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, 1998
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, 1998, there were outstanding 30,165,325 shares of Common Stock,
$.01 par value.
<PAGE>
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, 1998 and 1997 2
Consolidated Balance Sheets as of
June 30, 1998 and December 31, 1997 3
Consolidated Statements of Cash Flows for the
Six Months Ended June 30, 1998 and 1997 4
Notes to Consolidated Financial Statements 5
<PAGE>
QUEST DIAGNOSTICS INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 1998 AND
1997 (in thousands, except per share data)
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
------------------ ----------------
June 30, June 30, June 30, June 30,
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net revenues.............................. $ 366,739 $ 401,523 $ 734,614 $ 789,626
Costs and expenses:
Cost of services........................ 217,806 239,593 435,846 478,907
Selling, general and administrative..... 116,133 127,854 236,579 251,827
Interest expense, net................... 9,036 10,499 18,150 21,112
Amortization of intangible assets....... 5,366 5,980 10,746 12,022
Other, net.............................. 139 1,153 1,364 897
--------- --------- --------- ---------
Total................................. 348,480 385,079 702,685 764,765
--------- --------- --------- ---------
Income before taxes....................... 18,259 16,444 31,929 24,861
Income tax expense ....................... 9,405 8,356 16,444 12,726
--------- --------- --------- ---------
Net income ............................... $ 8,854 $ 8,088 $ 15,485 $ 12,135
========= ========= ========= =========
Basic net income per common share......... $ 0.30 $ 0.28 $ 0.52 $ 0.42
Diluted net income per common share....... $ 0.29 $ 0.28 $ 0.51 $ 0.42
Basic weighted average common shares
outstanding............................ 29,783 29,102 29,736 28,987
Diluted weighted average common shares
outstanding............................ 30,579 29,497 30,290 29,318
</TABLE>
The accompanying notes are an integral part of these statements.
2
<PAGE>
QUEST DIAGNOSTICS INCORPORATED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JUNE 30, 1998 AND DECEMBER 31, 1997
(in thousands, except per share data)
<TABLE>
<CAPTION>
June 30, December 31,
1998 1997
---- ----
(unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 152,686 $ 161,661
Accounts receivable, net of allowance of $70,262 and $89,870
at June 30, 1998 and December 31, 1997, respectively.. 243,238 238,369
Inventories............................................... 29,221 30,360
Deferred taxes on income.................................. 85,862 97,471
Due from Corning Incorporated............................. 25,785 31,600
Prepaid expenses and other assets......................... 14,303 12,423
---------- ----------
Total current assets.................................. 551,095 571,884
Property, plant and equipment, net............................ 244,396 250,223
Intangible assets, net........................................ 505,624 513,779
Other assets.................................................. 62,966 65,042
---------- ----------
TOTAL ASSETS.................................................. $1,364,081 $1,400,928
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses..................... $ 226,117 $ 244,885
Short-term borrowings..................................... 42,656 32,648
Income taxes payable...................................... 9,623 17,613
---------- ----------
Total current liabilities............................. 278,396 295,146
Long-term debt................................................ 446,340 482,161
Other liabilities............................................. 78,730 81,961
---------- ----------
Total liabilities..................................... 803,466 859,268
Commitments and contingencies
Stockholders' equity:
Preferred stock........................................... 1,000 1,000
Common stock, par value $0.01 per share; 100,000 shares
authorized; 30,106 (excluding 119 shares held in
treasury) and 29,986 shares issued at June 30, 1998
and December 31, 1997, respectively................... 301 300
Additional paid-in capital................................ 1,202,610 1,198,194
Accumulated deficit....................................... (634,854) (650,281)
Accumulated other comprehensive loss...................... (2,209) (2,515)
Unearned compensation..................................... (6,233) (5,038)
---------- ----------
Total stockholders' equity............................ 560,615 541,660
---------- ----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY.................... $1,364,081 $1,400,928
========== ==========
</TABLE>
The accompanying notes are an integral part of these statements.
3
<PAGE>
QUEST DIAGNOSTICS INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 1998 AND 1997
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net income.................................................... $ 15,485 $ 12,135
Adjustments to reconcile net income
to net cash provided by operating activities:
Depreciation and amortization............................. 34,497 38,760
Provision for doubtful accounts........................... 44,999 59,825
Deferred income tax provision............................. 13,096 6,089
Other, net................................................ 3,735 3,412
Changes in operating assets and liabilities:
Accounts receivable................................... (49,868) (50,070)
Accounts payable and accrued expenses................. 2,791 7,814
Restructuring, integration and other special charges.. (15,719) (8,031)
Due from Corning Incorporated and affiliates.......... 5,815 8,494
Other assets and liabilities, net..................... (13,645) 2,056
-------- --------
Net cash provided by operating activities..................... 41,186 80,484
-------- --------
Cash flows from investing activities:
Capital expenditures...................................... (19,457) (12,973)
Proceeds from disposition of assets....................... 460 1,076
Acquisition of business................................... -- (16,000)
(Increase) decrease in investments........................ (482) 1,338
-------- --------
Net cash used in investing activities......................... (19,479) (26,559)
-------- --------
Cash flows from financing activities:
Repayment of long-term debt............................... (25,730) (711)
Repayments under Working Capital Facility................. -- (19,300)
Purchase of treasury stock............................... (4,994) --
Dividends paid............................................ (58) (40)
Exercise of stock options................................. 100 --
-------- --------
Net cash used in financing activities......................... (30,682) (20,051)
-------- --------
Net change in cash and cash equivalents....................... (8,975) 33,874
Cash and cash equivalents, beginning of year.................. 161,661 41,960
-------- --------
Cash and cash equivalents, end of period...................... $152,686 $ 75,834
======== ========
Cash paid during the period for:
Interest.................................................. $ 21,960 $ 21,760
Income taxes.............................................. $ 11,699 $ 4,389
</TABLE>
8The accompanying notes are an integral part of these statements.
4
<PAGE>
QUEST DIAGNOSTICS INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, unless otherwise indicated)
(unaudited)
1. BASIS OF PRESENTATION
Background
Prior to January 1, 1997, Quest Diagnostics Incorporated and its
subsidiaries (the "Company") was a wholly-owned subsidiary of Corning
Incorporated ("Corning"). On December 31, 1996, Corning distributed all of the
outstanding shares of common stock of the Company to the stockholders of
Corning, with one share of common stock of the Company being distributed for
each eight shares of outstanding common stock of Corning (the "Spin-Off
Distribution").
Basis of Presentation
The interim consolidated financial statements reflect all adjustments which,
in the opinion of management, are necessary for a fair statement of the results
of operations for the periods presented. 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 period are not necessarily indicative of the results
that may by 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,
1997.
Comprehensive Income
Effective January 1, 1998, the Company adopted Statement of Financial
Accounting Standards No. 130, "Reporting Comprehensive Income." This statement
establishes standards for the reporting and display of comprehensive income and
its components in the financial statements. Comprehensive income encompasses all
changes in stockholders' equity (except those arising from transactions with
stockholders) and includes net income, net unrealized capital gains or losses on
available-for-sale securities and foreign currency translation adjustments.
Comprehensive income was $15.8 million and $14.1 million for the six months
ended June 30, 1998 and 1997, respectively. Comprehensive income was $8.7
million and $9.8 million for the quarter ended June 30, 1998 and 1997,
respectively.
Earnings Per Share
Earnings per share are computed by dividing net income less dividends on the
Company's Preferred Stock (approximately $30 per quarter) by the weighted
average number of common shares outstanding during the period. The difference
between basic and dilutive weighted average common shares results primarily from
stock options.
2. COMMITMENTS AND CONTINGENCIES
The Company has entered into several settlement agreements with various
governmental and private payors during recent years relating primarily to
industry-wide billing and marketing practices that had been substantially
discontinued by early 1993. At present, a government investigation of certain
practices by Nichols Institute, a clinical laboratory company acquired in 1994,
and a former joint venture of Damon Corporation, a clinical laboratory acquired
in 1993, are ongoing. As part of the Spin-Off Distribution, Corning has agreed
to indemnify the Company against all settlements for any governmental claims
relating to billing practices of the Company and its predecessors that were
pending on December 31, 1996. Corning also agreed to indemnify the Company for
50% of the aggregate of all settlement payments made by the Company that are in
excess of $42 million to private parties that relate to indemnified or
previously settled governmental claims for services provided prior to December
31, 1996; however, the indemnification of private party claims will not exceed
$25 million and will be paid to the Company net of anticipated tax benefits to
be realized by the Company. Such indemnification does not cover any
non-governmental claims settled after December 31, 2001. At June 30, 1998, the
receivable from Corning totaled $25.8 million, representing management's best
estimate of amounts which are probable of being received from Corning to satisfy
the remaining indemnified governmental claims on an after-tax basis.
5
<PAGE>
QUEST DIAGNOSTICS INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, unless otherwise indicated)
(unaudited)
At June 30, 1998, settlement reserves totaled $68.8 million, including $27.5
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 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, for non-indemnified claims, the Company's cash flows in the
period in which such claims are settled. The Company does not believe that these
issues will have a material adverse effect on its overall financial condition.
