<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
- --------------------------------------------------------------------------------
FORM 8-K (Amendment No. 1)
CURENT REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of Earliest Event Reported): August 16, 1999
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)
<PAGE>
Quest Diagnostics Incorporated (the "Company") hereby amends Item 7 of its
Current Report on Form 8-K (Date of Report: August 16, 1999) in its entirety to
read as follows:
ITEM 7. FINANCIAL STATEMENTS AND SCHEDULES
a. Financial statements of businesses acquired.
The combined financial statements of SBCL and certain related affiliates
as of December 31, 1998 and 1997 and for three years ended December 31,
1998, 1997 and 1996 are incorporated by reference to Appendix F to the
Proxy Statement.
The unaudited interim combined balance sheet of SBCL and certain related
affiliates as of June 30, 1999 and the related unaudited interim
combined statements of operations, cash flows and changes in parent's
equity for the three and six months ended June 30, 1999 and June 25,
1998 are included as Exhibit 99.4.
b. Pro forma financial information
The unaudited pro forma combined balance sheet of the Company as of June
30, 1999 and the unaudited pro forma combined statements of operations
of the Company for the three and six months ended June 30, 1999, and the
year ended December 31, 1998 are included as Exhibit 99.5.
c. Exhibits.
EXHIBIT INDEX
Exhibit No. Description
- ----------- -----------
99.4 The unaudited interim combined balance sheet of SBCL and certain
related affiliates as of June 30, 1999 and the related unaudited
interim combined statements of operations, cash flows and
changes in parent's equity for the three and six months ended
June 30, 1999 and June 25, 1998.
99.5 The unaudited pro forma combined balance sheet of the Company as
of June 30, 1999 and the unaudited pro forma combined statements
of operations of the Company for the three and six months ended
June 30, 1999, and the year ended December 31, 1998.
2
<PAGE>
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
October 29, 1999 QUEST DIAGNOSTICS INCORPORATED
By:
--------------------------------------
Name: Robert A. Hagemann
Vice President and Chief Financial Officer
3
<PAGE>
EXHIBIT 99.4
SMITHKLINE BEECHAM CLINICAL LABORATORIES, INC. AND CERTAIN RELATED
AFFILIATES
COMBINED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
ASSETS
June 30, December 31,
1999 1998
---------- ----------
<S> <C> <C>
Current assets:
Cash $ -- $ --
Accounts receivable (net of allowances of
$88,507 and $86,396 respectively) 398,960 356,102
Inventories 18,436 17,934
Prepaid expenses and other current assets 12,253 9,975
---------- ----------
Total current assets 429,649 384,011
Goodwill and other intangibles, net 493,467 503,879
Property, plant and equipment, net 208,730 215,519
Other assets 14,504 35,862
---------- ----------
Total assets $1,146,350 $1,139,271
========== ==========
LIABILITIES AND PARENT'S EQUITY
Current liabilities:
Accounts payable $ 52,890 $ 39,152
Current portion of long-term debt 2,161 2,160
Accrued compensation and benefits 27,405 37,657
Estimated out-of-network laboratory claims 51,136 --
Other current liabilities 57,369 45,644
---------- ----------
Total current liabilities 190,961 124,613
Long-term debt 29,770 32,902
Deferred income 700 --
Commitments and contingent liabilities
Parent's equity 924,919 981,756
---------- ----------
Total liabilities and Parent's equity $1,146,350 $1,139,271
========== ==========
</TABLE>
The accompanying notes are an integral part of the combined financial statements
1
<PAGE>
SMITHKLINE BEECHAM CLINICAL LABORATORIES, INC. AND CERTAIN RELATED
AFFILIATES
COMBINED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
--------------------------------- ---------------------------------
June 30, June 25, June 30, June 25,
1999 1998 1999 1998
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Net revenues $ 474,689 $ 384,194 $ 888,021 $ 730,707
Costs and expenses:
Cost of services 333,922 266,410 629,215 501,761
Provision for bad debts 41,501 28,330 77,107 59,888
Selling, general and administrative 80,847 68,626 146,881 133,679
Interest expense, net 11,364 11,759 22,673 23,017
Amortization of goodwill and intangibles 7,529 7,573 14,971 14,736
Other expense (income), net 1,712 (9,436) (7,491) (20,816)
------------- ------------- ------------- -------------
Total costs and expenses 476,875 373,262 883,356 712,265
------------- ------------- ------------- -------------
(Loss) income before taxes (2,186) 10,932 4,665 18,442
Income tax expense 1,226 6,473 6,066 11,577
------------- ------------- ------------- -------------
Net (loss) income $ (3,412) $ 4,459 $ (1,401) $ 6,865
============= ============= ============= =============
</TABLE>
The accompanying notes are an integral part of the combined financial statements
2
<PAGE>
SMITHKLINE BEECHAM CLINICAL LABORATORIES, INC. AND CERTAIN RELATED
AFFILIATES
COMBINED STATEMENTS OF CHANGES IN PARENT'S EQUITY
(DOLLARS IN THOUSANDS)
(UNAUDITED)
June 30, June 25,
1999 1998
--------- ---------
Balance, beginning of year $ 981,756 $ 992,949
Net (loss) income (1,401) 6,865
Net transfers to parent (55,436) (14,866)
--------- ---------
Balance, end of period $ 924,919 $ 984,948
========= =========
The accompanying notes are an integral part of the combined financial statements
3
