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EXHIBIT 99.7
SMITHKLINE BEECHAM CLINICAL LABORATORIES, INC. AND CERTAIN RELATED
AFFILIATES
COMBINED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
ASSETS
June 30, December 31,
1999 1998
----------------------- ----------------------
Current assets:
Cash $ - $ -
Accounts receivable (net of allowances of
$121,507 and $101,396 respectively) 353,960 329,102
Inventories 18,436 17,934
Prepaid expenses and other current assets 12,253 9,975
----------------------- ----------------------
Total current assets 384,649 357,011
Goodwill and other intangibles, net 493,467 503,879
Property, plant and equipment, net 208,730 215,519
Other assets 14,504 35,862
----------------------- ----------------------
Total assets $ 1,101,350 $ 1,112,271
======================= ======================
LIABILITIES AND PARENT'S EQUITY
Current liabilities:
Accounts payable $ 52,890 $ 39,152
Current portion of long-term debt 2,161 2,160
Accrued compensation and benefits 27,405 37,657
Estimated out-of-network laboratory claims 51,136 -
Other current liabilities 72,569 45,644
----------------------- ----------------------
Total current liabilities 206,161 124,613
Long-term debt 29,770 32,902
Deferred income 700 -
Commitments and contingent liabilities
Parent's equity 864,719 954,756
----------------------- ----------------------
Total liabilities and Parent's equity $ 1,101,350 $1,112,271
======================= ======================
The accompanying notes are an integral part of the combined financial statements
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SMITHKLINE BEECHAM CLINICAL LABORATORIES, INC. AND CERTAIN RELATED
AFFILIATES
COMBINED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
Three Months Ended Six Months Ended
------------------------ -------------------------
June 30, June 25, June 30, June 25,
1999 1998 1999 1998
-------- -------- -------- --------
Net revenues $474,689 $384,194 $888,021 $730,707
Costs and expenses:
Cost of services 349,122 266,410 644,415 501,761
Provision for bad debts 59,501 28,330 95,107 59,888
Selling, general and administrative 80,847 68,626 146,881 133,679
Interest expense, net 11,364 11,759 22,673 23,017
Amortization of goodwill and intangibles 7,529 7,573 14,971 14,736
Other expense (income), net 1,712 (9,436) (7,491) (20,816)
-------- -------- -------- --------
Total costs and expenses 510,075 373,262 916,556 712,265
-------- -------- -------- -------
(Loss) income before taxes (35,386) 10,932 (28,535) 18,442
Income tax expense (12,054) 6,473 (7,214) 11,577
-------- -------- -------- --------
Net (loss) income $(23,332) $ 4,459 $(21,321) $ 6,865
======== ======== ======== ========
The accompanying notes are an integral part of the combined financial statements
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SMITHKLINE BEECHAM CLINICAL LABORATORIES, INC. AND CERTAIN RELATED
AFFILIATES
COMBINED STATEMENTS OF CHANGES IN PARENT'S EQUITY
(DOLLARS IN THOUSANDS)
(UNAUDITED)
June 30, June 25,
1999 1998
----------------------- -----------------------
Balance, beginning of year $ 954,756 $ 977,949
Net (loss) income (21,321) 6,865
Net transfers to parent (68,716) (14,866)
----------------------- -----------------------
Balance, end of period $ 864,719 $ 969,948
======================= =======================
The accompanying notes are an integral part of the combined financial statements
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SMITHKLINE BEECHAM CLINICAL LABORATORIES, INC. AND CERTAIN RELATED
AFFILIATES
COMBINED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
Six Months Ended
--------------------------------------------------
June 30, June 25,
CASH FLOWS FROM OPERATING ACTIVITIES: 1999 1998
---------------------- -----------------------
Net (loss) income $ (21,321) $ 6,865
Adjustments to reconcile net (loss) income to net
Cash provided by operating activities:
Depreciation and amortization 31,523 32,034
Gain on sale of assets (9,296) (13,909)