In April 1998, the Company entered into a settlement agreement with the U.S.
Attorney's office in Baltimore approximating $6.9 million related to the billing
of certain tests performed for which the Company had incomplete or missing order
forms from the physician. The occurrence of this practice was relatively rare
and was engaged in primarily to preserve the integrity of test results from
specimens subject to rapid deterioration. This settlement is covered by the
indemnification from Corning discussed above and was fully reserved for.
3. RESTRUCTURING RESERVES
The Company has recorded charges for restructuring plans in previous years.
Reserves relating to these programs totaled $24.6 million and $33.4 million at
June 30, 1998 and December 31, 1997, respectively. Management believes that the
costs of the restructuring plans will be financed through cash from operations
and does not anticipate any significant impact on its liquidity as a result of
the restructuring plans.
4. STOCKHOLDERS' EQUITY
Stock Purchase Program
In February 1998, the Board of Directors authorized the Company to
repurchase up to $27 million of common stock through 1999. The shares will be
reissued in connection with certain employee plans. In the first six months of
1998, the Company paid $5 million for approximately 250 thousand shares under
the program.
Unearned Compensation
Under the Company's Employees Equity Participation Program, approximately
300 thousand shares of restricted stock were granted in 1998, primarily to
executive employees. These shares are contingent on achievement of financial
performance goals and are subject to forfeiture if employment terminates prior
to the end of the prescribed period. The market value of the shares awarded
under the plan is recorded as unearned compensation. The unearned amounts are
amortized to compensation expense as earned.
5. SUMMARIZED FINANCIAL INFORMATION
The Company's 10.75% senior subordinated notes due 2006 are guaranteed,
fully, jointly and severally, and unconditionally, on a senior subordinated
basis by substantially all of the Company's wholly-owned, domestic subsidiaries
("Subsidiary Guarantors"). The non-guarantor subsidiaries are foreign and less
than wholly-owned subsidiaries.
The following condensed consolidating financial data illustrates the
composition of the combined guarantors. The Company believes that separate
complete financial statements of the respective guarantors would not provide
additional material information that would be useful in assessing the financial
composition of the Subsidiary Guarantors.
6
<PAGE>
QUEST DIAGNOSTICS INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, unless otherwise indicated)
(unaudited)
Condensed Consolidating Statement of Operations
Six Months Ended June 30, 1998
<TABLE>
<CAPTION>
Non-
Subsidiary Guarantor
Parent Guarantors Subsidiaries Eliminations Consolidated
------ ---------- ------------ ----------- ------------
<S> <C> <C> <C> <C> <C>
Net revenues........................ $ 304,085 $ 416,555 $ 13,974 $ -- $ 734,614
Costs and expenses:
Cost of services.................. 178,800 249,761 7,285 -- 435,846
Selling, general and
administrative.................... 131,025 99,904 5,650 -- 236,579
Interest expense, net............. 5,307 12,549 294 -- 18,150
Amortization of intangible assets. 3,385 7,153 208 -- 10,746
Royalty (income) expense.......... (36,987) 36,987 -- -- --
Other, net........................ (317) 7 1,674 -- 1,364
--------- --------- --------- --------- ---------
Total........................... 281,213 406,361 15,111 -- 702,685
--------- --------- --------- --------- ---------
Income (loss) before taxes.......... 22,872 10,194 (1,137) -- 31,929
Income tax expense.................. 15,553 886 5 -- 16,444
Equity income from subsidiaries..... 8,166 -- -- (8,166) --
--------- --------- --------- ---------- ----------
Net income (loss)................... $ 15,485 $ 9,308 $ (1,142) $ (8,166) $ 15,485
========= ========= ========== ======== =========
</TABLE>
Condensed Consolidating Statement of Operations
Six Months Ended June 30, 1997
<TABLE>
<CAPTION>
Non-
Subsidiary Guarantor
Parent Guarantors Subsidiaries Eliminations Consolidated
------ ---------- ------------ ----------- ------------
<S> <C> <C> <C> <C> <C>
Net revenues........................ $ 340,656 $ 437,935 $ 11,035 $ -- $ 789,626
Costs and expenses:
Cost of services.................. 198,005 275,207 5,695 -- 478,907
Selling, general and
administrative.................... 140,623 106,557 4,647 -- 251,827
Interest expense, net............. 8,198 12,618 296 -- 21,112
Amortization of intangible assets. 4,371 7,649 2 -- 12,022
Royalty (income) expense.......... (37,266) 37,266 -- -- --
Other, net........................ (353) 429 821 -- 897
--------- --------- --------- --------- ---------
Total........................... 313,578 439,726 11,461 -- 764,765
--------- --------- --------- --------- ---------
Income (loss) before taxes.......... 27,078 (1,791) (426) -- 24,861
Income tax expense (benefit)........ 14,057 (1,795) 464 -- 12,726
Equity loss from subsidiaries....... (886) -- -- 886 --
--------- --------- --------- --------- ---------
Net income (loss)................... $ 12,135 $ 4 $ (890) $ 886 $ 12,135
========= ========= ========= ========= =========
</TABLE>
7
<PAGE>
QUEST DIAGNOSTICS INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, unless otherwise indicated)
(unaudited)
Condensed Consolidating Balance Sheet
June 30, 1998
<TABLE>
<CAPTION>
Non-
Subsidiary Guarantor
Parent Guarantors Subsidiaries Eliminations Consolidated
------ ---------- ------------ ----------- ------------
<S> <C> <C> <C> <C> <C>
Current assets:
Cash and cash equivalents........... $ 88,602 $ 61,604 $ 2,480 $ -- $ 152,686
Accounts receivable, net............ 74,347 164,980 3,911 -- 243,238
Other current assets................ 103,731 48,965 2,475 -- 155,171
---------- -------- --------- --------- ---------
Total current assets.............. 266,680 275,549 8,866 -- 551,095
Property, plant and equipment, net.. 98,165 141,252 4,979 -- 244,396
Intangible assets, net ............. 156,111 349,203 310 -- 505,624
Intercompany receivable (payable)... 37,252 (23,202) (14,050) -- --
Investment in subsidiaries.......... 419,068 -- -- (419,068) --
Other assets........................ 38,077 10,585 14,304 -- 62,966
---------- -------- --------- --------- ---------
Total assets...................... $1,015,353 $753,387 $ 14,409 $(419,068) $1,364,081
========== ======== ========= ========= ==========
Current liabilities:
Accounts payable and accrued
expenses............................ 166,108 67,283 2,349 -- 235,740
Short-term borrowings............... 20,280 21,963 413 -- 42,656
---------- -------- --------- --------- ---------
Total current liabilities......... 186,388 89,246 2,762 -- 278,396
Long-term debt...................... 208,629 233,516 4,195 -- 446,340
Other liabilities................... 59,721 16,904 2,105 -- 78,730
---------- -------- --------- --------- ---------
Total liabilities................... 454,738 339,666 9,062 -- 803,466
Stockholders' equity................ 560,615 413,721 5,347 (419,068) 560,615
---------- -------- --------- --------- ---------
Total liabilities and
stockholders' equity................ $1,015,353 $753,387 $ 14,409 $(419,068) $1,364,081
========== ======== ========= ========= ==========
</TABLE>
Condensed Consolidating Balance Sheet
December 31, 1997
<TABLE>
<CAPTION>
Non-
Subsidiary Guarantor
Parent Guarantors Subsidiaries Eliminations Consolidated
------ ---------- ------------ ----------- ------------
<S> <C> <C> <C> <C> <C>
Current assets:
Cash and cash equivalents........... $ 123,052 $ 35,527 $ 3,082 $ -- $ 161,661
Accounts receivable, net............ 87,231 148,618 2,520 -- 238,369
Other current assets................ 119,751 48,865 3,238 -- 171,854
---------- --------- --------- --------- ----------
Total current assets.............. 330,034 233,010 8,840 -- 571,884
Property, plant and equipment, net.. 101,700 144,849 3,674 -- 250,223
Intangible assets, net ............. 165,068 348,391 320 -- 513,779
Intercompany (payable) receivable... (14,134) 24,103 (9,969) -- --
Investment in subsidiaries.......... 412,413 -- -- (412,413) --
Other assets........................ 40,474 9,290 15,278 -- 65,042
---------- --------- --------- --------- ----------
Total assets...................... $1,035,555 $ 759,643 $ 18,143 $(412,413) $1,400,928
========== ========= ========= ========= ==========
Current liabilities:
Accounts payable and accrued
expenses............................ $ 188,966 $ 70,542 $ 2,990 $ -- $ 262,498
Short-term borrowings............... 15,688 16,640 320 -- 32,648
---------- --------- --------- --------- ----------
Total current liabilities......... 204,654 87,182 3,310 -- 295,146
Long-term debt...................... 225,145 252,480 4,536 -- 482,161
Other liabilities................... 64,096 15,568 2,297 -- 81,961
---------- --------- --------- --------- ----------
Total liabilities................. 493,895 355,230 10,143 -- 859,268
Stockholders' equity................ 541,660 404,413 8,000 (412,413) 541,660
---------- --------- --------- --------- ----------
Total liabilities and
stockholders' equity.......... $1,035,555 $ 759,643 $ 18,143 $(412,413) $1,400,928
========== ========= ========= ========= ==========
</TABLE>
8
<PAGE>
QUEST DIAGNOSTICS INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, unless otherwise indicated)
(unaudited)
Condensed Consolidating Statement of Cash Flows
Six Months Ended June 30, 1998
<TABLE>
<CAPTION>
Non-
Subsidiary Guarantor
Parent Guarantors Subsidiaries Eliminations Consolidated
------ ---------- ------------ ----------- ------------
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) ................... $ 15,485 $ 9,308 $(1,142) $(8,166) $ 15,485