<PAGE>
SMITHKLINE BEECHAM CLINICAL LABORATORIES, INC. AND CERTAIN RELATED
AFFILIATES
COMBINED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
Six Months Ended
-----------------------------
June 30, June 25,
CASH FLOWS FROM OPERATING ACTIVITIES: 1999 1998
----------- -----------
<S> <C> <C>
NET (LOSS) INCOME $ (1,401) $ 6,865
Adjustments to reconcile net (loss) income to net
Cash provided by operating activities:
Depreciation and amortization 31,523 32,034
Gain on sale of assets (9,296) (13,909)
Provisions for bad debts 77,107 59,888
Equity in undistributed earnings of affiliates (495) (1,123)
Changes in assets and liabilities:
Increase in accounts receivable (119,965) (61,705)
Increase in inventories (502) (581)
(Increase) decrease in prepaid expenses and other current assets (2,278) 879
(Increase) decrease in other assets 43 (1,427)
Increase in estimated out-of-network laboratory claims 51,136 --
Increase (decrease) in accounts payable, accrued compensation and benefits
and other current liabilities 15,011 (1,070)
----------- -----------
Net cash provided by operating activities 40,883 19,851
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (17,170) (13,012)
Proceeds from sale of assets 2,044 164
----------- -----------
NET CASH USED IN INVESTING ACTIVITIES (15,126) (12,848)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net transfers to Parent (22,626) (14,866)
Repayment of long-term debt (3,131) (1,056)
----------- -----------
Net cash used in financing activities (25,757) (15,922)
----------- -----------
Increase (decrease) in cash -- (8,919)
Cash, beginning of year -- 8,919
----------- -----------
Cash, end of period $ -- $ --
=========== ===========
Supplemental cash flow information:
Cash paid for:
Interest $ 1,096 $ 1,204
Non cash investing and financing activities:
Stock received in exchange for assets $ 11,000 $ 13,310
Deferred income from sale of assets $ 900 $ --
Investment in stock transferred to Parent $ 32,810 $ --
</TABLE>
The accompanying notes are an integral part of the combined financial statements
4
<PAGE>
SMITHKLINE BEECHAM CLINICAL LABORATORIES, INC. AND CERTAIN RELATED AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
SmithKline Beecham Clinical Laboratories, Inc. is a subsidiary of SmithKline
Beecham Corporation ("SmithKline Beecham Corp"), itself an indirect subsidiary
of SmithKline Beecham plc ("SmithKline Beecham plc" or the "Parent"), a public
limited company incorporated in 1989 under the laws of England and Wales. The
other entities combined in these financial statements are also indirectly owned
subsidiaries of SmithKline Beecham plc.
The combined financial statements of SmithKline Beecham Clinical Laboratories,
Inc., and certain related affiliates ("the Company"), include the accounts of
the following:
o SBCL Inc. (US)
o SmithKline Beecham Clinical Laboratories Inc. (US)
o The clinical laboratory operations of Fournex SA (Belgium)
o The clinical laboratory operations of SmithKline Beecham Laboratoires
Pharmaceutiques SA (France)
o The clinical laboratory operations of SmithKline Beecham Capital BV
(Netherlands)
o The clinical laboratory operations of SmithKline Beecham plc (UK)
The combined financial statements reflect the assets and liabilities, results of
operations and cash flows of the Company as if the Company had existed and
operated as a separate business.
In the opinion of management, the accompanying interim combined financial
statements contain all adjustments necessary to present fairly the financial
position of the Company as of June 30, 1999 and the results of operations and
cash flows for the six months ended June 30, 1999 and June 25, 1998. All
adjustments, except for an accrual for costs to provide free counseling and
blood tests to certain patients (see Note 3), are normal and recurring in
nature. The interim combined financial statements are unaudited and are subject
to year-end adjustment. The results of operations for the interim period are not
necessarily indicative of the results expected for the full year. These interim
combined financial statements should be read in conjunction with the Company's
audited combined financial statements as of December 31, 1998, and for the year
then ended.
PRINCIPLES OF COMBINATION
All significant intercompany accounts and transactions within the Company have
been eliminated as part of the combination. Investments in companies which are
20-50 percent owned by the Company are accounted for using the equity method of
accounting. All other investments are accounted for using the cost method.
FISCAL PERIOD
The Company operates on a calendar year basis for annual reporting purposes. For
interim reporting purposes, the Company normally operates on a 13 week fiscal
period that ends on the last Thursday of the calendar quarter. Due to a delay in
the transaction with Quest Diagnostics Incorporated ("Quest") (see Note 5), the
Company completed its second quarter of 1999 on June 30, 1999. As a result,
there were 68 trading days in the second quarter of 1999 compared to 64 trading
days in the second quarter of 1998.
5
<PAGE>
SMITHKLINE BEECHAM CLINICAL LABORATORIES, INC. AND CERTAIN RELATED AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
ESTIMATED OUT-OF-NETWORK LABORATORY CLAIMS
The Company is a party to two full risk capitated agreements with managed care
organizations (MCOs) to provide laboratory services to certain MCO members.
