SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
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FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the Quarter ended June 30, 2003
Commission file number 1-12215
Quest Diagnostics Incorporated
One Malcolm Avenue
Teterboro, NJ 07608
(201) 393-5000
Delaware
(State of Incorporation)
16-1387862
(I.R.S. Employer Identification Number)
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Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [_]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes [X] No [_]
As of July 29, 2003, there were outstanding 105,178,601 shares of the
registrant's common stock, $.01 par value.
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Index to consolidated financial statements filed as part of this report:
Page
----
Consolidated Statements of Operations for the Three and Six
Months Ended June 30, 2003 and 2002 2
Consolidated Balance Sheets as of June 30, 2003 and December 31,
2002 3
Consolidated Statements of Cash Flows for the Six Months Ended
June 30, 2003 and 2002 4
Notes to Consolidated Financial Statements 5
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Management's Discussion and Analysis of Financial Condition and
Results of Operations 17
Item 3. Quantitative and Qualitative Disclosures About Market Risk
See Item 2. "Management's Discussion and Analysis of Financial
Condition and Results of Operations"
Item 4. Controls and Procedures
Controls and Procedures 23
1
QUEST DIAGNOSTICS INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2003 AND 2002
(in thousands, except per share data)
(unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
----------------------- -----------------------
2003 2002 2003 2002
---------- ---------- ---------- ----------
Net revenues.............................. $1,219,935 $1,068,810 $2,312,732 $2,015,572
---------- ---------- ---------- ----------
Costs and expenses:
Cost of services....................... 703,124 630,258 1,351,221 1,187,996
Selling, general and administrative.... 296,062 276,821 575,261 535,224
Interest expense, net.................. 16,866 14,916 30,775 27,591
Amortization of intangible assets...... 2,068 2,065 4,091 4,220
Minority share of income............... 4,415 3,938 8,218 7,820
Other, net............................. (6,005) (5,660) (9,033) (6,274)
---------- ---------- ---------- ----------
Total.............................. 1,016,530 922,338 1,960,533 1,756,577
---------- ---------- ---------- ----------
Income before taxes....................... 203,405 146,472 352,199 258,995
Income tax expense........................ 82,993 59,321 143,751 105,155
---------- ---------- ---------- ----------
Net income................................ $ 120,412 $ 87,151 $ 208,448 $ 153,840
========== ========== ========== ==========
Basic earnings per common share:
Net income................................ $ 1.15 $ 0.90 $ 2.03 $ 1.60
========== ========== ========== ==========
Diluted earnings per common share:
Net income................................ $ 1.12 $ 0.87 $ 1.98 $ 1.54
========== ========== ========== ==========
Weighted average common shares
outstanding - basic.................... 105,049 96,393 102,543 95,907
Weighted average common shares
outstanding - diluted.................. 107,677 100,297 105,066 99,802
The accompanying notes are an integral part of these statements.
2
QUEST DIAGNOSTICS INCORPORATED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JUNE 30, 2003 AND DECEMBER 31, 2002
(in thousands, except per share data)
(unaudited)
June 30, December 31,
2003 2002
---------- ------------
Assets
Current assets:
Cash and cash equivalents........................................ $ 88,069 $ 96,777
Accounts receivable, net of allowance of $209,782 and
$193,456 at June 30, 2003 and December 31, 2002,
respectively.................................................. 628,404 522,131
Inventories...................................................... 68,482 60,899
Deferred income taxes............................................ 117,501 102,700
Prepaid expenses and other current assets........................ 50,676 41,936
---------- ----------
Total current assets.......................................... 953,132 824,443
Property, plant and equipment, net.................................. 583,042 570,149
Goodwill............................................................ 2,519,292 1,788,850
Intangible assets, net.............................................. 19,500 22,083
Deferred income taxes............................................... 66,825 29,756
Other assets........................................................ 102,250 88,916
---------- ----------
Total assets........................................................ $4,244,041 $3,324,197
========== ==========
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable and accrued expenses............................ $ 594,440 $ 609,945
Short-term borrowings and current portion of long-term debt...... 74,393 26,032
---------- ----------
Total current liabilities..................................... 668,833 635,977
Long-term debt...................................................... 1,065,171 796,507
Other liabilities................................................... 139,145 122,850
Commitments and contingencies
Stockholders' equity:
Common stock, par value $0.01 per share; 300,000 shares
authorized; 105,575 and 97,963 shares issued at June 30, 2003
and December 31, 2002, respectively........................... 1,056 980
Additional paid-in capital....................................... 2,219,631 1,817,511
Retained earnings (accumulated deficit) ......................... 167,676 (40,772)
Unearned compensation............................................ (5,072) (3,332)
Accumulated other comprehensive loss............................. (2,334) (5,524)
Treasury stock, at cost; 162 shares at June 30, 2003............. (10,065) --
---------- ----------
Total stockholders' equity.................................... 2,370,892 1,768,863
---------- ----------
Total liabilities and stockholders' equity.......................... $4,244,041 $3,324,197
========== ==========
The accompanying notes are an integral part of these statements.
3
QUEST DIAGNOSTICS INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 2003 AND 2002
(in thousands)
(unaudited)
2003 2002
--------- ---------
Cash flows from operating activities:
Net income............................................................ $ 208,448 $ 153,840
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization...................................... 74,972 63,815
Provision for doubtful accounts.................................... 113,543 110,477
Deferred income tax provision...................................... 5,891 17,563
Minority share of income........................................... 8,218 7,820
Stock compensation expense......................................... 2,876 4,953
Tax benefits associated with stock-based compensation plans........ 9,541 38,189
Other, net......................................................... 1,442 (2,056)
Changes in operating assets and liabilities:
Accounts receivable............................................. (157,996) (136,837)
Accounts payable and accrued expenses........................... (63,821) (38,040)
Integration, settlement and other special charges............... (9,283) (12,668)
Income taxes payable............................................ 29,769 9,848
Other assets and liabilities, net............................... 4,078 1,042
--------- ---------
Net cash provided by operating activities............................. 227,678 217,946
--------- ---------
Cash flows from investing activities:
Business acquisitions, net of cash acquired........................... (237,411) (333,512)
Capital expenditures.................................................. (75,806) (83,390)
Increase in investments and other assets.............................. (11,114) (2,917)
Proceeds from disposition of assets................................... 3,402 1,043
Collection of note receivable ........................................ -- 10,660
--------- ---------
Net cash used in investing activities................................. (320,929) (408,116)
--------- ---------
Cash flows from financing activities:
Proceeds from borrowings.............................................. 450,000 475,237
Repayments of debt.................................................... (354,539) (333,265)
Purchases of treasury stock........................................... (10,065) --
Exercise of stock options............................................. 9,207 22,103
Distributions to minority partners.................................... (6,262) (6,268)
Financing costs paid.................................................. (4,227) --
Other................................................................. 429 (129)
--------- ---------
Net cash provided by financing activities............................. 84,543 157,678
--------- ---------
Net change in cash and cash equivalents............................... (8,708) (32,492)
Cash and cash equivalents, beginning of period........................ 96,777 122,332
--------- ---------
Cash and cash equivalents, end of period.............................. $ 88,069 $ 89,840
========= =========
Cash paid during the period for:
Interest.............................................................. $ 32,545 $ 30,504
Income taxes.......................................................... 100,630 38,760
Businesses acquired:
Fair value of assets acquired......................................... $ 977,866 $ 549,947
Fair value of liabilities assumed..................................... 279,510 204,490
The accompanying notes are an integral part of these statements.
4
QUEST DIAGNOSTICS INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, unless otherwise indicated)
(unaudited)
1. BASIS OF PRESENTATION
Background
Quest Diagnostics Incorporated and its subsidiaries ("Quest Diagnostics" or
the "Company") is the largest clinical laboratory testing business in the United
States. As the nation's leading provider of diagnostic testing and related
services for the healthcare industry, Quest Diagnostics offers a broad range of
clinical laboratory testing services to physicians, hospitals, managed care
organizations, employers, governmental institutions and other independent
clinical laboratories. Quest Diagnostics is the leading provider of esoteric
testing, including gene-based testing, and testing for drugs of abuse. The
Company is also a leading provider of anatomic pathology services and testing to
support clinical trials of new pharmaceuticals worldwide. Through the Company's
national network of laboratories and patient service centers, and its esoteric
testing laboratory and development facilities, Quest Diagnostics offers
comprehensive and innovative diagnostic testing, information and related
services used by physicians and other healthcare customers to diagnose, treat
and monitor diseases and other medical conditions.
On an annualized basis, Quest Diagnostics processes over 130 million
requisitions through its extensive network of laboratories and patient service
centers in virtually every major metropolitan area throughout the United States.
Basis of Presentation
The interim consolidated financial statements reflect all adjustments
which, in the opinion of management, are necessary for a fair statement of
financial condition and results of operations for the periods presented. Except
as otherwise disclosed, all such adjustments are of a normal recurring nature.
