Quest Diagnostics 2003 Annual Report Download

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Earning
Your Trust
2003 ANNUAL REPORT
SIX SIGMA QUALITY
ADVANCED INFORMATION TECHNOLOGY
ACCESS & CONVENIENCE
INNOVATIVE SCIENCE & MEDICINE

Table of contents

  • Page 1
    SIX SIGM A QUALITY ADVANCED INFORM ATION TECHNOLOGY Earning Y our Trust ACCESS & CONVENIENCE INNOVATIVE SCIENCE & M EDICINE 2003 ANNUAL REPORT

  • Page 2
    ... losses on debt extinguishment and provisions for restructurings and other special charges. A reconciliation of these measures and the most directly comparable financial measures under generally accepted accounting principles can be found follow ing the attached 2003 Annual Report on Form 10-K.

  • Page 3
    ... m onths and years. We are com m itted to earn your trust as w e perform vital diagnostic tests that provide answ ers to im prove patient health. Every business day, m ore than half a m illion people and their fam ilies entrust Quest Diagnostics to tell their doctors w hether they are healthy or ill...

  • Page 4
    ... health. The com pany offers the broadest access to diagnostic testing services through its national netw ork of laboratories and patient service centers, and provides interpretive consultation through its extensive m edical and scientific staff. Quest Diagnostics is the leading provider of esoteric...

  • Page 5
    ... Operating Officer and CEO-Elect TO OUR FELLOW SHAREHOLDERS, CUSTOM ERS AND EM PLOYEES: Quest Diagnostics delivered another year of outstanding perform ance in 2003. We reported excellent financial results and continued to invest for the future, building on strength as the clear industry leader...

  • Page 6
    ... internally driven grow th, including expanding our sales force and providing enhanced training and tools, and taking Six Sigm a quality processes to the next level to drive greater custom er satisfaction. As the year ended, w e saw initial encouraging signs that these actions are producing results...

  • Page 7
    ... results by the values and vision of Quest Diagnostics. The com pany is built on a firm foundation of six values: Quality, Integrity, Innovation, Accountability, Collaboration and Leadership. These are not just w ords; they have real m eaning for our m ore than 37,000 em ployees and guide the way...

  • Page 8
    ...in all processes at Quest Diagnostics. All of our em ployees, including Basem Iskaros, M .D., Senior Staff Pathologist (right); M ara M usi, Billing Custom er Service Representative (bottom , left); and Nick Giorgio, Technologist, Autom ated Chem istry (below, left), are com m itted to providing the...

  • Page 9
    ... a doctor w ith test results, to reducing wait tim es at patient service centers, to im proving the accuracy of our billing process. RIGOROUS QUALITY ASSURANCE Clinical laboratories are subject to stringent regulations im posed by federal, state and local governm ent agencies. All Quest Diagnostics...

  • Page 10
    ..., Logistics Departm ent Supervisor (above, right); and John Duffy, Courier (top). We offer alm ost 2,000 conveniently located patient service centers and operate our ow n logistics netw ork that transports m ore than half a m illion specim ens to our laboratories every business day, rain or shine.

  • Page 11
    ... turn to our website (www.questdiagnostics.com) to learn m ore about laboratory tests in easy-to-understand, non-technical term s, to have billing questions answ ered, or to pay online. From top: Ethel Jimenez Client Service Representative Judi Hendricks Branch Operations Training Specialist 9

  • Page 12
    Quest Diagnostics em ployees, such as Leza Gallo, M .D., Director, Cytopathology (top, left) and Elsie Arroyo, Cytotechnologist (top, right), help physicians diagnose and treat disease. We are com m itted to continuously expanding our test offerings that can help to im prove the lives of patients. ...

  • Page 13
    ...Quest Diagnostics Nichols Institute M ervyn Sahud, M .D., F .A.C.P M edical Director, Coagulation One day, biochips m ay help individuals learn about their ow n genetic predisposition to disease and help their physicians tailor individualized treatm ent regim ens. In 2003, w e becam e the first com...

  • Page 14
    ... 2003 clients' usage of our unique online test ordering and results reporting system m ore than doubled. These solutions help physicians to save tim e, reduce errors and im prove patient care. Quest Diagnostics Data Center em ployees such as Evelyn Leiva, Com puter Operations Support Representative...