These services are provided by the Company and by independent laboratories under
terms of the agreements with the MCOs. Services under these arrangements are
reimbursed by the MCOs at contractually established rates. Expenses incurred
under these contracts are included in cost of services in the Company's combined
statement of operations. The estimated liability for out-of-network laboratory
claims outstanding is based upon an estimate of incurred but not reported
claims. Methods used to determine the estimates are continually revised and any
resulting adjustments are included in current operating results. The Company
does not purchase reinsurance, as it retains the underwriting risk for all
coverages under the contract.
(2) OTHER EXPENSE (INCOME), NET
Other expense (income), net, is comprised primarily of gain on the sale of
assets of $9,296 for the six months ended June 30, 1999, and gain on the sale of
assets of $13,909 and income from a customer contract related settlement of
$7,700 for the six months ended June 25, 1998.
(3) CONTINGENT LIABILITIES
The Company is involved in various legal and administrative proceedings
considered normal to its business, including suits claiming damages arising from
the Company's services. The Company is also a party to legal proceedings with
regard to environmental matters.
In 1996, the Company and the U.S. government and certain states reached a
settlement with respect to the government's civil and administrative claims
arising from an investigation by the Office of the Inspector General of the U.S.
Department of Health and Human Services into the Company's billing and marketing
practices. In connection therewith, certain affiliates of the Company paid the
government $325 million which had been reserved in prior years.
The Company is also responding to claims and lawsuits from non-governmental
parties, including private insurers, self-funded employer plans and patients,
concerning similar practices as they may relate to amounts paid by those
parties. The lawsuits include ten purported class actions filed in various
jurisdictions in the United States and one non-class action complaint by a
number of insurance companies that seek damages allegedly arising from payments
they made for clinical laboratory testing services. The ten purported class
actions have been consolidated into one complaint which has been consolidated
with the insurers' suit, for pretrial proceedings, in the U.S. District Court
for the District of Connecticut. On July 2, 1999, the District Court Judge
presiding over the consolidated litigation granted, with certain exceptions, the
Company's motions to dismiss (with prejudice) the insurance companies' second
amended complaint, thereby dismissing all of the RICO claims pending against the
Company as well as several of the other claims asserted in the litigation.
Similar claims by several other individual third party payers have been settled.
SmithKline Beecham plc has agreed to indemnify the Company for the after-tax
expense of any similar such settlements entered into after December 31, 1998.
6
<PAGE>
SMITHKLINE BEECHAM CLINICAL LABORATORIES, INC. AND CERTAIN RELATED AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
(3) CONTINGENT LIABILITIES (CONTINUED)
On March 22, 1999 the Company learned that an employee at a patient service
center in Palo Alto, California had at times reused certain needles when drawing
blood from patients. The phlebotomist was immediately suspended and thereafter
dismissed. The Company is cooperating with local, state and federal health
agencies to address public health issues arising from the employee's breach of
standard medical practices and has offered free testing to approximately 15,300
patients whose blood may have been drawn by this phlebotomist to determine
whether those patients have been exposed to hepatitis B, hepatitis C or HIV. A
number of civil actions, including some purporting to be class actions, have
been filed against the Company in federal and state courts in California on
behalf of individuals who may have been affected by the phlebotomist's reuse of
needles or other alleged improper practices. An initial provision for the
estimated cost of the free counseling and follow-up blood tests for the affected
patients has been included in cost of services in the Company's combined
statement of operations for the six months ended June 30, 1999, but at this
stage the total costs associated with this matter are not yet determinable.
SmithKline Beecham has agreed to amend the stock and asset purchase agreement
with Quest to provide that SmithKline Beecham plc will indemnify Quest and the
Company for the out-of-pocket costs of the counseling and testing, for
liabilities arising out of the civil actions and for other losses arising out of
the conduct of this employee, other than consequential damages.
Although the outcome of claims, legal proceedings and other matters in which the
Company is involved cannot be predicted with any certainty, the Company does not
expect that its ultimate liability for such matters, after taking into account
provisions, tax benefits and insurance, to have a material adverse effect on its
financial condition, results of operations or cash flows.
(4) COMMITMENTS
The Company has financed two facilities with capital leases. In 2000, the
capital leases on these facilities will expire, at which point the Company has
three options: extend the leases for three years, at which point the Company is
obligated to purchase the facilities, purchase the facilities or find a third
party to purchase the facilities. If the last option is chosen, the Company is
liable for any difference between the residual value and the fair market value
if the residual value exceeds the fair value. The future minimum lease payments
due under these leases is $27,928 as of June 30, 1999 (see Note 5).
SmithKline Beecham Clinical Laboratories, Inc. is a guarantor of debt related to
the aforementioned capital leases. At December 31, 1998 total guaranteed debt
outstanding approximated the Company's payables to the lessor.
(5) SALE OF THE COMPANY
On February 9, 1999, SmithKline Beecham plc entered into an agreement to sell
the Company to Quest in exchange for approximately $1 billion of cash and 12.6
million shares of Quest common stock, which will approximate 29.5% of Quest's
outstanding shares at closing. As part of the purchase agreement, various
compensation plans will be altered. Also, as a result of the transaction with
Quest, the future capital lease commitments may be accelerated due to change in
control provisions of the lease agreements.
7
<PAGE>
SMITHKLINE BEECHAM CLINICAL LABORATORIES, INC. AND CERTAIN RELATED AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
(6) SUBSEQUENT EVENTS
In July 1999, the Company extended, for three years, the lease of one of its
facilities financed with a capital lease (see Note 4).
