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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-K
[LOGO] Quest Diagnostics
Annual Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
For the Fiscal Year Ended December 31, 2000
Commission File Number 1-12215
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Quest Diagnostics Incorporated
One Malcolm Avenue, Teterboro, NJ 07608
(201) 393-5000
Delaware
(State of Incorporation)
16-1387862
(I.R.S. Employer Identification Number)
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Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class Name of Each Exchange on
Which Registered
Common Stock
with attached Preferred Share Purchase Right New York Stock Exchange
10 3/4% Senior Subordinated Notes due 2006 New York Stock Exchange
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Securities registered pursuant to Section 12(g) of the Act: None
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 |_|
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K. | |
As of February 28, 2001, the aggregate market value of the approximately 33.7
million shares of voting and non-voting common equity held by non-affiliates of
the registrant was approximately $3.6 billion, based on the closing price on
such date of the Company's Common Stock on the New York Stock Exchange.
As of February 28, 2001, there were outstanding 46,669,365 shares of Common
Stock, $.01 par value.
Documents Incorporated by Reference
Part of Form 10-K into
Document which incorporated
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Portions of the Registrant's Proxy Statement to be filed by April 30, 2001.......... Part III
Such Proxy Statement, except for portions thereof which have been specifically
incorporated by reference, shall not be deemed "filed" as part of this report on
Form 10-K.
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PART I
Item 1. Business
Overview
We are the nation's leading provider of diagnostic testing and related
services for the healthcare industry, with annual net revenues of approximately
$3.4 billion. We offer a broad range of clinical laboratory testing services
used by physicians in the detection, diagnosis, evaluation, monitoring and
treatment of diseases and other medical conditions. We have a more extensive
national network of laboratories and patient service centers than our
competitors and revenues nearly double that of our nearest competitor. We have
the leading market share in clinical laboratory testing and esoteric testing,
including molecular diagnostics, as well as anatomic pathology services and
testing for drugs of abuse.
We currently process over 100 million requisitions each year. Each
requisition form accompanies a patient specimen, indicating the tests to be
performed and the party to be billed for the tests. Our customers include
physicians, hospitals, managed care organizations, employers, governmental
institutions and other independent clinical laboratories.
We have a network of principal laboratories located in approximately 30
major metropolitan areas throughout the United States, several joint venture
laboratories, approximately 150 smaller "rapid response" laboratories and
approximately 1,300 patient service centers. We also operate a leading esoteric
testing laboratory and development facility known as Nichols Institute located
in San Juan Capistrano, California as well as laboratory facilities in Mexico
City, Mexico and near London, England.
In addition to our laboratory testing business, our clinical trials
business is one of the leading providers of testing to support clinical trials
of new pharmaceuticals worldwide. We also collect and analyze laboratory,
pharmaceutical and other data through our Quest Informatics division in order to
help pharmaceutical companies with their marketing and disease management
efforts, as well as to help large healthcare customers better manage the health
of their patients.
On August 16, 1999, we completed the acquisition of SmithKline Beecham
Clinical Laboratories, Inc. ("SBCL"). We estimate that the successful execution
of our business strategy, along with the expected benefits of the SBCL
acquisition, will yield an annual earnings growth rate greater than 30% over the
next several years, before special charges.
We are a Delaware corporation. We sometimes refer to ourselves and our
subsidiaries as the "Company". We are the successor to MetPath Inc., a New York
corporation that was organized in 1967. From 1982 to 1996, we were a subsidiary
of Corning Incorporated ("Corning"). On December 31, 1996, Corning distributed
all of the outstanding shares of our common stock to the stockholders of
Corning. Our principal executive offices are located at One Malcolm Avenue,
Teterboro, New Jersey 07608, telephone number: (201) 393-5000.
