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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
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FORM 8-K
CURRENT REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of Earliest Event Reported): October 11, 2000
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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On August 16, 1999, Quest Diagnostics Incorporated (the "Company" or
"Quest Diagnostics") completed the acquisition of the clinical laboratory
business of SmithKline Beecham plc ("SmithKline Beecham") for approximately $1.3
billion. The acquisition of SmithKline Beecham Clinical Laboratories, Inc. and
certain related affiliates ("SBCL") was accounted for under the purchase method
of accounting.
The SBCL acquisition agreements included a provision for a reduction in
the purchase price paid by Quest Diagnostics in the event that the combined
balance sheet of SBCL indicated that the net assets acquired, as of the
acquisition date, were below a prescribed level. Adjustments to the August 16,
1999 combined balance sheet of SBCL, which were subject to resolution as set
forth in the SBCL acquisition agreements and were the subject of on-going
discussions between the parties, had already been reflected by the Company in
the previously reported pro forma combined financial information to the extent
management believed that they were applicable. On October 11, 2000, the purchase
price adjustment was finalized with the result that SmithKline Beecham owed
Quest Diagnostics $98.6 million. This amount was offset by $3.6 million
separately owed by Quest Diagnostics to SmithKline Beecham, resulting in a net
payment to the Company by SmithKline Beecham of $95.0 million. This payment from
SmithKline Beecham will be recorded in the Company's historical financial
statements in the fourth quarter of 2000 as a reduction in the purchase price of
the SBCL acquisition.
In addition to the purchase price reduction described above, the
purchase price allocation relating to the SBCL acquisition was completed in
conjunction with the preparation of the Company's quarterly report on Form 10-Q
for the fiscal quarter ended September 30, 2000. None of the adjustments,
resulting from the purchase price reduction or the completion of the purchase
price allocation, will have any impact on the Company's previously reported
historical financial statements.
In conjunction with finalizing the SBCL purchase price adjustment,
SmithKline Beecham restated the following financial statements of SBCL as of and
for the periods indicated:
- The combined financial statements of SBCL as of December 31,
1998 and 1997 and for the three years ended December 31, 1998,
1997 and 1996.
- The unaudited interim combined balance sheet of SBCL as of June
30, 1999 and the related unaudited interim combined statements of
operations, cash flows and changes in parent's equity for the
three and six months ended June 30, 1999 and June 25, 1998.
The restated historical financial statements of SBCL are included in
Item 7. a. below.
In addition, Quest Diagnostics has filed this Form 8-K to amend the pro
forma combined financial information previously reported by the Company (1) to
reflect the restated historical financial statements of SBCL prepared in
conjunction with finalizing the purchase price adjustment provided for in the
SBCL acquisition agreements, (2) to reflect the reduction in the purchase price
of the SBCL acquisition, (3) to reflect the completion of the purchase price
allocation, and (4) to revise other adjustments that had been reflected in the
previously reported pro forma combined financial information. The amendment has
no impact on any of the previously reported historical financial statements of
Quest Diagnostics, either before or after the acquisition. The restated
unaudited pro forma combined balance sheet of the Company as of June 30, 1999
and the unaudited pro forma combined statements of operations of the Company for
the three and six months ended June 30, 1999 and the year ended December 31,
1998 are included in Item 7. b. below.
In addition, on October 11, 2000, the Company and SmithKline Beecham
agreed to terminate the Category Three Laboratory Data Access Agreement and the
related Participation Agreement that were entered into on August 16, 1999. The
Category One Laboratory Data Access Agreement remains in effect.
ITEM 5. PRO FORMA COMPARISONS
This Form 8-K also revises and updates the discussion of the
supplemental pro forma combined financial information of Quest Diagnostics that
was included in the sections of the following documents previously filed with
the Securities and Exchange Commission:
- The Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 1999 - "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Pro Forma Combined
Financial Information";
- The Company's Quarterly Report on Form 10-Q for the quarter ended
March 31, 2000 - "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Pro Forma
Comparisons"; and
- The Company's Quarterly Report on Form 10-Q for the quarter ended
June 30, 2000 - "Management's Discussion and Analysis of Financial
Condition and Results of Operations - Pro Forma Comparisons".
This Form 8-K has no impact on any of the previously reported
historical financial statements of Quest Diagnostics, either before or after the
acquisition.
