<PAGE> 1
EXHIBIT 99.8
UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS
On August 16, 1999, Quest Diagnostics Incorporated (the "Company" or
"Quest Diagnostics") completed the acquisition of the clinical laboratory
business of SmithKline Beecham plc ("SmithKline Beecham") for approximately $1.3
billion. The acquisition of SmithKline Beecham Clinical Laboratories, Inc. and
certain related affiliates ("SBCL") was accounted for under the purchase method
of accounting.
Quest Diagnostics has filed this Form 8-K to amend the pro forma combined
financial information previously reported by the Company (1) to reflect the
restated historical financial statements of SBCL prepared in conjunction with
finalizing the purchase price adjustment provided for in the SBCL acquisition
agreements, (2) to reflect the reduction in the purchase price of the SBCL
acquisition (3) to reflect the completion of the purchase price allocation, and
(4) to revise other adjustments that had been reflected in the previously
reported pro forma combined financial information. The amendment has no impact
on any of the previously reported historical financial statements of Quest
Diagnostics, either before or after the acquisition.
The following unaudited pro forma combined financial statements of Quest
Diagnostics have been prepared to illustrate the effects of the following
transactions:
- Quest Diagnostics' purchase of the clinical laboratory business of
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 then outstanding
common stock, and the payment of $1.025 billion in cash, which includes
$20 million payable under a non-competition agreement.
- Quest Diagnostics' financing of the cash purchase price and transaction
costs associated with the SBCL acquisition and its repayment of its then
existing bank debt with cash on-hand and borrowings under the new credit
facility.
The SBCL acquisition agreements included a provision for a reduction in
the purchase price paid by Quest Diagnostics in the event that the combined
balance sheet of SBCL indicated that the net assets acquired, as of the
acquisition date, were below a prescribed level. On October 11, 2000, the
purchase price adjustment was finalized with the result that SmithKline Beecham
owed Quest Diagnostics $98.6 million. This amount was offset by $3.6 million
separately owed by Quest Diagnostics to SmithKline Beecham, resulting in a net
payment to the Company by SmithKline Beecham of $95.0 million. This payment
from SmithKline Beecham will be recorded in the historical financial statements
of the Company in the fourth quarter of 2000 as a reduction in the purchase
price of the SBCL acquisition.
In addition to the purchase price reduction described above, the purchase
price allocation relating to the SBCL acquisition was completed in conjunction
with the preparation of the Company's quarterly report on Form 10-Q for the
fiscal quarter ended September 30, 2000. Adjustments to the SBCL purchase price
allocation reflected in the unaudited pro forma combined balance sheet as of
June 30, 1999 are primarily related to deferred tax assets acquired, the sale of
certain assets of SBCL to unconsolidated joint ventures of Quest Diagnostics and
accrued expenses related to pre-acquisition periods. None of the adjustments,
resulting from the purchase price reduction or the completion of the purchase
price allocation, will have any impact on the Company's previously reported
historical financial statements.
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 costs associated with severance and other integration-related
activities for 1999 and 2000, including the elimination of duplicate facilities
and related workforce reductions are included in the unaudited pro forma
combined balance sheet as of June 30, 1999. A significant portion of the
integration related costs are expected to require cash outlays.
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 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 assist in analyzing the financial implications of
the SBCL acquisition. The unaudited pro forma combined financial information may
not be indicative of the combined financial 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. The unaudited pro forma combined financial
information is only a summary and you should read it together with the
historical financial statements and related notes of Quest Diagnostics and the
historical financial statements and related notes of SBCL.