Also in July 1999, the Company obtained waivers of the change in control
provisions of the lease agreements for the two facilities financed with capital
leases (see Note 4). The provisions would have permitted the lessor to
accelerate the future capital lease commitments as a result of the transaction
with Quest (see Note 5).
8
<PAGE>
EXHIBIT 99.5
UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS
The following unaudited pro forma combined financial statements of Quest
Diagnostics have been prepared to illustrate the effects of the following
transactions:
o Quest Diagnostics' purchase of the clinical laboratory business of
SmithKline Beecham plc ("SmithKline Beecham") for approximately $1.3
billion. The purchase price was paid through the issuance of 12,564,336
shares of common stock of the Company, representing approximately 29% of
the Company's outstanding common stock, and the payment of $1.025 billion
in cash, which includes $20 million payable under a non-competition
agreement.
o Quest Diagnostics financed the cash purchase price and transaction
costs associated with the SBCL acquisition and repaid its then existing
bank debt with cash on-hand and borrowings under the new credit facility.
The unaudited pro forma combined balance sheet as of June 30, 1999 gives effect
to the SBCL acquisition, the repayment of Quest Diagnostics' then existing bank
debt and the amounts borrowed under the new credit facility as if they had
occurred on June 30, 1999. The unaudited pro forma combined statements of
operations assume the SBCL acquisition, repayment of Quest Diagnostics' then
existing bank debt and borrowings under the new credit facility were effected on
the first day of the earliest period presented. The SBCL acquisition will be
accounted for under the purchase method of accounting. As such, the cost to
acquire SBCL will be allocated to the assets and liabilities acquired based
on estimated fair values at the closing of the SBCL acquisition. A
preliminary allocation of the acquisition cost has been made to the assets
and liabilities of SBCL in the unaudited pro forma combined financial
statements based on estimates. The final allocation may be different from the
amounts reflected in the unaudited pro forma combined financial statements
presented herein.
The estimated costs associated with severance and other integration-related
activities for 1999 and 2000, including the elimination of duplicate facilities,
operational realignment and related workforce reductions are included in the
unaudited pro forma combined balance sheet as of June 30, 1999. Quest
Diagnostics expects to incur additional costs in subsequent years to fully
integrate SBCL with Quest Diagnostics. A significant portion of the
integration related costs are expected to require cash outlays. These
estimates are preliminary and will be subject to revisions as integration
plans are developed and finalized.
The unaudited pro forma combined statements of operations do not include the
impact of nonrecurring costs and synergies directly related to the SBCL
acquisition, including the costs and benefits associated with the integration of
SBCL with Quest Diagnostics.
The stock and asset purchase agreement provides for a purchase price adjustment
based on audit of the closing combined balance sheet of SBCL and certain
affiliates. As a result of this audit, Quest Diagnostics identified several
adjustments to the unaudited closing balance sheet of SBCL. Quest Diagnostics
has reflected such adjustments in the accompanying unaudited pro forma combined
financial statements to the extent they were determined to be applicable to the
periods presented. There can be no assurances that the amounts reflected in the
unaudited pro forma combined financial statements will not be subject to change
as a result of the resolution of the purchase price adjustment.
The pro forma adjustments, and the assumptions on which they are based, are
described in the accompanying notes to the unaudited pro forma combined
financial statements.
The unaudited pro forma combined financial statements are presented for
illustrative purposes only to aid in the analysis of the financial aspects of
the SBCL acquisition and the borrowings under the new credit facility. The
unaudited pro forma combined financial statements are not necessarily indicative
of the combined financial position or results of operations that would have been
realized had Quest Diagnostics and SBCL been a single entity during the periods
presented. In addition, the unaudited pro forma combined financial information
is not necessarily indicative of the future results that the combined company
will experience after the SBCL acquisition. The unaudited financial pro forma
combined financial statements and related notes should be read in conjunction
with the historical financial statements of Quest Diagnostics and SBCL.