The interim consolidated financial statements have been compiled without audit.
Operating results for the interim periods are not necessarily indicative of the
results that may be expected for the full year. These interim consolidated
financial statements should be read in conjunction with the audited consolidated
financial statements included in the Company's 2002 Annual Report on Form 10-K.
Earnings Per Share
Basic earnings per common share is calculated by dividing net income by the
weighted average number of common shares outstanding. Diluted earnings per
common share is calculated by dividing net income by the weighted average number
of common shares outstanding after giving effect to all potentially dilutive
common shares outstanding during the period. The if-converted method is used in
determining the dilutive effect of the Company's 1 3/4% contingent convertible
debentures in periods when the holders of such securities are permitted to
exercise their conversion rights. Potentially dilutive common shares include
outstanding stock options and restricted common shares granted under the
Company's Employees Equity Participation Program. These dilutive securities
increased the weighted average number of common shares outstanding by 2.6 and
2.5 million shares for the three and six months ended June 30, 2003,
respectively. For both the three and six months ended June 30, 2002, these
dilutive securities increased the weighted average number of common shares
outstanding by 3.9 million shares.
Stock-Based Compensation
The Company has chosen to adopt the disclosure only provisions of Statement
of Financial Accounting Standards ("SFAS") No. 123, "Accounting for Stock-Based
Compensation" ("SFAS 123"), as amended by SFAS No. 148, "Accounting for
Stock-Based Compensation - Transition and Disclosure - an amendment of FASB
Statement No. 123" ("SFAS 148") and continue to account for stock-based
compensation using the intrinsic value method prescribed in Accounting
Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to
Employees" ("APB 25"), and related interpretations. Under this approach, the
cost of restricted stock awards is expensed over their vesting period, while the
imputed cost of stock option grants and discounts offered under the Company's
Employee Stock Purchase Plan ("ESPP") is disclosed, based on the vesting
provisions of the individual grants, but not charged to expense. Stock-based
compensation expense recorded in accordance with APB 25, related to restricted
stock awards, was $1.3 million and $2.5 million for the three months ended June
30, 2003 and 2002, respectively, and $2.9 and $5.0 million for the six months
ended June 30, 2003 and 2002, respectively.
5
QUEST DIAGNOSTICS INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(in thousands, unless otherwise indicated)
(unaudited)
The following table presents net income and basic and diluted earnings per
common share, had the Company elected to recognize compensation cost based on
the fair value at the grant dates for stock option awards and discount granted
for stock purchases under the Company's ESPP, consistent with the method
prescribed by SFAS 123, as amended by SFAS 148:
Three Months Ended Six Months Ended
June 30, June 30,
------------------- -------------------
2003 2002 2003 2002
-------- -------- -------- --------
Net income:
Net income, as reported ........................ $120,412 $ 87,151 $208,448 $153,840
Add: Stock-based compensation under APB 25 ..... 1,340 2,496 2,876 4,953
Deduct: Total stock-based compensation
expense determined under fair value method
for all awards, net of related tax effects... (13,124) (12,405) (27,929) (22,906)
-------- -------- -------- --------
Pro forma net income ........................... $108,628 $ 77,242 $183,395 $135,887
======== ======== ======== ========
Earnings per common share:
Basic - as reported ......................... $ 1.15 $ 0.90 $ 2.03 $ 1.60
-------- -------- -------- --------
Basic - pro forma ........................... $ 1.03 $ 0.80 $ 1.79 $ 1.42
-------- -------- -------- --------
Diluted - as reported ....................... $ 1.12 $ 0.87 $ 1.98 $ 1.54
-------- -------- -------- --------
Diluted - pro forma ......................... $ 1.02 $ 0.77 $ 1.77 $ 1.36
-------- -------- -------- --------
The fair value of each option grant was estimated on the date of grant
using the Black-Scholes option-pricing model with the following weighted average
assumptions:
Three Months Ended Six Months Ended
June 30, June 30,
------------------- -------------------
2003 2002 2003 2002
-------- -------- -------- --------
Dividend yield ................................. 0.0% 0.0% 0.0% 0.0%
Risk-free interest rate ........................ 2.6% 4.3% 2.8% 4.2%
Expected volatility ............................ 48.5% 45.2% 48.1% 45.2%
Expected holding period, in years .............. 5 5 5 5
New Accounting Standards
In April 2002, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 145, "Rescission of FASB Statements No. 4, 44, and 64, Amendment of
FASB Statement No. 13, and Technical Corrections" ("SFAS 145"). SFAS 145
rescinds SFAS No. 4, "Reporting Gains and Losses from Extinguishment of Debt"
("SFAS 4"), SFAS No. 44, "Accounting for Intangible Assets of Motor Carriers"
("SFAS 44") and SFAS No. 64, "Extinguishments of Debt Made to Satisfy
Sinking-Fund Requirements" ("SFAS 64") and amends SFAS No. 13, "Accounting for
Leases" ("SFAS 13"). This statement updates, clarifies and simplifies existing
accounting pronouncements. As a result of rescinding SFAS 4 and SFAS 64, the
criteria in APB Opinion No. 30, "Reporting the Results of Operations-Reporting
the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual
and Infrequently Occurring Events and Transactions", is used to classify gains
and losses from extinguishment of debt. SFAS 44 was no longer necessary because
the transitions under the Motor Carrier Act of 1980 were completed. SFAS 13 was
amended to eliminate an inconsistency between the required accounting for
sale-leaseback transactions and the required accounting for certain lease
modifications that have economic effects that are similar to sale-leaseback
transactions and makes technical corrections to existing pronouncements. The
provisions of SFAS 145 are effective for fiscal years beginning after May 15,
2002. The Company adopted SFAS 145 effective January 1, 2003. The adoption of
SFAS 145 did not have a material impact on the Company's financial position and
had no impact on the Company's consolidated statements of operations for the
periods presented.
6
QUEST DIAGNOSTICS INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(in thousands, unless otherwise indicated)
(unaudited)
In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities" ("SFAS 146"), which addresses the
recognition, measurement, and reporting of costs associated with exit or
disposal activities, and supercedes Emerging Issues Task Force Issue No. 94-3,
"Liability Recognition for Certain Employee Termination Benefits and Other Costs
to Exit an Activity (including Certain Costs Incurred in a Restructuring)"
("EITF 94-3"). The principal difference between SFAS 146 and EITF 94-3 relates
to the requirements for recognition of a liability for a cost associated with an
exit or disposal activity. SFAS 146 requires that a liability for a cost
associated with an exit or disposal activity, including those related to
employee termination benefits and obligations under operating leases and other
contracts, be recognized when the liability is incurred, and not necessarily the
date of an entity's commitment to an exit plan, as under EITF 94-3. SFAS 146
also establishes that the initial measurement of a liability recognized under
SFAS 146 be based on fair value. The provisions of SFAS 146 are effective for
exit or disposal activities that are initiated after December 31, 2002. The
Company adopted SFAS 146 effective January 1, 2003.
In November 2002, the FASB issued Interpretation No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others" ("FIN 45"). FIN 45 requires a guarantor to
recognize a liability, at the inception of the guarantee, for the fair value of
obligations it has undertaken in issuing the guarantee and also include more
detailed disclosures with respect to guarantees. FIN 45 is effective on a
prospective basis for guarantees issued or modified starting January 1, 2003 and
requires the additional disclosures in interim and annual financial statements
effective for the period ended December 31, 2002. The Company's adoption of the
initial recognition and measurement provisions of FIN 45 effective January 1,
2003, did not have a material impact on the Company's results of operations or
financial position.
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities" ("SFAS 149"), which amends and
clarifies financial accounting and reporting for derivative instruments,
including certain derivative instruments embedded in other contracts, and for
hedging activities under SFAS 133. SFAS 149 is effective for contracts entered
into or modified after June 30, 2003, and for hedging relationships designated
after June 30, 2003. The Company will adopt SFAS 149 effective July 1, 2003, and
does not expect that the provisions of SFAS 149 will have a material impact on
the Company's results of operations or financial position.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Instruments with Characteristics of both Liabilities and Equity" ("SFAS 150"),
which establishes standards for how an issuer classifies and measures certain
financial instruments with characteristics of both liabilities and equity. SFAS
150 is effective for financial instruments entered into or modified after May
31, 2003, and otherwise is effective at the beginning of the first interim
period beginning after June 15, 2003. The Company's adoption of the initial
recognition and initial measurement provisions of SFAS 150 effective June 1,
2003, did not have a material impact on the Company's results of operations or
financial position.
2. BUSINESS ACQUISITION
Acquisition of Unilab Corporation
On February 26, 2003, the Company accepted for payment more than 99% of the
outstanding capital stock of Unilab Corporation ("Unilab"), the leading
independent clinical laboratory in California. On February 28, 2003, the Company
acquired the remaining shares of Unilab through a merger. In connection with the
acquisition, the Company paid $297 million in cash and issued 7.1 million shares
of Quest Diagnostics common stock to acquire all of the outstanding capital
stock of Unilab. In addition, the Company reserved approximately 0.3 million
shares of Quest Diagnostics common stock for outstanding stock options of Unilab
which were converted upon the completion of the acquisition into options to
acquire shares of Quest Diagnostics common stock (the "converted options").
