1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
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, 2001
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)
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 ______
---------
As of July 31, 2001, there were outstanding 94,739,689 shares of Common Stock,
$.01 par value.
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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, 2001 and 2000 2
Consolidated Balance Sheets as of
June 30, 2001 and December 31, 2000 3
Consolidated Statements of Cash Flows for the
Six Months Ended June 30, 2001 and 2000 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 18
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
See Item 2. "Management's Discussion and Analysis of Financial Condition
and Results of Operations"
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QUEST DIAGNOSTICS INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2001 AND 2000
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
2001 2000 2001 2000
----------- ----------- ----------- -----------
NET REVENUES ...................... $ 931,589 $ 877,113 $ 1,814,142 $ 1,734,592
----------- ----------- ----------- -----------
COSTS AND EXPENSES:
Cost of services ................ 549,391 520,437 1,078,456 1,049,474
Selling, general and
administrative ................ 256,474 252,846 509,276 502,681
Interest expense, net ........... 20,458 30,204 43,158 59,967
Amortization of intangible assets 12,139 11,954 23,239 23,894
Provision for special charges ... 5,997 2,100 5,997 2,100
Minority share of income ........ 2,851 3,240 3,967 5,376
Other, net ...................... (1,432) (1,881) (1,134) (2,309)
----------- ----------- ----------- -----------
Total .......................... 845,878 818,900 1,662,959 1,641,183
----------- ----------- ----------- -----------
INCOME BEFORE TAXES AND
EXTRAORDINARY LOSS................. 85,711 58,213 151,183 93,409
INCOME TAX EXPENSE ................ 38,607 28,045 68,331 45,432
----------- ----------- ----------- -----------
INCOME BEFORE EXTRAORDINARY LOSS .. 47,104 30,168 82,852 47,977
EXTRAORDINARY LOSS, NET OF TAXES .. (21,609) -- (21,609) --
----------- ----------- ----------- -----------
NET INCOME ........................ $ 25,495 $ 30,168 $ 61,243 $ 47,977
=========== =========== =========== ===========
BASIC NET INCOME PER COMMON SHARE:
Income before extraordinary loss .. $ 0.51 $ 0.34 $ 0.90 $ 0.54
Extraordinary loss, net of taxes .. (0.23) -- (0.24) --
----------- ----------- ----------- -----------
Net income ........................ $ 0.28 $ 0.34 $ 0.66 $ 0.54
=========== =========== =========== ===========
DILUTED NET INCOME PER COMMON
SHARE:
Income before extraordinary loss .. $ 0.48 $ 0.32 $ 0.85 $ 0.52
Extraordinary loss, net of taxes .. (0.22) -- (0.22) --
----------- ----------- ----------- -----------
Net income ........................ $ 0.26 $ 0.32 $ 0.63 $ 0.52
=========== =========== =========== ===========
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING - BASIC ............. 92,566 89,154 92,228 88,708
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING - DILUTED ........... 97,304 93,963 96,962 92,597
The accompanying notes are an integral part of these statements.
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QUEST DIAGNOSTICS INCORPORATED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JUNE 30, 2001 AND DECEMBER 31, 2000
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
JUNE 30, DECEMBER 31,
2001 2000
----------- -----------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents ............................. $ 174,165 $ 171,477
Accounts receivable, net of allowance of
$151,025 and $120,358 at June 30, 2001 and
December 31, 2000, respectively....................... 520,873 485,573
Inventories ........................................... 44,456 44,274
Deferred taxes on income .............................. 167,579 188,483
Prepaid expenses and other current assets ............. 49,587 90,882
----------- -----------
Total current assets ................................. 956,660 980,689
PROPERTY, PLANT AND EQUIPMENT, NET ...................... 486,839 449,856
INTANGIBLE ASSETS, NET .................................. 1,293,469 1,261,603
DEFERRED TAXES ON INCOME ................................ 49,563 42,622
OTHER ASSETS ............................................ 111,894 129,766
----------- -----------
TOTAL ASSETS ............................................ $ 2,898,425 $ 2,864,536
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued expenses ................. $ 602,312 $ 689,582
Short-term borrowings and current portion of
long-term debt ...................................... 287,747 265,408
----------- -----------
Total current liabilities ............................ 890,059 954,990
LONG-TERM DEBT .......................................... 726,673 760,705
OTHER LIABILITIES ....................................... 120,820 117,046
COMMITMENTS AND CONTINGENCIES
PREFERRED STOCK ......................................... 1,000 1,000
COMMON STOCKHOLDERS' EQUITY:
Common stock, par value $0.01 per share; 300,000 shares
authorized; 94,487 and 93,083 shares issued
and outstanding at June 30, 2001 and December 31,
2000, respectively .................................. 945 465
Additional paid-in capital ............................ 1,649,103 1,591,976
Accumulated deficit ................................... (463,927) (525,111)
Unearned compensation ................................. (22,649) (31,077)
Accumulated other comprehensive loss .................. (3,599) (5,458)
----------- -----------
Total common stockholders' equity .................... 1,159,873 1,030,795
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY .............. $ 2,898,425 $ 2,864,536
=========== ===========
The accompanying notes are an integral part of these statements.
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QUEST DIAGNOSTICS INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 2001 AND 2000
(IN THOUSANDS)
(UNAUDITED)
2001 2000
--------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income ................................... $ 61,243 $ 47,977
Extraordinary loss, net of taxes ............. 21,609 --
Adjustments to reconcile net income
to net cash provided by operating activities:
Depreciation and amortization .............. 70,903 67,364
Provision for doubtful accounts ............ 110,854 124,215
Provision for special charges .............. 5,997 2,100
Deferred income tax provision .............. 1,247 1,706
Stock compensation expense ................. 11,814 9,010
Minority share of income ................... 3,967 5,376
Other, net ................................. 2,962 (727)
Changes in operating assets and liabilities:
Accounts receivable ....................... (146,154) (158,954)
Accounts payable and accrued expenses ..... (20,253) 53,220
Integration, settlement and special charges (33,439) (26,629)
Other assets and liabilities, net ......... 60,885 15,319
--------- ---------
NET CASH PROVIDED BY OPERATING ACTIVITIES .... 151,635 139,977
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures ......................... (78,432) (40,702)
Business acquisitions ........................ (55,746) (925)
Proceeds from disposition of assets .......... 21,492 747
Increase in investments ...................... (9,901) (7,086)
Decrease in note receivable .................. 2,000 --
--------- ---------
NET CASH USED IN INVESTING ACTIVITIES ........ (120,587) (47,966)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayments of long-term debt ................. (734,025) (22,446)
Proceeds from borrowings ..................... 722,333 --
Costs paid in connection with debt refinancing (23,684) (362)
Exercise of stock options .................... 10,132 7,801
Distributions to minority partners ........... (2,969) (4,832)
Preferred stock dividends paid ............... (147) (29)
--------- ---------
NET CASH USED IN FINANCING ACTIVITIES ........ (28,360) (19,868)
--------- ---------
NET CHANGE IN CASH AND CASH EQUIVALENTS ...... 2,688 72,143
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR . 171,477 27,284
--------- ---------
CASH AND CASH EQUIVALENTS, END OF PERIOD ..... $ 174,165 $ 99,427
========= =========
CASH PAID DURING THE PERIOD FOR:
Interest ..................................... $ 50,704 $ 53,908
Income taxes ................................. 20,442 17,240
The accompanying notes are an integral part of these statements.
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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 has the leading market share in
clinical laboratory testing and esoteric testing, including molecular
diagnostics, as well as anatomic pathology services and testing for drugs of
abuse. Through the Company's national network of laboratories and patient
service centers, and its leading esoteric testing laboratory and development
facility known as Nichols Institute, 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. Quest Diagnostics offers clinical testing
and services to support clinical trials of new pharmaceuticals worldwide. Quest
Informatics collects and analyzes laboratory, pharmaceutical and other data to
develop information products to help pharmaceutical companies with their
marketing and disease management efforts, as well as to help healthcare
customers better manage the health of their patients.
Quest Diagnostics currently processes over 100 million requisitions each
year 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
and are subject to year-end adjustments. 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 Form 10-K for the year ended December 31, 2000.
Earnings Per Share
On May 8, 2001, the stockholders approved an amendment to the Company's
restated certificate of incorporation to increase the number of common shares
authorized from 100 million shares to 300 million shares. On May 31, 2001, the
Company effected a two-for-one stock split through the issuance of a stock
dividend of one new share of common stock for each share of common stock held by
stockholders of record on May 16, 2001. References to the number of common
shares and per common share amounts in the accompanying consolidated balance
sheets and consolidated statements of operations, including earnings per common
share calculations and related disclosures, have been restated to give
retroactive effect to the stock split for all periods presented.
