated to 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 senior debt securities 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.
As described above, all of our debt securities are effectively subordinated
to all existing and future 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 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."
SINKING FUND
The senior debt securities will not be entitled to the benefit of any
sinking fund.
COVENANTS
The following covenants will apply unless otherwise specified in a
prospectus supplement:
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 senior debt
securities 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 existing subsidiary guarantee is secured
by such Lien equally and 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 senior debt securities;
- Liens securing only the senior debt securities;
- 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
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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 the board of
directors of Quest Diagnostics) 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 senior debt securities or Indebtedness
ranking equally with the senior debt securities 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.
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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" other than any Liens
permitted solely 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" other than any
Sale and Leaseback Transactions permitted solely 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 issuance of the senior debt
securities;
- 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
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;
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- any Indebtedness resulting from a Sale and Leaseback Transaction which is
permitted by the "-- Limitation on Sale and Leaseback Transactions"
covenant (other than any Sale and Leaseback Transaction which is
permitted solely pursuant to the provisions of "-- Exempted Liens and
Sale and Leaseback Transactions");
- 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 shall not consolidate with or merge with or into any
other Person or sell, transfer or lease all or substantially all of its assets
to any Person, unless:
- either Quest Diagnostics shall be the continuing corporation, or the
corporation (if other than Quest Diagnostics) formed by such
consolidation or into which Quest Diagnostics is merged or the Person
which acquires by sale, transfer or lease of all or substantially all of
Quest Diagnostics' assets shall (1) be organized under the laws of the
United States or any state thereof and (2) expressly assume, by a
supplemental indenture, executed and delivered to the Trustee, in form
satisfactory to the Trustee, all of the obligations of Quest Diagnostics
under the indenture and on all the securities;
- immediately after giving effect to such transaction, no event of default
shall have occurred and be continuing; and
- Quest Diagnostics and the successor Person have delivered to the Trustee
an Officers' Certificate and an Opinion of Counsel each stating that such
consolidation, merger, conveyance or transfer and such supplemental
indenture comply with this provision and that all conditions precedents
for such transaction have been complied with.
EVENTS OF DEFAULT
The term "Event of Default" in respect of the senior debt securities of a
series means any of the following:
- Quest Diagnostics or any Subsidiary Guarantor does not pay the principal
of or any premium on the senior debt securities of that series on its due
date;
- Quest Diagnostics or any Subsidiary Guarantor does not pay interest on
the senior debt securities 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 senior debt securities 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 senior debt securities 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
26
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 senior debt securities 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 senior debt securities 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 senior 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.
If an event of default with respect to the senior debt securities of a
series has occurred and has not been cured, the trustee or the holders of not
less than 25% in principal amount of the outstanding senior debt securities of
that series may declare the entire principal amount (and premium, if any) of,
and accrued interest on all the senior 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 with respect to the senior debt securities of a
series occurs because of certain events in bankruptcy, insolvency or
reorganization, the principal amount of the senior debt securities 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 senior debt
securities of a series may also waive certain past defaults under the Indenture
on behalf of all of the holders of the senior debt securities of that series. A
declaration of acceleration of maturity with respect to the senior debt
securities of a series may be canceled, under specified circumstances, by the
holders of at least a majority in principal amount of the senior debt securities
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 protection reasonably
satisfactory to it from expenses and liability called an "indemnity." If such
indemnity is provided, the holders of a majority in principal amount of the
senior debt securities of a series may, with respect to the senior debt
securities 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 senior debt securities of a 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 senior
debt securities 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 senior debt securities
of that series must not have given the trustee a direction inconsistent
with the above notice.
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However, you are entitled at any time to bring a lawsuit for the payment of
money due on your senior debt securities on or after the due date.
Holders of a majority in principal amount of the senior 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
indenture and the senior debt securities, or else specifying any default.
CONVERSION AND EXCHANGE
If any senior 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 senior 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 senior 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 21 West, 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 senior debt
securities in the names of holders and transferring senior 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
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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.
You will not be required to pay a service charge to transfer or exchange
senior 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 senior debt securities are redeemable and we redeem less than all of
the senior debt securities of a particular series, we may block the transfer or
exchange of senior 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 senior debt securities selected for
redemption, except that we will continue to permit transfers and exchanges of
the unredeemed portion of any senior 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 senior 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 senior 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 senior 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 senior
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 senior 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.