The supplemental pro forma combined financial information included in
the above-referenced documents is not required disclosure under Regulation S-X.
The Company has updated the pro forma combined financial information because
management believes it provides useful information in analyzing the financial
implications of the SBCL acquisition.
RECONCILIATION OF PRO FORMA NET INCOME
Within the Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 1999 - "Management's Discussion and Analysis of Financial
Condition and Results of Operations - Pro Forma Combined
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Financial Information", the Company included a table containing selected pro
forma combined financial information that the Company presented for illustrative
purposes only to assist in analyzing the financial implications of the SBCL
acquisition. The above referenced table presented pro forma combined statement
of operations data, pro forma basic and diluted earnings per common share data
and pro forma Adjusted EBITDA for each of the quarters ended March 31, 1998
through December 31, 1999.
The following table reconciles, for each of the quarters ended March
31, 1998 through December 31, 1999, pro forma net income, as previously
reported, to pro forma net income, as restated, (1) to reflect the restated
historical financial statements of SBCL prepared in conjunction with finalizing
the purchase price adjustment provided for in the SBCL acquisition agreements,
as described above, (2) to reflect the reduction in the purchase price of the
SBCL acquisition, (3) to reflect the completion of the purchase price
allocation, and (4) to revise other adjustments that had been reflected in the
previously reported pro forma net income.
Reconciliation of
Pro Forma Combined Financial Information
(IN THOUSANDS)
(UNAUDITED)
QUARTER ENDED
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MARCH 31, JUNE 30, SEPT. 30, DEC. 31, MARCH 31, JUNE 30, SEPT. 30, DEC. 31,
1998 1998 1998 1998 1999 1999 1999 1999
---------- ---------- ---------- ---------- ---------- --------- --------- ----------
Pro forma net income (loss)
as previously reported $13,908 $ 7,911 $10,781 $ 9,943 $ 8,228 $(8,870) $(12,280) $(14,536)
-------- -------- -------- -------- -------- --------- --------- ---------
Reconciling adjustments
increase (decrease):
Net revenues (43) (43) 2,967 (9,033) -- -- -- --
Cost of services -- -- -- -- (140) (140) 281 --
Selling, general and
administrative expenses (550) (550) (550) (5,171) (983) 16,434 6,918 --
Interest expense, net -- -- -- -- 167 167 (334) --
Amortization of intangible
assets 423 423 423 423 423 423 (256) --
Other, net (4,274) (9,656) (701) (295) (9,652) -- -- --
-------- -------- -------- -------- -------- --------- --------- ---------
Reconciling adjustments
before taxes 4,358 9,740 3,795 (3,990) 10,185 (16,884) (6,609) --
Income tax expense (benefit) 1,912 4,065 1,687 (1,427) 4,242 (6,584) (2,746) --
-------- -------- -------- -------- -------- --------- --------- ---------
Reconciling adjustments,
net of tax 2,446 5,675 2,108 (2,563) 5,943 (10,300) (3,863) --
-------- -------- -------- -------- -------- --------- --------- ---------
Pro forma net income
(loss), restated $16,354 $13,586 $12,889 $ 7,380 $14,171 $(19,170) $(16,143) $(14,536)
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The quarterly reconciling adjustments presented consist primarily of
adjustments to previously reported pro forma bad debt expense (included in
selling, general and administrative expenses), gains on the sale and license of
certain technology and assets (included in other, net), net revenues and
amortization of intangible assets, net of applicable taxes.
The adjustments to selling, general and administrative expenses are
primarily related to bad debt charges to properly reflect the recoverability of
SBCL receivables during various periods prior to the closing of the SBCL
acquisition. The adjustments to net revenues are primarily related to revisions
for sales price adjustments. The adjustments to other, net represent gains
recognized by SBCL on the sale and license of certain technology and its
physician office-based teleprinter assets and network. As part of the
consideration for these transactions, SBCL received an ownership interest in the
buyer. This ownership interest was transferred by SBCL to SmithKline Beecham
prior to the closing of the acquisition, pursuant to the SBCL acquisition
agreements. Since SBCL did not retain the ownership interest and as a result of
management's belief that the gains were of a non-recurring nature, Quest
Diagnostics included a pro forma adjustment in its previously filed pro forma
combined financial statements to remove these gains from pro forma net income
(loss). Adjustments of this nature are excluded from the scope of the typical
pro forma adjustments acceptable under Article 11 of Regulation S-X which
provides guidance regarding the preparation and presentation of pro forma
financial statements. As such, in conjunction with revising its pro forma
combined financial information, the Company reversed the previously proposed pro
forma adjustments such that the above referenced gains are included in pro forma
net income, as restated. The adjustments to amortization of intangible assets
(which is not deductible for tax purposes) reflect the impact of (1) the SBCL
purchase price reduction and (2) revisions to the preliminary allocation of the
SBCL purchase price, primarily related to deferred tax assets acquired.