<PAGE>
QUEST DIAGNOSTICS INCORPORATED AND SUBSIDIARIES
UNAUDITED PRO FORMA COMBINED BALANCE SHEET
JUNE 30, 1999
(IN THOUSANDS)
<TABLE>
<CAPTION>
Pro Forma and
Quest Other Adjusted
Diagnostics SBCL Adjustments Pro Forma
-------------- --------------- ------------------------ --------------
<S> <C> <C> <C> <C> <C>
ASSETS
CURRENT ASSETS
Cash.......................................... $ 148,478 $ - $ 1,163,060 (a)
(31,975) (b)
(239,968) (c)
(1,025,000) (d)
(4,110) (d)(2)
(10,485) (f) $ -
Accounts receivable, net...................... 224,920 398,960 (51,012) (d)(1) 572,868
Other current assets.......................... 154,409 30,689 (1,962) (d)(1)
3,640 (d)(3)
83,921 (d)(4)
20,767 (d)(5)
22,000 (e) 313,464
------------ ------------ ------------ ------------
Total current assets.......................... 527,807 429,649 (71,124) 886,332
PROPERTY, PLANT AND EQUIPMENT, NET............... 243,107 208,730 (2,336) (d)(1)
(14,200) (d)(6)
(40,500) (d)(7)
(49,500) (e) 345,301
INTANGIBLE ASSETS, NET........................... 482,813 493,467 474,662 (d)(8) 1,450,942
OTHER ASSETS..................................... 59,080 14,504 31,975 (b)
(3,693) (c)
(221) (d)(1)
(5,176) (d)(2)
25,967 (d)(4)
12,063 (d)(5)
19,800 (e) 154,299
------------ ------------ ------------ ------------
TOTAL ASSETS..................................... $ 1,312,807 $ 1,146,350 $ 377,717 $ 2,836,874
============ ============ ============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable and accrued expenses......... $ 251,903 $ 188,800 $ (1,468) (c)
(1,477) (c)
11,548 (d)(1)
45,838 (d)(5)
45,000 (d)(7)
55,000 (e)
(12,246) (f) $ 582,898
Revolving credit facility..................... - - 88,060 (a) 88,060
Current portion of long-term debt............. 61,452 2,161 23,125 (a)
(61,000) (c)
(81) (d)(1) 25,657
------------ ------------ ------------- ------------
Total current liabilities..................... 313,355 190,961 192,299 696,615
LONG-TERM DEBT................................... 338,391 29,770 1,051,875 (a)
(177,500) (c)
(131) (d)(1) 1,242,405
OTHER LIABILITIES................................ 63,243 700 10,039 (d)(1)
28,500 (d)(5) 102,482
PREFERRED STOCK.................................. 1,000 - - 1,000
COMMON STOCKHOLDERS' EQUITY...................... 596,818 924,919 (2,216) (c)
(664,210) (d)(8)
(62,700) (e)
1,761 (f) 794,372
------------ ------------ ------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY....... $ 1,312,807 $ 1,146,350 $ 377,717 $ 2,836,874
============ ============ ============ ============
</TABLE>
See the accompanying notes to the unaudited pro forma combined financial
statements.
2
<PAGE>
QUEST DIAGNOSTICS INCORPORATED AND SUBSIDIARIES
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED JUNE 30, 1999
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
Pro Forma and
Quest Other Adjusted
Diagnostics SBCL Adjustments Pro Forma
-------------- --------------- ------------------ -------------
<S> <C> <C> <C> <C>
NET REVENUES..................................... $ 394,034 $ 474,689 $ (29,703)(g)
(1,487)(i) $ 837,533
COSTS AND EXPENSES
Cost of services.............................. 225,659 333,922 (12,088)(g)
(14,160)(h)
(1,495)(i)
(4,147)(j) 527,691
Selling, general and administrative........... 131,642 122,348 (6,542)(g)
16,146 (h)
1,049 (i)
(1,336)(j)
(1,137)(k) 262,170
Special charges............................... - - 15,813 (i) 15,813
Interest expense, net......................... 5,008 11,364 (167)(i)
1,496 (l)
12,022 (m) 29,723
Amortization of intangible assets............. 5,219 7,529 (1,767)(n) 10,981
Other, net.................................... 1,999 1,712 (1,986)(h) 1,600
(125)(g)
------------ ------------ ------------ -------------
Total....................................... 369,527 476,875 1,575 847,978
------------ ------------ ------------ -------------
INCOME (LOSS) BEFORE INCOME TAXES................ 24,507 (2,186) (32,766) (10,445)
INCOME TAX EXPENSE (BENEFIT)..................... 11,420 1,226 (14,219)(p) (1,573)
------------ ------------ ------------ -------------
NET INCOME (LOSS)................................ $ 13,087 $ (3,412) $ (18,546) $ (8,872)
============ ============ ============ =============
BASIC NET INCOME PER COMMON SHARE (q)............ $ 0.44 $ (0.21)
============ =============
DILUTED NET INCOME PER COMMON SHARE (q).......... $ 0.43 $ (0.21)
============ =============
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING -
BASIC (q)................................... 29,920 43,248
============ =============
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING -
DILUTED (q)................................. 30,729 43,933
============ =============
</TABLE>
See the accompanying notes to the unaudited pro forma combined financial
statements.
3
<PAGE>
QUEST DIAGNOSTICS INCORPORATED AND SUBSIDIARIES
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 1999
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
Pro Forma and
Quest Other Adjusted
Diagnostics SBCL Adjustments Pro Forma
-------------- --------------- ------------------ --------------
<S> <C> <C> <C> <C>
NET REVENUES..................................... $ 775,875 $ 888,021 $ (2,913)(i) $ 1,660,983
COSTS AND EXPENSES
Cost of services.............................. 452,654 629,215 (28,557)(h)
(3,127)(i)
(8,325)(j) 1,041,860
Selling, general and administrative........... 258,655 223,988 31,284 (h)
1,382 (i)
(2,665)(j)
(1,980)(k) 510,664
Special charges............................... - - 15,813 (i) 15,813
Interest expense, net......................... 12,367 22,673 (334)(i)
3,303 (l)
23,393 (m) 61,403
Amortization of intangible assets............. 10,313 14,971 (3,446)(n) 21,838
Other, net.................................... 3,301 (7,491) (2,727)(h)
9,652 (o) 2,735
------------ ------------ ------------ -------------
Total....................................... 737,290 883,356 33,667 1,654,313
------------ ------------ ------------ -------------
INCOME (LOSS) BEFORE INCOME TAXES................ 38,585 4,665 (36,580) 6,670
INCOME TAX EXPENSE (BENEFIT)..................... 18,065 6,066 (16,819)(p) 7,312
------------ ------------ ------------- -------------
NET INCOME (LOSS)................................ $ 20,520 $ (1,401) $ (19,761) $ (642)
------------ ------------- -------------- -------------
BASIC NET INCOME PER COMMON SHARE (q)............ $ 0.69 $ (0.02)
------------ -------------
DILUTED NET INCOME PER COMMON SHARE (q).......... $ 0.67 $ (0.02)
------------ -------------
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING -
BASIC (q)................................... 29,819 43,146
------------ -------------
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING -
DILUTED (q)................................. 30,505 43,720
------------ -------------
</TABLE>
See the accompanying notes to the unaudited pro forma combined financial
statements.