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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.
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 senior debt
securities.
NOTICES
With respect to registered securities, we and the trustee will send notices
regarding the senior 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.
BOOK ENTRY, DELIVERY AND FORM
The senior debt securities of a 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 senior debt securities 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.
MODIFICATION OR WAIVER
There are three types of changes we can make to the indenture and the
senior debt securities.
CHANGES REQUIRING YOUR APPROVAL. First, there are changes that cannot be
made to your senior 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 senior
debt security;
- reducing any amounts due on a senior 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 senior debt security;
- impairing your right to sue for payment or to convert or exchange a
security;
- modifying the senior debt securities to subordinate the senior debt
securities to other indebtedness;
- reducing the percentage of holders of senior debt securities whose
consent is needed to modify or amend the indenture;
- reducing the percentage of holders of senior 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 senior
debt securities;
- modifying any other aspect of the provisions of the indenture dealing
with modification and waiver except to increase the voting requirements;
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- 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 senior debt securities is the kind that requires a
vote in favor by holders of outstanding senior 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 senior 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 indenture or the outstanding senior 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 senior 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 senior
debt securities in any material respect. Qualifying or maintaining the
qualification of the indenture under the Trust Indenture Act does not require
any vote by holders of senior 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 senior
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
senior debt securities were accelerated to that date because of a
default; and
- 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
senior debt security described in the prospectus supplement.
Senior 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. Senior 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 indenture.
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 indenture will cease to be of further effect, and we and our subsidiary
guarantors will be deemed to have satisfied and discharged the indenture with
respect to a particular series of senior 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,
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- we deposit with the trustee, in trust, funds sufficient to pay the entire
indebtedness on the senior 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 senior debt securities that have
become due and payable) or to the stated maturity or the redemption date,
as the case may be (for senior debt securities that have not become due
and payable),
- we have paid or caused to be paid all other sums payable under the
indenture 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 senior 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 senior 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 senior 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 senior debt securities on their various due dates including,
possibly, their earliest redemption date.
- Under current federal tax law, the deposit and our legal release from the
senior debt securities would likely be treated as though you surrendered
your senior 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 senior 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 senior 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 senior 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.
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 senior 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 senior
debt securities. 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 senior 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 senior debt securities on their various due dates.
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- 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 senior debt securities any differently
than if we did not make the deposit and just repaid the senior 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 senior 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 senior debt securities;
- our promises regarding conduct of our business and other matters and any
other covenants applicable to the series of senior debt securities; and
- the definition of an event of default as a breach of such covenants.
If we accomplish covenant defeasance, you can still look to us and our
subsidiary guarantors for repayment of the senior 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 senior 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 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.
THE TRUSTEE
The initial trustee under the indenture will be The Bank of New York. The
Bank of New York will also be the initial paying agent and registrar for the
senior debt securities. The Bank of New York is also the trustee and note
registrar for our 6 3/4% senior notes due 2006, our 7 1/2% senior notes due 2011
and any remaining 10 3/4% senior subordinated notes due 2006.
The 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 senior 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.
The 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.
The 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 the indenture, 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.
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GOVERNING LAW
The indenture and the senior debt securities will be governed by, and
construed in accordance with, the laws of the State of New York without
application of principles of conflicts of law thereunder.
DEFINITIONS
The following definitions are applicable to this Description of Senior Debt
Securities:
"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 acquiring such assets, 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 rental 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, compounded semi-annually. The term "net rental payments"
under any lease for any period shall mean the sum of the rental and other
payments required to be paid in such period by the lessee thereunder, not
including, however, any amounts required to be paid by such lessee (whether or
not designated as rental or additional rental) on account of maintenance and
repairs, reconstructions, insurance, taxes, assessments, water rates, operating
and labor costs or similar charges required to be paid by such lessee thereunder
or any amounts required to be paid by such lessee thereunder contingent upon the
amount sales, maintenance and repairs, reconstruction, insurance, taxes,
assessments, water rates or similar charges.
"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
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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.
"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 senior debt securities 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 June 20, 2001, 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
35
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 senior debt securities, provided that, in each case, such Initial
Subsidiary Guarantor or such other domestic Subsidiary continues to guarantee
the senior debt securities at such time.
