Quest Diagnostics 2000 Annual Report Download - page 65

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payment by SmithKline Beecham of $95.0 million. The purchase price adjustment was recorded in the Company’s
financial statements in the fourth quarter of 2000 as a reduction in the amount of goodwill recorded in conjunction with
the SBCL acquisition.
The remaining components of the purchase price allocation relating to the SBCL acquisition were finalized
during the third quarter of 2000. The resulting adjustments to the SBCL purchase price allocation primarily related to an
increase in deferred tax assets acquired, the sale of certain assets of SBCL at fair value to unconsolidated joint ventures of
Quest Diagnostics and an increase in accrued liabilities for costs related to pre-acquisition periods. As a result of these
adjustments, the Company reduced the amount of goodwill recorded in conjunction with the SBCL acquisition by
approximately $35 million during the third quarter of 2000.
In connection with finalizing the purchase price adjustment with SmithKline Beecham, Quest Diagnostics filed a
current report on Form 8-K on October 31, 2000 with the Securities and Exchange Commission to revise and update
certain 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, as described above, (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 unaudited pro forma combined
financial information included in this Form 10-K reflects the revised pro forma combined financial information included
in the Form 8-K referred to above.
None of the adjustments, resulting from the reduction in the SBCL purchase price or the completion of the
purchase price allocation, had any impact on the Company’s previously reported historical financial statements.
The unaudited pro forma combined financial information is presented for illustrative purposes only to assist in
analyzing the financial implications of the SBCL acquisition and borrowings under the Credit Agreement. 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.
Significant pro forma adjustments reflected in the unaudited pro forma combined financial information include
reductions in employee benefit costs and general corporate overhead allocated to the historical results of SBCL by
SmithKline Beecham, offset by an increase in net interest expense to reflect our new credit facility which was used to
finance the SBCL acquisition. Amortization of the goodwill, which accounts for a majority of the acquired intangible
assets, is calculated on the straight-line basis over forty years. Income taxes have been adjusted for the estimated income
tax impact of the pro forma adjustments at the incremental tax rate of 40%. A significant portion of the intangible assets
acquired in the SBCL acquisition is not deductible for tax purposes, which has the overall impact of increasing the
effective tax rate.
Both basic and diluted weighted average common shares outstanding have been presented on a pro forma basis
giving effect to the shares issued to SmithKline Beecham and the shares granted at closing to employees. Potentially
dilutive common shares primarily represent stock options. During periods in which net income available for common
stockholders is a loss, diluted weighted average common shares outstanding will equal basic weighted average common
shares outstanding, since under these circumstances, the incremental shares would have an anti-dilutive effect.
Historical Year Ended December 31, 2000 Compared with
Pro Forma Combined Year Ended December 31, 1999
The following discussion and analysis compares our historical results of operations for the year ended December
31, 2000 to the pro forma combined results of operations for the year ended December 31, 1999, assuming that SBCL
had been acquired by Quest Diagnostics on January 1, 1999. All references in this section to the year ended December
31, 2000 refer to the historical results of Quest Diagnostics for such period. All references in this section to the year
ended December 31, 1999 refer to the pro forma combined results of Quest Diagnostics for such period.
Income before an extraordinary loss for the year ended December 31, 2000 increased to $104.9 million,
compared to a loss of $33.5 million for the prior year period. Extraordinary losses, net of taxes, of $2.9 million and $2.1
million were recorded in 2000 and 1999, respectively, representing the write-off of deferred financing costs associated
with the prepayment of debt. Additionally, a number of special items were recorded in 2000 and 1999 which consisted of
the provisions for restructuring and other special charges reflected on the face of the historical and pro forma combined