Adjustments to reconcile net income
(loss) to net cash provided by (used
in) operating activities:
Depreciation and amortization ..... 14,414 19,343 740 -- 34,497
Provision for doubtful accounts ... 25,522 19,075 402 -- 44,999
Other, net ........................ 16,725 632 (526) -- 16,831
Changes in operating assets and
liabilities ......................... (72,797) 498 162 1,511 (70,626)
--------- -------- ------- ------- ---------
Net cash (used in) provided by
operating activities ................ (651) 48,856 (364) (6,655) 41,186
Net cash used in investing activities (16,931) (9,146) (57) 6,655 (19,479)
Net cash used in financing activities (16,868) (13,633) (181) -- (30,682)
--------- -------- ------- ------- ---------
Net change in cash and cash
equivalents ......................... (34,450) 26,077 (602) -- (8,975)
Cash and cash equivalents, beginning
of year ............................. 123,052 35,527 3,082 -- 161,661
--------- -------- ------- ------- ---------
Cash and cash equivalents, end of
period .............................. $ 88,602 $ 61,604 $ 2,480 $ -- $ 152,686
========= ======== ======= ======= =========
</TABLE>
Condensed Consolidating Statement of Cash Flows
Six Months Ended June 30, 1997
<TABLE>
<CAPTION>
Non-
Subsidiary Guarantor
Parent Guarantors Subsidiaries Eliminations Consolidated
------ ---------- ------------ ----------- ------------
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) ................... $ 12,135 $ 4 $ (890) $ 886 $ 12,135
Adjustments to reconcile net income
to net cash provided by operating
activities:
Depreciation and amortization ..... 16,707 21,893 160 -- 38,760
Provision for doubtful accounts ... 33,967 25,602 256 -- 59,825
Other, net ........................ 11,079 (2,746) 1,168 -- 9,501
Changes in operating assets and
liabilities ......................... (39,940) 38 85 80 (39,737)
-------- -------- ------- ----- --------
Net cash provided by operating
activities .......................... 33,948 44,791 779 966 80,484
Net cash used in investing activities (1,941) (23,629) (23) (966) (26,559)
Net cash used in financing activities (11,424) (8,192) (435) -- (20,051)
-------- -------- ------- ----- --------
Net change in cash and cash
equivalents ......................... 20,583 12,970 321 -- 33,874
Cash and cash equivalents, beginning
of year ............................. 26,975 12,882 2,103 -- 41,960
-------- -------- ------- ----- --------
Cash and cash equivalents, end of
period .............................. $ 47,558 $ 25,852 $ 2,424 $ -- $ 75,834
======== ======== ======= ===== ========
</TABLE>
9
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Results of Operations
Net income for the three and six months ended June 30, 1998 increased from
the prior year primarily as a result of operating cost and interest expense
reductions coupled with improved pricing. This was partially offset by lower
volume resulting from intensified competition, changes in physician ordering
patterns, actions taken on unprofitable accounts and the consolidation of
certain underperforming laboratories announced in December 1997. The second
quarter earnings improvement over the prior year was below the first quarter
improvement over the prior year. This change was primarily driven by lower year
over year price improvement and increased spending on information technology
capabilities. Net income for the six months ended June 30, 1998 includes a $2.5
million charge ($1.2 million, net of tax) recorded in the first quarter in
selling, general and administrative expenses, representing the final costs
associated with the Company's consolidation plan announced in December 1997.
Effective April 1, 1998, the Company implemented a new order form for
Medicare and Medicaid patients reflecting disease-oriented test panels developed
by the Health Care Financing Administration in conjunction with the American
Medical Association. While the Company did not see a significant impact during
the second quarter, these panels are likely to result in fewer tests ordered per
requisition and may put additional pressure on revenue and earnings.*
Net Revenues
Net revenues for the second quarter decreased by $34.8 million, or 8.7% from
the prior year level, principally due to a 10.1% decline in clinical testing
volume offset by an improvement in average prices of 1.4%. Net revenues for the
first half of 1998 decreased by $55.0 million, or 7.0% from the prior year
level, principally due to a 9.1% decline in clinical testing volume, partially
offset by an improvement in average prices of 2.2%. When adjusted for joint
venture and acquisition transactions completed last year, clinical testing
volume declined 8.6% and 8.0% for the second quarter and first half,
respectively. The volume decline for each period is primarily attributable to
intensified competition, changes in physician ordering patterns, actions taken
on unprofitable accounts and the consolidation of certain underperforming
laboratories announced in December 1997, which reduced volume by approximately
2.0% and 1.5% for the second quarter and first half, respectively.
Costs and Expenses
Total operating costs for the second quarter and first half of 1998 declined
by $33.5 million and $58.3 million, respectively, from the year earlier periods.
The Company's efforts to reduce its operating cost structure have had a
favorable impact on costs as a percentage of net revenue. However, this benefit
was partially offset by lower volume, increased spending on information
technology capabilities and a $2.5 million charge in the first quarter
representing the final costs associated with the Company's consolidation plan
announced in December 1997. Additional actions are being taken to further reduce
the Company's cost structure.*
Cost of services, which includes the costs of obtaining, transporting and
testing specimens, decreased
- --------
* This is a forward looking statement within the meaning of Section 27A of the
Securities Act of 1933, as amended, and Section 27E of the Securities Act of
1934, as amended, and is based on current expectations. Forward looking
statements involve risks and uncertainties that could cause actual results to
differ materially from the forward looking statement. These risks and
uncertainties include heightened competition, impact of changes in payor mix,
the impact upon the Company's collection rates or general and administrative
expenses resulting from compliance with Medicare administrative policies, and
reduction in tests ordered by existing customers. See Item 1. "Business--
Cautionary Statement for Purposes of the `Safe Harbor' Provisions of the Private
Securities Litigation Reform Act of 1995" contained in the Company's 1997 Annual
Report on Form 10-K.
10
<PAGE>
$21.8 million in the second quarter from the prior year, and as a percentage of
net revenues decreased to 59.4% from 59.7% in the prior year. Cost of services
in the first half of 1998 decreased $43.1 million from the prior year, and as a
percentage of net revenues decreased to 59.3% from 60.6% in the prior year.
These decreases reflect the Company's progress in reducing its cost structure.
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 from the prior year by $11.7 million in the
quarter and $15.2 million in the first half of 1998 and remained consistent with
the prior year as a percentage of net revenues. The second quarter decrease was
principally due to a $9.5 million reduction in bad debt expense to 5.8% of net
revenue from 7.7% of net revenues a year earlier. The first half decrease was
principally due to a $14.8 million reduction in bad debt expense to 6.1% of net
revenues from 7.6% of net revenues. The decrease in bad debt expense was
partially offset by an increase in information technology expenditures primarily
related to preparation for the Year 2000 and a $2.5 million charge in the first
quarter related to Company's consolidation of its laboratory network.
Net interest expense decreased from the prior year by $1.5 million and $3.0
million for the second quarter and first half of 1998, respectively, primarily
due to reduced debt levels and an increase in interest income resulting from
higher average cash balances.
Amortization of intangible assets decreased from the prior year by $0.6
million and $1.3 million for the second quarter and first half of 1998,
respectively, principally due to certain intangible assets having become fully
amortized.
Other, net for the second quarter decreased from the prior year level,
primarily due to the current year including a gain on the sale of a small
investment and the prior year including a charge related to the integration of a
small, strategic acquisition. For the first half of 1998, the change in other,
net is also affected by the prior year including a gain on the sale of an
investment and the current year including equity losses from a joint venture.
The Company's effective tax rate is significantly impacted by goodwill
amortization, a majority of which is not deductible for tax purposes, and has
the effect of increasing the overall tax rate.
Liquidity and Capital Resources
Cash decreased by $9.0 million from the year end balance, to $152.7 million
at June 30, 1998, due to operating activities which provided cash of $41.2
million, offset by investing and financing activities which used cash of $50.2
million. Net cash provided by operating activities was $39.3 million below the
prior year level. The decrease is primarily the result of changes in accounts
receivable and other asset and liability levels and increased payments
associated with restructuring and other special charges. The number of days
sales outstanding, a measure of billing and collection efficiency, was 61 days
at June 30, 1998 compared to 63 days at year end and 65 days a year earlier.