The aggregate purchase price of $698 million included the cash portion of
the purchase price of $297 million and transaction costs of approximately $20
million with the remaining portion of the purchase price paid through the
issuance of 7.1 million shares of Quest Diagnostics common stock (valued at $372
million or $52.80 per share, based on the average closing stock price of Quest
Diagnostics common stock for the five trading days ended March 4, 2003) and the
issuance of approximately 0.3 million converted options (valued at approximately
$9 million, based on the Black Scholes option-pricing model). Of the total
transaction costs incurred, approximately $8 million was paid during fiscal
2002.
7
QUEST DIAGNOSTICS INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(in thousands, unless otherwise indicated)
(unaudited)
In conjunction with the acquisition of Unilab, the Company repaid $220
million of debt, representing substantially all of Unilab's then existing
outstanding debt, and related accrued interest. Of the $220 million, $124
million represents payments related to the Company's cash tender offer which was
completed on March 7, 2003, for all of the outstanding $100.8 million principal
amount and related accrued interest of Unilab's 12 3/4% Senior Subordinated
Notes due 2009 and $23 million of related tender premium and associated tender
offer costs.
The Company financed the cash portion of the purchase price and related
transaction costs, and the repayment of substantially all of Unilab's
outstanding debt and related accrued interest with the proceeds from a new $450
million amortizing term loan facility (the "term loan") and cash on-hand. The
term loan 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 June 30, 2003, the Company's borrowing rate for
LIBOR-based loans was LIBOR plus 1.1875%. The term loan requires principal
repayments of the initial amount borrowed equal to 16.25%, 20%, 20%, 21.25% and
22.5% in years one through five, respectively. The term loan is guaranteed by
each of the Company's wholly owned subsidiaries that operate clinical
laboratories in the United States. The term loan 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. Through June 30, 2003, the Company has repaid $127
million of principal under the term loan.
As part of the acquisition, Quest Diagnostics acquired all of Unilab's
operations, including its primary testing facilities in Los Angeles, San Jose
and Sacramento, California, and approximately 365 patient service centers and 35
rapid response laboratories and approximately 4,100 employees. The Company
expects to realize significant benefits from the acquisition of Unilab. As the
leading independent clinical laboratory in California, the acquisition of Unilab
positions the Company to capitalize on its leading position within the
laboratory testing industry, further enhancing its national network and access
to its comprehensive range of services.
In connection with the acquisition of Unilab, as part of a settlement
agreement with the United States Federal Trade Commission, the Company entered
into an agreement to sell to Laboratory Corporation of America Holdings, Inc.,
("LabCorp"), certain assets in northern California, including the assignment of
agreements with four independent physician associations ("IPA") and leases for
46 patient service centers (five of which also serve as rapid response
laboratories) for $4.5 million (the "Divestiture"). Approximately $27 million in
annual net revenues are generated by capitated fees under the IPA contracts and
associated fee for service testing for physicians whose patients use these
patient service centers, as well as from specimens received directly from the
IPA physicians. During the second quarter of 2003, one of the IPA contracts was
assigned to LabCorp. The Company expects to complete the transaction by August
2003.
The acquisition of Unilab was accounted for under the purchase method of
accounting. As such, the cost to acquire Unilab has been allocated on a
preliminary basis to the assets and liabilities acquired based on estimated fair
values as of the closing date. The consolidated financial statements include the
results of operations of Unilab subsequent to the closing of the acquisition.
The following table summarizes the Company's preliminary purchase price
allocation related to the acquisition of Unilab based on the estimated fair
value of the assets acquired and liabilities assumed on the acquisition date.
The purchase price allocation will be finalized after completion of the
valuation of certain assets and liabilities.
8
QUEST DIAGNOSTICS INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(in thousands, unless otherwise indicated)
(unaudited)
Estimated Fair
Values as of
February 28, 2003
-----------------
Current assets ...................................... $187,617
Property, plant and equipment ....................... 11,289
Goodwill ............................................ 732,619
Other assets ........................................ 44,845
--------
Total assets acquired ............................ 976,370
--------
Current liabilities ................................. 54,945
Long-term liabilities ............................... 2,513
Long-term debt ...................................... 221,291
--------
Total liabilities assumed ........................ 278,749
--------
Net assets acquired .............................. $697,621
========
Based on management's review of the net assets acquired and consultations
with third-party valuation specialists, no intangible assets meeting the
criteria under SFAS No. 141, "Business Combinations", were identified. Of the
$733 million allocated to goodwill, approximately $85 million is expected to be
deductible for tax purposes.
The following unaudited pro forma combined financial information for the
three months ended June 30, 2002 and for the six months ended June 30, 2003 and
2002 assumes that Unilab and American Medical Laboratories, Incorporated,
("AML"), which the Company acquired on April 1, 2002, were acquired on January
1, 2002 (in thousands, except per share data):
Six Months Ended June 30,
Three Months Ended -------------------------
June 30, 2002 2003 2002
------------------ ---------- ----------
Net revenues ................................... $1,182,482 $2,387,161 $2,313,708
Net income ..................................... 98,894 205,231 174,653
Basic earnings per common share:
Net income ..................................... $ 0.96 $ 2.08 $ 1.70
Weighted average common shares outstanding
- basic ..................................... 103,447 104,816 102,962
Diluted earnings per common share:
Net income ..................................... $ 0.92 $ 2.03 $ 1.63
Weighted average common shares outstanding
- diluted ................................... 107,453 107,360 106,950
The pro forma combined financial information presented above reflects
certain reclassifications to the historical financial statements of Unilab and
AML to conform the acquired companies' accounting policies and classification of
certain costs and expenses to that of Quest Diagnostics. These adjustments had
no impact on pro forma net income. No adjustment has been made to the pro forma
combined financial information to reflect the impact of the Divestiture, which
would not have a material impact on Quest Diagnostics' financial condition,
results of operations or cash flow. Pro forma results for the six months ended
June 30, 2003 exclude $14.5 million of direct transaction costs, which were
incurred and
9
QUEST DIAGNOSTICS INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(in thousands, unless otherwise indicated)
(unaudited)
expensed by Unilab immediately prior to the closing of the Unilab acquisition.
Pro forma results for the three and six months ended June 30, 2002 exclude $14.5
million of direct transaction costs, which were incurred and expensed by AML
immediately prior to the closing of the AML acquisition.
3. GOODWILL AND INTANGIBLE ASSETS
The changes in the carrying amount of goodwill, net for the period ended
June 30, 2003 and for the year ended December 31, 2002 are as follows:
June 30, 2003 December 31, 2002
------------- -----------------
Balance at beginning of period .......... $1,788,850 $1,351,123
Goodwill acquired during the period ..... 730,442 437,727
---------- ----------
Balance at end of period ................ $2,519,292 $1,788,850
========== ==========
Intangible assets at June 30, 2003 and December 31, 2002 consisted of the
following:
June 30, 2003 December 31, 2002
-------------------------------- --------------------------------
Weighted Average Accumulated Accumulated
Amortization Period Cost Amortization Net Cost Amortization Net
------------------- ------- ------------ ------- ------- ------------ -------
Non-compete agreements .... 5 years $44,862 $(35,097) $ 9,765 $44,482 $(32,268) $12,214
Customer lists ............ 15 years 42,035 (34,660) 7,375 41,301 (33,751) 7,550
Other ..................... 10 years 4,775 (2,415) 2,360 4,580 (2,261) 2,319
------- -------- ------- ------- -------- -------
Total ................ 10 years $91,672 $(72,172) $19,500 $90,363 $(68,280) $22,083
======= ======== ======= ======= ======== =======
Amortization expense related to intangible assets was $2,068 and $2,065 for
the three months ended June 30, 2003 and 2002, respectively. For the six months
ended June 30, 2003 and 2002, amortization expense related to intangible assets
was $4,091 and $4,220, respectively.
The estimated amortization expense related to intangible assets for each of
the five succeeding fiscal years and thereafter as of June 30, 2003 is as
follows:
Fiscal Year Ending
December 31,
- ---------------------------
Remainder of 2003 ......... $ 4,136
2004 ...................... 6,268
2005 ...................... 2,844
2006 ...................... 1,664
2007 ...................... 912
2008 ...................... 768
Thereafter ................ 2,908
-------
Total ................. $19,500
=======
10
QUEST DIAGNOSTICS INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(in thousands, unless otherwise indicated)
(unaudited)
4. COMMITMENTS AND CONTINGENCIES
The Company has standby letters of credit issued under its unsecured
revolving credit facility to ensure its performance or payment to third parties,
which amounted to $42 million and $33 million at June 30, 2003 and December 31,
2002, respectively. The letters of credit, which are renewed annually, primarily
represent collateral for current and future automobile liability and workers'
compensation loss payments.