Provisions for bad debts 95,107 59,888
Equity in undistributed earnings of affiliates (495) ( 1,123)
Changes in assets and liabilities:
Increase in accounts receivable (119,965) (61,705)
Increase in inventories (502) (581)
(Increase) decrease in prepaid expenses and other current assets (2,278) 879
(Increase) decrease in other assets 43 (1,427)
Increase in estimated out-of-network laboratory claims 51,136 -
Increase (decrease) in accounts payable, accrued compensation
and benefits and other current liabilities 30,211 (1,070)
---------------------- -----------------------
Net cash provided by operating activities 54,163 19,851
---------------------- -----------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (17,170) (13,012)
Proceeds from sale of assets 2,044 164
---------------------- -----------------------
Net cash used in investing activities (15,126) (12,848)
---------------------- -----------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net transfers to Parent (35,906) (14,866)
Repayment of long-term debt (3,131) (1,056)
---------------------- -----------------------
Net cash used in financing activities (39,037) (15,922)
---------------------- -----------------------
Increase (decrease) in cash - (8,919)
Cash, beginning of year - 8,919
---------------------- -----------------------
Cash, end of period $ - $ -
====================== =======================
Supplemental cash flow information:
Cash paid for:
Interest $ 1,096 $ 1,204
Non cash investing and financing activities:
Stock received in exchange for assets $ 11,000 $ 13,310
Deferred income from sale of assets $ 900 $ -
Investment in stock transferred to Parent $ 32,810 $ -
The accompanying notes are an integral part of the combined financial statements
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SMITHKLINE BEECHAM CLINICAL LABORATORIES, INC. AND CERTAIN RELATED
AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
SmithKline Beecham Clinical Laboratories, Inc. is a subsidiary of SmithKline
Beecham Corporation ("SmithKline Beecham Corp"), itself an indirect subsidiary
of SmithKline Beecham plc ("SmithKline Beecham plc" or the "Parent"), a public
limited company incorporated in 1989 under the laws of England and Wales. The
other entities combined in these financial statements are also indirectly owned
subsidiaries of SmithKline Beecham plc.
The combined financial statements of SmithKline Beecham Clinical Laboratories,
Inc., and certain related affiliates ("the Company"), include the accounts of
the following:
- - SBCL Inc. (US)
- - SmithKline Beecham Clinical Laboratories Inc. (US)
- - The clinical laboratory operations of Fournex SA (Belgium)
- - The clinical laboratory operations of SmithKline Beecham Laboratoires
Pharmaceutiques SA (France)
- - The clinical laboratory operations of SmithKline Beecham Capital BV
(Netherlands)
- - The clinical laboratory operations of SmithKline Beecham plc (UK)
The combined financial statements reflect the assets and liabilities, results of
operations and cash flows of the Company as if the Company had existed and
operated as a separate business.
In the opinion of management, the accompanying interim combined financial
statements contain all adjustments necessary, after the restatement discussed
below, to present fairly the financial position of the Company as of June 30,
1999 and the results of operations and cash flows for the six months ended June
30, 1999 and June 25, 1998. All adjustments, except for an accrual for costs to
provide free counseling and blood tests to certain patients (see Note 3), are
normal and recurring in nature. The interim combined financial statements are
unaudited and are subject to year-end adjustment. The results of operations for
the interim period are not necessarily indicative of the results expected for
the full year. These interim combined financial statements should be read in
conjunction with the Company's audited combined financial statements as of
December 31, 1998, and for the year then ended.