  • Page 15
    ... ® We provide industry-leading inform ation technology solutions that earn the trust of doctors by enabling them to spend m ore tim e diagnosing and treating patients. Physician clients m ore than doubled their use of our online test ordering and results reporting system in 2003. Our Quest on Dem...

  • Page 16
    ... New York, New York ROSANNE HAGGERTY Founder and President Com m on Ground Com m unity New York, New York SURYA N. M OHAPATRA, PH.D. President and Chief Operating Officer and CEO-Elect Quest Diagnostics Incorporated Teterboro, New Jersey DAN C. STANZIONE, PH.D.* President Em eritus Bell Laboratories...

  • Page 17
    UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 FORM 10-K Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the Fiscal Year Ended December 31, 2003 Commission File Number 1-12215 Quest Diagnostics Incorporated One Malcolm Avenue, ...

  • Page 18
    ... company in our industry to provide full esoteric testing services, including gene-based testing, on both coasts through our Quest Diagnostics Nichols Institute facilities, located in San Juan Capistrano, California and Chantilly, Virginia. We also have laboratory facilities in Mexico City, Mexico...

  • Page 19
    ... to consumers. We believe these factors have reduced the utilization of healthcare services in general. Orders for laboratory testing are generated from physician offices, hospitals and employers. As such, factors such as the number of unemployed and uninsured and design changes in healthcare plans...

  • Page 20
    ..., we launched our proprietary eMaxx௡ Internet portal to physicians nationwide, which enables doctors to order diagnostic tests and review laboratory results online, as well as check patients' insurance eligibility in real time and view clinical information from many sources. • Pursue Strategic...

  • Page 21
    ...testing laboratory and hospital service center for the eastern United States, complementing our Nichols Institute esoteric testing facility in San Juan Capistrano, California. Esoteric testing volumes have been redirected within our national network to provide customers with improved turnaround time...

  • Page 22
    ... times. Patient service centers are facilities where specimens are collected. These centers are typically located in or near a building used by medical professionals. We operate 24 hours a day, 365 days a year. We perform and report most routine procedures within 24 hours. Most test results...

  • Page 23
    ... for esoteric testing under the Nichols Institute Diagnostics brand name. These are sold principally to hospitals, clinical laboratories and dialysis centers, both domestically and internationally. Our MedPlus subsidiary is a developer and integrator of clinical connectivity and data management...

  • Page 24
    ...companies or with physicians on behalf of their patients. Medicare and Medicaid reimbursements are based on fee schedules set by governmental authorities. Managed Care Organizations and Other Insurance Providers Health insurers, which typically contract with a limited number of clinical laboratories...

  • Page 25
    ... clinical laboratory testing while health insurers realize cost reductions under a single capitated arrangement. Hospitals We provide services to hospitals throughout the United States that vary from esoteric testing to helping manage their laboratories. We believe that we are the industry's market...

  • Page 26
    ... of clinical laboratory testing directly to consumers in certain states. Consumers pay for and receive the test results directly. In each case, a physician reviews the order and result. We believe this market will continue to grow over time. Sales and Marketing We market to and service our customers...

  • Page 27
    ... portal enables doctors to order diagnostic tests and review laboratory results online, as well as check patients' insurance eligibility in real time and view clinical information from many sources. In pilot markets, physicians are also able to use eMaxx௡ to prescribe pharmaceuticals. This service...

  • Page 28
    ..., as well as internal compliance policies and procedures, adds further complexity and costs to the billing process. Changes in laws and regulations could negatively impact our ability to bill our clients. The Centers for Medicare & Medicaid Services, or CMS (formerly the Health Care Financing...

  • Page 29
    ... service centers. We continue to implement our Six Sigma and standardization initiatives to help achieve our goal of becoming recognized as the undisputed quality leader in the healthcare services industry. Our Nichols Institute facility in San Juan Capistrano was the first clinical laboratory...

  • Page 30
    ... are more stringent than federal law. For example, state laws may require additional personnel qualifications, quality control, record maintenance and/or proficiency testing. The cost of compliance with CLIA makes it cost prohibitive for many physicians to operate clinical laboratories in their of...