The United States Clinical Laboratory Testing Market
Clinical laboratory testing is an essential element in the delivery of
quality healthcare services. Physicians use laboratory tests to assist in the
detection, diagnosis, evaluation, monitoring and treatment of diseases and other
medical conditions. Clinical laboratory testing is generally categorized as
clinical testing and anatomical pathology testing. Clinical testing is performed
on body fluids, such as blood and urine. Anatomical pathology testing is
performed on tissues and other samples, such as human cells. Most clinical
laboratory tests are considered routine and can be performed by most independent
clinical laboratories. Tests that are not routine and that require more
sophisticated equipment and personnel are considered esoteric tests. Esoteric
tests are generally referred to laboratories that specialize in performing those
tests.
We believe that the United States diagnostics testing industry had over
$30 billion in annual revenues in 2000 and is expected to grow at a rate of
approximately three percent per year through 2002. Most laboratory tests are
performed by one of three types of laboratories: independent clinical
laboratories; hospital-affiliated laboratories; and physician-office
laboratories. We believe that in 2000 hospital-affiliated laboratories performed
over one-half of the clinical laboratory tests in the United States, independent
clinical laboratories performed approximately one-third of those tests, and
physician-office laboratories performed the balance.
Over the last several years, the underlying fundamentals of the
diagnostics testing industry have been improving. During the early 1990s, the
industry was negatively impacted by significant government regulation and
investigations into various billing practices. In addition, the rapid growth of
managed care, as a result of the need to reduce overall
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healthcare costs, led to revenue and profit declines within the laboratory
testing industry, which in turn led to industry consolidation, particularly
among commercial laboratories. As a result of these dynamics, fewer but larger
commercial laboratories have emerged which have greater economies of scale, new
and rigorous programs designed to assure compliance with government billing
regulations and other laws, and a more disciplined approach to pricing services.
These changes, principally led by us, have resulted in improved profitability
and a reduced risk of non-compliance with complex government regulations. At the
same time, a slowdown in the growth of managed care and decreasing influence by
managed care organizations on the ordering of clinical testing by providers has
led to renewed growth in testing volumes and further improvements in
profitability during 2000.
We believe that during the next several years, the industry will continue to
experience growth in testing volume due to the following factors:
o general aging of the United States population;
o increasing focus on early detection and prevention as a means to
reduce the overall cost of healthcare and development of more
sophisticated and specialized tests for early detection of disease
and disease management;
o increasing volume of tests for diagnosis and monitoring of
infectious diseases such as AIDS and hepatitis C;
o research and development in the area of genomics, which is expected
to yield new genetic tests and techniques;
o increasing affordability of tests due to advances in technology and
cost efficiencies;
o increasing volume of tests as part of employer sponsored
comprehensive wellness programs;
o increasing awareness by consumers of the value of clinical
laboratory testing and increasing willingness of consumers to pay
for tests that may not be covered by third party payers; and
o a slowdown in the growth of managed care and decreasing influence by
managed care organizations on the ordering of clinical testing by
providers as managed care organizations impose fewer controls on
providers and patients.
Business Strategy
Our mission is to be recognized by our customers and employees as the best
provider of comprehensive and innovative diagnostic testing, information and
related services. The principal components of this strategy are to:
o Capitalize on Our Leading Position Within the Laboratory Testing
Market: We are the leader in our core clinical laboratory testing
business and the only truly national provider of clinical laboratory
testing services. Our network of approximately 1,300 patient service
centers, 150 rapid response laboratories and principal laboratories
in approximately 30 major metropolitan areas enable us to serve
managed care organizations, hospitals, physicians, employers and
other healthcare providers and their patients throughout the United
States. We believe that customers will increasingly seek to utilize
laboratory testing companies that have a nationwide presence and
offer a comprehensive range of services and that, as a result, we
will be able to profitably enhance our market position.