The Company's previously issued financial statements for the six months ended
June 30, 1999 have been restated to properly reflect the provisions for bad
debts, determination of net revenues and an accrual for a loss contract. The
impact of these adjustments on the Company's financial results as originally
reported is summarized below:
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SMITHKLINE BEECHAM CLINICAL LABORATORIES, INC. AND CERTAIN RELATED
AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
For the Three Months Ended For the Six Months Ended
June 30, 1999 June 30, 1999
------------------------------------------------ -----------------------------------------------
As Previously As Previously
Reported As Restated Reported As Restated
------------------------ ----------------------- ------------------------ ----------------------
Net revenues $ 474,689 $ 474,689 $ 888,021 $ 888,021
Total costs and expenses 476,875 510,075 883,356 916,556
Income (loss) before taxes (2,186) (35,386) 4,665 (28,535)
Income tax expense 1,226 (12,054) 6,066 (7,214)
Net income (loss) (3,412) (23,332) (1,401) (21,321)
PRINCIPLES OF COMBINATION
All significant intercompany accounts and transactions within the Company have
been eliminated as part of the combination. Investments in companies which are
20-50 percent owned by the Company are accounted for using the equity method of
accounting. All other investments are accounted for using the cost method.
FISCAL PERIOD
The Company operates on a calendar year basis for annual reporting purposes. For
interim reporting purposes, the Company normally operates on a 13 week fiscal
period that ends on the last Thursday of the calendar quarter. Due to a delay in
the transaction with Quest Diagnostics Incorporated ("Quest") (see Note 5), the
Company completed its second quarter of 1999 on June 30, 1999. As a result,
there were 68 trading days in the second quarter of 1999 compared to 64 trading
days in the second quarter of 1998.
ESTIMATED OUT-OF-NETWORK LABORATORY CLAIMS
The Company is a party to two full risk capitated agreements with managed care
organizations (MCOs) to provide laboratory services to certain MCO members.
These services are provided by the Company and by independent laboratories under
terms of the agreements with the MCOs. Services under these arrangements are
reimbursed by the MCOs at contractually established rates. Expenses incurred
under these contracts are included in cost of services in the Company's combined
statement of operations. The estimated liability for out-of-network laboratory
claims outstanding is based upon an estimate of incurred but not reported
claims. Methods used to determine the estimates are continually revised and any
resulting adjustments are included in current operating results. The Company
does not purchase reinsurance, as it retains the underwriting risk for all
coverages under the contract.
(2) OTHER EXPENSE (INCOME), NET
Other expense (income), net, is comprised primarily of gain on the sale of
assets of $9,296 for the six months ended June 30, 1999, and gain on the sale of
assets of $13,909 and income from a customer contract related settlement of
$7,700 for the six months ended June 25, 1998.
(3) CONTINGENT LIABILITIES
The Company is involved in various legal and administrative proceedings
considered normal to its business, including suits claiming damages arising from
the Company's services. The Company is also a party to legal proceedings with
regard to environmental matters.
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SMITHKLINE BEECHAM CLINICAL LABORATORIES, INC. AND CERTAIN RELATED
AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
In 1996, the Company and the U.S. government and certain states reached a
settlement with respect to the government's civil and administrative claims
arising from an investigation by the Office of the Inspector General of the U.S.
Department of Health and Human Services into the Company's billing and marketing
practices. In connection therewith, certain affiliates of the Company paid the
government $325 million which had been reserved in prior years.
The Company is also responding to claims and lawsuits from non-governmental
parties, including private insurers, self-funded employer plans and patients,
concerning similar practices as they may relate to amounts paid by those
parties. The lawsuits include ten purported class actions filed in various
jurisdictions in the United States and one non-class action complaint by a
number of insurance companies that seek damages allegedly arising from payments
they made for clinical laboratory testing services. The ten purported class
actions have been consolidated into one complaint which has been consolidated
with the insurers' suit, for pretrial proceedings, in the U.S. District Court
for the District of Connecticut. On July 2, 1999, the District Court Judge
presiding over the consolidated litigation granted, with certain exceptions, the
Company's motions to dismiss (with prejudice) the insurance companies' second
amended complaint, thereby dismissing all of the RICO claims pending against the
Company as well as several of the other claims asserted in the litigation.