  • Page 31
    varies from state to state. In certain states these restrictions affect our ability to directly provide anatomic pathology services and/or to provide clinical laboratory services directly to consumers. Privacy and Security of Health Information; Standard Transactions Pursuant to the Health Insurance...

  • Page 32
    ... the Medicare business generally less profitable. However, we believe that our other business may significantly depend on continued participation in the Medicare and Medicaid programs, because many customers want a single laboratory to perform all of their clinical laboratory testing services...

  • Page 33
    ..., state Medicaid programs are prohibited from paying more (and in most instances, pay significantly less) than Medicare. Major clinical laboratories, including Quest Diagnostics, typically use two fee schedules for tests billed on a fee-for-service basis: • "Client'' fees charged to physicians...

  • Page 34
    ..., Medicare carriers have adopted policies under which they do not pay for many commonly ordered clinical tests unless the ordering physician has provided an appropriate diagnosis code supporting the medical necessity of the test. Physicians are required by law to provide diagnostic information when...

  • Page 35
    ... difficult process, with many obstacles to obtaining accurate claims payment, including applying the correct fee schedule. The announced change will enable the laboratory's "home'' carrier to maintain and apply the clinical laboratory fee schedule applicable to the carrier region where the test was...

  • Page 36
    ... or our ability to participate in Medicare, Medicaid and other federal and state healthcare programs. During the mid-1990s, Quest Diagnostics and SBCL settled government claims that primarily involved industry-wide billing and marketing practices that both companies believed to be lawful. The...

  • Page 37
    ... impact on our client base and reputation. We maintain various liability insurance programs for claims that could result from providing or failing to provide clinical laboratory testing services, including inaccurate testing results and other exposures. Our insurance coverage limits our maximum...

  • Page 38
    ...and collected revenue or general or administrative expenses resulting from our compliance with Medicare and Medicaid administrative policies and requirements of third party payers. These include: (1) the requirements of Medicare carriers to provide diagnosis codes for many commonly ordered tests and...

  • Page 39
    ... bill the Medicare and Medicaid programs or other adverse regulatory actions by federal, state and local agencies. See "Business-Regulation of Clinical Laboratory Operations''. Changes in federal, state or local laws or regulations, including changes that result in new or increased federal or state...

  • Page 40
    ... a billing center; a site in San Clemente, California, that serves as the main facility for Nichols Institute Diagnostics; a site in Cincinnati that serves as the main office for MedPlus; and an additional site in West Hills, California, that will serve as our regional laboratory in the Los Angeles...

  • Page 41
    ... in various legal proceedings arising in the ordinary course of business. Some of the proceedings against us involve claims that are... adverse effect on our financial position, but may be material to our results of operations and cash ï¬,ows in the period in which such proceedings or claims are...

  • Page 42
    ... Matters and Issuer Purchases of Equity Securities Our common stock is listed and traded on the New York Stock Exchange under the symbol "DGX.'' The following table sets forth, for the periods indicated, the high and low sales price per share as reported on the New York Stock Exchange Consolidated...

  • Page 43
    ... period covered by this report. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures are adequate and effective. (b) During the quarter ended December 31, 2003, there were no changes in our internal control...

  • Page 44
    ... operations company-wide, including physician, clinical trials, international and drugs of abuse testing, as well as the diagnostic instruments business. Mr. Zewe joined the Company in 1994 as General Manager of the Philadelphia regional laboratory, became Regional Vice President Sales and Marketing...

  • Page 45
    ...purchase price is 85% of the closing market price on the last business day of the calendar quarter (or, if lower, the closing market price on the first business day of the calendar quarter). The ESPP authorizes the issuance of 4 million shares of the Company's common stock. The number of securities...

  • Page 46
    ... Data: Quarterly Operating Results (unaudited) ...2. Financial Statement Schedule: Item F-1 F-2 F-3 F-4 F-5 F-6 F-36 Page Schedule II-Valuation Accounts and Reserves ...3. Exhibits filed as part of this report: See (c) below. (b) Report on Form 8-K filed during the fourth quarter of 2003...

  • Page 47
    ... Agent (filed as an Exhibit to the Company's quarterly report on Form 10-Q for the quarter ended September 30, 2003 and incorporated herein by reference) Amended and Restated Receivables Sale Agreement dated as of September 30, 2003 among Quest Diagnostics Incorporated and each of its direct...