<PAGE> 2
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>
ASSETS
CURRENT ASSETS
Cash...................................... $ 148,478 $ - $ 1,173,364 (a)
(31,975) (b)
(239,968) (c)
(1,025,000) (d)
(7,696) (d) (2)
(17,203) (f) $ -
Accounts receivable, net.................. 224,920 353,960 (5,211) (d) (1) 573,669
Other current assets...................... 154,409 30,689 (2,291) (d) (1)
3,640 (d) (3)
105,388 (d) (4)
25,999 (d) (5)
7,349 (e) 325,183
-------------- -------------- --------------- --------------
Total current assets...................... 527,807 384,649 (13,604) 898,852
PROPERTY, PLANT AND EQUIPMENT, NET........... 243,107 208,730 (26,458) (d) (6)
(10,841) (d) (7)
(8,767) (e) 405,771
INTANGIBLE ASSETS, NET....................... 482,813 493,467 356,150 (d) (8) 1,332,430
OTHER ASSETS................................. 59,080 14,504 31,975 (b)
(3,693) (c)
95,000 (d) (1)
10,279 (d) (1)
(5,176) (d) (2)
(5,037) (d) (3)
32,802 (d) (4)
33,639 (d) (5)
7,205 (e) 270,578
-------------- -------------- --------------- --------------
TOTAL ASSETS................................. $ 1,312,807 $ 1,101,350 $ 493,474 $ 2,907,631
-------------- -------------- --------------- --------------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable and accrued expenses..... $ 251,903 $ 204,000 $ (1,468) (c)
(1,477) (c)
23,035 (d) (1)
55,444 (d) (5)
25,895 (d) (7)
18,373 (e)
(14,800) (f) $ 560,905
Revolving credit facility................. - - 98,364 (a) 98,364
Current portion of long-term debt......... 61,452 2,161 23,125 (a)
(61,000) (c) 25,738
-------------- -------------- --------------- --------------
Total current liabilities................. 313,355 206,161 165,491 685,007
LONG-TERM DEBT............................... 338,391 29,770 1,051,875 (a)
(177,500) (c) 1,242,536
OTHER LIABILITIES............................ 63,243 700 51,446 (d) (5)
23,376 (d) (7)
9,245 (e) 148,010
PREFERRED STOCK.............................. 1,000 - - 1,000
COMMON STOCKHOLDERS' EQUITY.................. 596,818 864,719 (2,216) (c)
(604,009) (d) (8)
(21,831) (e)
(2,403) (f) 831,078
-------------- -------------- --------------- --------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY... $ 1,312,807 $ 1,101,350 $ 493,474 $ 2,907,631
-------------- -------------- --------------- --------------
</TABLE>
See the accompanying notes to the unaudited pro forma combined financial
statements.
<PAGE> 3
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
Quest and Other Adjusted
Diagnostics SBCL Adjustments Pro Forma
---------------- ---------------- ------------------------ ----------------
<S> <C> <C> <C> <C>
NET REVENUES..................................... $ 394,034 $ 474,689 $ (29,703) (g)
(1,487) (h) $ 837,533
COSTS AND EXPENSES
Cost of services.............................. 236,071 349,122 (15,200) (i)
(12,088) (g)
(1,602) (j)
(1,635) (h)
(4,147) (k) 550,521
Selling, general and administrative........... 121,230 140,348 (6,542) (g)
3,588 (j)
(517) (h)
(1,336) (k)
(1,137) (l) 255,634
Interest expense, net......................... 5,008 11,364 1,496 (m)
12,022 (n) 29,890
Amortization of intangible assets............. 5,219 7,529 (1,343) (o) 11,405
Special charges............................... - - 15,200 (i)
613 (h) 15,813
Other, net.................................... 1,999 1,712 (1,986) (j)
(128) (g) 1,597
-------------- -------------- -------------- ---------------
Total...................................... 369,527 510,075 (14,742) 864,860
-------------- -------------- -------------- ---------------
INCOME (LOSS) BEFORE INCOME TAXES................ 24,507 (35,386) (16,448) (27,327)
INCOME TAX EXPENSE (BENEFIT)..................... 11,420 (12,054) (7,523) (q) (8,157)
-------------- -------------- -------------- ---------------
NET INCOME (LOSS)................................ $ 13,087 $ (23,332) $ (8,925) $ (19,170)
-------------- -------------- --------------- ---------------
BASIC NET INCOME (LOSS) PER COMMON SHARE (r)..... $ 0.44 $ (0.44)
-------------- --------------
DILUTED NET INCOME (LOSS) PER COMMON SHARE (r)... $ 0.43 $ (0.44)
-------------- --------------
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING - BASIC (r)....................... 29,920 43,248
-------------- ---------------
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING - DILUTED (r)..................... 30,729 43,933
-------------- ---------------
</TABLE>
See the accompanying notes to the unaudited pro forma combined financial
statements.
<PAGE> 4
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 Adjustments Adjusted
Diagnostics SBCL Pro Forma
---------------- ---------------- ------------------------ ------------------
<S> <C> <C> <C> <C>
NET REVENUES..................................... $ 775,875 $ 888,021 $ (2,913) (h) $ 1,660,983
COSTS AND EXPENSES
Cost of services.............................. 473,478 644,415 (15,200) (i)
(3,439) (j)
(3,408) (h)
(8,325) (k) 1,087,521
Selling, general and administrative........... 237,831 241,988 6,170 (j)
(1,168) (h)
(2,665) (k)
(1,980) (l) 480,176
Interest expense, net......................... 12,367 22,673 3,304 (m)
23,393 (n) 61,737
Amortization of intangible assets............. 10,313 14,971 (2,600) (o) 22,684
Special charges............................... - - 15,200 (i)
613 (h) 15,813
Other, net.................................... 3,301 (7,491) (2,731) (j) (6,921)(p)
-------------- -------------- -------------- ---------------
Total...................................... 737,290 916,556 7,164 1,661,010
-------------- -------------- -------------- ---------------
INCOME (LOSS) BEFORE INCOME TAXES................ 38,585 (28,535) (10,077) (27)
INCOME TAX EXPENSE (BENEFIT)..................... 18,065 (7,214) (5,879) (q) 4,972
-------------- -------------- -------------- ---------------
NET INCOME (LOSS)................................ $ 20,520 $ (21,321) $ (4,198) $ (4,999)
-------------- -------------- --------------- --------------
BASIC NET INCOME (LOSS) PER COMMON SHARE (r)..... $ 0.69 $ (0.12)
-------------- ---------------
DILUTED NET INCOME (LOSS) PER COMMON SHARE (r)... $ 0.67 $ (0.12)
-------------- ---------------
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING - BASIC (r)....................... 29,819 43,146
-------------- ---------------
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING - DILUTED (r)..................... 30,505 43,720
-------------- ---------------
</TABLE>
See the accompanying notes to the unaudited pro forma combined financial
statements.