o Become a Leading Provider of Medical Information: We believe that we
have the largest private clinical laboratory results database in the
world. This database continues to grow as we perform tests related
to over 100 million requisitions involving approximately 80 million
patients each year. We believe that this database has substantial
value since a significant portion of all healthcare decisions and
spending are impacted by laboratory testing results. Large customers
of clinical laboratories are increasingly interested in integrating
our clinical laboratory data with other healthcare information to
answer quality, marketing and financial related questions. In
addition, pharmaceutical manufacturers are increasing their use of
the data to expand their marketing efforts, as well as to promote
disease management. In order to meet these emerging needs for
medical information, our Quest Informatics division has developed a
portfolio of information products including Internet-based health
and information services that provide customers secure access to our
extensive database, along with medical and analytical expertise. We
also provide customized services for
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pharmaceutical and health product companies to support the
development and implementation of their business strategies. We
intend to maintain the trust of patients and providers by ensuring
the security and confidentiality of individual patient results.
o Compete Through Providing the Highest Quality Services: We intend to
become recognized as the quality leader in the healthcare services
industry. We are implementing a Six Sigma initiative throughout our
organization. Six Sigma is an approach to managing that requires a
thorough understanding of customer needs and requirements, rigorous
tracking and measuring of services, and training of employees in
methodologies so that they can be held accountable for improving
results. During 2000, we provided training to our employees in the
Six Sigma methodology and introduced high-impact quality improvement
projects throughout our organization. Two of our laboratories and
our diagnostics kits facility have achieved ISO-9001 certification
and three of our laboratories have achieved ISO-9002 certification,
international standards for quality management systems. Our Nichols
Institute was the first clinical laboratory in North America to
achieve ISO-9001 certification. Several additional regional
laboratories are currently pursuing ISO-9002 certification.
o Continue to Lead Innovation: We intend to remain a leading innovator
in the clinical laboratory industry by continuing to introduce new
tests, technology and services. As the industry leader with the
largest and broadest network, we believe we are the best channel for
developers of new equipment and tests to introduce their products to
the marketplace. Through our relationship with the academic
community and pharmaceutical and biotechnology firms, we believe
that we are one of the leaders in transferring technical innovation
to the market. For example, we recently developed and introduced a
HIV-genotyping test which predicts the drug resistance of
HIV-infected patients and will help commercialize HIV-phenotyping
tests developed by third parties, which tests help select the most
appropriate combination therapy for HIV-infected patients. We intend
to continue to collaborate with and invest in emerging medical
technology companies that develop and commercialize novel
diagnostics, pharmaceutical and device technologies, such as our
recent investment in and collaboration with GMP Companies, Inc. We
also intend to continue to introduce new tests that we develop at
Nichols Institute, one of the leading esoteric testing laboratories
in the world and the largest provider of molecular diagnostics
testing in the United States. We believe that, with the unveiling of
the human genome, new genes and the association of these genes with
disease will continue to be discovered at an accelerating pace,
leading to research that will result in ever more complex and
thorough diagnostic testing. We believe that we are well positioned
to capture this growth.
o Pursue Strategic Growth Opportunities: We intend to continue to
leverage our network in order to capitalize on targeted strategic
growth opportunities both inside and outside our core laboratory
testing business. These opportunities are more fully described under
"Strategic Growth Opportunities" and include continuing to make
selective regional acquisitions, capturing the growth in the areas
of genomics and specialty testing, expanding into the
direct-to-consumer market by providing testing and medical
information services directly to consumers, leveraging our leading
anatomic pathology business into higher margin areas and
expanding our clinical trials testing and other services to the
pharmaceutical and biotechnology industries.
o Leverage Our Satisfaction Model: Our business philosophy is that
satisfied employees lead to satisfied customers, which in turn
benefits our stockholders. We regularly survey our employees and
customers and follow up on their concerns. We emphasize skills
training for all employees and leadership training for our
supervisory employees. Most importantly, we are committed to
treating each employee with dignity and respect and trust them to
treat our customers the same way. We believe that our treatment of
employees, together with our competitive pay and benefits, helps
increase employee satisfaction and performance, thereby enabling us
to provide the best services to our customers.