  • Page 48
    ... by reference to Exhibit (a)(20) of Quest Diagnostics' Schedule TO Amendment No. 20 filed with the Commission on January 6, 2003, file No. 001-12215) Form of Employees Stock Purchase Plan, as amended (filed as an Exhibit to the Company's annual report on Form 10-K for the year ended December 31...

  • Page 49
    ... incorporated herein by reference) Form of Senior Management Incentive Plan (filed as Appendix A to the Company's proxy statement dated March 28, 2003 and incorporated herein by reference) Code of Business Ethics Subsidiaries of Quest Diagnostics Incorporated Consent of PricewaterhouseCoopers LLP...

  • Page 50
    ... of the Board and Chief Executive Officer Senior Vice President and Chief Financial Officer Vice President, Controller and Chief Accounting Officer February 26, 2004 By February 26, 2004 By February 26, 2004 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has...

  • Page 51
    ... Company and management's discussion and analysis of financial condition and results of operations included elsewhere in this Annual Report on Form 10-K. Year Ended December 31, 2002(b) 2001 2000 (in thousands, except per share data) 2003(a) 1999(c) Operations Data: Net revenues ...Amortization...

  • Page 52
    ... SmithKline Beecham Clinical Laboratories, Inc., or SBCL. Consolidated operating results for 1999 include the results of operations of SBCL subsequent to the closing of the acquisition. (d) In July 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangibles'', or SFAS 142, which the Company...

  • Page 53
    ... common shares primarily include stock options and restricted common shares granted under our Employee Equity Participation Program. During the period in... effect. (k) On December 31, 2001, the Company repurchased all of its then outstanding preferred stock for its par value of $1 million plus accrued...

  • Page 54
    ... based on fee schedules set by governmental authorities. We incur significant additional costs as a result of our participation in Medicare and Medicaid programs, as billing and reimbursement for clinical laboratory testing is subject to considerable and complex federal and state regulations. These...

  • Page 55
    ... participation in the Medicare and Medicaid programs, because many customers want a single laboratory to perform all of their clinical laboratory testing services, regardless of who pays for such services. Health insurers, which typically contract with a limited number of clinical laboratories...

  • Page 56
    ... to reserve estimates resulting from adverse changes in collection and reimbursement experience and billing operations. Reserves for general and professional liability claims As a general matter, providers of clinical laboratory testing services may be subject to lawsuits alleging negligence or...

  • Page 57
    ... considers publicly available information regarding the market capitalization of our Company, as well as (i) publicly available information regarding comparable publicly-traded companies in the clinical laboratory testing industry, (ii) the financial projections and future prospects of our business...

  • Page 58
    ...in Connection with a Purchase Business Combination''. Unilab Corporation As part of the Unilab acquisition, we acquired all of Unilab's operations, including its primary testing facilities in Los Angeles, San Jose and Sacramento, California, and approximately 365 patient service centers and 35 rapid...

  • Page 59
    ...the collection and testing of specimens, as well as administrative and other support functions. Of the $9 million in costs, $7.9 million was recorded in the fourth quarter and related to actions that impact the employees and operations of Unilab, was accounted for as a cost of the Unilab acquisition...

  • Page 60
    ... our blood draws, but is reducing costs in accessioning and other parts of our operations due to improved billing information and a reduction in the number of inadequate patient samples obtained by our trained phlebotomists compared to samples collected by physician employed phlebotomists. Selling...

  • Page 61
    ... enhance patient care. Operating Costs and Expenses Total operating costs for the year ended December 31, 2002 increased $300 million from the prior year primarily due to increases in our clinical testing volume, largely as a result of the AML acquisition, employee compensation and supply costs and...

  • Page 62
    ...for ordering and resulting are improving the initial collection of billing information and generating savings in the cost of billing and bad debt expense, both of which are components of selling, general and administrative expense. Increased blood draws by Company-trained employee phlebotomists also...

  • Page 63
    ... each of the years ended December 31, 2003 and 2002. Quantitative and Qualitative Disclosures About Market Risk We address our exposure to market risks, principally the market risk of changes in interest rates, through a controlled program of risk management that may include the use of derivative...

