QUEST DIAGNOSTICS INCORPORATED AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

(dollars in thousands unless otherwise indicated)

Secured Receivables Credit Facility

On July 21, 2000, the Company completed a receivables-backed financing transaction (the “secured receivables credit facility”), the proceeds of which were used to pay down loans outstanding under the Company’s then existing senior secured credit facility that was used to finance the acquisition of SBCL. The secured receivables credit facility is currently being provided by Blue Ridge Asset Funding Corporation, a commercial paper funding vehicle administered by Wachovia Bank, N.A., La Fayette Asset Securitization LLC, a commercial funding vehicle administered by Credit Lyonnais and Jupiter Securitization Corporation, a commercial funding vehicle administered by Bank One, N.A.

Interest on the $250 million secured receivables credit facility is based on rates that are intended to approximate commercial paper rates for highly rated issuers. Borrowings outstanding under the secured receivables credit facility, if any, are classified as a current liability on our consolidated balance sheet since the lenders fund the borrowings through the issuance of commercial paper which matures at various dates within one year from the date of issuance and the term of the one-year back-up facilities described below. There were no borrowings outstanding as of December 31, 2003 and 2002.

The secured receivables credit facility has the benefit of one-year back-up facilities provided by three banks on a committed basis. On June 27, 2003, the Company extended the expiration date of the back-up facilities of its secured receivables credit facility from July 21, 2003 to April 21, 2004. The Company is currently in discussions with its lenders regarding a replacement for the facility and expects to have a replacement in place during the second quarter of 2004.

Credit Agreement

The Credit Agreement currently includes a $325 million unsecured revolving credit facility which expires in June 2006. Interest on the unsecured revolving credit facility is based on certain published rates plus an applicable margin that will vary over an approximate range of 50 basis points based on changes in the Company’s credit ratings. 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 defined in the Credit Agreement). Additionally, the Company has the ability to borrow up to $200 million under the $325 million unsecured revolving credit facility at rates determined by a competitive bidding process among the lenders. As of December 31, 2003, the Company’s borrowing rate for LIBOR-based loans was LIBOR plus 1.1875%. As of December 31, 2003 and 2002, there were no borrowings outstanding under the unsecured revolving credit facility.

Borrowings under the Credit Agreement are guaranteed by our wholly owned subsidiaries that operate clinical laboratories in the United States (the “Subsidiary Guarantors”). The Credit Agreement contains various covenants, including the maintenance of certain financial ratios, which could impact the Company’s ability to, among other things, incur additional indebtedness, repurchase shares of its outstanding common stock, make additional investments and consummate acquisitions.

Term Loan due June 2007

As discussed in Note 3, the Company financed the cash portion of the purchase price and related transaction costs associated with the Unilab acquisition, and the repayment of substantially all of Unilab’s outstanding debt and related accrued interest, with the proceeds from a $450 million amortizing term loan facility (the “term loan due June 2007”) and cash on-hand. The term loan due June 2007 carries interest at LIBOR plus an applicable margin that can fluctuate over a range of up to 80 basis points, based on changes in the Company’s credit 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, 2003, the Company’s borrowing rate for LIBOR-based loans was LIBOR plus 1.1875%. As of December 31, 2003, the term loan due June 2007 required remaining principal repayments of the initial amount borrowed equal to 16.18%, 16.18%, 17.19% and 18.2% in 2004 through 2007, respectively. The term loan due June 2007 is guaranteed by the Subsidiary Guarantors and contains various covenants similar to those under the Credit Agreement. Through December 31, 2003, the Company has repaid $145 million of principal under the term loan due June 2007. On January 12, 2004, the Company repaid an additional $75 million of principal under the term loan due June 2007 with the proceeds from a lower cost term loan due December 2008. The repayment in 2004 reduces the remaining principal repayments of the initial amount borrowed equal to 9.7%, 13.0%, 13.8% and 14.6% in 2004 through 2007, respectively.

Term Loan due December 2008

On December 19, 2003, the Company entered into a new $75 million amortizing term loan facility (the “term loan due December 2008“), which was funded on January 12, 2004 and the proceeds of which were used to repay $75 million under the term loan due June 2007. The term loan due December 2008 carries a lower interest rate than the term loan due June 2007 and 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, 2003, the Company’s borrowing rate for LIBOR-based loans was LIBOR plus 0.55%. 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 Agreement.

Senior Notes

In conjunction with its 2001 debt refinancing (see Note 7), the Company completed a $550 million senior notes offering in June 2001. The Senior Notes were issued in two tranches: (a) $275 million aggregate principal amount of 6 ¾% senior notes due 2006 (“Senior Notes due 2006”), issued at a discount of approximately $1.6 million and (b) $275 million aggregate principal amount of 7½% senior notes due 2011 (“Senior Notes due 2011”), issued at a discount of approximately $1.1 million. After considering the discounts, the effective interest rate on the Senior Notes due 2006 and Senior Notes due 2011 is 6.9% and 7.6%, respectively. The Senior Notes require semiannual interest payments which commenced January 12, 2002. The Senior Notes are unsecured obligations of the Company and rank equally with the Company’s other unsecured senior obligations. The Senior Notes are guaranteed by the Subsidiary Guarantors and do not have a sinking fund requirement.

1 ¾% Contingent Convertible Debentures

On November 26, 2001, the Company completed its $250 million offering of 1¾% contingent convertible debentures due 2021 (the “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 pay a fixed rate of interest semi-annually commencing on May 31, 2002, have a contingent interest component, which is considered to be a derivative instrument subject to SFAS 133, as amended, that will require the Company to pay contingent interest based on certain thresholds, as outlined in the indenture governing the Debentures. For income tax purposes, the Debentures are considered to be a contingent payment security. As such, interest expense for tax purposes is 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 both 2003 and 2002.

The Debentures are guaranteed by the Subsidiary Guarantors and do not have a sinking fund requirement.

Each one thousand dollar principal amount of Debentures is convertible initially into 11.429 shares of the Company’s common stock, which represents an initial conversion price of $87.50 per share. Holders may 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 is above 120% of the conversion price (or $105 per share) for specified periods; (2) if the Company calls the Debentures or (3) if specified corporate transactions have occurred.

The Company may call the Debentures at any time on or after November 30, 2004 for the principal amount of the Debentures plus any accrued and unpaid interest. On November 30, 2004, 2005, 2008, 2012 and 2016 each holder of the Debentures may require the Company to repurchase the holder’s Debentures for the principal amount of the Debentures plus any accrued and unpaid interest. The Company may repurchase the Debentures for cash, common stock, or a combination of both. The Company intends to settle any repurchases with a cash payment, funding such payment with a combination of cash on-hand and borrowings under its unsecured revolving credit facility. The Debentures are classified as long-term debt on the consolidated balance sheet at December 31, 2003 due to the Company’s existing ability and intent to refinance the Debentures on a long-term basis in the event the Debentures are put to the Company in November 2004.

Letter of Credit Lines

In December 2003, the Company entered into two lines of credit with two financial institutions totaling $68 million for the issuance of letters of credit (the “letter of credit lines”). The letter of credit lines mature in December 2004 and are guaranteed by the Subsidiary Guarantors. As of December 31, 2003, there $44 million of outstanding letters of credit under the letter of credit lines.

As of December 31, 2003, long-term debt, including capital leases, maturing in each of the years subsequent to December 31, 2004, is as follows:

The table above assumes that the Debentures are repaid at their stated maturity in 2021.