<PAGE> 5
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 and Adjusted
Diagnostics SBCL Other Adjustments Pro Forma
---------------- --------------- ------------------------ ------------------
<S> <C> <C> <C> <C>
NET REVENUES..................................... $ 1,458,607 $ 1,567,843 (4,819) (h) $ 3,021,631
COSTS AND EXPENSES
Cost of services.............................. 896,793 1,043,255 (4,573) (j)
(4,697) (h)
(23,432) (k) 1,907,346
Selling, general and administrative........... 445,885 424,514 6,932 (j)
(3,000) (h)
(7,699) (k)
(7,277) (l) 859,355
Interest expense, net......................... 33,403 47,640 7,673 (m)
37,836 (n) 126,552
Amortization of intangible assets............. 21,697 30,270 (5,530) (o) 46,437
Other, net.................................... 6,968 (25,911) (2,359) (j) (21,302)(p)
-------------- -------------- -------------- ---------------
Total...................................... 1,404,746 1,519,768 (6,126) 2,918,388
-------------- -------------- -------------- ---------------
INCOME (LOSS) BEFORE INCOME TAXES................ 53,861 48,075 1,307 103,243
INCOME TAX EXPENSE (BENEFIT)..................... 26,976 29,347 (3,289) (q) 53,034
-------------- -------------- -------------- ---------------
NET INCOME (LOSS)................................ $ 26,885 $ 18,728 $ 4,596 $ 50,209
-------------- -------------- -------------- ---------------
BASIC NET INCOME (LOSS) PER COMMON SHARE (r)..... $ 0.90 $ 1.16
-------------- ---------------
DILUTED NET INCOME (LOSS) PER COMMON SHARE (r)...
$ 0.89 $ 1.15
-------------- ---------------
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING - BASIC (r)....................... 29,684 43,031
-------------- ---------------
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING - DILUTED (r)..................... 30,229 43,440
-------------- ---------------
</TABLE>
See the accompanying notes to the unaudited pro forma combined financial
statements.
<PAGE> 6
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 $1,173.4 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 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> <C>
Cash portion of the purchase price $ 1,005.0
Non-compete consideration 20.0
--------------
TOTAL CASH CONSIDERATION BEFORE ADJUSTMENTS 1,025.0
Purchase Price Adjustment (98.6) (1)
Value of shares of common stock of Quest Diagnostics issued to
SmithKline Beecham 260.7
--------------
ADJUSTED PURCHASE PRICE 1,187.1
TRANSACTION COSTS 12.9 (2)
--------------
TOTAL ACQUISITION COSTS 1,200.0
ESTIMATED NET ASSETS ACQUIRED:
Accounts receivable, net $ 354.0
Adjustment to purchase price allocation (5.2) (1)
-----------
$ 348.8
Other current assets 30.7
Adjustment to purchase price allocation (2.3) (1)
Net assets held for sale 3.6 (3)
Current deferred tax asset 105.4 (4)
Due from SmithKline Beecham 26.0 (5)
-----------
163.4
Property, plant and equipment 208.7
Purchase accounting adjustment (26.5) (6)
Write-off of fixed assets due to integration activities (10.8) (7)
-----------
171.4
Other assets 14.5
Investment in joint venture (5.0) (3)
Adjustment to purchase price allocation 10.3 (1)
Noncurrent deferred tax asset 32.8 (4)
Due from SmithKline Beecham 33.6 (5)
Amount separately owed by Quest Diagnostics to SmithKline Beecham (3.6) (1)
--------
82.6
---------
Total tangible assets acquired 766.2
---------
Accounts payable and accrued expenses 204.0
Indemnified liabilities 55.4 (5)
Adjustment to purchase price allocation 23.0 (1)
Accrued costs to integrate SBCL and Quest Diagnostics 25.9 (7)
--------
308.3
Long-term debt, including current maturities 31.9
</TABLE>
<PAGE> 7
<TABLE>
<S> <C> <C> <C> <C>
Other liabilities .7
Indemnified liabilities 51.4 (5)
Accrued costs to integrate SBCL and Quest Diagnostics 23.4 (7)
--------
75.5
--------
Total liabilities 415.7
--------
Net tangible assets acquired 350.5
-----------
ESTIMATED INTANGIBLE ASSETS 849.5
SBCL intangible assets recorded at June 30, 1999 493.4
-----------
PRO FORMA ADJUSTMENT - INTANGIBLE ASSETS $ 356.1 (8)
-----------
</TABLE>
1. The SBCL acquisition agreements included a provision for a reduction
in the purchase price paid by Quest Diagnostics in the event that the
combined balance sheet of SBCL indicated that the net assets
acquired, as of the acquisition date, were below a prescribed level.