Similar claims by several other individual third party payers have been settled.
SmithKline Beecham plc has agreed to indemnify the Company for the after-tax
expense of any similar such settlements entered into after December 31, 1998.
On March 22, 1999 the Company learned that an employee at a patient service
center in Palo Alto, California had at times reused certain needles when drawing
blood from patients. The phlebotomist was immediately suspended and thereafter
dismissed. The Company is cooperating with local, state and federal health
agencies to address public health issues arising from the employee's breach of
standard medical practices and has offered free testing to approximately 15,300
patients whose blood may have been drawn by this phlebotomist to determine
whether those patients have been exposed to hepatitis B, hepatitis C or HIV. A
number of civil actions, including some purporting to be class actions, have
been filed against the Company in federal and state courts in California on
behalf of individuals who may have been affected by the phlebotomist's reuse of
needles or other alleged improper practices. An initial provision for the
estimated cost of the free counseling and follow-up blood tests for the affected
patients has been included in cost of services in the Company's combined
statement of operations for the six months ended June 30, 1999, but at this
stage the total costs associated with this matter are not yet determinable. The
stock and asset purchase agreement was amended to provide that SmithKline
Beecham plc will indemnify Quest and the Company for the out-of-pocket costs of
the counseling and testing, for liabilities arising out of the civil actions and
for other losses arising out of the conduct of this employee, other than
consequential damages.
Although the outcome of claims, legal proceedings and other matters in which the
Company is involved cannot be predicted with any certainty, the Company does not
expect that its ultimate liability for such matters, after taking into account
provisions, tax benefits and insurance, to have a material adverse effect on its
financial condition, results of operations or cash flows.
(4) COMMITMENTS
The Company has financed two facilities with capital leases. In 2000, the
capital leases on these facilities will expire, at which point the Company has
three options: extend the leases for three years, at which point the Company is
obligated to purchase the facilities, purchase the facilities or find a third
party to purchase the facilities. If the last option is chosen, the Company is
liable for any difference between the residual value and the fair market value
if the residual value exceeds the fair value. The future minimum lease payments
due under these leases is $27,928 as of June 30, 1999 (see Note 5).
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SMITHKLINE BEECHAM CLINICAL LABORATORIES, INC. AND CERTAIN RELATED
AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
SmithKline Beecham Clinical Laboratories, Inc. is a guarantor of debt related to
the aforementioned capital leases. At December 31, 1998 total guaranteed debt
outstanding approximated the Company's payables to the lessor.
(5) SALE OF THE COMPANY
On February 9, 1999, SmithKline Beecham plc entered into an agreement to sell
the Company to Quest Diagnostics in exchange for approximately $1 billion of
cash and 12.6 million shares of Quest Diagnostics common stock, which will
approximate 29.5% of Quest's Diagnostics' outstanding shares at closing. As part
of the purchase agreement, various compensation plans will be altered. Also, as
a result of the transaction with Quest Diagnostics, the future capital lease
commitments may be accelerated due to change in control provisions of the lease
agreements.
On August 16, 1999, Quest Diagnostics completed the acquisition of the Company
from SmithKline Beecham plc for approximately $1.025 billion in cash and through
the issuance of 12,564,336 shares of common stock of Quest Diagnostics. The
agreement to sell the Company includes a provision for a purchase price
adjustment. On October 11, 2000, SmithKline Beecham plc and Quest Diagnostics
announced that they agreed to a reduction in the purchase price of $98.6
million.
(6) SUBSEQUENT EVENTS
In July 1999, the Company extended, for three years, the lease of one of its
facilities financed with a capital lease (see Note 4).
Also in July 1999, the Company obtained waivers of the change in control
provisions of the lease agreements for the two facilities financed with capital
leases (see Note 4). The provisions would have permitted the lessor to
accelerate the future capital lease commitments as a result of the transaction
with Quest (see Note 5).
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