Acquisition and Integration of SBCL
On August 16, 1999, we completed the acquisition of SBCL, which operated
the clinical laboratory business of SmithKline Beecham plc, or SmithKline
Beecham. The original purchase price consisted of $1.025 billion in cash and
approximately 12.6 million shares of our common stock, which represented
approximately 29% of our then outstanding common stock. However, the SBCL
acquisition agreements included a provision for a reduction in the purchase
price paid by us in the event that the combined balance sheet of SBCL indicated
that the net assets acquired, as of the acquisition date, were below a
prescribed level. On October 11, 2000, the purchase price adjustment was
finalized with the result that SmithKline Beecham owed us $98.6 million. This
amount was offset by $3.6 million separately owed by us to SmithKline Beecham,
resulting in a net payment to us by SmithKline Beecham of $95.0 million. The
purchase price adjustment was recorded 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
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were finalized in conjunction with the preparation of our quarterly report on
Form 10-Q for the fiscal quarter ended September 30, 2000.
We expect to continue to realize significant benefits from combining our
existing laboratory network with that of SBCL. As part of an integration plan
finalized at the end of 1999, we are in the process of reducing redundant
facilities and infrastructure and redirecting testing volume to provide more
local testing and improve customer service. We do not intend to abandon any
geographic areas. As of December 31, 2000, we had completed the transition of
approximately 85% of our business affected by integration throughout our
national laboratory network. We expect the transition of the remaining business
affected by integration will be substantially completed early in the second
quarter of 2001. Other integration activities, including standardization of
information systems, will continue beyond 2001. Overall, given the large size of
SBCL's operations and the complexity of the clinical laboratory testing
business, we expect that the integration process may not be fully completed
until 2003.
During and after the integration process, we are committed to providing
the highest levels of customer service. Through a corporate project office, we
track and monitor key service and quality metrics and slow down the integration
process in the event that we experience significant declines in these metrics.
We have not experienced any significant service disruptions to date. However,
the integration process requires the dedication of significant management
resources, which may cause an interruption of or deterioration in our services,
which could result in a loss of momentum in the activities of our business.
Since most of our clinical laboratory testing is performed under arrangements
that are terminable at will or on short notice, any interruption of or
deterioration in our services may also result in a customer's decision to stop
using us for clinical laboratory testing. These events could have a material
adverse impact on our business. However, management believes that the successful
implementation of the SBCL integration plan and our value proposition based on
expanded patient access, our broad testing capabilities and most importantly,
the quality of the services we provide, will mitigate customer attrition.
While we expect to realize a number of significant benefits from the
acquisition of SBCL, we also expect to incur a number of costs as a result of
the integration process. Overall, we expect that the integration will result in
approximately $150 million in annual synergies, to be achieved over the next
several years. During 2000, we estimated that we achieved approximately $50
million of these synergies. However, we cannot assure investors that we will
continue to realize these synergies or that we will realize any of the
additional anticipated benefits, either at all or in a timely manner, or that we
will not incur significant additional costs during the integration process.
Our Services
Our laboratory testing business consists of routine testing, esoteric
testing, and clinical trials testing. Routine testing generates approximately
83% of our net revenues, esoteric testing generates approximately 12% of our net
revenues and clinical trials testing generates less than 3% of our net revenues.
We derive the balance of our net revenues primarily from the manufacture and
sale of diagnostic test systems, and from fees charged to customers, such as
managed care organizations and pharmaceutical companies, for information
products derived from clinical laboratory data. We derive approximately 2% of
our net revenues from foreign operations.
Routine Testing
Routine tests measure various important bodily health parameters such as
the functions of the kidney, heart, liver, thyroid and other organs. Commonly
ordered tests include:
o blood cholesterol level tests;
o complete blood cell counts;
o pap smears;
o HIV-related tests;
o urinalyses;
o pregnancy and other prenatal tests; and
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o alcohol and other substance-abuse tests.