Decreased spending on investing activities is primarily the result of a
reduction in acquisition spending, partially offset by increased capital
spending in 1998. Capital spending for the first half of 1998 was $19.5 million
compared to $13.0 million for the comparable prior year period. The Company
estimates that it will invest approximately $60 million during 1998 for capital
expenditures, principally related to investments in information technology
infrastructure and equipment and facility upgrades.*
- --------
* This is a forward looking statement within the meaning of Section 27A of the
Securities Act of 1933, as amended, and Section 27E of the Securities Act of
1934, as amended, and is based on current expectations. Forward looking
statements involve risks and uncertainties that could cause actual results to
differ materially from the forward looking statement. These risks and
uncertainties include computer or other system failures, development of
technologies that substantially alter the practice of medicine, and the failure
of third party payors and suppliers to adequately address the Year 2000 problem.
See Item 1. "Business--Cautionary Statement for Purposes of the `Safe Harbor'
Provisions of the Private Securities Litigation Reform Act of 1995" contained in
the Company's 1997 Annual Report on Form 10-K.
11
<PAGE>
During the first half of 1998, the Company paid down $25.7 million of debt,
including a $10 million debt prepayment, and purchased $5.0 million
(approximately 250,000 shares) of its common stock. Other than for the reduction
for outstanding letters of credit, which currently approximate $5.4 million, all
of the revolving working capital credit facility is currently available for
borrowing. The Company plans to continue stock purchases as authorized under the
February 1998 limited share purchase program which permits the Company to
purchase up to $27 million of its outstanding common stock through 1999.
Adjusted EBITDA
Adjusted EBITDA represents earnings before interest, taxes, depreciation,
amortization and non-recurring charges. Adjusted EBITDA for the three months
ended June 30, 1998 was $44.5 million, or 12.1% of net revenues, compared to
$46.1 million, or 11.5% of net revenues, in the prior year period. Adjusted
EBITDA for the six months ended June 30, 1998 was $87.1 million, or 11.9% of net
revenues, compared to $84.7 million, or 10.7% of net revenues, in the prior year
period. The improvement in adjusted EBITDA for the six months reflects the
Company's continued progress in reducing its cost structure on a declining
revenue base. During the second quarter, the Company continued to make progress
reducing its cost structure to align costs with business conditions, but
adjusted EBITDA was below the prior year due primarily to increased spending on
information technology capabilities.
12
<PAGE>
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
See Part II, Item 1 of the Company's Form 10-Q for the quarterly period
ended March 31, 1998.
Item 4. Submission of Matters to a Vote of Security Holders
(a) The first annual meeting of stockholders of the Company was held on May
12, 1998. 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 2001 annual meeting of stockholders, by the following
votes:
For Withheld
--- --------
Kenneth D. Brody 27,381,649 92,561
Mary A. Cirillo 27,382,499 91,711
The following persons continue as directors:
Van C. Campbell
Kenneth W. Freeman
Dan C. Stanzione
Gail R. Wilensky
The Stock Option Plan for Non-Employee Directors, which authorizes the
annual grant to each non-employee director of non-qualified stock options to
acquire 9,000 shares of the Company's common stock, was approved by the
following number of stockholder votes for, against and abstained:
For: 26,154,770 Against: 1,188,501 Abstained: 130,939
The appointment of Price Waterhouse LLP (PricewaterhouseCoopers LLP as of
July 1, 1998) as independent accountants to audit the financial statements of
the registrant and its subsidiaries for the fiscal year ending December 31,
1998, was approved by the following number of stockholder votes for, against and
abstained:
For: 27,348,070 Against: 55,381 Abstained: 70,759
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
<TABLE>
<CAPTION>
Exhibit Number Description
-------------- -----------
<S> <C>
4 Warrant to acquire shares of common stock of the Company issued to Premier
Laboratory Services Limited Partnership.
27 Financial Data Schedule
</TABLE>
(b) Reports on Form 8-K:
On June 3, 1998, the Company filed a current report on Form 8-K (Date
of Report: May 15, 1998) disclosing under Item 5 a strategic alliance with
Premier Inc ("Premier'). The Company has entered into a reference testing
agreement under which the Company would provide reference testing to Premier
13
<PAGE>
hospitals that access the agreement. The reference agreement has a five year
term (ending in December 2003) and is renewable at the option of Premier for an
additional five year term. On signing the reference agreement, the Company
issued to Premier a ten year warrant to acquire approximately 170,000 shares of
common stock of the Company at $20.146 per share, subject to antidilution
adjustment. The Company will pay to Premier cash fees (a portion of which
Premier could at its option use to purchase common stock of the Company)
proportional to the amounts billed to Premier hospitals for testing under the
reference agreement. In addition, the Company would issue to Premier additional
ten year warrants to acquire common stock of the Company if the annual amount of
such billings exceeds $100 million. The exercise price would be based on the
market price of the Company's common stock on the issuance of the warrants and
the value of such warrants would not exceed $2 million in total (the same
valuation as the warrants issued at the execution of the agreement) using the
Black Scholes option pricing model. The alliance also contemplates that the
Company will enter individually negotiated strategic services agreements with
Premier hospitals, under which the lowest cost testing environment would be
identified and utilized, resulting in increased savings to hospitals beyond what
is available under the reference agreement. On entering into a strategic
services arrangement with a Premier hospital, the Company would issue equity
(which may include warrants) dependent on the size of the transaction, which
equity would initially be held in escrow and released to Premier periodically
over the term of the arrangement.
14
<PAGE>
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 10, 1998
Quest Diagnostics Incorporated
By /s/ Kenneth W. Freeman Chairman of the Board,
------------------- Chief Executive Officer
Kenneth W. Freeman and President
By /s/ Robert A. Hagemann Vice President and
------------------ Chief Financial Officer
Robert A. Hagemann
15
Exhibit 4
THIS WARRANT AND THE SHARES ISSUABLE UPON EXERCISE OF THIS WARRANT MAY NOT HAVE
BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"), OR ANY
APPLICABLE STATE SECURITIES LAWS BY REASON OF EXEMPTIONS FROM THE REGISTRATION
REQUIREMENTS OF THE ACT AND SUCH STATE SECURITIES LAWS AND MAY NOT BE SOLD,
PLEDGED, ASSIGNED OR OTHERWISE DISPOSED OF IN THE ABSENCE OF AN EFFECTIVE
REGISTRATION STATEMENT UNDER THE ACT AND APPLICABLE STATE SECURITIES LAWS OR AN
EXEMPTION THEREFROM UNDER SUCH ACT OR LAWS. THE WARRANT IS ALSO SUBJECT TO
RESTRICTIONS ON TRANSFER SET FORTH IN THE AGREEMENT DATED AS OF MAY 15, 1998
AMONG QUEST DIAGNOSTICS INCORPORATED, PREMIER CLINICAL LABORATORY SERVICES,
INC., AND PREMIER LABORATORY SERVICES LIMITED PARTNERSHIP
WARRANT
Exercisable Only On or
After August 1, 1998 and
Before May 15, 2008
QUEST DIAGNOSTICS INCORPORATED
This certifies that, for value received, Premier Laboratory Services Limited
Partnership, a North Carolina limited partnership ("Premier"), or its registered
assigns, is entitled to subscribe for and purchase, at any time and from time to
time during the Effective Period, a number of shares of duly authorized, validly
issued, fully paid and non-assessable Common Stock, including fractional shares,
equal to the Warrant Shares at an initial exercise price of $20.146 per share,
subject to adjustment as hereinafter provided, upon the terms and subject to the
conditions hereinafter set forth.
1. Definitions. For the purposes of this Warrant, the following terms have the
meanings indicated:
"Additional Shares of Common Stock" means all shares of Common Stock issued
by the Corporation after May 15, 1998 other than (a) Common Stock issued to
Premier or as otherwise contemplated by the Master Agreement, and (b) Common
Stock issued pursuant to (i) the Corporation's Non-Employee Director Stock
Option Plan, the Employee Equity Participation Program (whether as restricted
stock or pursuant to Options or otherwise) and any successor stock option plan
or equity participation program that is approved by the shareholders of the
Corporation, (ii) the Corporation's Employee Stock Purchase Plan and any
successor plan that provides a discount not greater than the discount provided
under the Employee Stock Purchase Plan as of the date of this Agreement, (iii)
the Corporation's Profit Sharing (401K) Plan and any other employee benefit plan
of the Corporation that is qualified under Section 401(a) of the Internal
Revenue Code of 1986, as amended and (iv) any other employee benefit plan (but
only
1
<PAGE>
in this clause (iv) to the extent that the Fair Market Value of the Common Stock
issued under such plan is expensed on the Corporation's consolidated statements
of operations).
"Common Stock" means the Corporation's Common Stock, par value $0.01 per
share, and, in the case of a reclassification, recapitalization or other similar
change in such Common Stock or in the case of a consolidation or merger of the
Corporation with or into another Person, such consideration to which a holder of
a share of Common Stock would have been entitled upon the occurrence of such
event.