The Company has entered into several settlement agreements with various
governmental and private payers during recent years relating to industry-wide
billing and marketing practices that had been substantially discontinued by
early 1993. In addition, the Company is aware of several pending lawsuits filed
under the qui tam provisions of the civil False Claims Act and has received
notices of private claims relating to billing issues similar to those that were
the subject of prior settlements with various governmental payers. Some of the
proceedings against the Company involve claims that are substantial in amount.
Some of the cases involve the operations of Unilab prior to the closing of the
Unilab acquisition.
Although management believes that established reserves for both indemnified
and non-indemnified claims are sufficient, it is possible that additional
information (such as the indication by the government of criminal activity,
additional tests being questioned or other changes in the government's or
private claimants' theories of wrongdoing) may become available which may cause
the final resolution of these matters to exceed established reserves by an
amount which could be material to the Company's results of operations and cash
flows in the period in which such claims are settled. The Company does not
believe that these issues will have a material adverse effect on its overall
financial condition.
In addition to the billing-related settlement reserves discussed above, the
Company is involved in various legal proceedings arising in the ordinary course
of business. Some of the proceedings against the Company involve claims that are
substantial in amount. Although management cannot predict the outcome of such
proceedings or any claims made against the Company, management does not
anticipate that the ultimate outcome of the various proceedings or claims will
have a material adverse effect on the Company's financial position but may be
material to the Company's results of operations and cash flows in the period in
which such claims are resolved.
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 the Company's client base and
reputation. The Company maintains various liability insurance programs for
claims that could result from providing or failing to provide clinical
laboratory testing services, including inaccurate testing results and other
exposures. The Company's insurance coverage limits its maximum exposure on
individual claims; however, the Company is essentially self-insured for a
significant portion of these claims. The basis for claims reserves incorporates
actuarially determined losses based upon the Company's historical and projected
loss experience. Management believes that present insurance coverage and
reserves are sufficient to cover currently estimated exposures. Although
management cannot predict the outcome of any claims made against the Company,
management does not anticipate that the ultimate outcome of any such proceedings
or claims will have a material adverse effect on the Company's financial
position but may be material to the Company's results of operations and cash
flows in the period in which such claims are resolved.
11
QUEST DIAGNOSTICS INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(in thousands, unless otherwise indicated)
(unaudited)
5. STOCKHOLDERS' EQUITY
Changes in stockholders' equity for the six months ended June 30, 2003 were
as follows:
Retained Accumulated
Additional Earnings Other Compre
Common Paid-In (Accumulated Unearned Comprehensive Treasury -hensive
Stock Capital Deficit) Compensation Income (Loss) Stock Income
------ ---------- ------------ ------------ ------------- -------- --------
Balance, December 31, 2002............... $ 980 $1,817,511 $(40,772) $(3,332) $(5,524) $ --
Net income............................... 208,448 $208,448
Other comprehensive income............... 3,190 3,190
--------
Comprehensive income.................. $211,638
========
Shares issued to acquire Unilab
(7,055 common shares)................. 71 372,393
Fair value of Unilab converted
options............................... 8,452
Issuance of common stock under benefit
plans (274 common shares)............. 3 11,630 (5,041)
Exercise of options (453 common shares).. 4 9,203
Shares to cover employee payroll tax
withholdings on stock issued under
benefit plans (170 common shares)..... (2) (9,099)
Tax benefits associated with
stock-based compensation plans........ 9,541
Amortization of unearned compensation.... 3,301
Purchases of treasury stock
(162 common shares)................... (10,065)
------ ---------- -------- ------- ------- --------
Balance, June 30, 2003................... $1,056 $2,219,631 $167,676 $(5,072) $(2,334) $(10,065)
====== ========== ======== ======= ======= ========
During the six months ended June 30, 2003, 170 thousand shares were
surrendered to cover employee payroll tax withholdings related to the vesting of
restricted stock. For reporting purposes, these shares were accounted for as
treasury shares and were immediately retired.
In May 2003, the Company's Board of Directors authorized a share repurchase
program which permits the Company to purchase up to $300 million of its common
stock. Cumulative purchases under the program through June 30, 2003 totaled $10
million. All shares were purchased at prevailing market prices.
12
QUEST DIAGNOSTICS INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(in thousands, unless otherwise indicated)
(unaudited)
Changes in stockholders' equity for the six months ended June 30, 2002 were
as follows:
Accumulated
Additional Other Compre
Common Paid-In Accumulated Unearned Comprehensive -hensive
Stock Capital Deficit Compensation Income (Loss) Income
------ ---------- ----------- ------------ ------------- --------
Balance, December 31, 2001................... $960 $1,714,676 $(362,926) $(13,253) $(3,470)
Net income................................... 153,840 $153,840
Other comprehensive income................... 1,215 1,215
--------
Comprehensive income...................... $155,055
========
Issuance of common stock under benefit
plans (214 common shares)................. 2 13,523
Exercise of options (1,186 common shares).... 12 22,091
Tax benefits associated with stock-based
compensation plans........................ 38,189
Amortization of unearned compensation........ 5,135
---- ---------- --------- -------- -------
Balance, June 30, 2002....................... $974 $1,788,479 $(209,086) $ (8,118) $(2,255)
==== ========== ========= ======== =======
6. SUMMARIZED FINANCIAL INFORMATION
The Company's 6 3/4% senior notes due 2006, 7 1/2% senior notes due 2011
and 1 3/4% contingent convertible debentures due 2021 are guaranteed by each of
the Company's wholly owned subsidiaries that operate clinical laboratories in
the United States (the "Subsidiary Guarantors"). With the exception of Quest
Diagnostics Receivables Incorporated (see paragraph below), the non-guarantor
subsidiaries are primarily foreign and less than wholly owned subsidiaries.
In conjunction with the Company's receivables financing in July 2000, the
Company formed a new wholly owned non-guarantor subsidiary, Quest Diagnostics
Receivables Incorporated ("QDRI"). The Company and the Subsidiary Guarantors,
with the exception of AML and Unilab, transfer all private domestic receivables
(principally excluding receivables due from Medicare, Medicaid and other federal
programs, and receivables due from customers of its joint ventures) to QDRI.
QDRI utilizes the transferred receivables to collateralize the Company's secured
receivables credit facility. The Company and the Subsidiary Guarantors provide
collection services to QDRI. QDRI uses cash collections principally to purchase
new receivables from the Company and the Subsidiary Guarantors.
The following condensed consolidating financial data illustrates the
composition of the combined guarantors. Investments in subsidiaries are
accounted for by the parent using the equity method for purposes of the
supplemental consolidating presentation. Earnings (losses) of subsidiaries are
therefore reflected in the parent's investment accounts and earnings. The
principal elimination entries relate to investments in subsidiaries and
intercompany balances and transactions. On April 1, 2002, Quest Diagnostics
acquired AML, which has been included in the accompanying condensed
consolidating financial data, subsequent to the closing of the acquisition, as a
Subsidiary Guarantor. On February 28, 2003, Quest Diagnostics acquired Unilab,
which has been included in the accompanying condensed consolidating financial
data, subsequent to the closing of the acquisition, as a Subsidiary Guarantor.