On October 11, 2000, the purchase price adjustment was finalized with
the result that SmithKline Beecham owed Quest Diagnostics $98.6
million. This amount was offset by $3.6 million separately owed by
Quest Diagnostics to SmithKline Beecham, resulting in a net payment
to the Company by SmithKline Beecham of $95.0 million. This payment
from SmithKline Beecham will be recorded in the historical financial
statements of the Company in the fourth quarter of 2000 as a
reduction in the purchase price of the SBCL acquisition.
In addition to the purchase price reduction described above, the
purchase price allocation relating to the SBCL acquisition was
completed in conjunction with the preparation of the Company's
quarterly report on Form 10-Q for the fiscal quarter ended September
30, 2000. Adjustments to the SBCL purchase price allocation reflected
in the unaudited pro forma combined balance sheet as of June 30, 1999
are primarily related to deferred tax assets acquired, the sale of
certain assets of SBCL to unconsolidated joint ventures of Quest
Diagnostics and accrued expenses related to pre-acquisition periods.
None of the adjustments, resulting from the purchase price reduction
or the completion of the purchase price allocation, will have any
impact on the Company's previously reported historical financial
statements.
The accompanying unaudited pro forma combined financial information
reflects the impact of finalizing the SBCL purchase price adjustment,
as discussed above, and the revised purchase price allocation
relating to the SBCL acquisition.
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 $7.7
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.
6. Reflects the pro forma adjustment primarily to adjust the historical
net book values of SBCL to their respective estimated fair values at
the date of closing.
7. Costs to realize the benefits associated with the elimination of
duplicate facilities and other integration related activities of SBCL
are estimated at approximately $60.1 million. Approximately $49.3
million is primarily related to employee termination costs and
contractual obligations including those related to facilities and
equipment leases. The remaining $10.8 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.
8. Based on the preliminary allocation of the acquisition cost above,
the SBCL acquisition will result in $849.5 million of intangible
assets. Based on SBCL's historical financial statements, a pro forma
adjustment of $356.1 million was reflected in the unaudited pro forma
combined balance sheet at June 30, 1999. The decrease in common
stockholders' equity of $604.0 million represents the elimination of
SBCL's historical net equity of $864.7 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 $36.4 million for the estimated costs
associated with the elimination of excess capacity and other integration
activities of Quest Diagnostics. Of the total charge, $27.6 million
represents accrued liabilities primarily attributable to work force
reductions and the costs to exit leased facilities of Quest Diagnostics.
The remaining $8.8 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.
(f) Assuming the SBCL acquisition had closed on June 30, 1999, Quest
Diagnostics would have incurred $37.0 million of special charges in
conjunction with the acquisition of SBCL. Of the total, $19.8 million
represents stock based employee compensation related to special one-time
grants of the Company's common stock, and accelerated vesting, due
<PAGE> 8
to the completion of the SBCL acquisition, of stock grants made in
previous years; $3.5 million represented special recognition awards to
certain employees involved in the transaction and integration planning
processes of the SBCL acquisition; and $1.5 million represented costs
incurred by the Company in conjunction with its planned offering of new
senior subordinated notes, the proceeds of which were expected to repay
the Company's existing senior subordinated notes. The Company decided not
to proceed with the offering due to unsatisfactory market conditions. The
remainder of the special charge was 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) Reflects adjustments primarily to account for certain contracts as loss
contracts.
(i) Pro forma adjustment to reclassify the provision recorded in the
historical results of SBCL to account for a customer contract as a loss
contract.
(j) 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.
(k) 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.
(l) 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.
(m) 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.
(n) 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.
(o) 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.
(p) Pro forma net income for the six months ended June 30, 1999 included a
$9.7 million gain recognized by SBCL from the sale of its physician
office-based teleprinter assets and network which was recorded in other,
net. Pro forma net income for the year ended December 31, 1998 included
approximately $25.8 million of gains recorded by SBCL in 1998, the
majority of which resulted from gains recognized from the sale and license
of certain technology and from a favorable settlement of a contract
dispute which were recorded in other, net.
(q) 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.
<PAGE> 9
(r) 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.