"Convertible Securities" means evidences of indebtedness, shares of Stock or
other securities (excluding Options) which are or may be at any time convertible
into or exchangeable for shares of Common Stock, including, without limitation,
any shares of the Corporation's preferred stock which are convertible into or
exchangeable for shares of Common Stock. The term "Convertible Security" means
one of the Convertible Securities.
"Corporation" means Quest Diagnostics Incorporated, a Delaware corporation,
and its successors and assigns.
"Effective Date" means May 15, 1998.
"Effective Period" means the period beginning on the Effective Date at 9:00
a.m. New York time and ending on May 15, 2008 at 5:00 p.m. New York time.
"Exercise Date" means the date on which the Corporation receives from an
exercising Holder this Warrant and the subscription form attached hereto as
Exhibit A together with, if applicable, the exercise price as required by
Section 3.3.1 hereof.
"Fair Market Value" of a share of Common Stock as of any date means, as of
any date, the closing sales price of a share of Common Stock on the New York
Stock Exchange composite transactions list on such date (or if no sale took
place on such exchange on such date, the closing sales price on such exchange on
the most recent preceding date on which a sale took place). If the Common Stock
is no longer listed on the New York Stock Exchange, the Fair Market Value of
Common Stock shall be determined by the closing sales price on the stock
exchange, including NASDAQ, upon which the Common Stock is then listed or
regularly traded or if not so listed or regularly traded on any securities
exchange, the Fair Market Value of the Common Stock shall be determined by a
member firm of the New York Stock Exchange selected by the Corporation and
approved by the Holder. If the Corporation and the Holder are unable to agree on
the selection of a member firm, then the issue of selection of a member firm
shall be submitted to the American Arbitration Association.
"Holder" means Premier Laboratory Services Limited Partnership, a North
Carolina limited partnership, as the original registered holder of this Warrant,
and any registered permitted transferee of a Holder.
"Master Agreement" means the Master Agreement dated as of May 15, 1998 among
the Corporation, Premier Clinical Laboratory Services, Inc. and Holder.
"Member" has the meaning set forth in the Reference Agreement.
"Option" means any warrant, option or other right to subscribe for or
purchase any
2
<PAGE>
Additional Shares of Common Stock or any Convertible Security.
"Person" means an individual, corporation, partnership, trust,
unincorporated organization, limited liability company, limited liability
partnership, government body or agency or political subdivision thereof,
association, sole proprietorship or any other form of entity not specifically
listed herein.
"Reference Agreement" means the Group Purchasing Reference Agreement dated
as of the date hereof between the Corporation and the Holder.
"Securities Act" means the Securities Act of 1933, as amended, or any
similar Federal statute then in effect.
"Stock" will include any and all shares, interests or other equivalents
(however designated) of, or participation in, the capital stock of the
Corporation of any class.
"Subsidiary" means any corporation at least 50% of whose outstanding capital
stock will at the time be owned directly or indirectly by the Corporation or by
one or more Subsidiaries or by the Corporation and one or more Subsidiaries.
"Trading Day" means any day that the New York Stock Exchange is open for
trading.
"Warrant" means this Warrant.
"Warrant Price" will initially mean $20.146 per share of Common Stock and
thereafter such other price as will result from the adjustments specified in
Section 5 hereof.
"Warrant Shares" will initially mean one hundred sixty nine thousand nine
hundred ninety six (169,996) shares of Common Stock and thereafter such number
of shares of Common Stock as will result from the adjustments specified in
Section 5.
"Warrant Spread" as of any date means the difference between (i) the Fair
Market Value of a share of Common Stock as of that date and (ii) the Warrant
Price.
2. Duration. The right to exercise this Warrant to subscribe for and purchase
shares of Common Stock represented hereby will commence on the Effective Date
and will expire at the end of the Effective Period.
3
<PAGE>
3. Vesting; Method of Exercise; Payment; Issuance of New Warrant.
3.1 Vesting. During the term provided in Section 2, the Holder hereof may
exercise this Warrant only to the extent that the Warrant Shares will have
vested. The Warrant Shares will become exercisable as follows on the following
dates:
<TABLE>
<CAPTION>
Vesting Date % of Warrant Exercisable Incremental Shares Cumulative
------------ ------------------------ ------------------ ----------
<S> <C> <C> <C>
August 1, 1998 10 17,000
May 15, 1999 10 16,999 33,999
May 15, 2000 10 17,000 50,999
May 15, 2001 10 16,999 67,998
May 15, 2002 10 17,000 84,998
May 15, 2003 10 17,000 101,998
May 15, 2004 10 17,000 118,998
May 15, 2005 10 16,999 135,997
May 15, 2006 10 17,000 152,997
May 15, 2007 10 16,999 169,996
</TABLE>
Subject to the vesting provisions of this Section 3.1, the purchase right
represented by this Warrant may be exercised at any time during the Effective
Period. However, in the event that the Reference Agreement is terminated for any
reason prior to December 31, 2003, this Warrant will be exercisable during the
Effective Period only to the extent that the Warrant was exercisable at the date
that the Reference Agreement was terminated. Notwithstanding anything contained
herein to the contrary, all Warrant Shares will vest immediately upon the
occurrence of the events set forth in the last sentence of Section 5.5 of the
Master Agreement.
3.2 Notice of Exercise. The Holder hereof may exercise this Warrant, in whole or
in part, by delivery to the Corporation at its office at One Malcolm Avenue,
Teterboro, New Jersey 07608, Attention: Corporate Secretary (or such other
address as the Corporation may specify to the Holder from time to time), of (a)
a written notice of the Holder's election to exercise this Warrant,
substantially in the form of the subscription notice attached to this Warrant as
Exhibit A, duly executed by the Holder, (b) payment of the Warrant Price in the
manner provided in Section 3.3, and (c) this Warrant. In the event of any
exercise of the rights represented by this Warrant, (x) certificates for the
shares of Common Stock so purchased will be dated the first Trading Date
following the date of such exercise and delivered to the Holder hereof within a
reasonable time, not exceeding three (3) Trading Days after such exercise, and
the Holder hereof will be deemed for all purposes to be the Holder of the shares
of Common Stock so purchased as of the first Trading Date following the date of
such exercise, and (y) unless this Warrant has expired, a new Warrant
representing the number of shares, if any, with respect to which this Warrant
will not then have been exercised will also be issued to the Holder hereof
within such time. Any such warrant will be dated the date hereof and will be
identical with this Warrant except as to the number of shares of Common Stock
issuable pursuant thereto.
3.3 Manner of Exercise. Subject to the provisions of this Warrant, this Warrant
may be exercised in the manner set forth in either Section 3.3.1 or Section
3.3.2 below:
3.3.1 Cash. Upon presentation to the Corporation at the office specified in
Section 3.2 of this Warrant with the subscription notice attached to this
Warrant as Exhibit A duly completed, indicating a cash exercise and signed by
the Holder, and upon payment of an amount equal to the product of the Warrant
Price and the number of shares of Common Stock to be
4
<PAGE>
purchased, by, at the option of the Holder, (a) wire transfer to an account in a
bank located in the United States designated for such purpose by the Corporation
or (b) certified or official bank check, the Corporation will issue and cause to
be delivered to or upon the written order of the Holder and in such name or
names as the Holder may designate consistent with the terms of the Master
Agreement, a certificate for the shares of Common Stock issued upon such
exercise.
3.3.2 Cashless. (a) Upon presentation to the Corporation at the office
specified in Section 3.2 of this Warrant with the subscription notice attached
to this Warrant as Exhibit A duly completed, indicating a non-cash exercise
under this Section 3.3.2(a) and signed by the Holder, the Corporation will issue
and cause to be delivered to or upon the written order of the Holder and in such
name or names as the Holder may designate consistent with the terms of the
Master Agreement, a certificate for a number of shares of Common Stock equal to
the result of dividing (a) the product of (i) the number of shares of Common
Stock for which this Warrant may be exercised and (ii) the Warrant Spread on the
Exercise Date, by (b) the Fair Market Value of a share of Common Stock on the
Exercise Date.
(b) Upon presentation to the Corporation at the office specified in Section
3.2 of this Warrant with the subscription notice attached to this Warrant as
Exhibit A duly completed, indicating a non-cash exercise under this Section
3.3.2(b) and signed by the Holder, and upon the delivery to the Corporation of
that number of shares of Common Stock having an aggregate Fair Market Value as
of the Exercise Date equal to the Exercise Price multiplied by the number of
Warrant Shares being purchased upon such exercise, the Corporation will issue
and cause to be delivered to or upon the written order of the Holder and in such
name or names as the Holder may designate consistent with the terms of the
Master Agreement, a certificate for the shares of Common Stock issued upon such
exercise.
3.4 Listing. The Corporation will, at its own expense, from time to time take
all action which may be necessary to obtain and keep effective any and all
permits, consents, orders and approvals of governmental agencies and authorities
which are or become required or necessary so that any Common Stock, immediately
upon its issuance upon the exercise of this Warrant, will be listed on each
securities exchange, NASDAQ or other quotation services, if any, on which Common
Stock of the Corporation is then listed.