13
QUEST DIAGNOSTICS INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(in thousands, unless otherwise indicated)
(unaudited)
Condensed Consolidating Statement of Operations
Six Months Ended June 30, 2003
Subsidiary Non-Guarantor
Parent Guarantors Subsidiaries Eliminations Consolidated
--------- ---------- ------------- ------------ ------------
Net revenues .............................. $ 395,280 $1,806,325 $235,709 $(124,582) $2,312,732
Costs and expenses:
Cost of services ....................... 229,370 1,044,281 77,570 -- 1,351,221
Selling, general and administrative .... 37,272 432,808 112,967 (7,786) 575,261
Interest, net .......................... 35,504 108,872 3,195 (116,796) 30,775
Amortization of intangible assets ...... 1,110 2,981 -- -- 4,091
Royalty (income) expense ............... (139,965) 139,965 -- -- --
Other, net ............................. (665) (14) (136) -- (815)
--------- ---------- -------- --------- ----------
Total ............................... 162,626 1,728,893 193,596 (124,582) 1,960,533
--------- ---------- -------- --------- ----------
Income before taxes ....................... 232,654 77,432 42,113 -- 352,199
Income tax expense ........................ 95,119 30,972 17,660 -- 143,751
--------- ---------- -------- --------- ----------
Income before equity earnings ............. 137,535 46,460 24,453 -- 208,448
Equity earnings from subsidiaries ......... 70,913 -- -- (70,913) --
--------- ---------- -------- --------- ----------
Net income ................................ $ 208,448 $ 46,460 $ 24,453 $ (70,913) $ 208,448
========= ========== ======== ========= ==========
Condensed Consolidating Statement of Operations
Six Months Ended June 30, 2002
Subsidiary Non-Guarantor
Parent Guarantors Subsidiaries Eliminations Consolidated
--------- ---------- ------------- ------------ ------------
Net revenues .............................. $ 363,269 $1,545,617 $254,858 $(148,172) $2,015,572
Costs and expenses:
Cost of services ....................... 244,113 867,811 76,072 -- 1,187,996
Selling, general and administrative .... 84,571 327,658 130,633 (7,638) 535,224
Interest, net .......................... 40,409 122,626 5,090 (140,534) 27,591
Amortization of intangible assets ...... 996 3,224 -- -- 4,220
Royalty (income) expense ............... (124,157) 124,157 -- -- --
Other, net ............................. 1,687 (693) 552 -- 1,546
--------- ---------- -------- --------- ----------
Total ............................... 247,619 1,444,783 212,347 (148,172) 1,756,577
--------- ---------- -------- --------- ----------
Income before taxes ....................... 115,650 100,834 42,511 -- 258,995
Income tax expense ........................ 45,094 40,511 19,550 -- 105,155
--------- ---------- -------- --------- ----------
Income before equity earnings ............. 70,556 60,323 22,961 -- 153,840
Equity earnings from subsidiaries ......... 83,284 -- -- (83,284) --
--------- ---------- -------- --------- ----------
Net income ................................ $ 153,840 $ 60,323 $ 22,961 $ (83,284) $ 153,840
========= ========== ======== ========= ==========
14
QUEST DIAGNOSTICS INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(in thousands, unless otherwise indicated)
(unaudited)
Condensed Consolidating Balance Sheet
June 30, 2003
Subsidiary Non-Guarantor
Parent Guarantors Subsidiaries Eliminations Consolidated
---------- ---------- ------------- ------------ ------------
Assets
Current assets:
Cash and cash equivalents ......................... $ 70,670 $ 8,409 $ 8,990 $ -- $ 88,069
Accounts receivable, net .......................... 18,296 169,788 440,320 -- 628,404
Other current assets .............................. 57,701 99,274 79,684 -- 236,659
---------- ---------- --------- ----------- ----------
Total current assets ........................... 146,667 277,471 528,994 -- 953,132
Property, plant and equipment, net ................ 228,838 327,439 26,765 -- 583,042
Intangible assets, net ............................ 158,321 2,335,043 45,428 -- 2,538,792
Intercompany receivable (payable) ................. 686,690 (259,810) (426,880) -- --
Investment in subsidiaries ........................ 1,857,294 -- -- (1,857,294) --
Other assets ...................................... 60,809 75,279 32,987 -- 169,075
---------- ---------- --------- ----------- ----------
Total assets ................................... $3,138,619 $2,755,422 $ 207,294 $(1,857,294) $4,244,041
========== ========== ========= =========== ==========
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable and accrued expenses ............. $ 403,073 $ 163,269 $ 28,098 $ -- $ 594,440
Short-term borrowings and current portion of
long-term debt ................................. -- 74,050 343 -- 74,393
---------- ---------- --------- ----------- ----------
Total current liabilities ...................... 403,073 237,319 28,441 -- 668,833
Long-term debt .................................... 315,663 747,553 1,955 -- 1,065,171
Other liabilities ................................. 48,991 69,841 20,313 -- 139,145
Stockholders' equity .............................. 2,370,892 1,700,709 156,585 (1,857,294) 2,370,892
---------- ---------- --------- ----------- ----------
Total liabilities and stockholders' equity ..... $3,138,619 $2,755,422 $ 207,294 $(1,857,294) $4,244,041
========== ========== ========= =========== ==========
Condensed Consolidating Balance Sheet
December 31, 2002
Subsidiary Non-Guarantor
Parent Guarantors Subsidiaries Eliminations Consolidated
---------- ---------- ------------- ------------ ------------
Assets
Current assets:
Cash and cash equivalents ......................... $ 79,015 $ 7,377 $ 10,385 $ -- $ 96,777
Accounts receivable, net .......................... 15,032 89,626 417,473 -- 522,131
Other current assets .............................. 52,952 63,148 89,435 -- 205,535
---------- ---------- --------- ----------- ----------
Total current assets ........................... 146,999 160,151 517,293 -- 824,443
Property, plant and equipment, net ................ 227,263 317,243 25,643 -- 570,149
Intangible assets, net ............................ 159,293 1,607,767 43,873 -- 1,810,933
Intercompany receivable (payable) ................. 194,874 236,752 (431,626) -- --
Investment in subsidiaries ........................ 1,631,868 -- -- (1,631,868) --
Other assets ...................................... 61,653 26,905 30,114 -- 118,672
---------- ---------- --------- ----------- ----------
Total assets ................................... $2,421,950 $2,348,818 $ 185,297 $(1,631,868) $3,324,197
========== ========== ========= =========== ==========
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable and accrued expenses ............. $ 295,479 $ 287,539 $ 26,927 $ -- $ 609,945
Current portion of long-term debt ................. -- 25,689 343 -- 26,032
---------- ---------- --------- ----------- ----------
Total current liabilities ...................... 295,479 313,228 27,270 -- 635,977
Long-term debt .................................... 315,109 478,863 2,535 -- 796,507
Other liabilities ................................. 42,499 62,339 18,012 -- 122,850
Stockholders' equity .............................. 1,768,863 1,494,388 137,480 (1,631,868) 1,768,863
---------- ---------- --------- ----------- ----------
Total liabilities and stockholders' equity ..... $2,421,950 $2,348,818 $ 185,297 $(1,631,868) $3,324,197
========== ========== ========= =========== ==========
15
QUEST DIAGNOSTICS INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(in thousands, unless otherwise indicated)
(unaudited)
Condensed Consolidating Statement of Cash Flows
Six Months Ended June 30, 2003
Subsidiary Non-Guarantor
Parent Guarantors Subsidiaries Eliminations Consolidated
--------- ---------- ------------- ------------ ------------
Cash flows from operating activities:
Net income............................................ $ 208,448 $ 46,460 $ 24,453 $(70,913) $ 208,448
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization...................... 27,165 43,502 4,305 -- 74,972
Provision for doubtful accounts.................... 2,943 29,917 80,683 -- 113,543
Other, net......................................... (44,043) (12,476) 13,574 70,913 27,968
Changes in operating assets and liabilities........ (33,699) (78,008) (85,546) -- (197,253)
--------- -------- -------- -------- ---------
Net cash provided by operating activities............. 160,814 29,395 37,469 -- 227,678
Net cash used in investing activities................. (260,004) (39,305) (6,306) (15,314) (320,929)
Net cash provided by (used in) financing activities... 90,845 10,942 (32,558) 15,314 84,543
--------- -------- -------- -------- ---------
Net change in cash and cash equivalents............... (8,345) 1,032 (1,395) -- (8,708)
Cash and cash equivalents, beginning of period........ 79,015 7,377 10,385 -- 96,777
--------- -------- -------- -------- ---------
Cash and cash equivalents, end of period.............. $ 70,670 $ 8,409 $ 8,990 $ -- $ 88,069
========= ======== ======== ======== =========
Condensed Consolidating Statement of Cash Flows
Six Months Ended June 30, 2002
Subsidiary Non-Guarantor
Parent Guarantors Subsidiaries Eliminations Consolidated
--------- ---------- ------------- ------------ ------------
Cash flows from operating activities:
Net income............................................ $ 153,840 $ 60,323 $ 22,961 $ (83,284) $ 153,840
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization...................... 22,605 37,647 3,563 -- 63,815
Provision for doubtful accounts.................... 2,460 15,679 92,338 -- 110,477
Other, net......................................... (29,804) (2,787) 15,776 83,284 66,469
Changes in operating assets and liabilities........ 31,859 (89,358) (119,156) -- (176,655)
--------- -------- --------- --------- ---------
Net cash provided by operating activities............. 180,960 21,504 15,482 -- 217,946
Net cash used in investing activities................. (205,897) (54,056) (1,930) (146,233) (408,116)
Net cash provided by (used in) financing activities... 24,937 4,939 (18,431) 146,233 157,678
--------- -------- --------- --------- ---------
Net change in cash and cash equivalents............... -- (27,613) (4,879) -- (32,492)
Cash and cash equivalents, beginning of period........ -- 110,571 11,761 -- 122,332
--------- -------- --------- --------- ---------
Cash and cash equivalents, end of period.............. $ -- $ 82,958 $ 6,882 $ -- $ 89,840
========= ======== ========= ========= =========
16
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Critical Accounting Policies
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires us to make estimates
and assumptions and select accounting policies that affect the reported amounts
of assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements, as well as the reported amounts of
revenues and expenses during the reporting period. Actual results could differ
from those estimates.
While many operational aspects of our business are subject to complex
federal, state and local regulations, the accounting for our business is
generally straightforward with net revenues primarily recognized upon completion
of the testing process. Our revenues are primarily comprised of a high volume of
relatively low dollar transactions, and about half of all our costs and expenses
consist of employee compensation and benefits. Due to the nature of our
business, several of our accounting policies involve significant estimates and
judgments. These accounting policies have been described in our 2002 Annual
Report on Form 10-K.