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DESCRIPTION OF SUBORDINATED DEBT SECURITIES
We may issue subordinated debt securities from time to time in one or more
distinct series. This section summarizes the material terms of our subordinated
debt securities. Some of the financial and other terms of any series of
subordinated 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 subordinated 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 this section is a summary of the material terms of the indenture,
it does not describe every aspect of the subordinated debt securities. We urge
you to read the indenture because it, and not this description, defines your
rights as a holder of subordinated debt securities. Some of the definitions are
repeated in this prospectus, but for the rest you will need to read the
indenture. We have filed the indenture as an exhibit to our Securities Act and
Exchange Act reports that we have filed with the SEC. See "Where You Can Find
More Information," for information on how to obtain a copy of the indenture.
Whenever we refer in this Description of Subordinated Debt Securities to
terms defined in the indenture below, such defined terms are incorporated herein
by reference. As used in this Description of Subordinated Debt Securities, 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.
The subordinated debt securities will be issued under an indenture (the
"Indenture") among Quest Diagnostics, as issuer, the Bank of New York, as
trustee and, if the subordinated debt securities are to be guaranteed by
subsidiaries of Quest Diagnostics, the initial subsidiary guarantors party
thereto. The terms of the subordinated debt securities will 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.
GENERAL
The subordinated debt securities will be unsecured obligations of our
company
Our subordinated debt securities may be guaranteed by certain of our
subsidiaries. We refer to these subsidiaries as our "subsidiary guarantors."
Because our subordinated debt securities may or may not be guaranteed by our
subsidiary guarantors, references to our subsidiary guarantors are applicable
only if the prospectus supplement indicates that the debt securities will be
guaranteed by our subsidiary guarantors.
Quest Diagnostics may, from time to time, without the consent of the
holders of subordinated debt securities, issue additional subordinated debt
securities having the same ranking and the same interest rate, maturity and
other terms as the subordinated debt securities of that series. Any additional
subordinated debt securities and the subordinated debt securities of that series
will constitute a single series under the Indenture. This type of offering is
often referred to as a "reopening."
Subordinated debt securities will bear interest at the annual rate noted on
the cover page of a prospectus supplement. Interest will be payable semiannually
each year. Interest on the subordinated debt securities will be paid to holders
of record immediately before the interest payment date.
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You should read the prospectus supplement for the following terms of the
series of subordinated debt securities offered by the prospectus supplement:
- The title of the subordinated debt securities.
- The aggregate principal amount of the subordinated debt securities, the
percentage of their principal amount at which the subordinated debt
securities will be issued and the date or dates when the principal of the
subordinated 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
subordinated 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 subordinated debt
securities and where notices or demands to or upon us in respect of the
subordinated debt securities may be served.
- Any optional redemption provisions.
- Any sinking fund or other provisions that would obligate us to repurchase
or redeem the subordinated debt securities.
- Whether the amount of payments of principal of, or premium, if any, or
interest on the subordinated 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 subordinated debt securities.
- If not the principal amount of the subordinated debt securities, the
portion of the principal amount that will be payable upon acceleration of
the maturity of the subordinated 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 subordinated debt securities.
- Any provisions granting special rights to the holders of the subordinated
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 subordinated debt securities.
- If the subordinated 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 subordinated debt securities, including whether such
subordinated 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 subordinated
debt securities.
- The person to whom any interest in a subordinated 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 subordinated 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 subordinated debt securities will be convertible into or
exchangeable for any other securities and, if so, the terms and
conditions upon which such subordinated 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
subordinated 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 subordinated 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 subordinated 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 subordinated debt securities will include
additional amounts if required by the terms of such subordinated debt
securities.
The indenture does not limit the amount of subordinated debt securities
that we are authorized to issue from time to time. The indenture also provides
that there may be more than one trustee thereunder, each for one or more series
of subordinated 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 subordinated 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 subordinated debt securities for which it is trustee. If two or more
trustees are acting under the indenture, then the subordinated debt securities
for which each trustee is acting would be treated as if issued under separate
indentures.
We may issue subordinated debt securities with terms different from those
of subordinated 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
subordinated debt securities and issue additional subordinated debt securities
of that series unless the reopening was restricted when that series was created.
There is no requirement that we issue subordinated 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
subordinated debt securities.