Basic net income per common share is calculated by dividing net income,
less preferred stock dividends (approximately $30 thousand per quarter), by the
weighted average number of common shares outstanding. Diluted net income per
common share is calculated by dividing net income, less preferred stock
dividends, by the weighted average number of common shares outstanding after
giving effect to all potentially dilutive common shares outstanding during the
period. Potentially dilutive common shares include outstanding stock options and
restricted common shares granted under the Company's Employee Equity
Participation Program. These dilutive securities increased the weighted average
number of common shares outstanding by 4.7 million shares and 4.8 million
shares, respectively, for the three months ended June 30, 2001 and 2000. The
dilutive effect of these securities for the six months ended June 30, 2001 and
2000 increased the weighted average number of common shares outstanding by 4.7
million shares and 3.9 million shares, respectively.
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QUEST DIAGNOSTICS INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(IN THOUSANDS, UNLESS OTHERWISE INDICATED)
(UNAUDITED)
Financial Instruments
The Company's policy is to use financial instruments only to manage
exposure to market risks. The Company has established a control environment that
includes policies and procedures for risk assessment and the approval, reporting
and monitoring of derivative financial instrument activities. These policies
prohibit holding or issuing derivative financial instruments for trading
purposes.
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for
Derivative Instruments and Hedging Activities" ("SFAS 133"). In June 1999, the
FASB issued SFAS 137, "Accounting for Derivative Instruments and Hedging
Activities - Deferral of the Effective Date of FASB Statement No. 133", under
which SFAS 133 is effective for all fiscal quarters of all fiscal years
beginning after June 15, 2000 (2001 for the Company). In June 2000, the FASB
issued SFAS 138, "Accounting for Certain Derivative Instruments and Certain
Hedging Activities", which addresses a limited number of issues causing
implementation difficulties for entities applying SFAS 133. SFAS 133, as
amended, requires that all derivative instruments be recorded on the balance
sheet at their fair value. Changes in the fair value of derivatives are recorded
each period in current earnings or other comprehensive income, depending on
whether a derivative is designated as part of a hedge transaction and, if it is,
the type of hedge transaction. Effective January 1, 2001, the Company adopted
SFAS 133, as amended. The cumulative effect of the change in accounting for
derivative financial instruments upon adoption of SFAS 133, as amended, reduced
comprehensive income by approximately $1 million during the six months ended
June 30, 2001.
Prior to the Company's debt refinancing in June 2001 (see Note 2), the
Company's credit agreement required the Company to maintain interest rate swap
agreements to mitigate the risk of changes in interest rates associated with a
portion of its variable interest rate indebtedness. These interest rate swap
agreements were considered a hedge against changes in the amount of future cash
flows associated with the interest payments of the Company's variable rate debt
obligations. Accordingly, the interest rate swap agreements were recorded at
their estimated fair value on the consolidated balance sheet and the related
gains or losses on these contracts were deferred in shareholders' equity as a
component of comprehensive income. In conjunction with the debt refinancing, the
interest rate swap agreements were terminated and the losses included in
shareholders' equity as a component of comprehensive income were reflected in
the consolidated statement of operations for the three and six months ended June
30, 2001 (See Note 5).
New Accounting Standards
In July 2001, the FASB issued SFAS No. 141, "Business Combinations" ("SFAS
141") and SFAS No. 142, "Goodwill and Other Intangible Assets" ("SFAS 142")
requiring business combinations initiated after June 30, 2001 to be accounted
for using the purchase method of accounting, and broadening the criteria for
recording intangible assets separate from goodwill. SFAS 142 requires the use of
a nonamortization approach to account for purchased goodwill and certain
intangibles. Under a nonamortization approach, goodwill and certain intangibles
will not be amortized into results of operations, but instead will be reviewed
for impairment and an impairment charge will be recorded in the periods in which
the recorded carrying value of goodwill and certain intangibles is more than its
estimated fair value. The provisions of SFAS 141 will be adopted for any
business combination consummated after June 30, 2001. The provisions of SFAS
142, which apply to goodwill and intangible assets, will be adopted by the
Company on January 1, 2002. The adoption of these accounting standards is
expected to reduce the amount of amortization of intangible assets recorded in
the Company's consolidated financial statements, commencing January 1, 2002.
Management is currently evaluating whether the new criteria for recording
intangible assets separate from goodwill will require the Company to reclassify
any of its intangible assets.
2. DEBT REFINANCING
On June 27, 2001, the Company refinanced a majority of its long-term debt
on a senior unsecured basis to reduce overall interest costs and obtain less
restrictive covenants. Specifically, the Company completed a $550 million senior
notes offering (the "Senior Notes") and entered into a new $500 million senior
unsecured credit facility (the "Credit Agreement") which included a $175 million
term loan. The Company used the net proceeds from the senior notes offering and
new term loan, together with its cash on hand, to repay all of the $584 million
which was outstanding under its then existing senior secured credit agreement,
including the costs to settle existing interest rate swap agreements, and to
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QUEST DIAGNOSTICS INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(IN THOUSANDS, UNLESS OTHERWISE INDICATED)
(UNAUDITED)
consummate a cash tender offer and consent solicitation for its 10 3/4% senior
subordinated notes due 2006 (the "Subordinated Notes").
In conjunction with the cash tender offer for the Company's Subordinated
Notes, approximately $147 million in aggregate principal amount, or 98% of the
$150 million of outstanding Subordinated Notes was tendered. In addition, the
Company received the requisite consents from the holders of Subordinated Notes
to amend the indenture governing the Subordinated Notes to eliminate
substantially all of its restrictive provisions. The Company has made payments
of approximately $160 million to holders with respect to the cash tender offer
and consent solicitation, including tender premium and related solicitation and
banking fees, and accrued interest.
The Company incurred approximately $30 million of costs associated with
the debt refinancing. Of that amount, $11 million represented costs associated
with placing the new debt, which will be amortized over the term of the Senior
Notes and Credit Agreement and $6 million represented the cost to terminate the
interest rate swap agreements on the debt which was refinanced. The remaining
$13 million represented primarily the tender premium incurred in conjunction
with the Company's cash tender offer of the Subordinated Notes which was
included in the extraordinary loss recorded in the second quarter of 2001 (see
Note 6).
The Senior Notes were issued in two tranches: (a) $275,000,000 aggregate
principal amount of 6 3/4% senior notes due 2006 ("Senior Notes due 2006"),
issued at a discount of approximately $1.6 million and (b) $275,000,000
aggregate principal amount of 7 1/2% senior notes due 2011 ("Senior Notes due
2011"), issued at a discount of approximately $1.1 million. After considering
the discounts, the effective interest rate on the Senior Notes due 2006 and
Senior Notes due 2011 is 6.9% and 7.6%, respectively. The Senior Notes require
semiannual interest payments commencing January 12, 2002. The Senior Notes are
unsecured obligations of the Company and rank equally with the Company's other
unsecured senior obligations. The Senior Notes are guaranteed by each of the
Company's wholly owned subsidiaries that operate clinical laboratories in the
United States (the "Subsidiary Guarantors").
The Company's new senior unsecured credit facility consists of a five-year
$175 million amortizing term loan and a five-year $325 million revolving credit
facility. Interest is based on certain published rates plus an applicable margin
that will vary based on changes in the Company's credit ratings. At the option
of the Company, it may elect to enter into LIBOR based interest rate contracts
for periods up to 180 days. Interest on any outstanding amounts not covered
under the LIBOR based interest rate contracts is based on an alternate base rate
which is calculated by reference to the prime rate or federal funds rate (as
defined in the Credit Agreement). Additionally, the Company has the ability to
borrow up to $200 million under the five year $325 million revolving credit
facility at rates determined by a competitive bidding process among the lenders.
As of June 30, 2001, the Company's borrowing rate on LIBOR-based loans was LIBOR
plus 1.3125%. The obligations of the Company under the Credit Agreement are
guaranteed by the Subsidiary Guarantors (i.e., the same subsidiaries that
guarantee the Senior Notes). The Credit Agreement contains various covenants,
including the maintenance of certain financial ratios, which could impact the
Company's ability to, among other things, incur additional indebtedness,
repurchase shares of its outstanding common stock, make additional investments
and consummate acquisitions.
3. INTEGRATION OF SBCL AND QUEST DIAGNOSTICS BUSINESSES
During the fourth quarter of 1999, Quest Diagnostics finalized its plan to
integrate SmithKline Beecham Clinical Laboratories, Inc. ("SBCL") into Quest
Diagnostics' laboratory network. The plan focused principally on laboratory
consolidations in geographic markets served by more than one of the Company's
laboratories, and the redirection of testing volume within the Company's
national network to provide more local testing and improve customer service.