Acquisition of Unilab Corporation
On February 26, 2003, we accepted for payment more than 99% of the
outstanding capital stock of Unilab Corporation ("Unilab"), the leading
independent clinical laboratory in California. On February 28, 2003, we acquired
the remaining shares of Unilab through a merger. In connection with the
acquisition, we paid $297 million in cash and issued 7.1 million shares of Quest
Diagnostics common stock to acquire all of the outstanding capital stock of
Unilab. In addition, we reserved approximately 0.3 million shares of Quest
Diagnostics common stock for outstanding stock options of Unilab which were
converted upon the completion of the acquisition into options to acquire shares
of Quest Diagnostics common stock. See Note 2 to the interim consolidated
financial statements for a full discussion of the Unilab acquisition.
We estimate that we will incur up to $20 million of costs to integrate
Quest Diagnostics and Unilab. A significant portion of these costs is expected
to require cash outlays and is expected to primarily relate to severance and
other integration-related costs through 2005, including the elimination of
excess capacity and workforce reductions. These estimates are preliminary and
will be subject to revisions as detail integration plans are developed and
implemented. To the extent that the costs relate to actions that impact the
employees and operations of Unilab, such costs will be accounted for as a cost
of the Unilab acquisition and included in goodwill. To the extent that the costs
relate to actions that impact Quest Diagnostics' employees and operations, such
costs will be accounted for as a charge to earnings in the periods that the
related actions are taken. Upon completion of the Unilab integration, we expect
to realize approximately $25 million to $30 million of annual synergies and we
expect to achieve this annual rate of synergies by the end of 2005.
Results of Operations
Three and Six Months Ended June 30, 2003 Compared with Three and Six Months
Ended June 30, 2002
Net income for the three months ended June 30, 2003 increased to $120
million from $87 million for the prior year period. For the six months ended
June 30, 2003, net income increased to $208 million from $154 million for the
prior year period. These increases in earnings were primarily attributable to
revenue growth and improved efficiencies generated from our Six Sigma and
standardization initiatives. These improvements were partially offset by
increases in employee compensation and benefit costs, investments in our
information technology strategy and, for the six months ended June 30, 2003, the
impact of severe winter weather and the strike by New Jersey physicians during
the first quarter of 2003.
Net Revenues
Net revenues for the three months ended June 30, 2003 grew by 14.1% over
the prior year level, driven by the acquisition of Unilab and by continued
strength in average revenue per requisition. Net revenues for the six months
ended June 30, 2003 grew by 14.7% over the prior year level and include the
results of Unilab for four months and American Medical Laboratories,
Incorporated ("AML"), which was acquired on April 1, 2002, for six months. Pro
forma revenue growth, assuming that both Unilab and AML had been part of Quest
Diagnostics since January 1, 2002, was 3.4% and 3.3% for the three and six
months ended June 30, 2003, respectively, compared to the prior year periods.
17
For the three and six months ended June 30, 2003, clinical testing volume,
measured by the number of requisitions, increased 9.9% and 10.8%, respectively,
compared to the prior year periods. The acquisition of Unilab contributed about
12.5% and 9% to the overall volume growth during the three and six months ended
June 30, 2003, respectively. The acquisition of AML contributed about 3.5% to
the overall volume growth during the six months ended June 30, 2003. Volume for
the second quarter of 2003 also reflects the timing of the Easter and Passover
holidays, which reduced volume by 1%, compared to the prior year period. Severe
winter storms and the New Jersey physicians' strike during the first quarter of
2003, reduced year-to-date volume by approximately 0.8% for the six months ended
June 30, 2003, compared to the prior year period. In addition, our
drugs-of-abuse testing business, which is most directly impacted by economic
conditions, declined during the three and six months ended June 30, 2003,
reducing company-wide volume growth by approximately half a percentage point for
both periods. The remainder of the volume reduction for the three and six months
ended June 30, 2003, is primarily attributable to general economic conditions,
which we believe are impacting patient spending behaviors, and reducing
utilization of healthcare services.
Pro forma testing volume, assuming that both Unilab and AML had been part
of Quest Diagnostics since January 1, 2002, declined approximately 2.3% and 1.6%
for the three and six months ended June 30, 2003, respectively, compared to the
prior year periods. The timing of the holidays also reduced pro forma volume in
the second quarter of 2003 by 1%. Pro forma testing volume for the three and six
months ended June 30, 2003 was impacted by continued economic uncertainty, the
severe winter storms and the physicians' strike during the first quarter of 2003
and continued softness in the drugs-of-abuse testing business.
Average revenue per requisition improved 3.5% and 3.6% for the three and
six months ended June 30, 2003, compared to the prior year periods, primarily
attributable to a continuing shift in test mix to higher value testing,
including gene-based testing, which continued to grow at a rate greater than 20%
over the prior year level. In addition, a shift in payer mix contributed a
portion of the increase in average revenue per requisition. The inclusion of
Unilab's results as of February 28, 2003 reduced average revenue per requisition
by approximately 1.5% and 1% for the three and six months ended June 30, 2003,
respectively, since Unilab's business has lower revenue per requisition than the
rest of our business.
Operating Costs and Expenses
Total operating costs for the three and six months ended June 30, 2003
increased $92 million and $203 million, respectively, from the prior year
periods primarily due to increases in our clinical testing volume, largely as a
result of the Unilab acquisition, employee compensation and benefits, supply
costs and depreciation expense; partially offset by a reduction in bad debt
expense. Total operating costs for the six months ended June 30, 2003 were also
impacted by the AML acquisition. While our cost structure has been favorably
impacted by the improved efficiencies generated from our Six Sigma and
standardization initiatives, we continue to make investments to enhance our
infrastructure to pursue our overall business strategy.
Cost of services, which includes the costs of obtaining, transporting and
testing specimens was 57.6% of net revenues for the three months ended June 30,
2003, decreasing from 59.0% of net revenues in the prior year period. For the
six months ended June 30, 2003, cost of services, as a percentage of net
revenues, decreased to 58.4% from 58.9% a year ago. These improvements were
primarily the result of efficiency gains resulting from our Six Sigma and
standardization efforts and the increase in average revenue per requisition.
These improvements were partially offset by one-time installation costs of
deploying our Internet-based orders and results systems in physicians' offices.
The increase in ordering and obtaining test results via our Internet-based
systems is improving the initial collection of billing information and
generating savings in the cost of billing and bad debt expense, both of which
are components of selling, general and administrative expenses. At June 30,
2003, excluding Unilab where our Internet connectivity is not yet available,
approximately 20% of our orders and approximately 25% of our test results were
Internet-based.
Selling, general and administrative expenses, which include the costs of
the sales force, billing operations, bad debt expense and general management and
administrative support, decreased during the three months ended June 30, 2003 as
a percentage of net revenues to 24.3% from 25.9% in the prior year period. For
the six months ended June 30, 2003, selling, general and administrative expenses
decreased as a percentage of net revenues to 24.9% from 26.6% in the prior year
period. These improvements were primarily due to efficiencies from our Six Sigma
and standardization efforts, in particular bad debt expense, and the improvement
in average revenue per requisition. During the second quarter of 2003, bad debt
expense improved to 4.8% of net revenues, compared to 5.2% of net revenues in
the prior year period. For the six months ended June 30, 2003, bad debt expense
was 4.9% of net revenues, compared to 5.5% of net revenues in the prior year
period. The improvement in bad debt expense was principally attributable to the
continued progress that we have made in our overall collection experience
through process improvements, driven by our Six Sigma and standardization
initiatives. The reduction in bad debt as a percentage of net revenues occurred
despite the addition of
18
Unilab, which has higher levels of bad debt than the rest of Quest Diagnostics.
These improvements primarily relate to the collection of diagnosis, patient and
insurance information necessary to effectively bill for services performed. We
believe that our Six Sigma and standardization initiatives will provide
additional opportunities to further improve our overall collection experience
and cost structure.
Interest, Net
Net interest expense for the three and six months ended June 30, 2003
increased from the prior year periods by $2.0 million and $3.2 million,
respectively, and was primarily attributable to the amounts borrowed to finance
the acquisition of Unilab and to repay substantially all of Unilab's outstanding
debt.
Amortization of Intangible Assets
Amortization of intangible assets for the three months ended June 30, 2003
was comparable to the prior year period. Amortization of intangible assets for
the six months ended June 30, 2003 decreased slightly from the prior year period
principally as the result of certain intangible assets becoming fully amortized
during the remainder of 2002.
Other, Net
"Other, net", which represents income for each of the periods presented,
and includes equity earnings from our unconsolidated joint ventures and
miscellaneous gains and losses, increased $0.3 million and $2.8 million for the
three and six months ended June 30, 2003, respectively, compared to the prior
year periods. The increase for the three and six months ended June 30, 2003
reflects investment gains and an increase in equity earnings from our
unconsolidated joint ventures in 2003, offset in part by miscellaneous real
estate gains and investment losses in 2002. The increase for the six months
ended June 30, 2003 also reflects the costs of a contract settlement, which was
recorded in 2002.