  • Page 64
    ...improved operating performance, our ability to accelerate the tax deductions resulting from Internal Revenue Service rule changes, efficiencies in our billing and collection processes and a reduction in SBCL integration costs paid. The increase was partially offset by settlement payments, primarily...

  • Page 65
    ... fund future dividend payments with cash ï¬,ows from operations, and do not expect the dividend to have a material impact on our ability to finance future growth. Share Repurchase Plan In May 2003, our Board of Directors authorized a share repurchase program, which permits us to purchase up to $300...

  • Page 66
    ... operating leases, noncancelable commitments to purchase products or services, and reserves with respect to insurance and billing-related claims is contained in Note 15 to the Consolidated Financial Statements. In December 2003, we entered into two lines of credit with two financial institutions...

  • Page 67
    ... plan design changes are having on our business. As the leading national provider of diagnostic testing, information and related services with the most extensive network of laboratories and patient service centers throughout the United States, we expect to further enhance patient access and customer...

  • Page 68
    ...in quality; convenience and accessibility; a broad test menu; and a broad range of information technology products to help providers and insurers better manage their patients' health. We continue to invest in areas that are differentiating us from our competitors, including: Six Sigma quality, which...

  • Page 69
    ... and a program of internal audits. The Audit and Finance Committee of the Board of Directors is responsible for reviewing and monitoring Quest Diagnostics' financial reporting and accounting practices and the annual appointment of the independent auditors. The Audit and Finance Committee meets...

  • Page 70
    ... position of Quest Diagnostics Incorporated and its subsidiaries (the "Company'') at December 31, 2003 and 2002, and the results of their operations and their cash ï¬,ows for each of the three years in the period ended December 31, 2003 in conformity with accounting principles generally accepted in...

  • Page 71
    QUEST DIAGNOSTICS INCORPORATED AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS DECEMBER 31, 2003 AND 2002 (in thousands, except per share data) 2003 2002 Assets Current assets: Cash and cash equivalents ...Accounts receivable, net of allowance of $211,739 and $193,456 at December 31, 2003 and 2002, ...

  • Page 72
    QUEST DIAGNOSTICS INCORPORATED AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001 (in thousands, except per share data) 2003 2002 2001 Net revenues ...Operating costs and expenses: Cost of services ...Selling, general and administrative ...

  • Page 73
    ...tax provision (benefit) ...Minority share of income ...Stock compensation expense ...Tax benefits associated with stock-based compensation plans ...Other, net ...Changes in operating assets and liabilities: Accounts receivable ...Accounts payable and accrued expenses ...Integration, settlement and...

  • Page 74
    ... to cover employee payroll tax withholdings on stock issued under benefit plans (181 common shares) ...Tax benefits associated with stock-based compensation plans ...Amortization of unearned compensation ...Purchases of treasury stock (3,990 common shares) ...Balance, December 31, 2003 ...$ 465...

  • Page 75
    ...the healthcare industry, Quest Diagnostics offers a broad range of clinical laboratory testing services to physicians, hospitals, managed care organizations, employers, governmental institutions and other commercial clinical laboratories. Quest Diagnostics is the leading provider of esoteric testing...

  • Page 76
    ... generated by Medicare and Medicaid programs. Under capitated agreements with health insurers, the Company recognizes revenue based on a predetermined monthly contractual rate for each member of the insurers' health plan regardless of the number or cost of services provided by the Company. Taxes on...

  • Page 77
    ..., "Accounting for Stock Issued to Employees'' ("APB 25''), and related interpretations. Under this approach, the cost of restricted stock awards is expensed over their vesting period, while the imputed cost of stock option grants and discounts offered under the Company's Employee Stock Purchase Plan...

  • Page 78
    ... to these customers, is limited. While the Company has receivables due from federal and state governmental agencies, the Company does not believe that such receivables represent a credit risk since the related healthcare programs are funded by federal and state governments, and payment is primarily...

  • Page 79
    ... is separable. Intangible assets, principally representing the cost of customer lists and non-competition agreements acquired, are capitalized and amortized on the straight-line method over their expected useful life, which generally ranges from five to fifteen years. The Company does not have any...

  • Page 80
    ... the impairment, if any. Management's estimate of fair value considers publicly available information regarding the market capitalization of the Company as well as (i) publicly available information regarding comparable publicly-traded companies in the clinical laboratory testing industry, (ii) the...