While the Company did not exit any geographic markets as a result of the plan,
laboratories that were closed or reduced in size were located in the following
metropolitan areas: Boston, Baltimore, Cleveland, Dallas, Detroit, Miami, New
York and Philadelphia. The Company also transferred esoteric testing performed
at SBCL's National Esoteric Testing Center in Van Nuys, California to Nichols
Institute. Employee groups impacted as a result of these actions included those
involved in the collection and testing of specimens, as well as administrative
and other support functions. During the fourth quarter of 1999, the Company
recorded the estimated costs associated with executing the integration plan. The
majority of these integration costs related to employee severance, contractual
obligations associated with leased facilities and equipment, and the write-off
of fixed assets which management believed would have no future economic benefit
upon combining the operations. Integration costs related to planned activities
affecting SBCL's operations and employees were recorded as a
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QUEST DIAGNOSTICS INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(IN THOUSANDS, UNLESS OTHERWISE INDICATED)
(UNAUDITED)
cost of the acquisition. Integration costs associated with the planned
integration of SBCL affecting Quest Diagnostics' operations and employees were
recorded as a charge to earnings in the fourth quarter of 1999.
The following table summarizes the Company's accruals for integration
costs affecting the acquired business of SBCL (in millions):
Costs of
Employee Exiting
Severance Leased
Costs Facilities Other Total
----- ---------- ----- -----
Balance, December 31, 2000 ....... $19.9 $ 1.9 $ 1.8 $23.6
Amounts utilized in 2001 ......... (9.4) (0.8) (1.2) (11.4)
----- ----- ----- -----
Balance, June 30, 2001 ........... $10.5 $ 1.1 $ 0.6 $12.2
===== ===== ===== =====
The following table summarizes the Company's accruals for restructuring
costs associated with the planned integration of SBCL affecting Quest
Diagnostics' operations and employees (in millions):
Costs of
Employee Exiting
Severance Leased
Costs Facilities Other Total
----- ---------- ----- -----
Balance, December 31, 2000 ......... $ 8.8 $ 6.6 $ 0.7 $16.1
Amounts utilized in 2001 ........... (5.3) (1.4) (0.5) (7.2)
----- ----- ----- -----
Balance, June 30, 2001 ............. $ 3.5 $ 5.2 $ 0.2 $ 8.9
===== ===== ===== =====
The actions associated with the SBCL integration plan, provided for in
accruals for integration costs as of December 31, 2000, including those related
to severed employees, were completed as of June 30, 2001. While a significant
portion of the remaining accruals associated with the SBCL integration plan are
expected to be paid in 2001, there are certain severance and facility related
exit costs, principally lease obligations, that have payment terms extending
beyond 2001.
4. BUSINESS ACQUISITIONS
On February 1, 2001, the Company acquired the assets of Clinical
Laboratories of Colorado, LLC ("CLC") for $47.0 million, which included $4.0
million associated with non-competition agreements. At the closing of the
acquisition, the Company used existing cash to fund the purchase price and
related transaction costs of the acquisition. The acquisition of CLC was
accounted for under the purchase method of accounting. The historical financial
statements of Quest Diagnostics include the results of operations of CLC
subsequent to the closing of the acquisition. Goodwill in the amount of
approximately $42 million, representing acquisition costs in excess of the fair
value of net assets acquired, is being amortized on the straight-line basis over
forty years (see Note 1 - New Accounting Standards). The amounts paid under the
non-compete agreements are being amortized on the straight-line basis over five
years.
During the second quarter of 2001, the Company paid $8.5 million to
acquire the minority ownership interest of a consolidated joint venture from its
joint venture partner.
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QUEST DIAGNOSTICS INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(IN THOUSANDS, UNLESS OTHERWISE INDICATED)
(UNAUDITED)
5. PROVISION FOR SPECIAL CHARGES
During the second quarter of 2001, the Company recorded a special charge
of $6.0 million in connection with the refinancing of its debt and settlement of
the Company's interest rate swap agreements. Prior to the Company's debt
refinancing in June 2001 (see Note 2), the Company's credit agreement required
the Company to maintain interest rate swap agreements to mitigate the risk of
changes in interest rates associated with a portion of its variable interest
rate indebtedness. These interest rate swap agreements were considered a hedge
against changes in the amount of future cash flows associated with the interest
payments of the Company's variable rate debt obligations. Accordingly, the
interest rate swap agreements were recorded at their estimated fair value in the
Company's consolidated balance sheet and the related losses on these contracts
were deferred in shareholders' equity as a component of comprehensive income. In
conjunction with the debt refinancing, the interest rate swap agreements were
terminated and the losses included in shareholders' equity as a component of
comprehensive income were reflected as a special charge in the consolidated
statement of operations for the three and six months ended June 30, 2001.
During the second quarter of 2000, the Company recorded a net special
charge of $2.1 million. Of the special charge, $13.4 million represented the
costs to cancel certain contracts that management believed were not economically
viable as a result of the SBCL acquisition. These costs were principally
associated with the cancellation of a co-marketing agreement for clinical trials
testing services. These charges were in large part offset by a reduction in
reserves attributable to a favorable resolution of outstanding claims for
reimbursements associated with billings of certain tests.
6. EXTRAORDINARY LOSS
In conjunction with the Company's debt refinancing in the second quarter
of 2001, the Company recorded an extraordinary loss of $36.0 million, ($21.6
million, net of taxes). The loss represented the write-off of deferred financing
costs of $23.2 million, associated with the Company's debt which was refinanced,
and $12.8 million of payments related primarily to the tender premium incurred
in connection with the Company's cash tender offer of the Subordinated Notes
(see Note 2).
7. COMMITMENTS AND CONTINGENCIES
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. Several of
the cases involve the operations of SBCL prior to the closing of the SBCL
acquisition.
Corning Incorporated ("Corning") has agreed to indemnify the Company
against all monetary settlements for any governmental claims relating to the
billing practices of the Company and its predecessors based on investigations
that were pending on December 31, 1996. Corning also agreed to indemnify the
Company in respect of private claims relating to indemnified or previously
settled government claims that alleged overbillings by Quest Diagnostics or any
of its existing subsidiaries for services provided before January 1, 1997.
Corning will indemnify Quest Diagnostics in respect of private claims for 50% of
the aggregate of all judgment or settlement payments made by December 31, 2001
that exceed $42 million. The 50% share will be limited to a total amount of $25
million and will be reduced to take into account any deductions or tax benefits
realized by Quest Diagnostics. In accordance with the indemnity described above,
the Company received $8.1 million from Corning during the first quarter of 2001
in connection with the Company's civil settlement of claims in the fourth
quarter of 2000 with respect to Nichols Institute's former regional
laboratories.
Similar to Quest Diagnostics, SBCL has entered into settlement agreements
with various governmental agencies and private payers primarily relating to its
prior billing and marketing practices. Effective in 1997, SBCL and the United
States government and various states reached a settlement with respect to the
government's civil and administrative claims. SBCL is also responding to claims
from private payers relating to billing and marketing issues similar to those
that were the subject of the settlement with the government. The claims include
ten purported class actions filed in various jurisdictions in the United States
and two non-class action complaints by a number of insurance companies. Nine of
the purported class actions have been consolidated into one complaint, which has
been consolidated with one of the insurers'
9
11
QUEST DIAGNOSTICS INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(IN THOUSANDS, UNLESS OTHERWISE INDICATED)
(UNAUDITED)
suits for pre-trial proceedings. During April 2001, a settlement was reached in
two of the complaints against SBCL for approximately $30 million. The settlement
was paid directly by SmithKline Beecham plc ("SmithKline Beecham") in April
2001, under the terms of the indemnity described below.
SmithKline Beecham has agreed to indemnify Quest Diagnostics, on an
after-tax basis, against monetary payments for governmental claims or
investigations relating to the billing practices of SBCL that had been settled
before or were pending as of the closing date of the SBCL acquisition.
SmithKline Beecham has also agreed to indemnify Quest Diagnostics, on an
after-tax basis, against monetary payments to private payers, relating to or
arising out of the governmental claims. The indemnification with respect to
governmental claims is for 100% of those claims. SmithKline Beecham will
indemnify Quest Diagnostics, in respect of private claims for: 100% of those
claims, up to an aggregate amount of $80 million; 50% of those claims to the
extent the aggregate amount exceeds $80 million but is less than $130 million;
and 100% of such claims to the extent the aggregate amount exceeds $130 million.
The indemnification also covers 80% of out-of-pocket costs and expenses relating
to investigations of the claims indemnified against by SmithKline Beecham.
SmithKline Beecham has also agreed to indemnify the Company with respect to
pending actions relating to a former SBCL employee that at times reused certain
needles when drawing blood from patients. In addition, SmithKline Beecham has
agreed to indemnify the Company against all monetary payments relating to
professional liability claims of SBCL for services provided prior to the closing
of the SBCL acquisition.