Impact of Contingent Convertible Debentures on Diluted Earnings per Common
Share
The if-converted method is used in determining the dilutive effect of our 1
3/4% contingent convertible debentures due 2021 (the "Debentures") in periods
when the holders of such securities are permitted to exercise their conversion
rights. As of and for the three and six months ended June 30, 2003, the holders
of the Debentures did not have the ability to exercise their conversion rights.
Had the requirements to allow the holders to exercise their conversion rights
been met and the Debentures remained outstanding for the entire period, diluted
earnings per common share would have been reduced by approximately 2% during the
three and six months ended June 30, 2003. See Note 12 to the Consolidated
Financial Statements contained in our 2002 Annual Report on Form 10-K for a
further discussion of the Debentures.
Quantitative and Qualitative Disclosures About Market Risk
We address our exposure to market risks, principally the market risk of
changes in interest rates, through a controlled program of risk management that
may include the use of derivative financial instruments. We do not hold or issue
derivative financial instruments for trading purposes. We do not believe that
our foreign exchange exposure is material to our financial position or results
of operations. See Note 2 to the Consolidated Financial Statements contained in
our 2002 Annual Report on Form 10-K for additional discussion of our financial
instruments and hedging activities.
At June 30, 2003 and December 31, 2002, the fair value of our debt was
estimated at approximately $1.2 billion and $899 million, respectively, using
quoted market prices and yields for the same or similar types of borrowings,
taking into account the underlying terms of the debt instruments. At June 30,
2003 and December 31, 2002, the estimated fair value exceeded the carrying value
of the debt by approximately $90 million and $77 million, respectively. An
assumed 10% increase in interest rates (representing approximately 50 and 60
basis points at June 30, 2003 and December 31, 2002, respectively) would
potentially reduce the estimated fair value of our debt by approximately $18
million and $21 million at June 30, 2003 and December 31, 2002, respectively.
The Debentures have a contingent interest component that will require us to
pay contingent interest based on certain thresholds, as outlined in the
indenture governing the Debentures. The contingent interest component, which is
more fully described in Note 12 to the Consolidated Financial Statements
contained in our 2002 Annual Report on Form 10-K, is considered to be a
derivative instrument subject to Statement of Financial Accounting Standards
("SFAS") No. 133,
19
"Accounting for Derivative Instruments and Hedging Activities", as amended. As
such, the derivative was recorded at its fair value in the consolidated balance
sheet and was not material at June 30, 2003 and December 31, 2002.
Borrowings under our unsecured revolving credit facility under our credit
agreement, our term loan and our secured receivables credit facility are subject
to variable interest rates, unless fixed through interest rate swap or other
agreements. Interest rates on our unsecured revolving credit facility and term
loan are subject to a pricing schedule that can fluctuate over a range of up to
80 basis points, based on changes in our credit rating. As such, our borrowing
cost under these credit arrangements will be subject to both fluctuations in
interest rates and changes in our credit rating. As of June 30, 2003, our
borrowing rate for LIBOR-based loans was LIBOR plus 1.1875%. At June 30, 2003,
there was $323 million outstanding under our term loan and there were no
borrowings outstanding under our unsecured revolving credit facility or secured
receivables credit facility.
Based on our net exposure to interest rate changes, an assumed 10% change
in interest rates on our variable rate indebtedness (representing approximately
15 basis points) would impact annual net interest expense by approximately $0.4
million, assuming no changes to the debt outstanding at June 30, 2003.
Liquidity and Capital Resources
Cash and Cash Equivalents
Cash and cash equivalents at June 30, 2003 totaled $88 million, compared to
$97 million at December 31, 2002. Cash flows from operating activities in 2003
provided cash of $228 million, which along with cash flows from financing
activities of $85 million, were used to fund investing activities, which
required cash of $321 million. Cash and cash equivalents at June 30, 2002
totaled $90 million, a decrease of $32 million from December 31, 2001. Cash
flows from operating activities in 2002 provided cash of $218 million, which
along with cash flows from financing activities of $158 million, were used to
fund investing activities, which required cash of $408 million.
Cash Flows From Operating Activities
Net cash provided by operating activities for the six months ended June 30,
2003 was $228 million compared to $218 million in the prior year period. This
increase was primarily due to improved operating performance and efficiencies in
our billing and collection processes, partially offset by an increase in income
tax payments and a decrease in the tax benefits realized associated with the
exercise of employee stock options. Days sales outstanding, a measure of billing
and collection efficiency, improved to 47 days at June 30, 2003 from 52 days at
June 30, 2002.
Cash Flows From Investing Activities
Net cash used in investing activities for the six months ended June 30,
2003 was $321 million, consisting primarily of acquisition and related
transaction costs of $237 million to acquire the outstanding capital stock of
Unilab, and capital expenditures of $76 million. The acquisition and related
transaction costs included the cash portion of the Unilab purchase price of $297
million and approximately $12 million of transaction costs paid in 2003,
partially offset by $72 million of cash acquired from Unilab. Net cash used in
investing activities for the six months ended June 30, 2002 was $408 million,
consisting primarily of acquisition and related costs of $334 million to acquire
the outstanding voting stock of AML, and capital expenditures of $83 million.
Cash Flows From Financing Activities
Net cash provided by financing activities for the six months ended June 30,
2003 was $85 million, consisting primarily of $450 million of borrowings under
our term loan facility, partially offset by debt repayments totaling $355
million. Borrowings under our term loan facility were used to finance the cash
portion of the purchase price and related transaction costs associated with the
acquisition of Unilab, and to repay $220 million of debt, representing
substantially all of Unilab's then existing outstanding debt, and related
accrued interest. Of the $220 million, $124 million represents payments related
to our cash tender offer which was completed on March 7, 2003, for all of the
outstanding $100.8 million principal amount of Unilab's 12 3/4% Senior
Subordinated Notes due 2009 and $23 million of related tender premium and
associated tender offer costs. The remaining debt repayments in 2003 consisted
primarily of $127 million of repayments under our term loan facility and a $6
million capital lease repayment. During the six months ended June 30, 2003, we
repurchased $10 million of our common stock.
20
Net cash provided by financing activities for the six months ended June 30,
2002 was $158 million, consisting primarily of the net cash activity associated
with our acquisition of AML and proceeds from the exercise of stock options.
AML's all-cash purchase price of approximately $335 million and related
transaction costs, together with the repayment of approximately $150 million of
acquired AML debt and accrued interest was financed by us with cash on-hand and
$300 million of borrowings under our existing secured receivables credit
facility and $175 million of borrowings under our existing unsecured revolving
credit facility. During the second quarter of 2002, we repaid all of the $175
million borrowed under our unsecured revolving credit facility.
Dividend Policy
We have never declared or paid cash dividends on our common stock and do
not anticipate paying dividends on our common stock in the foreseeable future.
Share Repurchase Plan
In May 2003, our Board of Directors authorized a share repurchase program,
which permits us to purchase up to $300 million of our common stock. Cumulative
purchases under the program through June 30, 2003 totaled $10 million. We expect
to fund the share repurchase program through cash flows from operations and we
expect to increase the rate of share repurchases under the program during the
second half of 2003. We do not expect the share repurchase program to have a
material impact on our ability to finance future growth.
Contractual Obligations and Commitments
A description of the terms of our indebtedness, related debt service
requirements and our future payments under certain of our contractual
obligations is contained in Note 12 to the Consolidated Financial Statements in
our 2002 Annual Report on Form 10-K. A discussion of our acquisition of Unilab,
including the terms of our term loan facility used to finance the acquisition of
Unilab and repayment of substantially all of Unilab's outstanding debt, is
contained in Note 2 to the interim consolidated financial statements. On June
27, 2003, we extended the expiration date of the back-up facilities of our
secured receivables credit facility from July 21, 2003 to April 21, 2004. A
discussion and analysis regarding our minimum rental commitments under
noncancelable operating leases, noncancelable commitments to purchase products
or services, and reserves with respect to insurance claims at December 31, 2002
is contained in Note 17 to the Consolidated Financial Statements in our 2002
Annual Report on Form 10-K. See Note 4 to the interim consolidated financial
statements for information regarding the status of our remaining contractual
obligations and commitments, including billing-related claims.
Our credit agreements relating to our unsecured revolving credit facility
and our term loan facility contain various covenants and conditions, including
the maintenance of certain financial ratios, that could impact our ability to,
among other things, incur additional indebtedness, repurchase shares of our
outstanding common stock, make additional investments and consummate
acquisitions. We do not expect these covenants to adversely impact our ability
to execute our growth strategy or conduct normal business operations.