We may issue the subordinated debt securities as original issue discount
securities, which are subordinated debt securities, including any zero-coupon
subordinated 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 subordinated debt
securities. The guarantees of the subordinated debt securities will be endorsed
on the subordinated debt securities and will be unsecured obligations of our
subsidiary guarantors.
To the extent that our subordinated debt securities are guaranteed, the
subordinated debt securities described in this prospectus may be fully and
unconditionally guaranteed on a joint and several basis by any
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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.
The Indenture provides 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 subordinated debt securities
may be entitled to collect under the guarantees. Holders, by their acceptance of
our subordinated 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."
RANKING
Unless provided otherwise in the applicable prospectus supplement, the
subordinated debt securities are not secured by any of our property or assets.
Accordingly, your ownership of subordinated debt securities means you are one of
our unsecured creditors. 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, both the senior and subordinated debt
securities, if they are not guaranteed by our subsidiaries, will be effectively
subordinated to the indebtedness of our subsidiaries.
The subordinated debt securities will be subordinate and junior in right of
payment to all the existing and future Senior Indebtedness of Quest Diagnostics.
The subordinated debt securities will rank equally with other unsecured
obligations of Quest Diagnostics which are subordinated to Senior Indebtedness
of Quest Diagnostics to the same extent as the subordinated debt securities. The
subordinated guarantees of a Subsidiary Guarantor will be subordinate and junior
in right of payment to all the existing and future Senior Indebtedness of such
Subsidiary Guarantor. The subordinated guarantees of a Subsidiary Guarantor will
rank equally with other unsecured obligations of such Subsidiary Guarantor which
is subordinated to Senior Indebtedness of such Subsidiary Guarantor to the same
extent as the subordinated guarantees.
The subordinated debt securities and the subordinated guarantees will be
effectively subordinated to any secured obligations (whether senior or
subordinated) of Quest Diagnostics or Subsidiary Guarantors, as the case may be,
to the extent of the value of the assets securing such obligations.
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 subordinated debt securities. The
subordinated debt securities will be structurally subordinated to all existing
and future obligations (whether senior or subordinated) of Quest Diagnostics'
subsidiaries (unless such subsidiaries are Subsidiary Guarantors), including
claims with respect to trade payables. In addition, the subordinated guarantees
of our Subsidiary Guarantors will be structurally subordinated to all existing
and future obligations (whether senior or subordinated) 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 subordinated debt securities 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.
As described above, all of our debt securities are effectively subordinated
to all existing and future obligations of any of our non-guarantor subsidiaries,
and would be so subordinated if a guarantee issued by
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any of our subsidiary guarantors were avoided or subordinated in favor of the
subsidiary guarantor's other creditors. 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."
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 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 any remaining 10 3/4% senior subordinated notes due 2006 of Quest
Diagnostics, and
- renewals, extensions, modifications and refunding of any such
indebtedness.
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"Senior Guarantees" with respect to any subsidiary guarantor is defined in
the subordinated indenture as all obligations of such subsidiary guarantor under
a guarantee of Senior Indebtedness of Quest Diagnostics.
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.
MERGER OR CONSOLIDATION
Under the terms of the indenture, 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 subordinated
debt securities;
- immediately after the merger or transfer of assets, no default on the
subordinated 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.
EVENTS OF DEFAULT
You will have special rights if an event of default occurs in respect of
the subordinated 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
subordinated 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 subordinated debt security of such series on its due
date.
- We and any of our subsidiary guarantors do not pay interest on a
subordinated 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 subordinated
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 subordinated 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 subordinated
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 subordinated 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
subordinated debt securities does not necessarily constitute an event of default
for any other series of debt securities issued under an indenture. The trustee
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may withhold notice to the holders of subordinated 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 subordinated debt securities of the affected series may declare
the entire principal amount of all the subordinated 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 subordinated 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 subordinated debt securities
of the affected series if (1) all existing events of default, other than the
nonpayment of principal of or premium or interest, if any, on the subordinated
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 protection reasonably
satisfactory to it from expenses and liability, called an "indemnity". If such
indemnity is provided, the holders of a majority in principal amount of the
outstanding subordinated 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 fight, 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 fights 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
subordinated 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 subordinated 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 subordinated debt securities on or after the due date.