Amounts due from SmithKline Beecham at June 30, 2001, related to
indemnified billing, professional liability and other claims discussed above,
totaled approximately $42 million and represented management's best estimate of
the amounts which are probable of being received from SmithKline Beecham to
satisfy the indemnified claims on an after-tax basis. The estimated reserves and
related amounts due from SmithKline Beecham are subject to change as additional
information regarding the outstanding claims is gathered and evaluated.
At June 30, 2001 recorded reserves, relating primarily to billing claims
including those indemnified by Corning and SmithKline Beecham, approximated $55
million, including $2 million in other long-term liabilities. 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.
10
12
QUEST DIAGNOSTICS INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(IN THOUSANDS, UNLESS OTHERWISE INDICATED)
(UNAUDITED)
8. COMMON STOCKHOLDERS' EQUITY
Changes in common stockholders' equity for the six months ended June 30,
2001 were as follows:
Accumulated
Additional Other Compre-
Common Paid-In Accumulated Unearned Comprehensive hensive
Stock Capital Deficit Compensation (Loss) Income
----- ------- ------- ------------ ------ --------------
BALANCE,
DECEMBER 31, 2000 $ 465 $1,591,976 $ (525,111) $ (31,077) $(5,458)
Net income 61,243 $ 61,243
Other comprehensive income
1,859 1,859
--------
Comprehensive income $ 63,102
========
Two-for-one stock split (47,149
common shares) 472 (472)
Preferred dividends declared (59)
Issuance of common stock under
benefit plans (193 common
shares) 2 24,764 (4,053)
Exercise of options (606 common
shares) 6 10,126
Shares to cover employee
payroll tax withholdings on
exercised options (2 common
shares) (189)
Tax benefits associated with
stock-based compensation plans 22,898
Amortization of unearned
compensation 12,481
------- ---------- ----------- --------- -------
BALANCE,
JUNE 30, 2001 $ 945 $1,649,103 $ (463,927) $ (22,649) $(3,599)
======= ========== =========== ========= =======
During the six months ended June 30, 2001, two thousand common shares were
surrendered to cover employee payroll tax withholdings related to the exercise
of stock options. For reporting purposes, these shares were accounted for as
treasury purchases which were immediately retired.
For the six months ended June 30, 2001, other comprehensive income
included the cumulative effect of the change in accounting for derivative
financial instruments upon adoption of SFAS 133, as amended, which reduced
comprehensive income by approximately $1 million. In addition, in conjunction
with the Company's debt refinancing, the interest rate swap agreements were
terminated and the losses included in shareholders' equity as a component of
comprehensive income were reflected as a special charge in the consolidated
statement of operations for the three and six months ended June 30, 2001 (See
Note 5).
11
13
QUEST DIAGNOSTICS INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(IN THOUSANDS, UNLESS OTHERWISE INDICATED)
(UNAUDITED)
Changes in common stockholders' equity for the six months ended June 30,
2000 were as follows:
Accumulated
Additional Other Compre-
Common Paid-In Accumulated Unearned Comprehensive hensive
Stock Capital Deficit Compensation (Loss) Income
----- ------- ------- ------------ ------ ------
BALANCE,
DECEMBER 31, 1999 $ 444 $ 1,502,551 $ (627,045) $ (11,438) $ (2,450)
Net income 47,977 $ 47,977
Other comprehensive loss (480) (480)
--------
Comprehensive income $ 47,497
========
Preferred dividends declared (58)
Issuance of common stock under
benefit plans (752 common
shares) 7 38,417 (27,106)
Exercise of options (657 common
shares) 6 7,795
Shares to cover employee
payroll tax withholdings on
exercised stock options (142
common shares) (1) (8,098)
Tax benefits associated with
stock-based compensation plans
10,786
Amortization of unearned
compensation 9,010
------- ----------- ----------- --------- -------
BALANCE,
JUNE 30, 2000 $ 456 $ 1,551,451 $ (579,126) $ (29,534) $(2,930)
======= =========== =========== ========= =======
During the six months ended June 30, 2000, one hundred forty-two thousand
common shares were surrendered to cover employee payroll tax withholdings
related to the exercise of stock options. For reporting purposes, these shares
were accounted for as treasury purchases which were immediately retired.
9. PENDING ACQUISITION
On April 25, 2001, the Company signed a definitive agreement to acquire
the outstanding voting shares of MedPlus, Inc. ("MedPlus"), a leading developer
and integrator of clinical connectivity and data management solutions for
healthcare organizations and clinicians. The agreement calls for the Company to
pay $2 per share in cash for the remaining 82% of voting shares of MedPlus it
does not currently own. The closing of this transaction, which also is dependent
on approval by MedPlus shareholders, is expected to occur after the MedPlus
annual meeting. At the closing of the acquisition, the Company expects to use
existing cash to fund the purchase price (estimated at approximately $18
million) and related transaction costs of the acquisition. The acquisition of
MedPlus will be accounted for under the purchase method of accounting. During
the second quarter of 2001, the Company adopted the equity method of accounting
for its investment in MedPlus and recorded a $1.5 million charge in the
consolidated statement of operations for the three and six months ended June 30,
2001 representing its share of losses in MedPlus.
12
14
QUEST DIAGNOSTICS INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(IN THOUSANDS, UNLESS OTHERWISE INDICATED)
(UNAUDITED)
10. SUMMARIZED FINANCIAL INFORMATION
The Senior Notes 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 the third
quarter of 2000, the Company formed a new wholly owned non-guarantor subsidiary,
Quest Diagnostics Receivables Incorporated ("QDRI"). The Company and the
Subsidiary Guarantors transferred 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 utilized the
transferred receivables to collateralize the receivables financing. 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.
13
15
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, 2001
Subsidiary Non-Guarantor
Parent Guarantors Subsidiaries Eliminations Consolidated
------ ------------ ------------- ------------ ------------
Net revenues .................................. $ 301,626 $ 1,437,653 $ 217,717 $ (142,854) $ 1,814,142
Costs and expenses:
Cost of services ............................. 219,952 808,689 49,815 -- 1,078,456
Selling, general and administrative .......... 78,758 312,868 125,014 (7,364) 509,276
Interest, net ................................ 33,461 131,882 13,305 (135,490) 43,158
Amortization of intangibles .................. 2,324 20,616 299 -- 23,239
Provision for special charges ................ 5,997 -- -- -- 5,997
Royalty (income) expense ..................... (122,054) 122,054 -- -- --
Other, net ................................... 685 (877) 3,025 -- 2,833
----------- ----------- ----------- ----------- -----------
Total ....................................... 219,123 1,395,232 191,458 (142,854) 1,662,959
----------- ----------- ----------- ----------- -----------
Income before taxes and extraordinary loss..... 82,503 42,421 26,259 -- 151,183
Income tax expense ............................ 36,922 20,517 10,892 -- 68,331
----------- ----------- ----------- ----------- -----------
Income before equity earnings and
extraordinary loss .......................... 45,581 21,904 15,367 -- 82,852
Equity earnings from subsidiaries ............. 19,542 -- -- (19,542) --
----------- ----------- ----------- ----------- -----------
Income before extraordinary loss .............. 65,123 21,904 15,367 (19,542) 82,852
Extraordinary loss, net of taxes .............. (3,880) (15,567) (2,162) -- (21,609)
----------- ----------- ----------- ----------- -----------
Net income .................................... $ 61,243 $ 6,337 $ 13,205 $ (19,542) $ 61,243
=========== =========== =========== =========== ===========
Condensed Consolidating Statement of Operations
Six Months Ended June 30, 2000
Subsidiary Non-Guarantor
Parent Guarantors Subsidiaries Eliminations Consolidated
------ ------------ ------------ ------------ ------------
Net revenues ................................... $ 348,226 $ 1,335,322 $ 51,044 $ -- $ 1,734,592
Costs and expenses:
Cost of services .............................. 216,558 791,893 41,023 -- 1,049,474
Selling, general and administrative ........... 152,413 336,925 13,343 -- 502,681
Interest, net ................................. 7,144 52,633 190 -- 59,967
Amortization of intangibles ................... 2,856 20,808 230 -- 23,894
Provision for special charges ................. 2,100 -- -- -- 2,100
Royalty (income) expense ...................... (38,405) 38,405 -- -- --
Other, net .................................... 120 (160) 3,107 -- 3,067
----------- ----------- ----------- ----------- -----------
Total ........................................ 342,786 1,240,504 57,893 -- 1,641,183
----------- ----------- ----------- ----------- -----------
Income (loss) before taxes ..................... 5,440 94,818 (6,849) -- 93,409
Income tax expense (benefit) ................... 4,187 43,936 (2,691) -- 45,432
Equity earnings from subsidiaries .............. 46,724 -- -- (46,724) --