4
<PAGE>
QUEST DIAGNOSTICS INCORPORATED AND SUBSIDIARIES
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1998
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
Quest Pro Forma
Diagnostics SBCL Adjustments Pro Forma
-------------- --------------- ------------------ -------------
<S> <C> <C> <C> <C>
NET REVENUES..................................... $ 1,458,607 $ 1,579,843 (10,667)(i) $ 3,027,783
COSTS AND EXPENSES
Cost of services.............................. 861,044 1,043,255 (62,327)(h)
(4,697)(i)
(23,432)(j) 1,813,843
Selling, general and administrative........... 481,634 424,514 64,685 (h)
3,821 (i)
(7,699)(j)
(7,277)(k) 959,678
Interest expense, net......................... 33,403 47,640 7,672 (l)
37,836 (m) 126,551
Amortization of intangible assets............. 21,697 30,270 (7,220)(n) 44,747
Other, net.................................... 6,968 (25,911) (2,358)(h)
14,924 (q) (6,377)
------------ ------------ ------------ -------------
Total....................................... 1,404,746 1,519,768 13,928 2,938,442
------------ ------------ ------------ -------------
INCOME (LOSS) BEFORE INCOME TAXES................ 53,861 60,075 (24,595) 89,341
INCOME TAX EXPENSE (BENEFIT)..................... 26,976 34,147 (14,326)(r) 46,797
------------ ------------ ------------ --------------
NET INCOME (LOSS)................................ $ 26,885 $ 25,928 $ (10,269) $ 42,544
============ ============ ============
BASIC NET INCOME PER COMMON SHARE (s)............ $ 0.90 $ 0.99
============ =============
DILUTED NET INCOME PER COMMON SHARE (s).......... $ 0.89 $ 0.98
============ =============
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING -
BASIC (s)................................... 29,684 43,031
============ =============
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING -
DILUTED (s)................................. 30,229 43,440
============ =============
</TABLE>
See the accompanying notes to the unaudited pro forma combined financial
statements.
5
<PAGE>
QUEST DIAGNOSTICS INCORPORATED AND SUBSIDIARIES
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
BALANCE SHEET PRO FORMA ADJUSTMENTS
(a) Reflects the gross cash proceeds of $1,162.2 million in debt under the new
credit facility to finance the cash purchase price and transaction costs
associated with the SBCL acquisition, and to repay Quest Diagnostics' then
existing bank debt. At the close of the transaction on August 16, 1999,
Quest Diagnostics borrowed $1,132.5 million under the new credit facility
(including $57.5 million under the revolving credit facility) to fund the
cash portion of the purchase price of the SBCL acquisition and pay
transaction costs. As of September 30, 1999, Quest Diagnostics had repaid
the entire amount borrowed under the revolving credit facility at closing.
(b) Reflects the reduction in gross proceeds associated with the payment of
deferred financing costs totaling $36.9 million, less amounts paid through
June 30, 1999 of $4.9 million which were capitalized and recorded in the
Quest Diagnostics historical balance sheet as of June 30, 1999 within other
assets.
(c) Reflects the repayment of Quest Diagnostics' then existing bank debt, plus
accrued interest payable of $1.5 million as of June 30, 1999. The
unamortized balance of deferred financing costs related to such debt of
approximately $3.7 million was charged to common stockholders' equity, net
of taxes of $1.5 million.
(d) Reflects the purchase of SmithKline Beecham's clinical laboratory business
and the payment of transaction costs associated with the SBCL acquisition.