5
<PAGE>
4. Stock Fully Paid; Reservation of Shares.
4.1 Stock Fully Paid. The Corporation covenants and agrees that all shares of
Common Stock which may be issued upon the exercise of this Warrant will, upon
issuance in accordance with Section 3.3 hereof, be fully paid and non-assessable
and free from all taxes, liens and charges with respect to issuance (excluding
any income or other taxes) and free of preemptive rights. The Corporation
further covenants and agrees that during the Exercise Period, the Corporation
will at all times have authorized and reserved for the purpose of the issue upon
exercise of this Warrant a sufficient number of shares of Common Stock to
provide for the exercise of the rights represented by this Warrant. If the
Warrant Price is at any time less than the par value of the Common Stock, the
Corporation also covenants and agrees to cause to be taken such action (whether
by decreasing the par value of the Common Stock, the conversion of the Common
Stock from par value to no par value, or otherwise) as will permit the exercise
of this Warrant without any additional payment by the Holder hereof (other than
payment of the Warrant Price and applicable transfer taxes, if any), which
Common Stock, upon such issuance, will be fully paid and non-assessable.
4.2 Reservation of Shares. The Corporation will not by any action, including,
without limitation, amending its certificate of incorporation or through any
reorganization, transfer of assets, consolidation, merger, dissolution, issue or
sale of securities or any other voluntary action, avoid or seek to avoid the
observance or performance of any of the terms of this Warrant but will at all
times in good faith assist in the carrying out of all such terms and in the
taking of all such actions as may be necessary or appropriate to protect the
rights of the Holder hereof against impairment. Without limiting the generality
of the foregoing, the Corporation will (a) not increase the par value of any
shares of Common Stock above the amount payable therefor upon the exercise of
this Warrant and the issuance of the Common Stock immediately prior to such
increase in par value and (b) take all such action as may be necessary or
appropriate in order that the Corporation may validly and legally issue fully
paid and non-assessable shares of Common Stock, free and clear of preemptive
rights and any liens, claims, encumbrances and restrictions (other than as
provided herein) upon the exercise of this Warrant.
4.3 Fractional Interests, The Corporation will not be required to issue
fractional Warrant Shares on the exercise of this Warrant. If (a) any fraction
of a Warrant Share would, except for the provisions of this Section 4.3, be
issuable on the exercise of this Warrant (or specified portion thereof), and (b)
the Holder has paid the amount due upon such exercise with respect to such
fractional share, then the Corporation will return to such Holder the amount so
paid with respect to such fractional Warrant Share.
5. Adjustment of Purchase Price and Number of Shares. The number and kind of
securities purchasable upon the exercise of this Warrant and the amount of the
Warrant Price will be subject to adjustment from time to time upon the happening
of certain events and in each case as if this Warrant were fully vested as
follows:
5.1 Recapitalization, Reorganization, Reclassification, Consolidation or
Merger. In the event of any recapitalization or reorganization, or any
consolidation of the Corporation with, or a merger of the Corporation into, any
other Person, or a sale or lease or other transfer of all or substantially all
of the assets of the Corporation, or a distribution by the Corporation of its
assets with respect to the Common Stock as a liquidating or partial liquidating
dividend, the Holder will have the right thereafter to exercise this Warrant for
the acquisition of the kind and amount of shares of stock or other securities
and property to which the Holder would have been entitled if
6
<PAGE>
the Holder had purchased Common Stock of the Corporation by the full exercise of
this Warrant immediately prior to any such event and the Corporation will make
lawful provision therefor as part of such event. The Corporation will not effect
any such consolidation, merger, sale, lease or other transfer involving another
Person unless, upon or prior to the consummation thereof the successor Person or
the Person to which the property of the Corporation has been consolidated,
merged, sold, leased or otherwise transferred, will assume by written instrument
the obligation to deliver to the Holder such shares of stock, securities, cash
or property as in accordance with the foregoing provisions the Holder will be
entitled to receive.
5.2 Subdivision or Combination of Shares. If the Corporation, at any time
while this Warrant is outstanding, will subdivide or combine any class or
classes of its Common Stock, the Warrant Price will be adjusted, as at the date
the Corporation will take a record of the holders of such class or classes of
Common Stock for the purpose of such subdivision or combination (or if no such
record is taken, as at the date of such subdivision or combination), to that
price determined by multiplying the Warrant Price in effect immediately prior to
the record date (or if no such record is taken, then immediately prior to such
subdivision or combination), by a fraction, the numerator of which will be the
total number of shares of Common Stock outstanding immediately prior to such
subdivision or combination, and the denominator of which will be the total
number of shares of Common Stock outstanding immediately after such subdivision
or combination (plus in the event that the Corporation paid cash for fractional
shares, the number of additional shares which would have been outstanding had
the Corporation issued fractional shares in connection therewith). Upon each
adjustment in the Warrant Price pursuant to any provision of this Section 5.2,
the number of shares of Common Stock purchasable hereunder will be adjusted to
the product obtained by multiplying the number of such shares purchasable
immediately prior to such adjustment in the Warrant Price by a fraction, the
numerator of which will be the Warrant Price immediately prior to such
adjustment and the denominator of which will be the Warrant Price immediately
thereafter.
5.3 Issuance of Additional Shares of Common Stock; Stock Dividends. If the
Corporation, at any time while this Warrant is outstanding, will issue any
Additional Shares of Common Stock, including shares issued as a Common Stock
distribution or dividend (otherwise than as provided in Section 5.1 and 5.2) at
a price per share less than Fair Market Value as of the date immediately prior
to such issuance (or in the case of a distribution or dividend, as of the record
date therefore, or in the case of an acquisition in which the consideration
involves in whole or in part the issuance of Common Stock, the date as of which
the consideration is agreed to), then the number of shares of Common Stock
purchasable upon exercise of this Warrant will be adjusted by multiplying the
number of shares of Common Stock subject to purchase upon exercise of this
Warrant by a fraction, the numerator of which will be the total number of shares
of Common Stock outstanding (including shares issuable upon exercise or
conversion of outstanding Convertible Securities) immediately prior to such
issuance of Additional Shares of Common Stock issued plus the number of
Additional Shares of Common Stock so issued, and the denominator of which shall
be an amount equal to the sum of (a) the number of shares of Common Stock
outstanding (including shares issuable upon exercise or conversion of
outstanding Convertible Securities) immediately prior to such issuance of
Additional Shares of Common Stock plus (b) the number of shares of Common Stock
which the aggregate consideration, if any, received by the Corporation
(determined as provided in Section 5.6 hereof) for such issuance of Additional
Shares of Common Stock would buy at the Fair Market Value thereof as of the date
immediately prior to such issuance. In the event of any such adjustment, the
Warrant Price will be adjusted to a number determined by dividing the Warrant
Price immediately prior to such issuance of Additional Shares of Common Stock by
the fraction used
7
<PAGE>
for purposes of the aforementioned adjustment. This Section 5.3 will not apply
under any of the circumstances for which an adjustment is provided in Sections
5.1, 5.2 or 5.4. No adjustment will be made under this Section 5.3 upon the
issuance of any Additional Shares of Common Stock which are issued pursuant to
any Options or Convertible Securities if (a) upon the issuance of any Options or
Convertible Securities any such adjustment has previously been made pursuant to
Section 5.4 or (b) no adjustment was required pursuant to Section 5.4. The
provisions of this Section 5.3, including by operation of Section 5.4 below,
will not operate to increase the Warrant Price or to reduce the number of shares
of Common Stock subject to purchase upon exercise of this Warrant.
5.4 Issuance of Options or Convertible Securities.
5.4.1 Issuance of Options below Fair Market Value. If the Corporation will,
at any time while this Warrant is outstanding, issue any Options, whether or not
such Options or the rights to convert or exchange any Convertible Securities
issuable upon exercise of such Options are immediately exercisable, and the
price per share for which Common Stock is issuable upon the exercise of such
Options or upon conversion or exchange of Convertible Securities issuable upon
exercise of such Options (determined by dividing (a) the aggregate amount, if
any, received or receivable by the Corporation as consideration for the granting
of such Options, plus the minimum aggregate amount of additional consideration
payable to the Corporation upon the exercise of all such Options, plus, in the
case of Options to acquire Convertible Securities, the minimum aggregate amount
of additional consideration, if any, payable upon the conversion or exchange
thereof, by (b) the total maximum number of shares of Common Stock issuable upon
the exercise of such Options or upon the conversion or exchange of all such
Convertible Securities issuable upon the exercise of such Options) is less than
the Fair Market Value per share of outstanding Common Stock of the Corporation
on the date immediately prior to the granting of such Options or immediately
prior to the date of announcement thereof (whichever is less), then for purposes
of Section 5.3 hereof, the total maximum number of shares of Common Stock
issuable upon the exercise of such Options or upon conversion or exchange of the
total maximum amount of such Convertible Securities issuable upon the exercise
of such Options will be deemed to have been issued as of the date of granting of
such Options and thereafter will be deemed to be outstanding and the Corporation
will be deemed to have received as consideration such price per share,
determined as provided above, therefor. Except as otherwise provided in Section
5.4.3 hereof, no additional adjustment of the number of shares of Common Stock
purchasable upon the exercise of this Warrant or of the Warrant Price will be
made upon the actual exercise of such Options or upon conversion or exchange of
such Convertible Securities. No adjustment will be made under this Section 5.4.1
with respect to Options issued by the Corporation in an acquisition in exchange
for options previously issued by the issuer being acquired provided that the
exercise price and number of Options issued by the Corporation in such
acquisition are determined in a manner so as to preserve the investment basis
and intrinsic gain associated with the Options being canceled.