  • Page 81
    ... consolidated statements of operations. Financial Instruments The Company's policy for managing exposure to market risks may include the use of financial instruments, including derivatives. The Company has established a control environment that includes policies and procedures for risk assessment...

  • Page 82
    ... currently operates in one reportable business segment. Substantially all of the Company's services are provided within the United States, and substantially all of the Company's assets are located within the United States. No one customer accounted for ten percent or more of net revenues in 2003...

  • Page 83
    ... the Company's expanded network of patient service centers. In addition, customers will be provided with state-of-the-art electronic connectivity services, innovative technologies and an expanded esoteric testing menu from the Company's Nichols Institute based in San Juan Capistrano, California. In...

  • Page 84
    ... the acquisition of AML, Quest Diagnostics acquired all of AML's operations, including two full-service laboratories, 51 patient service centers, and hospital sales, service and logistics capabilities. The all-cash purchase price of approximately $335 million and related transaction costs, together...

  • Page 85
    ... and clinicians, and all of the voting stock of Clinical Diagnostic Services, Inc. ("CDS''), which operated a diagnostic testing laboratory and more than 50 patient service centers in New York and New Jersey. Additionally, during 2001, the Company acquired the minority ownership interest of...

  • Page 86
    ... esoteric testing laboratory and hospital service center for the eastern United States, complementing the Company's Nichols Institute esoteric testing facility in San Juan Capistrano, California. Esoteric testing volumes have been redirected within the Company's national network to provide customers...

  • Page 87
    ... severance and facility exit costs, are expected to be paid in 2004. Integration of Clinical Diagnostic Services, Inc. During the fourth quarter of 2002, the Company finalized its plan related to the integration of CDS into Quest Diagnostics' laboratory network in the New York metropolitan area...

  • Page 88
    ...of the federal statutory rate to the Company's effective tax rate for 2003, 2002 and 2001 was as follows: 2003 2002 2001 Tax provision at statutory rate ...State and local income taxes, net of federal benefit ...Non-deductible goodwill amortization ...Impact of foreign operations ...Non-deductible...

  • Page 89
    ...Income taxes paid ...Businesses acquired: Fair value of assets acquired ...Fair value of liabilities assumed ...Non-cash financing activities: Fair value of common stock issued to acquire Unilab ...Fair value of converted options issued in conjunction with the Unilab acquisition ...7. LOSS ON DEBT...

  • Page 90
    ... Period $1,976,903 730,025 $2,706,928 $1,539,176 437,727 $1,976,903 December 31, 2003 Accumulated Cost Amortization Net December 31, 2002 Accumulated Cost Amortization Net Non-compete agreements . . Customer lists ...Other ...Total ... 5 15 10 10 years years years years $44,942 42,225 5,895...

  • Page 91
    ... ...Trade accounts payable ...Income taxes payable ...Accrued restructuring and integration costs ...Accrued settlement reserves ...Total ... $255,340 221,783 118,731 29,073 12,493 12,430 $649,850 $250,226 208,037 111,982 20,268 10,791 8,641 $609,945 11. DEBT Long-term debt at December 31, 2003...

  • Page 92
    ... shares of its outstanding common stock, make additional investments and consummate acquisitions. Term Loan due June 2007 As discussed in Note 3, the Company financed the cash portion of the purchase price and related transaction costs associated with the Unilab acquisition, and the repayment of...

  • Page 93
    ...any repurchases with a cash payment, funding such payment with a combination of cash on-hand and borrowings under its unsecured revolving credit facility. The Debentures are classified as long-term debt on the consolidated balance sheet at December 31, 2003 due to the Company's existing ability and...

  • Page 94
    ...of Quest Diagnostics common stock trades with a preferred share purchase right, which entitles stockholders to purchase one-hundredth of a share of Series A Preferred Stock upon the occurrence of certain events. In conjunction with the SBCL acquisition, the Board of Directors of the Company approved...

  • Page 95
    ... 23, 2004 to shareholders of record on January 8, 2004. Share Repurchase Plan In May 2003, the Company's Board of Directors authorized a share repurchase program, which permits the Company to purchase up to $300 million of its common stock. In October 2003, the Board of Directors increased the share...