The preliminary allocation of acquisition cost to the SBCL assets and
liabilities acquired under the purchase method of accounting is as follows
(in millions):
<TABLE>
<S> <C> <C> <C>
Cash portion of the purchase price $ 1,005.0
Non-compete consideration 20.0
------------
TOTAL CASH CONSIDERATION BEFORE ADJUSTMENTS 1,025.0
Net tangible worth adjustment to cash portion of the
purchase price --(1)
Value of shares of common stock of Quest Diagnostics issued
to SmithKline Beecham 260.7
------------
ADJUSTED PURCHASE PRICE 1,285.7
TRANSACTION COSTS 9.3(2)
------------
TOTAL ACQUISITION COST 1,295.0
ESTIMATED NET ASSETS ACQUIRED:
Accounts receivable, net $ 399.0
Opening balance sheet adjustments (51.0) (1)
---------
$ 348.0
Other current assets 30.7
Opening balance sheet adjustments (2.0) (1)
Net assets held for sale 3.6 (3)
Current deferred tax asset 83.9 (4)
Due from SmithKline Beecham 20.8 (5)
--------
137.0
Property, plant and equipment 208.7
Opening balance sheet adjustments (2.3) (1)
Purchase accounting adjustment (14.2) (6)
Write-off of fixed assets due to integration activities (40.5) (7)
---------
151.7
Other assets 14.5
Opening balance sheet adjustments (.2) (1)
Noncurrent deferred tax asset 25.9 (4)
6
<PAGE>
Due from SmithKline Beecham 12.1 (5)
--------
52.3
Total tangible assets acquired 689.0
Accounts payable and accrued expenses 188.8
Opening balance sheet adjustments 11.6 (1)
Indemnified liabilities 45.8 (5)
Accrued costs to integrate SBCL and Quest Diagnostics
45.0 (7)
--------
291.2
Long-term debt, including current maturities 31.9
Opening balance sheet adjustments (.2) (1)
---------
31.7
Other liabilities .7
Opening balance sheet adjustments 10.0 (1)
Indemnified liabilities 28.5 (5)
--------
39.2
Total liabilities 362.1
--------
Net tangible assets acquired 326.9
----------
ESTIMATED INTANGIBLE ASSETS 968.1
SBCL intangible assets recorded at June 30, 1999 493.4
----------
PRO FORMA ADJUSTMENT - INTANGIBLE ASSETS $ 474.7 (8)
==========
</TABLE>
1. The Stock and Asset Purchase Agreement includes a provision for a purchase
price adjustment based on an audit of the August 16, 1999 combined balance
sheet of SBCL and certain affiliates. Adjustments resulting from this
audit, which are subject to resolution as set forth in the Stock and Asset
Purchase Agreement, have been reflected in the pro forma combined balance
sheet as of June 30, 1999 to the extent that the Company believes they are
applicable. The adjustments were primarily related to the recoverability of
accounts receivable and a provision to recognize certain contracts as loss
contracts. However, amounts due from SmithKline Beecham, as a result of
the purchase price adjustment, have not been reflected in the June 30,
1999 pro forma combined balance sheet. There can be no assurances that
the amounts reflected in the unaudited pro forma combined financial
statements will not be subject to change as a result of the resolution
of the purchase price adjustment.
2. These costs consist primarily of fees and expenses of investment bankers,
attorneys and accountants, printing costs, SEC filing fees and other
related charges. Through June 30, 1999, approximately $5.2 million of these
costs had been paid and were included in the Quest Diagnostics historical
balance sheet as of June 30, 1999 within other assets. For purposes of
preparing the June 30, 1999 unaudited pro forma combined balance sheet, the
remaining estimated fees of $4.1 million were assumed paid on June 30,
1999.
3. In conjunction with the acquisition of SBCL, Quest Diagnostics sold its
newly acquired interest that SBCL held in a joint venture in Mexico. The
adjustment records the joint venture at fair value in the pro forma
combined balance sheet as of June 30, 1999 within other current assets.
4. Represents pro forma adjustment to record the deferred tax position
associated with the acquired assets and liabilities of SBCL.
5. Liabilities for which the obligation is being retained by SmithKline
Beecham through an indemnity to Quest Diagnostics, are recoverable from
SmithKline Beecham on an after-tax basis. Quest Diagnostics has recorded an
estimate for the indemnified liabilities, which primarily relate to taxes
and billing and professional liability claims, in the pro forma combined
balance sheet as of June 30, 1999 with a net receivable due from SmithKline
Beecham.
7
<PAGE>
6. Reflects the pro forma adjustment to adjust the historical net book values
of SBCL to their respective estimated fair values at the date of closing.
7. Costs to realize synergies associated with the elimination of duplicate
facilities and other integration related activities of SBCL are estimated
at $85.5 million. Approximately $45.0 million is primarily related to
employee termination costs and costs to exit leased facilities. The
remaining $40.5 million is attributable to write-offs of fixed assets for
which management believes there is no future economic benefit as a result
of the SBCL acquisition.
These estimates are preliminary and may be revised as the integration plans
are more fully developed and finalized.
8. Based on the preliminary allocation of the acquisition cost above, the SBCL
acquisition will result in $968.1 million of intangible assets. Based on
SBCL's historical financial statements, a pro forma adjustment of
$474.7 million was reflected in the unaudited pro forma combined balance
sheet at June 30, 1999. The decrease in common stockholders' equity of
$664.2 million represents the elimination of SBCL's historical net equity
of $924.9 million, offset by the value of the 12.6 million shares of Quest
Diagnostics common stock issued to SmithKline Beecham of $260.7 million.
(e) Reflects the restructuring charge of $104.5 million (net of taxes of $41.8
million) for the estimated costs associated with the elimination of excess
capacity and other integration activities of Quest Diagnostics. Of the
total charge, $55.0 million represents accrued liabilities primarily
attributable to work force reductions and the costs to exit leased
facilities of Quest Diagnostics. The remaining $49.5 million is due to the
write-off of Quest Diagnostics' fixed assets which management believes
there is no future economic benefit as a result of the SBCL acquisition.
These estimates are preliminary and may be revised as the integration plans
are more fully developed and finalized.
(f) Assuming the SBCL acquisition had closed on June 30, 1999, Quest
Diagnostics would have incurred $30.6 million of special charges ($18.4
million, net of tax) in conjunction with the acquisition of SBCL. Of the
total, $20.1 million represents stock based employee compensation related
to special one-time grants of the Company's common stock, and accelerated
vesting, due to the completion of the SBCL acquisition, of stock grants
made in previous years. The remainder of the charge is primarily
attributable to professional and consulting fees incurred in connection
with integration related planning activities.