5.4.2 Issuance of Convertible Securities below Fair Market Value. If the
Corporation will after the date of issuance of the Warrant issue any Convertible
Securities, whether or not the rights to exchange or convert any such
Convertible Securities are immediately exercisable, and the price per share for
which Common Stock is issuable upon such conversion or exchange (determined by
dividing (a) the aggregate amount received or receivable by the Corporation as
consideration for such Convertible Securities, plus the minimum aggregate amount
of additional consideration, if any, payable to the Corporation upon the
conversion or exchange thereof, by (b) the total maximum number of shares Common
Stock issuable upon the
8
<PAGE>
conversion or exchange of all such Convertible Securities) will be less than the
Fair Market Value per share of outstanding Common Stock of the Corporation on
the date immediately prior to such issuance of such Convertible Securities or on
the date immediately prior to the announcement thereof (whichever is less), then
for purposes of Section 5.3 hereof, the total maximum number of shares of Common
Stock issuable upon conversion or exchange of all such Convertible Securities
will be deemed to have been issued as of the date of the issuance of such
Convertible Securities and thereafter will be deemed to be outstanding and the
Corporation will be deemed to have received as consideration such price per
share, determined as provided above, therefore. Except as otherwise provided in
Section 5.4.3 hereof, no additional adjustment of the number of shares of Common
stock purchasable upon the exercise of this Warrant or of the Warrant Price will
be made upon the conversion or exchange of such Convertible Securities. No
adjustment will be made under this Section 5.4.2 with respect to Convertible
Securities issued by the Corporation in an acquisition in exchange for
convertible securities previously issued by the issuer being acquired provided
that the exercise price and number of Convertible Securities issued by the
Corporation in such acquisition are determined in a manner so as to preserve the
investment basis and intrinsic gain associated with the Convertible Securities
being canceled.
5.4.3. Change in Terms. If the purchase price provided for in any Option
referred to in Section 5.4.1 hereof, the additional consideration, if any,
payable upon the conversion or exchange of any Convertible Securities referred
to in Section 5.4.1 or 5.4.2 hereof or in the rate at which any Convertible
Securities referred to in Section 5.4.1 or 5.4.2 hereof are convertible into or
exchangeable for Common Stock will change at any time (other than under or by
reason of provisions designed to protect against, and having the effect of
protecting against, dilution upon an event which results in a related adjustment
pursuant to this Section 5), the number of shares of Common Stock purchasable
upon exercise of this Warrant and the Warrant Price then in effect will
forthwith be readjusted (effective only with respect to any exercise of this
Warrant after such readjustment) to the number of shares of Common Stock
purchasable upon exercise of this Warrant and the Warrant Price which would then
be in effect had the adjustment made upon the issuance of such Options or
Convertible Securities been made based upon such changed purchase price,
additional consideration or conversion rate, as the case may be; provided,
however, that such readjustment will give effect to such change only with
respect to such Options and Convertible Securities as then remain outstanding.
If, at any time after any adjustment or readjustment of the number of shares of
Common Stock purchasable upon exercise of this Warrant or the Warrant Price will
have been made pursuant to this Section 5.4, the right of conversion, exercise
or exchange of such Option or Convertible Securities will expire or terminate
and the right of conversion, exercise or exchange in respect of a portion of
such Option or Convertible Securities will not have been exercised, such
previous adjustment will be rescinded and annulled. Thereupon, a recomputation
will be made of the effect of such Option or Convertible Securities on the basis
of treating the number of shares of Common Stock, if any, theretofore actually
issued or issuable pursuant to the previous exercise of such right of
conversion, exercise or exchange as having been issued on the date or dates of
such conversion, exercise or exchange and for the consideration actually
received and receivable therefor, and treating any such Option or Convertible
Securities which then remain outstanding as having been granted or issued
immediately after the time of any such issuance for the consideration per share
for which shares of Common Stock are issuable under such Option or Convertible
Securities; and, if and to the extent called for by the foregoing provisions of
this Section 5.4.3 on the basis aforesaid, a new adjustment of the number of
shares of Common Stock purchasable upon exercise of this Warrant and the Warrant
Price will be made, which new adjustment will supersede (effective only with
respect to any exercise of this Warrant after such readjustment) the previous
adjustment so rescinded and annulled.
9
<PAGE>
5.4.4. Stock Dividends or other Distributions. If the Corporation will after
the date of issuance of this Warrant pay a dividend or make any other
distribution upon any capital stock of the Corporation payable in Common Stock,
Options or Convertible Securities, then, for purposes of Section 5.3 and this
Section 5.4, such Common Stock, Options or Convertible Securities, as the case
may be, will be deemed to have been issued or sold without consideration.
However, notwithstanding any provision to the contrary, no adjustment in the
number of Warrant Shares purchasable upon the exercise of this Warrant or the
Warrant Price need be made under Section 5.3 as a result of any such dividend or
distribution if the Corporation issues or distributes to each Holder of this
Warrant script or other documentation entitling the Holder upon exercise of this
Warrant to receive the securities or property which each Holder of this Warrant
would have been entitled to receive had the Warrant been exercised prior to the
happening of such event or the record date with respect thereto. No adjustment
need be made for a change in the par value of the Warrant Shares.
5.5 Subscription Rights. If at any time the Corporation grants its
shareholders any right to subscribe pro rata for additional securities of the
Corporation or any Subsidiary, whether Common Stock, Options, Convertible
Securities, or other classifications, or for any other securities or interests
that the Holder would have been entitled to subscribe for if, immediately prior
to such grant, the Holder had exercised this Warrant, and if such action by the
Corporation does not result in a readjustment of the number of Warrant Shares or
in the Warrant Price under any other subsection of this Section 5, then the
Corporation will also grant to the Holder the same subscription rights that the
Holder would be entitled to if the Holder had exercised this Warrant in full
(without regard to vesting) immediately prior to such grant, but such
subscription rights will be exercisable only coincident with (and only to the
extent of) the exercise of this Warrant.
5.6 Computation of Consideration. The consideration received by the
Corporation will be deemed to be the following: to the extent that any
Additional Shares of Common Stock, Options or Convertible Securities will be
issued for cash consideration, the consideration received by the Corporation
therefore; or, if such Additional Shares of Common Stock, Options or Convertible
Securities are offered by the Corporation for subscription, the subscription
price; or if such Additional Shares of Common Stock, Options or Convertible
Securities are sold to underwriters or dealers for public offering without a
subscription offering, the initial public offering price, in any such case
excluding any amounts paid or receivable for accrued dividends and without
deduction of any compensation, discounts, commissions, or expenses paid or
incurred by the Corporation for or in connection with the underwriting thereof
or otherwise in connection with the issue thereof. The consideration for any
Additional Shares of Common Stock issuable pursuant to any Options or
Convertible Securities will be the consideration received by the Corporation for
issuing such Options or Convertible Securities, plus the additional
consideration payable to the Corporation upon the exercise, conversion or
exchange of such Options or Convertible Securities. In case of the issuance at
any time of any Additional Shares of Common Stock, Options or Convertible
Securities in payment or satisfaction of any dividend upon any class of stock
other than Common Stock, the Corporation will be deemed to have received for
such Additional Shares of Common Stock, Options or Convertible Securities a
consideration equal to the amount of such dividend so paid or satisfied. In any
case in which the consideration to be received or paid will be other than cash
(such as an acquisition in which the consideration involves in whole or in part
the issuance of Common Stock), the Board of Directors of the Corporation will
determine in good faith the fair market value of such consideration and promptly
notify the Holder of its determination of the fair market value of
10
<PAGE>
such consideration.
5.7 Treasury Shares. In making any adjustments in the Warrant Price
hereinbefore provided in this Section 5, the number of shares of Common Stock at
any time outstanding will not include any shares thereof then directly or
indirectly owned or held by or for the account of the Corporation or any of its
Subsidiaries.
5.8 Other Action Affecting Common Stock. In case after the date hereof the
Corporation will take any action affecting its Common Stock, other than an
action described in any of the foregoing Sections 5.1 through 5.7, inclusive,
and the failure to make any adjustment would not fairly protect the purchase
rights represented by this Warrant in accordance with the intent and principles
of this Section 5, then the Warrant Price will be adjusted in such manner as the
Board of Directors of the Corporation will in good faith determine to be
equitable in the circumstances.