Holders of a majority in principal amount of the subordinated 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
indenture and the subordinated debt securities, or else specifying any default.
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CONVERSION AND EXCHANGE
If any subordinated 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 subordinated 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 21 West, 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 subordinated debt
securities in the names of holders and transferring subordinated 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.
You will not be required to pay a service charge to transfer or exchange
subordinated 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 subordinated debt securities are redeemable and we redeem less than
all of the subordinated debt securities of a particular series, we may block the
transfer or exchange of subordinated 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
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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 subordinated debt securities selected for redemption,
except that we will continue to permit transfers and exchanges of the unredeemed
portion of any subordinated 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 subordinated 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 subordinated 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 subordinated 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
subordinated 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 subordinated 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.
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 subordinated
debt securities.
NOTICES
With respect to registered securities, we and the trustee will send notices
regarding the subordinated 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
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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.
MODIFICATION OR WAIVER
There are three types of changes we can make to the indenture and the
subordinated debt securities.
CHANGES REQUIRING YOUR APPROVAL. First, there are changes that cannot be
made to your subordinated 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
subordinated debt security;
- reducing any amounts due on a subordinated 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 subordinated debt security;
- impairing your right to sue for payment or to convert or exchange a
security;
- modifying the subordination provisions in a manner that is adverse to
holders of the subordinated debt securities;
- reducing the percentage of holders of subordinated debt securities whose
consent is needed to modify or amend the indenture;
- reducing the percentage of holders of subordinated 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
subordinated 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 subordinated debt securities is the kind that
requires a vote in favor by holders of outstanding subordinated 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 subordinated 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 indenture or the outstanding
subordinated 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 subordinated 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
subordinated debt securities in any material respect. Qualifying or maintaining
the qualification of the indenture under the Trust Indenture Act does not
require any vote by holders of subordinated debt securities.
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FURTHER DETAILS CONCERNING VOTING. When taking a vote, we will use the
following rules to decide how much principal amount to attribute to a
subordinated 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
subordinated debt securities were accelerated to that date because of a
default; and
- for subordinated 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 subordinated debt security described in the prospectus supplement.
Subordinated 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. Subordinated 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 indenture.
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 indenture will cease to be of further effect, and we and our subsidiary
guarantors will be deemed to have satisfied and discharged the indenture with
respect to a particular series of debt securities, when the following conditions
have been satisfied:
- all subordinated 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 subordinated 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 subordinated debt securities
that have become due and payable) or to the stated maturity or the
redemption date, as the case may be (for subordinated debt securities
that have not become due and payable),
- we have paid or caused to be paid all other sums payable under the
indenture 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 subordinated 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.
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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 subordinated 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 subordinated 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 subordinated debt securities on their various due dates
including, possibly, their earliest redemption date.
- Under current federal tax law, the deposit and our legal release from the
subordinated 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 subordinated 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 subordinated 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 subordinated
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
subordinated 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 subordinated 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 subordinated 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 subordinated debt securities any
differently than if we did not make the deposit and just repaid the
subordinated 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 subordinated 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 subordinated 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 subordinated debt securities
that will be described in the prospectus supplement; and
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- 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 subordinated 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 subordinated 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 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.
THE TRUSTEE
The initial trustee under the 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 6 3/4% senior notes due 2006, our 7 1/2% senior notes due 2011 and any
remaining 10 3/4% senior subordinated notes due 2006.
The 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 subordinated
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.
The 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.
The 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 the indenture, 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 indenture and the subordinated debt securities will be governed by, and
construed in accordance with, the laws of the State of New York without
application of principles of conflicts of law thereunder.
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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.
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
50
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.
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
52
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.
- 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.
53
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.
54
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
stockholder, unless (1) the transaction is approved by at least a majority of
directors which are not affiliated or associated
55
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 fight, 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 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;
56
- 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.
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.
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
57
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.
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.
58
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 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
the three year period 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.
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$225,000,000
[QUEST DIAGNOSTICS LOGO]
1.75% CONTINGENT CONVERTIBLE DEBENTURES DUE 2021
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PROSPECTUS SUPPLEMENT
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BANC OF AMERICA SECURITIES LLC
WACHOVIA SECURITIES
CREDIT LYONNAIS SECURITIES (USA) INC.
November 19, 2001
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