Unconsolidated Joint Ventures
At June 30, 2003 and December 31, 2002, we had investments in
unconsolidated joint ventures in Phoenix, Arizona; Indianapolis, Indiana;
Dayton, Ohio; and Chesapeake, Virginia, which are accounted for under the equity
method of accounting. We believe that our transactions with our joint ventures
are conducted at arm's length, reflecting current market conditions and pricing.
Total net revenues of our unconsolidated joint ventures, on a combined basis,
are less than 6% of our consolidated net revenues. Total assets associated with
our unconsolidated joint ventures are less than 3% of our consolidated total
assets. We have no material unconditional obligations or guarantees to, or in
support of, our unconsolidated joint ventures and their operations.
Requirements and Capital Resources
We estimate that we will invest approximately $170 million to $180 million
during 2003 for capital expenditures to support and expand our existing
operations, principally related to investments in information technology,
equipment, and facility upgrades. Other than the reduction for outstanding
letters of credit, which approximated $42 million at June 30, 2003, all of the
$325 million revolving credit facility under the credit agreement and all of the
$250 million secured receivables credit facility remained available to us for
future borrowing at June 30, 2003.
21
We believe that cash from operations and our borrowing capacity under our
unsecured revolving credit facility and secured receivables credit facility will
provide sufficient financial flexibility to meet seasonal working capital
requirements and to fund capital expenditures, debt service requirements and
additional growth opportunities for the foreseeable future, exclusive of any
potential temporary impact of the Health Insurance Portability and
Accountability Act of 1996, as discussed below. Improvements in our industry and
in particular our financial performance have resulted in improvements to our
credit ratings from both Standard & Poor's and Moody's Investor Services. Our
investment grade credit ratings have had a favorable impact on our cost of and
access to capital. We believe that our improved financial performance should
provide us with access to additional financing, if necessary, to fund growth
opportunities that cannot be funded from existing sources.
Health Insurance Portability and Accountability Act of 1996
The Secretary of the Department of Human Health and Services, or HHS, has
issued final regulations under the Health Insurance Portability and
Accountability Act of 1996 ("HIPAA"), designed to improve the efficiency and
effectiveness of the health care system by facilitating the electronic exchange
of information in health care transactions while protecting the privacy and
security of the information exchanged. Three principal regulations have been
issued: privacy regulations, security regulations, and standards for electronic
transactions.
We implemented the HIPAA privacy regulations by April 2003, as required,
and are evaluating the costs of enhancing our systems and procedures when
necessary to comply with the security regulations by the compliance deadline of
April 20, 2005.
The HIPAA transaction regulations provide uniform standards for electronic
transactions and code sets, including the code set used for billing and
electronic transactions for claims, remittance advices, enrollment, and
eligibility. Payers were supposed to be ready to test with providers beginning
April 16, 2003. We are testing claims submissions with many of our payers, but
many payers are behind in being ready to test. It is unlikely that all payers
will be ready by the compliance deadline of October 16, 2003.
There is a divergence of interpretation on how the new standards for
electronic transactions are to be implemented such as whether payers may require
us to provide information we may not readily obtain from physicians today (for
example certain demographic information not usually provided by physicians). In
addition, it is possible that providers may have to bill some payers using paper
claims until such payers are ready to implement the new requirements. As a
result, we could face increased costs and complexity, as well as a temporary
disruption in receipts and ongoing reductions in reimbursements and net
revenues. We are working closely with our payers and our trade association to
present issues and problems as they arise to the proper regulators and standards
setting organizations. The Centers for Medicare and Medicaid Services (CMS)
issued Guidance on July 24, 2003 that it will not penalize a covered entity for
post-implementation date transactions that are not fully compliant with the
transactions standards, if the covered entity can demonstrate its good faith
efforts to comply with the standards. CMS' stated purpose for this flexible
enforcement position is to "permit health plans to mitigate unintended adverse
effects on covered entities' cash flow and business operations during the
transition to the standards, as well as on the availability and quality of
patient care." Quest Diagnostics is working with its payers in good faith to
reach agreement on each payer's data requirements and to test claims
submissions, while, at the same time, developing contingency plans to minimize
the potential impact in the event payers are not ready. At this time, we cannot
estimate the potential impact of implementing the HIPAA transaction standards.
Impact of New Accounting Standards
In April 2002, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 145, "Rescission of FASB Statements No. 4, 44, and 64, Amendment of
FASB Statement No. 13, and Technical Corrections". In July 2002, the FASB issued
SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal
Activities". In November 2002, the FASB issued Interpretation No. 45,
"Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others". In April 2003, the FASB issued
SFAS No. 149, "Amendment of Statement 133 on Derivative Instruments and Hedging
Activities". In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Instruments with Characteristics of both Liabilities and Equity".
The impact of the above referenced accounting standards is discussed in
Note 1 to the interim consolidated financial statements.
22
Forward-Looking Statements
Some statements and disclosures in this document are forward-looking
statements. Forward-looking statements include all statements that do not relate
solely to historical or current facts and can be identified by the use of words
such as "may", "believe", "will", "expect", "project", "estimate", "anticipate",
"plan" or "continue". These forward-looking statements 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 (the "Litigation Reform Act") 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 document. The risks and other factors that could cause our actual
financial results to differ materially from those projected, forecasted or
estimated by us in forward-looking statements may include, but are not limited
to, unanticipated expenditures, changing relationships with customers, payers,
suppliers and strategic partners, competitive environment, changes in government
regulations, conditions of the economy and other factors described in our 2002
Annual Report on Form 10-K and subsequent filings.
Item 4. Controls and Procedures
(a) Our Chief Executive Officer and Chief Financial Officer have evaluated the
effectiveness of the design and operation of our disclosure controls and
procedures (as defined under Rules 13a-15(e) and 15d-15(e) of the
Securities Exchange Act of 1934, as amended) as of the end of the period
covered by this report. Based upon that evaluation, our Chief Executive
Officer and Chief Financial Officer have concluded that our disclosure
controls and procedures are adequate and effective.
(b) During the quarterly period covered by this report, there were no changes
in our internal control over financial reporting that have materially
affected, or are reasonably likely to materially affect, our internal
control over financial reporting.
23
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
See Note 4 to the interim consolidated financial statements for information
regarding the status of government investigations and private claims.
Item 4. Submission of Matters to a Vote of Security Holders
(a) The annual meeting of stockholders of the Company was held on May 13, 2003.
At the meeting the matters described below were approved by the
stockholders.
(b-c) The following nominees for the office of director were elected for terms
expiring at the 2006 annual meeting of stockholders, by the following
votes:
For Withheld
---------- ---------
James F. Flaherty III 93,134,122 1,182,576
Kenneth W. Freeman 92,408,602 1,908,096
Gail R. Wilensky 93,143,354 1,173,344
John B. Ziegler 93,043,395 1,273,303
24
The following persons continue as directors:
Kenneth D. Brody
William F. Buehler
Mary A. Cirillo
William R. Grant
Rosanne Haggerty
Surya N. Mohapatra
Dan C. Stanzione
The appointment of the PricewaterhouseCoopers LLP as independent
accountants to audit the financial statements of the Company and its
subsidiaries for the fiscal year ending December 31, 2003, was approved by
the following number of stockholder votes for, against, and abstained:
For: 91,975,247 Against: 1,636,188 Abstained: 705,263
The Senior Management Incentive Plan was approved by the following number
of stockholder votes for, against, and abstained:
For: 83,870,530 Against: 8,191,360 Abstained: 2,254,808
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
10.1 Amendment No. 6 to the Amended and Restated Credit and Security
Agreement dated as of June 27, 2003 among Quest Diagnostics
Receivables Inc., as Borrower, the Company, as Initial Servicer, each
of the lenders party thereto and Wachovia Bank, National Association,
as Administrative Agent
10.2 The Quest Diagnostics Incorporated Amended and Restated Deferred
Compensation Plan For Directors
10.3 Quest Diagnostics Incorporated Procedures for the Exercise of
Designated Options by Covered Employees
10.4 Quest Diagnostics Incorporated 1999 Employee Equity Participation
Program, as amended as of July 31, 2003
31.1 Certification of Chief Executive Officer Pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002
31.2 Certification of Chief Financial Officer Pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002
32.1 Certification of Chief Executive Officer Pursuant to 18 U.S.C.
'SS' 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002
32.2 Certification of Chief Financial Officer Pursuant to 18 U.S.C.
'SS' 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002
(b) Report on Form 8-K filed during the second quarter of 2003:
On May 1, 2003, the Company filed an amended current report on Form 8-K
(Date of Report: February 26, 2003) reporting under Item 2 on the
acquisition of the outstanding capital stock of Unilab Corporation.
25
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
July 31, 2003
Quest Diagnostics Incorporated
By /s/ Kenneth W. Freeman
------------------------------
Kenneth W. Freeman
Chairman of the Board and
Chief Executive Officer
By /s/ Robert A. Hagemann
------------------------------
Robert A. Hagemann
Vice President and
Chief Financial Officer
26
STATEMENT OF DIFFERENCES
------------------------
The section symbol shall be expressed as............................... 'SS'