  • Page 96
    ..., the Company established the Quest Diagnostics Incorporated Stock Option Plan for Non-employee Directors (the "Director Option Plan''). The Director Option Plan provides for the grant to non-employee directors of non-qualified stock options to purchase shares of Quest Diagnostics common stock at...

  • Page 97
    ... thousand shares of common stock were purchased by eligible employees in 2003, 2002 and 2001, respectively. Employee Stock Ownership Plan Prior to 1999, the Company maintained its Employee Stock Ownership Plan ("ESOP'') to account for certain shares of Quest Diagnostics common stock which had been...

  • Page 98
    ... agreements, SmithKline Beecham and Quest Diagnostics entered into data access agreements under which Quest Diagnostics granted SmithKline Beecham and certain affiliated companies certain non-exclusive rights and access to use Quest Diagnostics' proprietary clinical laboratory information database...

  • Page 99
    ..., respectively. The Company has certain noncancelable commitments to purchase products or services from various suppliers, mainly for telecommunications and standing orders to purchase reagents and other laboratory supplies. At December 31, 2003, the approximate total future purchase commitments are...

  • Page 100
    ... Company's client base and reputation. The Company maintains various liability insurance programs for claims that could result from providing or failing to provide clinical laboratory testing services, including inaccurate testing results and other exposures. The Company's insurance coverage limits...

  • Page 101
    QUEST DIAGNOSTICS INCORPORATED AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-CONTINUED (dollars in thousands unless otherwise indicated) Condensed Consolidating Balance Sheet December 31, 2003 Parent Subsidiary Guarantors NonGuarantor Subsidiaries Eliminations Consolidated Assets ...

  • Page 102
    ... For the Year Ended December 31, 2003 Parent Subsidiary Guarantors NonGuarantor Subsidiaries Eliminations Consolidated Net revenues ...$ 791,399 $3,709,590 Operating costs and expenses: Cost of services ...457,819 2,147,387 Selling, general and administrative ...76,626 880,951 Amortization...

  • Page 103
    ... Net revenues ...$ 596,909 $2,862,536 Operating costs and expenses: Cost of services ...431,382 1,610,902 Selling, general and ... doubtful accounts ...4,944 64,835 Other, net ...(78,968) 2,463 Changes in operating assets and liabilities ...54,277 (178,027) Net cash provided by operating activities ...

  • Page 104
    QUEST DIAGNOSTICS INCORPORATED AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-...Provision for doubtful accounts ...7,966 29,513 Other, net ...(52,282) 15,317 Changes in operating assets and liabilities ...168,559 (250,548) Net cash provided (used in) by operating activities ...492...

  • Page 105
    ... On February 28, 2003, Quest Diagnostics completed the acquisition of Unilab. The quarterly operating results include the results of operations of Unilab subsequent to the closing of the acquisition (see Note 3). (b) On April 1, 2002, Quest Diagnostics completed its acquisition of AML. The quarterly...

  • Page 106
    QUEST DIAGNOSTICS INCORPORATED AND SUBSIDIARIES SCHEDULE II-VALUATION ACCOUNTS AND RESERVES (in thousands) Balance at 1-1-03 Provision for Doubtful Accounts Net Deductions and Other Balance at 12-31-03 Year ended December 31, 2003 Doubtful accounts and allowances ... $193,456 $228,222 ...

  • Page 107
    QUEST DIAGNOSTICS INCORPORATED AND SUBSIDIARIES RECONCILIATION OF NON-GAAP MEASURES The following is a reconciliation of non-GAAP measures presented in the financial highlights to their most comparable measure under generally accepted accounting principles. Year ended December 31, (in thousands, ...

  • Page 108
    ...INFORM ATION COM M ON STOCK Quest Diagnostics Incorporated (ticker sym bol: " DGX" ) shares are listed on the New York Stock Exchange. Options on Quest Diagnostics shares are traded on the Chicago Board Options Exchange. ANNUAL REPORT ON FORM 10-K A copy of the Quest Diagnostics 2003 Annual Report...

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    QUEST DIAGNOSTICS INCORPORATED One M alcolm Avenue Teterboro, NJ 07608 w w w.questdiagnostics.com M I1338