----------- ----------- ----------- ----------- -----------
Net income (loss) .............................. $ 47,977 $ 50,882 $ (4,158) $ (46,724) $ 47,977
=========== =========== =========== =========== ===========
14
16
QUEST DIAGNOSTICS INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(IN THOUSANDS, UNLESS OTHERWISE INDICATED)
(UNAUDITED)
Condensed Consolidating Balance Sheet
June 30, 2001
Subsidiary Non-Guarantor
Parent Guarantors Subsidiaries Eliminations Consolidated
------ ------------ ---------- ------------ ------------
Assets
Current assets:
Cash and cash equivalents ................... $ -- $ 164,816 $ 9,349 $ -- $ 174,165
Accounts receivable, net .................... 10,478 39,569 470,826 -- 520,873
Other current assets ........................ 92,878 75,367 93,377 -- 261,622
----------- ----------- ----------- ----------- -----------
Total current assets ...................... 103,356 279,752 573,552 -- 956,660
Property, plant and equipment, net .......... 150,390 323,159 13,290 -- 486,839
Intangible assets, net ...................... 78,123 1,206,281 9,065 -- 1,293,469
Intercompany receivable (payable) ........... 158,895 111,013 (269,908) -- --
Investment in subsidiaries .................. 1,048,780 -- -- (1,048,780) --
Other assets ................................ 74,617 57,417 29,423 -- 161,457
----------- ----------- ----------- ----------- -----------
Total assets .............................. $ 1,614,161 $ 1,977,622 $ 355,422 $(1,048,780) $ 2,898,425
=========== =========== =========== =========== ===========
Liabilities and Stockholders' Equity
- ------------------------------------
Current liabilities:
Accounts payable and accrued expenses ........ $ 319,177 $ 260,228 $ 22,907 $ -- $ 602,312
Short-term borrowings and current portion of
long-term debt ............................. 4,782 26,500 256,465 -- 287,747
----------- ----------- ----------- ----------- -----------
Total current liabilities .................. 323,959 286,728 279,372 -- 890,059
Long-term debt ............................... 86,439 632,128 8,106 -- 726,673
Other liabilities ............................ 42,890 65,341 12,589 -- 120,820
Preferred stock .............................. 1,000 -- -- -- 1,000
Common stockholders' equity .................. 1,159,873 993,425 55,355 (1,048,780) 1,159,873
----------- ----------- ----------- ----------- -----------
Total liabilities and stockholders'
equity .................................... $ 1,614,161 $ 1,977,622 $ 355,422 $(1,048,780) $ 2,898,425
========== ========== ========= =========== ==========
</Table>
15
17
QUEST DIAGNOSTICS INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(IN THOUSANDS, UNLESS OTHERWISE INDICATED)
(UNAUDITED)
Condensed Consolidating Balance Sheet
December 31, 2000
Subsidiary Non-Guarantor
Parent Guarantors Subsidiaries Eliminations Consolidated
------ ------------ ------------- ------------ ------------
Assets
Current assets:
Cash and cash equivalents ....................... $ -- $ 163,863 $ 7,614 $ -- $ 171,477
Accounts receivable, net ........................ 6,159 29,548 449,866 -- 485,573
Other current assets ............................ 191,693 129,881 9,030 (6,965) 323,639
----------- ----------- ----------- ----------- -----------
Total current assets .......................... 197,852 323,292 466,510 (6,965) 980,689
Property, plant and equipment, net .............. 121,159 316,630 12,067 -- 449,856
Intangible assets, net .......................... 72,514 1,180,341 8,748 -- 1,261,603
Intercompany receivable (payable) ............... (78,538) 253,994 (175,456) -- --
Investment in subsidiaries ...................... 1,031,135 -- -- (1,031,135) --
Other assets .................................... 66,623 71,692 34,073 -- 172,388
----------- ----------- ----------- ----------- -----------
Total assets .................................. $ 1,410,745 $ 2,145,949 $ 345,942 $(1,038,100) $ 2,864,536
=========== =========== =========== =========== ===========
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable and accrued expenses ........ $ 247,558 $ 418,147 $ 30,842 $ (6,965) $ 689,582
Short-term borrowings and current
portion of long-term debt ................... 837 8,215 256,356 -- 265,408
----------- ----------- ----------- ----------- -----------
Total current liabilities .................. 248,395 426,362 287,198 (6,965) 954,990
Long-term debt ............................... 95,711 661,340 3,654 -- 760,705
Other liabilities ............................ 34,844 71,159 11,043 -- 117,046
Preferred stock .............................. 1,000 -- -- -- 1,000
Common stockholders' equity .................. 1,030,795 987,088 44,047 (1,031,135) 1,030,795
----------- ----------- ----------- ----------- -----------
Total liabilities and stockholders' equity.. $ 1,410,745 $ 2,145,949 $ 345,942 $(1,038,100) $ 2,864,536
========== =========== =========== =========== ==========
16
18
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, 2001
Subsidiary Non-Guarantor
Parent Guarantors Subsidiaries Eliminations Consolidated
------ ---------- ------------- ------------ ------------
Cash flows from operating activities:
Net income .................................... $ 61,243 $ 6,337 $ 13,205 $ (19,542) $ 61,243
Extraordinary loss, net of taxes .............. 3,880 15,567 2,162 -- 21,609
Adjustments to reconcile net income
to net cash provided by operating
activities:
Depreciation and amortization ................ 19,443 49,106 2,354 -- 70,903
Provision for doubtful accounts .............. 715 10,047 100,092 -- 110,854
Provision for special charges ................ 5,997 -- -- -- 5,997
Other, net ................................... 4,582 30,349 (34,483) 19,542 19,990
Changes in operating assets and liabilities... (78,225) (4,194) (56,542) -- (138,961)
--------- --------- --------- --------- ---------
Net cash provided by operating activities...... 17,635 107,212 26,788 -- 151,635
Net cash used in investing activities ......... (23,888) (91,941) (194) (4,564) (120,587)
Net cash provided by (used in)
financing activities ......................... 6,253 (14,318) (24,859) 4,564 (28,360)
--------- --------- --------- --------- ---------
Net change in cash and cash equivalents........ -- 953 1,735 -- 2,688
Cash and cash equivalents, beginning of year... -- 163,863 7,614 -- 171,477
--------- --------- --------- --------- ---------
Cash and cash equivalents, end of period....... $ -- $ 164,816 $ 9,349 $ -- $ 174,165
========= ======== ========= ========= =========
Condensed Consolidating Statement of Cash Flows
Six Months Ended June 30, 2000
Subsidiary Non-Guarantor
Parent Guarantors Subsidiaries Eliminations Consolidated
------ ---------- ------------- ------------ ------------
Cash flows from operating activities:
Net income (loss) ............................. $ 47,977 $ 50,882 $ (4,158) $ (46,724) $ 47,977
Adjustments to reconcile net income
(loss) to net cash provided by
operating activities:
Depreciation and amortization ................ 20,502 45,340 1,522 -- 67,364
Provision for doubtful accounts .............. 17,347 105,616 1,252 -- 124,215
Provision for special charges ................ 2,100 -- -- -- 2,100
Other, net ................................... (28,900) (5,979) 3,520 46,724 15,365
Changes in operating assets and liabilities... (38,363) (83,693) 5,012 -- (117,044)
--------- --------- --------- --------- ---------
Net cash provided by operating activities...... 20,663 112,166 7,148 -- 139,977
Net cash used in investing activities ......... (24,241) (21,665) (1,094) (966) (47,966)
Net cash provided by (used in)
financing activities ......................... 3,578 (18,169) (6,243) 966 (19,868)
--------- --------- --------- --------- ---------
Net change in cash and cash equivalents........ -- 72,332 (189) -- 72,143
Cash and cash equivalents, beginning of year... -- 18,864 8,420 -- 27,284
--------- --------- --------- --------- ---------
Cash and cash equivalents, end of period....... $ -- $ 91,196 $ 8,231 $ -- $ 99,427
========= ======== ========= ========= =========
17
19
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
INTEGRATION OF SBCL AND QUEST DIAGNOSTICS BUSINESSES
We expect to continue to realize significant benefits from combining our
existing laboratory network with that of SmithKline Beecham Clinical
Laboratories, Inc. ("SBCL"). We have completed the process of reducing redundant
facilities and infrastructure, including laboratory consolidations in geographic
markets served by more than one of our laboratories, and redirecting testing
volume within our national network to provide more local testing and improve
customer service. We have not exited any geographic markets as a result of the
plan. Employee groups impacted as a result of these actions included those
involved in the collection and testing of specimens, as well as administrative
and other support functions. During the fourth quarter of 1999, we recorded the
estimated costs associated with executing the integration plan. The majority of
these integration costs related to employee severance, contractual obligations
associated with leased facilities and equipment, and the write-off of fixed
assets which management believed would have no future economic benefit upon
combining operations. Integration costs related to planned activities affecting
SBCL's operations and employees were recorded as a cost of the acquisition.
