-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, SK7hBiGWRZxHC3MKdlmIdwoei85To5bTPCWK3mb/K1VRp9261Y/AH+nTivRjpRuZ h7hL+NpC54HNzhFFzIUltg== 0000950146-98-001362.txt : 19980813 0000950146-98-001362.hdr.sgml : 19980813 ACCESSION NUMBER: 0000950146-98-001362 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19980630 FILED AS OF DATE: 19980812 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: QUEST DIAGNOSTICS INC CENTRAL INDEX KEY: 0001022079 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-MEDICAL LABORATORIES [8071] IRS NUMBER: 161387862 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-12215 FILM NUMBER: 98683845 BUSINESS ADDRESS: STREET 1: ONE MALCOLM AVE CITY: TETERBORO STATE: NJ ZIP: 07608 BUSINESS PHONE: 2013935143 MAIL ADDRESS: STREET 1: ONE MALCOLM AVE CITY: TETERBORO STATE: NJ ZIP: 07601 FORMER COMPANY: FORMER CONFORMED NAME: CORNING CLINICAL LABORATORIES INC DATE OF NAME CHANGE: 19960903 10-Q 1 QUARTERLY REPORT 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. 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 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)
Three Months Ended Six Months Ended ------------------ ---------------- June 30, June 30, June 30, June 30, 1998 1997 1998 1997 ---- ---- ---- ---- 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
The accompanying notes are an integral part of these statements. 2 QUEST DIAGNOSTICS INCORPORATED AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS JUNE 30, 1998 AND DECEMBER 31, 1997 (in thousands, except per share data)
June 30, December 31, 1998 1997 ---- ---- (unaudited) 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 ========== ==========
The accompanying notes are an integral part of these statements. 3 QUEST DIAGNOSTICS INCORPORATED AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE SIX MONTHS ENDED JUNE 30, 1998 AND 1997 (in thousands) (unaudited)
1998 1997 ---- ---- 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
8The accompanying notes are an integral part of these statements. 4 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 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 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
Non- Subsidiary Guarantor Parent Guarantors Subsidiaries Eliminations Consolidated ------ ---------- ------------ ----------- ------------ 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 ========= ========= ========== ======== =========
Condensed Consolidating Statement of Operations Six Months Ended June 30, 1997
Non- Subsidiary Guarantor Parent Guarantors Subsidiaries Eliminations Consolidated ------ ---------- ------------ ----------- ------------ 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 ========= ========= ========= ========= =========
7 QUEST DIAGNOSTICS INCORPORATED AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (dollars in thousands, unless otherwise indicated) (unaudited) Condensed Consolidating Balance Sheet June 30, 1998
Non- Subsidiary Guarantor Parent Guarantors Subsidiaries Eliminations Consolidated ------ ---------- ------------ ----------- ------------ 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 ========== ======== ========= ========= ==========
Condensed Consolidating Balance Sheet December 31, 1997
Non- Subsidiary Guarantor Parent Guarantors Subsidiaries Eliminations Consolidated ------ ---------- ------------ ----------- ------------ 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 ========== ========= ========= ========= ==========
8 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
Non- Subsidiary Guarantor Parent Guarantors Subsidiaries Eliminations Consolidated ------ ---------- ------------ ----------- ------------ 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 ========= ======== ======= ======= =========
Condensed Consolidating Statement of Cash Flows Six Months Ended June 30, 1997
Non- Subsidiary Guarantor Parent Guarantors Subsidiaries Eliminations Consolidated ------ ---------- ------------ ----------- ------------ 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 ======== ======== ======= ===== ========
9 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 $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 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 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:
Exhibit Number Description -------------- ----------- 4 Warrant to acquire shares of common stock of the Company issued to Premier Laboratory Services Limited Partnership. 27 Financial Data Schedule
(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 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 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 EX-4 2 WARRANT TO ACQUIRE SHARES OF COMMON STOCK 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 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 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 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:
Vesting Date % of Warrant Exercisable Incremental Shares Cumulative ------------ ------------------------ ------------------ ---------- 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
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 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 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 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 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 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 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 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 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 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 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 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, $0.01 par value, of Quest Diagnostics Incorporated and herewith delivers that number of shares of Common Stock having an aggregate Fair Market Value equal to the Exercise Price multiplied by the number of Warrant Shares being purchased hereby, as payment of the Warrant Price in accordance with the terms set forth in Section 3.3.2(b) of the Warrant. 15 Issuance Instructions The undersigned requests that a certificate for such Common Stock be registered in the name of _________________________________ whose address is _______________________________________________ and that such certificate be delivered to whose address is ________________________. If such number of shares of Common Stock is less than all of the shares of Common Stock which may be purchased upon the exercise of the Warrant, the undersigned hereby requests that a new Warrant representing the remaining balance of this Warrant be registered in the name of _____________________________________________ whose address is ____________________________________and that such Warrant be delivered to _____________________ whose address is ____________________________. - --------------------------- Name of Registered Owner - ------------------------------- Signature of Registered Owner - ------------------------------- - ------------------------------- Address - ------------------------------- Federal ID Number 16 EX-27 3 FDS QUEST DIAGNOSTICS INCORPORATED Q2 '98
5 0001022079 Quest Diagnostics Incorporated 1000 US$ 6-MOS DEC-31-1998 JAN-01-1998 JUN-30-1998 1 152,686 0 243,238 70,262 29,221 551,095 244,396 341,654 1,364,081 278,396 0 0 1,000 1,202,610 (643,296) 1,364,081 734,614 734,614 435,846 672,425 1,364 44,999 18,150 31,929 16,444 15,485 0 0 0 15,485 0.52 0.51
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