STATEMENT OF OPERATIONS PRO FORMA ADJUSTMENTS
(g) SBCL's historical interim financial statements are presented based on a
thirteen week fiscal period that ends on the last Thursday of the calendar
quarter. As a result, SBCL's historical interim results of operations
reflect 68 business days in the second quarter of 1999 compared to 64
business days in the second quarter of 1998 and 59 business days in the
first quarter of 1999. In order to provide more meaningful comparisons,
Quest Diagnostics recorded this pro forma adjustment to reflect SBCL's
historical interim results of operations on a calendar quarter consistent
with that of Quest Diagnostics. The impact of these adjustments serves to
decrease SBCL's reported historical results for the second quarter of 1999
while favorably impacting SBCL's historical results for the first quarter
of 1999.
(h) In order to provide more meaningful comparisons, Quest Diagnostics recorded
this pro forma adjustment to classify certain costs and expenses in the
historical financial statements of SBCL on a basis consistent with that of
Quest Diagnostics. These adjustments are primarily associated with the
classification of occupancy costs, professional liability insurance
expenses and research and development costs.
(i) As noted in (d) (1) above, the Stock and Asset Purchase Agreement includes
a provision for a purchase price adjustment based on an audit of the August
16, 1999 combined balance sheet of SBCL and certain affiliates. Adjustments
resulting from this audit, which are subject to resolution as set forth in
the Stock and Asset Purchase Agreement, have been reflected in the pro
forma combined statements of operations to the extent that the Company
believes they are applicable to the periods presented. The adjustments were
primarily related to the
8
<PAGE>
accounting for certain contracts as loss contracts for accounting purposes
and recoverability of accounts receivable. There can be no assurances that
the amounts reflected in the unaudited pro forma combined financial
statements will not be subject to change as a result of the resolution of
the purchase price adjustment.
(j) Reflects a net reduction in employee benefits, principally related to
certain benefit plans sponsored by SmithKline Beecham which were not
assumed by Quest Diagnostics under the stock and asset agreement.
Responsibility for the costs and liabilities associated with those plans
will remain with SmithKline Beecham.
(k) The pro forma adjustment reflects a reduction in expenses related to
general corporate overhead which was charged to the historical combined
financial statements of SBCL and related affiliates from SmithKline
Beecham.
(l) The pro forma adjustment reflects a reduction in interest income recognized
by Quest Diagnostics in the respective period. Assuming the SBCL
acquisition and anticipated borrowings took place on January 1, 1998,
average cash balances for the periods presented would have been lower,
resulting in significantly lower amounts of interest income earned on cash
and cash equivalents.
(m) The pro forma adjustment to interest expense, net represents the difference
between the combined historical interest expense (consisting of the
interest incurred by Quest Diagnostics on its then existing bank debt, and
the intercompany interest expense charged and allocated to SBCL by
SmithKline Beecham), and the assumed interest expense under the new credit
facility. For purposes of calculating the pro forma net interest expense
adjustment, the debt was assumed to consist of $1,100.0 million of
borrowings under the new credit facility. The weighted average assumed
interest rate on the borrowings for the new credit facility, including the
estimated impact to maintain interest rate hedge agreements covering a
notional amount of not less than 50% of its net funded debt, and the impact
of the amortization of deferred financing costs, was approximately 9.8%. If
the interest rate in the new credit facility fluctuates by 1/8%, interest
expense fluctuates by approximately $1.4 million annually. Depending on
market conditions at the time that the interest rate hedge agreements are
completed, and the ability of Quest Diagnostics to generate cash flow, the
interest rates and amounts borrowed under the new credit facility may vary
from that indicated above.
(n) Reflects the pro forma impact on the amortization of intangible assets.
Amortization of the goodwill, which accounts for a majority of the acquired
intangible assets, is calculated on the straight-line basis over forty
years.
(o) This pro forma adjustment removes non-recurring gains on the sale of assets
recorded in SBCL's historical combined financial statements for the
respective periods. For the six months ended June 30, 1999, SBCL recognized
income from the sale of its physician office-based teleprinter assets and
network of about $9.6 million. During the twelve months ended December 31,
1998, SBCL recognized income related to the sale and license of certain
technology of approximately $14.9 million.
(p) The pro forma adjustment to income tax expense represents the estimated
income tax impact of the pro forma adjustments at the incremental tax rate
of 40%. On an annual basis, approximately $4.0 million of the pro forma
adjustment to amortization of intangible assets is deductible for tax
purposes.
(q) Basic net income per common share is calculated by dividing net income
(loss), less preferred stock dividends(approximately $30 per quarter), by
the weighted average number of common shares outstanding. Diluted net
income per common share is calculated by dividing net income (loss), 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 primarily
represent outstanding stock options. Basic and diluted net income per share
on a pro forma basis gives effect to the 12.6 million shares of Quest
Diagnostics common stock issued to SmithKline Beecham and to the shares
issued to certain employees (as a result of the special one-time grant and
accelerated vesting), assuming the SBCL acquisition closed on January 1,
1998.
Pro forma net income for the year ended December 31, 1998 includes
approximately $11 million ($6.7 million, net of tax) of non-recurring gains
recorded by SBCL in 1998, the majority of which resulted from a favorable
settlement of a contract dispute.
9