Integration costs associated with the planned integration of SBCL affecting
Quest Diagnostics' operations and employees were recorded as a charge to
earnings in the fourth quarter of 1999. A full discussion and analysis of the
reserves related to the SBCL integration is contained in Note 3 to the interim
consolidated financial statements.
The actions associated with the SBCL integration plan, provided for in
accruals for integration costs as of December 31, 2000, including those related
to severed employees, were completed as of June 30, 2001. Other activities, for
which no accruals had been recorded as of December 31, 2000, including the
standardization of information systems, will continue beyond 2001.
We continue to expect that the SBCL integration will result in
approximately $150 million of annual synergies to be achieved by the end of
2002. During 2000, we estimate that we realized approximately $50 million of
these synergies, and at the end of 2000 we had achieved an annual rate of
synergies approaching $100 million. We expect that during 2001 we will realize
additional synergies driven by cost reductions, and we anticipate that by the
end of 2001, we will achieve an annual rate of synergies of at least $120
million. For the three and six months ended June 30, 2001, we estimate that we
realized approximately $30 million and $55 million, respectively, of these
synergies, and at the end of the second quarter of 2001, we had achieved an
annual rate of synergies of approximately $120 million.
Management anticipates that additional charges may be recorded associated
with further consolidation activities. Management cannot estimate the amount or
the timing of these charges at this time, but expects to fund these charges with
cash from operations.
RESULTS OF OPERATIONS
THREE AND SIX MONTHS ENDED JUNE 30, 2001 COMPARED WITH THREE AND SIX MONTHS
ENDED JUNE 30, 2000
Income before an extraordinary loss for the three months ended June 30,
2001 increased to $47.1 million from $30.2 million for the three months ended
June 30, 2000. For the six months ended June 30, 2001, income before an
extraordinary loss increased to $82.9 million from $48.0 million for the prior
year period. In conjunction with our debt refinancing in the second quarter of
2001, results for the three and six months ended June 30, 2001 included an
extraordinary loss of $36.0 million ($21.6 million, net of tax). In addition,
results for the three and six months ended June 30, 2001 and 2000 included
special charges of $6.0 million ($3.6 million, net of tax) and $2.1 million
($1.3 million, net of tax), reflected on the face of the consolidated statements
of operations. Excluding the special charges and extraordinary loss, income for
the three months ended June 30, 2001 increased to $50.7 million, compared to
$31.4 million for the prior year period, an increase of 61%. Income for the six
months ended June 30, 2001 increased to $86.5 million, compared to $49.2
million, an increase of 76%, excluding the special charges and extraordinary
loss. These increases were primarily attributable to improvements in average
revenue per requisition, the realization of synergies from the SBCL integration
and a reduction in net interest expense, partially offset by increases in
employee compensation and supply costs, and investments in our Six Sigma quality
initiative, information technology strategy and strategic growth opportunities.
After considering the special charges and extraordinary loss, reported net
income for the three months ended June 30, 2001 was $25.5 million, compared to
$30.2 million for the prior year period. For the six months ended June 30, 2001,
reported net income increased to $61.2 million from $48.0 million for the prior
year period.
Results for the three and six months ended June 30, 2000 included the
effects of testing performed by third parties under our laboratory network
management arrangements. As laboratory network manager, we included in our
consolidated
18
20
revenues and expenses the cost of testing performed by third parties. This
treatment added $14.4 million and $46.8 million to both reported revenues and
cost of services for the three and six months ended June 30, 2000, respectively.
This treatment also serves to increase cost of services as a percentage of net
revenues and decrease selling, general and administrative expenses as a
percentage of net revenues. During the first quarter of 2000, we terminated a
laboratory network management arrangement with AetnaUSHealthcare, and entered
into a new non-exclusive contract under which we are no longer responsible for
the cost of testing performed by third parties. In addition, during the third
quarter of 2000, we amended our laboratory network management contract with
Oxford Health to remove the financial risk associated with testing performed by
third parties. As a result of these contract modifications, we are no longer
required to include in our consolidated revenues and expenses, the cost of
testing performed by third parties. This impacts the comparability of results
between the periods presented and serves to reduce the increase in reported net
revenues during the three and six months ended June 30, 2001 by $14.4 million
and $46.8 million, respectively.
Net Revenues
Excluding the effect of testing performed by third parties under our
laboratory network management arrangements in 2000, net revenues for the three
and six months ended June 30, 2001 grew by 8.0% and 7.5%, respectively, when
compared to the prior year period, primarily due to improvements in average
revenue per requisition of 7.9% and 8.0%, respectively. The improvement in
average revenue per requisition was primarily attributable to improved pricing
on managed care business, a shift in test mix to higher value testing and a
shift in payer mix to fee-for-service reimbursement. Business contributed during
2000 to our unconsolidated joint ventures in Phoenix, Arizona, Indianapolis,
Indiana and Dayton, Ohio reduced our reported requisition volume for the three
and six months ended June 30, 2001 by approximately 1.4% and 1.5%, respectively,
compared to the prior year period. After adjusting for business contributed to
unconsolidated joint ventures, clinical testing volume, measured by the number
of requisitions, for the three and six months ended June 30, 2001 increased
approximately 1.6% and 1.1%, respectively, over the prior year period.
Contributing to this increase was our acquisition of the assets of Clinical
Laboratories of Colorado, LLC ("CLC") in the first quarter of 2001, which
increased volume for both the three and six months ended June 30, 2001 by
approximately 1%, and an increase in volume from our principal customers,
physicians and hospitals, of approximately 2.9% and 2.1%, respectively.
Partially offsetting these increases was a decline in testing volumes associated
with our drugs of abuse testing business, driven by a general slowing of the
economy and a corresponding slowdown in hiring, which reduced total company
volume for the three and six months ended June 30, 2001 by about 2.3% and 2.0%,
respectively, compared to the prior year period. Overall, reported volumes for
the three months ended June 30, 2001 increased by approximately 0.2%, compared
to the prior year period. For the six months ended June 30, 2001, reported
volumes decreased by approximately 0.4%, compared to the prior year period.
Operating Costs and Expenses
Excluding the effect of testing performed by third parties under our
laboratory network management arrangements in 2000, total operating costs for
the three and six months ended June 30, 2001 increased approximately $47 million
and $82 million, respectively, from the earlier period. These increases were
primarily due to increases in employee compensation and supply costs, partially
offset by a reduction in bad debt expense. While our cost structure has been
favorably impacted by the synergies realized as a result of the SBCL
integration, we continue to make investments to enhance our infrastructure to
pursue our overall business strategy. These investments include those related
to:
- Our Six Sigma quality initiative which we believe will provide us with
a competitive advantage in the market place and ultimately serve to
reduce costs;
- Skills training for all employees, which together with our competitive
pay and benefits, helps to increase employee satisfaction and
performance, thereby enabling us to provide better services to our
customers;
- Our information technology strategy; and
- Our strategic growth opportunities such as direct-to-consumer testing.
The following discussion and analysis regarding cost of services, selling,
general and administrative expenses and bad debt expense exclude the effect of
testing performed by third parties under our laboratory network management
arrangements in 2000, which serve to increase cost of services as a percentage
of net revenues and reduce selling, general and administrative expenses as a
percentage of net revenues. Cost of services include the costs of obtaining,
transporting and testing specimens. While costs of services as a percentage of
net revenues for the three months ended June 30, 2001, increased to 59.0% from
58.7% a year ago, it decreased from 59.9% in the first quarter of 2001. The
increase was primarily
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attributable to increased employee compensation and supply costs, partially
offset by improvements in average revenue per requisition. Costs of services as
a percentage of net revenues was 59.4% for the six months ended June 30, 2001,
which is consistent with the prior year's level.
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, 2001 as
a percentage of net revenues to 27.5% from 29.3% in the prior year period. For
the six months ended June 30, 2001, selling, general and administrative expenses
decreased as a percentage of net revenues to 28.1% from 29.8% in the prior year
period. These decreases were primarily due to improvements in average revenue
per requisition and bad debt expense, partially offset by an increase in
employee compensation costs and investments to enhance our infrastructure to
pursue our overall business strategy. During the second quarter of 2001, bad
debt expense was 6.0% of net revenues, compared to 7.1% of net revenues a year
ago. For the six months ended June 30, 2001, bad debt expense was 6.1% of net
revenues, compared to 7.4% of net revenues in the prior year. The improvements
in bad debt expense were principally attributable to the continuing significant
progress that we have made to improve the overall collection experience of the
combined company through process improvements primarily related to the
collection of diagnosis, patient and insurance information necessary to
effectively bill for services performed. Based on prior experience as well as
the continued sharing of internal best practices in the billing functions, we
believe that substantial opportunities continue to exist to improve our overall
collection experience.