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None of the adjustments, resulting from the purchase price reduction or the
completion of the purchase price allocation, will have any impact on the
Company's previously reported historical financial statements. Additionally, the
adjustments outlined above, not previously considered in determining pro forma
Adjusted EBITDA, are discrete items which have been excluded in determining
Adjusted EBITDA. Therefore, the pro forma Adjusted EBITDA amounts, previously
reported in the supplemental pro forma combined financial information, remain
unchanged.
As a result of the matters discussed above, Quest Diagnostics hereby revises and
updates the sections of the following documents:
a. The Company's Annual Report on Form 10-K for the fiscal year ended December
31 1999 - "Management's Discussion and Analysis of Financial Condition and
Results of Operations - Pro Forma Combined Financial Information" which is
included as Exhibit 99.3.
b. The Company's Quarterly Report on Form 10-Q for the quarter ended March 31,
2000 - "Management's Discussion and Analysis of Financial Condition and
Results of Operations - Pro Forma Comparisons" which is included as Exhibit
99.4.
c. The Company's Quarterly Report on Form 10-Q for the quarter ended June 30,
2000 - "Management's Discussion and Analysis of Financial Condition and
Results of Operations - Pro Forma Comparisons" which is included as Exhibit
99.5.
ITEM 7. FINANCIAL STATEMENTS AND SCHEDULES
Quest Diagnostics hereby amends Item 7 of its Current Report on Form 8-K
(Date of Report: August 16, 1999) in its entirety to read as follows:
a. Financial statements of businesses acquired.
The combined financial statements of SBCL as of December 31, 1998 and
1997 and for the three years ended December 31, 1998, 1997 and 1996 are
included as Exhibit 99.6.
The unaudited interim combined balance sheet of SBCL as of June 30, 1999
and the related unaudited interim combined statements of operations, cash
flows and changes in parent's equity for the three and six months ended
June 30, 1999 and June 25, 1998 are included as Exhibit 99.7.
b. Pro forma financial information
The unaudited pro forma combined balance sheet of the Company as of June
30, 1999 and the unaudited pro forma combined statements of operations of
the Company for the three and six months ended June 30, 1999, and the
year ended December 31, 1998 are included as Exhibit 99.8.
c. Exhibits.
EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION
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99.3 The Company's Annual Report on Form 10-K for the fiscal
year ended December 31 1999 - "Management's Discussion
and Analysis of Financial Condition and Results of
Operations - Pro Forma Combined Financial Information"
99.4 The Company's Quarterly Report on Form 10-Q for the
quarter ended March 31, 2000 - "Management's Discussion
and Analysis of Financial Condition and Results of
Operations - Pro Forma Comparisons"
99.5 The Company's Quarterly Report on Form 10-Q for the
quarter ended June 30, 2000 - "Management's Discussion
and Analysis of Financial Condition and Results of
Operations - Pro Forma Comparisons"
99.6 The combined financial statements of SBCL and
certain related affiliates as of December 31, 1998 and
1997 and for the three years ended December 31, 1998,
1997 and 1996.
99.7 The unaudited interim combined balance sheet
of SBCL and certain related affiliates as of June 30,
1999 and the related unaudited interim combined
statements of operations, cash flows and changes in
parent's equity for the three and six months ended June
30, 1999 and June 25, 1998.
99.8 The unaudited pro forma combined balance sheet of the
Company as of June 30, 1999 and the unaudited pro forma
combined statements of operations of the Company for the
three and six months ended June 30, 1999, and the year
ended December 31, 1998.
99.9 Consent of Independent Accountants
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 hereunto duly authorized.
October 30, 2000
QUEST DIAGNOSTICS INCORPORATED
By: /s/ ROBERT A. HAGEMANN
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Name: Robert A. Hagemann
Vice President and Chief Financial Officer