5.9 De Minimis Adjustment Notwithstanding any provision to the contrary, no
adjustment in the number of Warrant Shares purchasable hereunder or the Warrant
Price will be required unless such adjustment would require an increase or
decrease of at least one percent (1%) in the number of Warrant Shares
purchasable upon the exercise of this Warrant; provided, however, that any
adjustments which by reason of this Section 5.9 are not required to be made will
be carried forward and taken into account in any subsequent adjustment. All
calculations will be made to the nearest one-thousandth of a share.
6. Notice of Certain Events, Adjustments.
6.1 Prior Notice of Certain Events. The Corporation will deliver (by first
class mail postage prepaid) to the Holder of this Warrant written notice at
least ten (10) days prior to the occurrence of the following events:
(a) the date on which a record is to be taken for the purpose of any
dividend, distribution or grant of rights, or, if a record is not to
be taken, the date as of which the shareholders of Common Stock of
record to be entitled to such dividend, distribution or grant of
rights are to be determined;
(b) the date on which a record is to be taken for the purpose of
determining shareholders of Common Stock entitled to vote on any
reclassification, reorganization, consolidation, merger, sale,
transfer, dissolution, liquidation, winding up or purchase,
retirement or redemption; and
(c) the date, if any, as of which holders of record of the Common Stock
will be entitled to exchange their Common Stock for securities or
other property deliverable upon such reclassification,
reorganization, consolidation, merger, sale, transfer, dissolution,
liquidation, winding up, purchase, retirement or redemption.
6.2 Notice of Adjustments. If any circumstance or adjustment described in
Sections 5.1, 5.2, 5.3 or 5.4 hereof occurs, then within ten (10) days after
such adjustment, the Corporation will deliver (by first class mail postage
prepaid) to the Holder of this Warrant notice thereof, and will state in
reasonable detail (a) the event requiring any adjustment to whether the Warrant
Price or the number of shares of Common Stock purchasable upon exercise of this
11
<PAGE>
Warrant, (b) the amount of the adjustment, (c) the method by which such
adjustment was calculated (including a description of the basis on which the
Board of Directors of the Corporation made any determination hereunder), and (d)
the Warrant Price and number of shares of Common Stock purchasable hereunder
after giving effect to such adjustment.
7. Restrictions on Transferability. The Warrant and the Common Stock issued
upon exercise of the Warrant may not be transferred, hypothecated or assigned
except to the extent permitted by Section 8.3 of the Master Agreement. The
Holder, by acceptance of this Warrant, agrees to be bound by the provisions of
Section 8.3 of the Master Agreement. Subject to compliance with this Section 8.3
of the Master Agreement, this Warrant may be transferred on the books of the
Corporation by the Holder hereof in person or by duly authorized attorney, upon
surrender of this Warrant at the principal office of the Corporation, properly
endorsed and upon payment of any necessary transfer tax or other governmental
charge imposed upon such transfer. This Warrant is exchangeable at the aforesaid
principal office of the Corporation for a Warrant for the purchase of the same
aggregate number of shares of Common Stock, each new warrant to represent the
right to purchase such number of shares of Common Stock as the Holder hereof
will designate at the time of such exchange. All Warrants issued on transfers or
exchanges will be dated the date hereof and will be identical with this Warrant
except as to the number of shares of Common Stock issuable pursuant hereto.
8. Registration Rights. The Holder of this Warrant will be entitled to the
rights, privileges and benefits set forth in the Registration Rights Agreement
dated as of the date hereof between the initial Holder of this Warrant and the
Corporation. The Warrant is not a Registrable Security under the terms of the
Registration Rights Agreement but the Shares subject to the terms of this
Warrant are Registrable Securities. It will be a condition to the registration
of such Shares that the Holder of this Warrant (or the lead underwriter)
exercises this Warrant at or prior to the closing scheduled under the applicable
underwriting agreement. Notwithstanding the provisions of Section 7, the Holder
may transfer the Warrant to an underwriter in connection with any registered
offering provided that such transfer is contingent on the Warrant being
exercised by the underwriter at or prior to the closing scheduled under the
applicable underwriting agreement.
9. Amendment and Waiver. Any term, covenant, agreement or condition in this
Warrant may be amended, or compliance therewith may be waived (either generally
or in a particular instance and either retroactively or prospectively), by a
written instrument or written instruments executed by the Corporation and the
Holder.
10. Governing Law. THIS WARRANT WILL BE GOVERNED BY AND CONSTRUED IN
ACCORDANCE WITH THE LAWS OF THE STATE OF DELAWARE WITHOUT GIVING EFFECT TO THE
CHOICE OF LAW PRINCIPLES OF SUCH STATE.
11. Replacement. On receipt of evidence reasonably satisfactory to the
Corporation of the loss, theft, destruction or mutilation of this warrant and in
the case of loss, theft or destruction, on delivery of an indemnity agreement or
bond reasonably satisfactory in form and amount to the Corporation or, in the
case of mutilation, on surrender and cancellation of this warrant, the
Corporation, at its expense, will execute and deliver in lieu of this Warrant a
new warrant of like tenor.
12. Specific Performance. The Holder will have the right to specific
performance by the Corporation of the provisions of this Warrant. The
Corporation hereby irrevocably waives,
12
<PAGE>
to the extent that it may do so under applicable law, any defense based on the
adequacy of a remedy at law which may be asserted as a bar to the remedy of
specific performance in any action brought against the Corporation for specific
performance of this Warrant by the Holder.
13
<PAGE>
IN WITNESS WHEREOF, the Corporation has executed and delivered this
Warrant as of the date set forth below.
Dated: May 15, 1998
QUEST DIAGNOSTICS INCORPORATED
By:______________________
Kenneth W. Freeman
Chairman, President and Chief Executive Officer
Attest:
_______________________
Leo C. Farrenkopf, Jr.
Secretary
14
<PAGE>
EXHIBIT A
SUBSCRIPTION NOTICE
[To be executed only upon exercise of Warrant]
Cash Exercise Method
The undersigned registered owner of the attached Warrant irrevocably
exercises, by the Cash Exercise Method in accordance with Section 3.4.1 of the
Warrant, the attached Warrant for the purchase of ___________ shares of Common
Stock, $0.01 par value, of Quest Diagnostics Incorporated and herewith makes
payment therefor, to the order of the Corporation in the amount of
$________________ as payment of the Warrant Price in accordance with the terms
set forth in Section 3.3.1.
Non-cash Exercise Method
The undersigned registered owner of the attached Warrant irrevocably
exercises, by the Non-cash Exercise Method in accordance with Section 3.3.2(a)
of the Warrant, the attached Warrant in [full] in exchange for a certificate for
a number of shares of Common Stock $.01 par value, of Quest Diagnostics
Incorporated equal to the result of dividing (i) the product of (a) the number
of shares of Common Stock, $0.01 par value, for which this Warrant may be
exercised and (b) the Warrant Spread on the Exercise Date, by (ii) the Fair
Market Value of a share of Common Stock on the Exercise Date; or
The undersigned registered owner of the attached Warrant irrevocably
exercises, by the Non-cash Exercise Method in accordance with Section 3.3.2(b)
of the Warrant, the attached Warrant for the purchase of ______________ shares
of Common Stock, $0.01 par value, of Quest Diagnostics Incorporated and herewith
delivers that number of shares of Common Stock having an aggregate Fair Market
Value equal to the Exercise Price multiplied by the number of Warrant Shares
being purchased hereby, as payment of the Warrant Price in accordance with the
terms set forth in Section 3.3.2(b) of the Warrant.
15
<PAGE>
Issuance Instructions
The undersigned requests that a certificate for such Common Stock be
registered in the name of _________________________________ whose address is
_______________________________________________ and that such certificate be
delivered to whose address is ________________________. If such number of shares
of Common Stock is less than all of the shares of Common Stock which may be
purchased upon the exercise of the Warrant, the undersigned hereby requests that
a new Warrant representing the remaining balance of this Warrant be registered
in the name of _____________________________________________ whose address is
____________________________________and that such Warrant be delivered to
_____________________ whose address is ____________________________.
- ---------------------------
Name of Registered Owner
- -------------------------------
Signature of Registered Owner
- -------------------------------
- -------------------------------
Address
- -------------------------------
Federal ID Number
16
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<NAME> Quest Diagnostics Incorporated
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<CURRENCY> US$
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
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<RECEIVABLES> 243,238
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<TOTAL-ASSETS> 1,364,081
<CURRENT-LIABILITIES> 278,396
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0
1,000
<COMMON> 1,202,610
<OTHER-SE> (643,296)
<TOTAL-LIABILITY-AND-EQUITY> 1,364,081
<SALES> 734,614
<TOTAL-REVENUES> 734,614
<CGS> 435,846
<TOTAL-COSTS> 672,425
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<INTEREST-EXPENSE> 18,150
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<INCOME-TAX> 16,444
<INCOME-CONTINUING> 15,485
<DISCONTINUED> 0
<EXTRAORDINARY> 0
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