Interest Expense, Net
Net interest expense for the three and six months ended June 30, 2001
decreased from the prior year periods by $9.7 million and $16.8 million,
respectively. These reductions were primarily due to an overall reduction in
debt levels, the favorable impact of our receivables credit facility which has
served to lower the weighted average borrowing rate on our outstanding debt and
lower interest rates on our variable rate debt.
Amortization of Intangible Assets
Amortization of intangible assets for the three months ended June 30, 2001
increased from the prior year period by $0.2 million. This increase was
primarily attributable to the amortization of intangible assets related to our
acquisition of CLC and the amortization of goodwill associated with certain
investments accounted for under the equity method of accounting. These increases
were offset in large part by the impact of the adjustments recorded in the third
and fourth quarters of 2000 to reduce the amount of goodwill associated with the
SBCL acquisition by approximately $130 million. For the six months ended June
30, 2001, amortization of intangible assets decreased $0.7 million as a result
of the same factors.
In July 2001, the Financial Accounting Standards Board issued two new
accounting standards related to business combinations and goodwill and other
intangible assets. The adoption of these accounting standards is expected to
reduce our amortization of intangible assets, commencing January 1, 2002. See
"Impact of New Accounting Standards" below for further details.
Provision for Special Charges
During the second quarter of 2001, we recorded a special charge of $6.0
million in connection with the refinancing of our debt and settlement of our
interest rate swap agreements. Prior to our debt refinancing in June 2001, our
credit agreement required us to maintain interest rate swap agreements to
mitigate the risk of changes in interest rates associated with a portion of our
variable interest rate indebtedness. These interest rate swap agreements were
considered a hedge against changes in the amount of future cash flows associated
with the interest payments of our variable rate debt obligations. Accordingly,
the interest rate swap agreements were recorded at their estimated fair value in
our consolidated balance sheet and the related losses on these contracts were
deferred in shareholders' equity as a component of comprehensive income. In
conjunction with the debt refinancing, the interest rate swap agreements were
terminated and the losses reflected in shareholders' equity as a component of
comprehensive income were reclassified to earnings during the second quarter of
2001 and classified as a special charge in the consolidated statement of
operations for the three and six months ended June 30, 2001.
During the second quarter of 2000, we recorded a net special charge of $2.1
million. Of the special charge, $13.4 million represented the costs to cancel
certain contracts that we believed were not economically viable as a result of
the SBCL acquisition. These costs were principally associated with the
cancellation of a co-marketing agreement for clinical trials testing services.
We believe that the cancellation of this agreement will not have an adverse
effect on net revenues. These charges were in large part offset by a reduction
in reserves attributable to a favorable resolution of outstanding claims for
reimbursements associated with billings of certain tests.
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Minority Share of Income
Minority share of income for the six months ended June 30, 2001 decreased
from the prior year level, primarily due to start up losses associated with a
new joint venture in Oklahoma in which we hold a 51% interest.
Other, Net
Other, net for the three and six months ended June 30, 2001 increased by
$.4 million and $1.2 million, respectively, compared to the prior year level,
primarily due to the write-off of certain impaired assets of $7.0 million and
$9.2 million, respectively, partially offset by a $6.3 million gain on the sale
of an investment in the second quarter of 2001 and an increase in equity
earnings primarily from our unconsolidated joint ventures.
Income Taxes
Our effective tax rate is significantly impacted by goodwill amortization,
the majority of which is not deductible for tax purposes, and has the effect of
increasing the overall tax rate. The reduction in the effective tax rate for the
three and six months ended June 2001 was primarily due to pretax earnings
increasing at a faster rate than goodwill amortization and other non-deductible
items.
Extraordinary Loss
In conjunction with our debt refinancing in the second quarter of 2001, we
recorded an extraordinary loss of $36.0 million, ($21.6 million, net of taxes).
The loss represented the write-off of deferred financing costs of $23.2 million,
associated with our debt which was refinanced, and $12.8 million of payments
related primarily to the tender premium incurred in connection with our cash
tender offer of our 10 3/4% senior subordinated notes due 2006 (the
"Subordinated Notes"). Our debt refinancing is more fully described under "Debt
Refinancing" and in Note 2 to the interim consolidated financial statements.
Adjusted EBITDA
Adjusted EBITDA represents income before extraordinary loss, income taxes,
net interest expense, depreciation, amortization and special charges. Adjusted
EBITDA for the three and six months ended June 30, 2000 also excludes $3.1
million and $4.5 million, respectively, of costs associated with the SBCL
integration plan which were included in operating costs and expensed as
incurred. Adjusted EBITDA is presented and discussed because management believes
it is a useful adjunct to net income and other measurements under accounting
principles generally accepted in the United States since it is a meaningful
measure of a company's performance and ability to meet its future debt service
requirements, fund capital expenditures and meet working capital requirements.
Adjusted EBITDA is not a measure of financial performance under accounting
principles generally accepted in the United States and should not be considered
as an alternative to (i) net income (or any other measure of performance under
accounting principles generally accepted in the United States) as a measure of
performance or (ii) cash flows from operating, investing or financing activities
as an indicator of cash flows or as a measure of liquidity.
Adjusted EBITDA for the three months ended June 30, 2001 improved to $148.8
million, or 16.0% of net revenues, from $127.8 million, or 14.6% of net
revenues, in the prior year period. For the six months ended June 30, 2001,
Adjusted EBITDA improved to $271.2 million, or 15.0% of net revenues, from
$227.4 million, or 13.1% of net revenues, in the prior year period. The
improvements in Adjusted EBITDA were primarily due to improvements in the
average revenue per requisition and cost synergies resulting from the SBCL
integration, partially offset by increases in employee compensation and supply
costs and investments in our Six Sigma quality initiative, information
technology strategy and strategic growth opportunities.
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
includes 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 2000 Annual Report on
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Form 10-K for additional discussion of our financial instruments and hedging
activities. Prior to our debt refinancing in June 2001, our credit agreement
required us to maintain interest rate swap agreements to mitigate the risk of
changes in interest rates associated with a portion of our variable rate bank
debt. In conjunction with our debt refinancing, the interest rate swap
agreements were terminated. Our debt refinancing is more fully described under
"Debt Refinancing" and in Note 2 to the interim consolidated financial
statements.
At both June 30, 2001 and December 31, 2000, the fair value of our debt was
estimated at approximately $1.0 billion, 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, 2001 and December 31, 2000, the
estimated fair value exceeded the carrying value of the debt by approximately $2
million and $5 million, respectively. An assumed 10% increase in interest rates
(representing approximately 70 basis points) would potentially reduce the
estimated fair value of our debt by approximately $0.6 million at June 30, 2001.
At June 30, 2001 and December 31, 2000, we had approximately $438 million
and $848 million, respectively, of variable interest rate debt outstanding.
Based on our net exposure to interest rate changes, an assumed 10% increase in
interest rates (representing approximately 70 basis points) would result in a
$0.5 million reduction in our after-tax earnings and cash flows for the six
months ended June 30, 2001 based on debt levels as of June 30, 2001. The primary
interest rate exposures on the variable interest rate debt are with respect to
interest rates on United States dollars as quoted in the London interbank
market.
DEBT REFINANCING
On June 27, 2001, we refinanced a majority of our long-term debt on a
senior unsecured basis to reduce overall interest costs and obtain less
restrictive covenants. Specifically, we completed a $550 million senior notes
offering (the "Senior Notes") and entered into a new $500 million senior
unsecured credit facility (the "Credit Agreement") which included a $175 million
term loan. We used the net proceeds from the senior notes offering and new term
loan, together with cash on hand, to repay all of the $584 million which was
outstanding under our then existing senior secured credit agreement, including
the costs to settle existing interest rate swap agreements, and to consummate a
cash tender offer and consent solicitation for our Subordinated Notes. The
refinancing is expected to lower annual interest expense by approximately $23
million. Interest expense for the second half of 2001 is expected to be reduced
by approximately $11 million as a result of the refinancing. The Senior Notes
and Credit Agreement are further described in Note 2 to the interim consolidated
financial statements.
In conjunction with the cash tender offer for the Subordinated Notes,
approximately $147 million in aggregate principal amount, or 98% of the $150
million of outstanding Subordinated Notes was tendered. In addition, we received
the requisite consents from the holders of Subordinated Notes to amend the
indenture governing the Subordinated Notes to eliminate substantially all of its
restrictive provisions. We have made payments of approximately $160 million to
holders with respect to the cash tender offer and consent solicitation,
including tender premium and related solicitation and banking fees, and accrued
interest.
We incurred approximately $30 million of costs associated with the debt
refinancing. Of that amount, $11 million represented costs associated with
placing the new debt which will be amortized over the term of the Senior Notes
and Credit Agreement and $6 million represented the cost to terminate the
interest rate swap agreements on the debt which was refinanced. The remaining
$13 million represented primarily the tender premium incurred in conjunction
with our cash tender offer of the Subordinated Notes which was included in the
extraordinary loss recorded in the second quarter of 2001 as discussed in Note 6
to the interim consolidated financial statements.
