Quest Diagnostics 2005 Annual Report Download - page 100

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QUEST DIAGNOSTICS INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(dollars in thousands unless otherwise indicated)
Term Loan due December 2008
On December 19, 2003, the Company entered into a $75 million amortizing term loan facility (the “term
loan due December 2008’’), which was funded on January 12, 2004. Interest under the term loan due December
2008 is based on LIBOR plus an applicable margin that can fluctuate over a range of up to 119 basis points,
based on changes in the Company’s public debt rating. At the option of the Company, it may elect to enter
into LIBOR-based interest rate contracts for periods up to 180 days. Interest on any outstanding amounts not
covered under the LIBOR-based interest rate contracts is based on an alternate base rate, which is calculated by
reference to the prime rate or federal funds rate. As of December 31, 2005 and 2004, the Company’s borrowing
rate for LIBOR-based loans was LIBOR plus 0.50% and 0.55%, respectively. The term loan due December
2008 requires principal repayments of the initial amount borrowed equal to 20% on each of the third and fourth
anniversary dates of the funding and the remainder of the outstanding balance on December 31, 2008. The term
loan due December 2008 is guaranteed by the Subsidiary Guarantors and contains various covenants similar to
those under the Credit Facility.
Debentures due June 2034
In connection with the acquisition of LabOne, the Company assumed $103.5 million of 3.50% convertible
senior debentures of LabOne due June 15, 2034 (the “Debentures due June 2034’’). As a result of the change
in control of LabOne, the holders of the debentures had the right from November 1, 2005 to December 1, 2005
to: (i) have their debentures repurchased by LabOne for 100% of the principal amount of the debentures, plus
accrued and unpaid interest thereon through November 30, 2005; or (ii) have their debentures converted into the
amount the respective holder would have received if the holder had converted the debentures prior to
November 1, 2005, plus an additional premium. As a result of the change in control of LabOne, and as
provided in the indenture to the debentures, the conversion rate increased so that each $1,000 principal amount
of the debentures was convertible into cash in the amount of $1,280.88 if converted by December 1, 2005. As
a result of the change in control of LabOne, of the total outstanding principal balance of the Debentures due
June 2034 of $103.5 million, $99 million of principal was converted for $126.8 million in cash, reflecting a
premium of $27.8 million. The remaining outstanding principal of the Debentures due June 2034 totaling $4.5
million was adjusted to its estimated fair value of $2.9 million, reflecting a discount of $1.6 million based on
the net present value of the estimated remaining obligations, at current interest rates. The Debentures due June
2034 are no longer convertible into shares of common stock of LabOne or the Company. The Debentures due
June 2034 require semi-annual interest payments in June and December.
Contingent Convertible Debentures
On November 26, 2001, the Company completed its $250 million offering of its Debentures. The net
proceeds of the offering, together with cash on hand, were used to repay all of the $256 million principal that
was then outstanding under the Company’s secured receivables credit facility. The Debentures, which paid a
fixed rate of interest semi-annually commencing on May 31, 2002, had a contingent interest component, which
was considered to be a derivative instrument subject to SFAS 133, as amended, that would have required the
Company to pay contingent interest based on certain thresholds, as outlined in the indenture governing the
Debentures. For income tax purposes, the Debentures were considered to be a contingent payment security. As
such, interest expense for tax purposes was based on an assumed interest rate related to a comparable fixed
interest rate debt security issued by the Company without a conversion feature. The assumed interest rate for
tax purposes was 7% for 2004.
The Debentures were guaranteed by the Subsidiary Guarantors and did not have a sinking fund
requirement.
Each one thousand dollar principal amount of Debentures was convertible initially into 22.858 shares of the
Company’s common stock, which represented an initial conversion price of $43.75 per share. Holders were able
to surrender the Debentures for conversion into shares of the Company’s common stock under any of the
following circumstances: (1) if the sales price of the Company’s common stock was above 120% of the
conversion price (or $52.50 per share) for specified periods; (2) if the Company called the Debentures; or (3) if
specified corporate transactions occurred.
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