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LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents at June 30, 2001 totaled $174.2 million, an
increase of $2.7 million from December 31, 2000. Cash flows from operating
activities in 2001 provided cash of $151.6 million, which was used to fund
investing and financing activities which required cash of $148.9 million. Cash
and cash equivalents at June 30, 2000 totaled $99.4 million, an increase of
$72.1 million from December 31, 1999. Cash flows from operating activities in
2000 provided cash of $140.0 million, which was used to fund investing and
financing activities which required cash of $67.9 million. We maintain
zero-balance bank accounts for the majority of our cash disbursements. Prior to
the second quarter of 2000, we maintained our largest disbursement accounts and
primary concentration accounts at the same financial institution, giving that
financial institution the legal right of offset. As such, book overdrafts
related to the disbursement accounts were offset against cash balances in the
concentration accounts for reporting purposes. During the second quarter of
2000, we moved our primary concentration account to another financial
institution such that no offset existed at June 30, 2000. As a result, book
overdrafts in the amount of $46.4 million at June 30, 2000, representing
outstanding checks, were classified as liabilities and not reflected as a
reduction of cash at June 30, 2000.
Net cash from operating activities for 2001 was $11.7 million higher than
the 2000 level. Excluding the $46.4 million increase in 2000 cash from
operations, associated with the accounting for book overdrafts discussed above,
the increase in net cash from operating activities for 2001 was $58.1 million,
compared to the prior year period. This increase was primarily due to improved
operating performance, partially offset by increased employee incentive payments
and the costs to settle our interest rate swap agreements. Days sales
outstanding, a measure of billing and collection efficiency, was 51 days at June
30, 2001, compared to 51 days at March 31, 2001 and 56 days at December 31,
2000.
Net cash used in investing activities in 2001 was $120.6 million,
consisting primarily of capital expenditures of $78.4 million, acquisition and
related costs of $55.7 million, including $47.2 million to acquire the assets of
CLC in Denver, and $21.5 million in proceeds from the disposition of assets,
including $20.6 million from the sale of an investment in the second quarter of
2001. Net cash used in investing activities in 2000 was $48.0 million,
consisting primarily of capital expenditures of $40.7 million. The increase in
capital spending above the prior year level was primarily attributable to
facility expansions and reconfigurations initiated as part of our integration
plans and information technology investments.
Net cash used in financing activities for 2001 was $28.4 million consisting
primarily of the net cash activity associated with our debt refinancing in the
second quarter of 2001, partially offset by proceeds from the exercise of stock
options. During the second quarter of 2001, we refinanced the majority of our
long-term debt. The gross proceeds of $722.3 million from the Senior Notes
offering and the new term loan under the Credit Agreement, together with cash on
hand, was used to repay the entire outstanding principal under our then existing
credit agreement and to consummate the cash tender offer and consent
solicitation for our Subordinated Notes. Of the $734.0 million in debt
repayments for the six months ended June 30, 2001, $584.0 million related to the
repayment of the entire outstanding principal under our then existing credit
agreement and $147.0 million represented the aggregate principal amount of
outstanding Subordinated Notes which were tendered. During 2001, we incurred
approximately $30 million of costs associated with the debt refinancing. Of that
amount, $23.7 million was included in financing activities and principally
represented $10.9 million of costs associated with placing the new debt, and a
$12.8 million tender premium incurred in conjunction with our cash tender offer
of the Subordinated Notes, which was included in the extraordinary loss recorded
in the second quarter of 2001. The remaining $6 million was reflected in cash
from operations and represented the cost to settle the interest rate swap
agreements on the debt which was refinanced. Net cash used in financing
activities for 2000 was $19.9 million, consisting primarily of $22.4 million of
scheduled debt repayments and $4.8 million of distributions to minority
partners, partially offset by $7.8 million of proceeds from the exercise of
stock options.
We estimate that we will invest approximately $140 million to $150 million
during 2001 for capital expenditures, principally related to investments in
information technology, equipment, and facility upgrades and expansions. Other
than the reduction for outstanding letters of credit, which approximated $24
million at June 30, 2001, all of the new $325 million revolving credit facility
under our Credit Agreement was available for borrowing at June 30, 2001.
We believe that cash from operations and the revolving credit facility
under our new Credit Agreement, together with the indemnifications by Corning
Incorporated and SmithKline Beecham plc against monetary fines, penalties or
losses from outstanding government and other related claims, will provide
sufficient financial flexibility to meet seasonal working capital requirements
and to fund capital expenditures and additional growth opportunities for the
foreseeable future. Our improved credit ratings from both Standard & Poor's and
Moody's Investor Services have had a favorable impact on our cost of and access
to capital. Additionally, we believe that our improved financial performance
should provide us with access to additional financing, if necessary, to fund
growth opportunities which cannot be funded from existing sources. We do not
anticipate paying dividends on our common stock in the foreseeable future.
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On April 25, 2001, we signed a definitive agreement to acquire the
outstanding voting shares of MedPlus, Inc. ("MedPlus"), a leading developer and
integrator of clinical connectivity and data management solutions for healthcare
organizations and clinicians. The agreement calls for us to pay $2 per share in
cash for the remaining 82% of voting shares of MedPlus that we do not currently
own. The closing of this transaction, which also is dependent on approval by
MedPlus shareholders, is expected to occur after the MedPlus annual meeting. At
the closing of the acquisition, we expect to use existing cash to fund the
purchase price (estimated at approximately $18 million) and related transaction
costs of the acquisition. The acquisition of MedPlus will be accounted for under
the purchase method of accounting.
On May 31, 2001, we effected a two-for-one stock split of our common stock
by means of a stock dividend of one new share of common stock for each share of
common stock held by stockholders of record on May 16, 2001.
IMPACT OF NEW ACCOUNTING STANDARDS
In July 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 141, "Business Combinations" ("SFAS
141") and SFAS No. 142, "Goodwill and Other Intangible Assets" ("SFAS 142")
requiring business combinations initiated after June 30, 2001 to be accounted
for using the purchase method of accounting, and broadening the criteria for
recording intangible assets separate from goodwill. SFAS 142 requires the use of
a nonamortization approach to account for purchased goodwill and certain
intangibles. Under a nonamortization approach, goodwill and certain intangibles
will not be amortized into results of operations, but instead will be reviewed
for impairment and an impairment charge will be recorded in the periods in which
the recorded carrying value of goodwill and certain intangibles is more than its
estimated fair value. The provisions of SFAS 141 will be adopted for any
business combination consummated after June 30, 2001. The provisions of SFAS
142, which apply to goodwill and intangible assets, will be adopted by us on
January 1, 2002. The adoption of these accounting standards is expected to
reduce our amortization of intangible assets commencing January 1, 2002. We are
currently evaluating whether the new criteria for recording intangible assets
separate from goodwill will require us to reclassify any of our intangible
assets.
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 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 are detailed in our 2000 Annual
Report on Form 10-K.
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PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
See Note 7 to the interim consolidated financial statements for information
regarding the status of government investigations and private claims, including
those related to SBCL.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) The annual meeting of stockholders of the Company was held on
May 8, 2001. 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 2004 annual meeting of stockholders,
with the following number of votes for and withheld:
For Withheld
Report on Kenneth D. Brody 34,107,227 9,173,813
Mary A. Cirillo 42,306,675 974,365
William R. Grant 42,957,257 323,783
The following persons continue as directors:
William F. Buehler
Van C. Campbell
Kenneth W. Freeman
Dan C. Stanzione
Gail R. Wilensky
John B. Ziegler
The proposed amendment to the Company's Restated Certificate of
Incorporation to increase the number of authorized shares of common stock from
100 million shares to 300 million shares was approved, with the following number
of votes for, against, and abstained:
For: 40,529,756 Against: 2,688,496 Abstained: 62,788
The proposed amendment to the Company's 1999 Equity Participation
Program to increase the number of shares of common stock issuable under the
program from 6 million shares to 9 million shares was approved, with the
following number of votes for, against, and abstained:
For: 26,969,689 Against: 11,381,643 Abstained: 74,480
Non-votes:4,855,228
The appointment of PricewaterhouseCoopers LLP as independent accountants
to audit the financial statements of the Company and its subsidiaries for the
fiscal year ending December 31, 2001, was approved, with the following number of
votes for, against, and abstained:
For: 43,035,374 Against: 166,374 Abstained: 79,292
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
None.
(b) Reports on Form 8-K:
On June 1, 2001, the Company filed a current report on Form 8-K
regarding the Company's two-for-one stock split, effective May
31, 2001.
On July 3, 2001, the Company filed a current report on Form 8-K
regarding the Company's debt refinancing.
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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.
August 3, 2001
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 Corporate Vice President and
Chief Financial Officer
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