We perform routine testing through our network of major laboratories,
rapid response laboratories, or "stat" labs, and patient service centers. We
also perform routine testing at the hospital laboratories we manage. Major
laboratories offer a full line of routine clinical tests. Rapid response
laboratories are local facilities where we can quickly perform an abbreviated
line of routine tests for customers that require rapid turnaround. Patient
service centers are facilities at which specimens are collected. These centers
are typically located in or near a building for 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 are delivered
electronically.
Esoteric Testing
Esoteric tests are those tests that are performed less frequently than
routine tests and require more sophisticated equipment and materials,
professional "hands-on" attention and more highly skilled personnel. Because it
is not cost-effective for most clinical laboratories to perform the low volume
of esoteric tests in-house, they generally refer many esoteric tests to an
esoteric clinical testing laboratory. Esoteric tests are generally priced higher
than routine tests.
Our Nichols Institute is one of the leading esoteric clinical testing
laboratories in the world. In 1998, Nichols Institute, located in San Juan
Capistrano, California, became the first clinical laboratory in North America to
achieve ISO-9001 certification. As a result of the SBCL acquisition, we acquired
SBCL's National Esoteric Testing Center, located in Van Nuys, California. We
have transferred esoteric testing performed at the Van Nuys facility to Nichols
Institute.
Nichols Institute performs hundreds of types of esoteric tests that are
not routinely performed by our regional laboratories. These esoteric tests are
generally in the following fields:
o endocrinology (the study of glands, their hormone secretions and
their effects on body growth and metabolism);
o genetics (the study of chromosomes, genes, and their protein
products and effects);
o immunology (the study of the immune system including antibodies,
immune system cells and their effects);
o microbiology (the study of microscopic forms of life including
bacteria, viruses, fungi and other infectious agents);
o oncology (the study of abnormal cell growth including benign tumors
and cancer);
o serology (a science dealing with the body fluids and their analysis,
including antibodies, proteins and other characteristics);
o special chemistry (more sophisticated testing requiring special
expertise and technology); and
o toxicology (the study of chemicals and drugs and their effects on
the body's metabolism).
Through our relationship with the academic community and pharmaceutical
and biotechnology firms, we believe that we are one of the leaders in
transferring technical innovation to the market. Nichols Institute was the first
private reference laboratory to introduce a number of new tests, including tests
to measure circulating hormone levels and tests to predict breast cancer. We
continue to develop new and more sophisticated testing to monitor the success of
therapy for cancer, AIDS and hepatitis C, and to detect other diseases and
disorders. In 2000, we introduced automatic reflex high-risk DNA human
papillomavirus testing for borderline ThinPrep(R) Pap Tests(TM), using the
original specimen. In addition, we introduced HCV DupliType(TM) testing to
provide subtyping for a broader range of hepatitis C viral isolates than was
previously available using other technologies.
We use complex technologies such as branched DNA and polymerase chain
reaction (PCR) to detect lower levels of HIV than can be measured using other
technologies. The concentration of HIV, also referred to as viral load, can
also be measured. The ability to measure the viral load permits healthcare
providers to better tailor drug therapies for HIV-infected patients.
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We maintain a relationship with the academic community through our
Academic Associates program, under which academia and biotechnology firms work
directly with our staff scientists to monitor and consult on existing test
procedures and develop new esoteric test methods. In addition, we have entered
into licensing arrangements and co-development agreements with biotechnology
companies and academic medical centers.
Clinical Trials Testing
We believe that, as a result of the acquisition of SBCL's clinical trials
business, we are one of the world's three largest providers of clinical
laboratory testing performed in connection with clinical research trials on new
drugs. Clinical research trials are required by the FDA to assess the safety and
efficacy of new drugs. We have clinical trials testing centers in the United
States and in England. We also provide clinical trials testing in Australia and
South Africa through arrangements with third parties. Clinical trials involving
new drugs are increasingly being performed both inside and outside the United
States. Approximately 40% of our net revenues from clinical trials testing
represents testing for SmithKline Beecham. Under a ten-year agreement, we are
the primary provider of clinical trials testing services for SmithKline Beecham
worldwide. We believe that this business will not be negatively impacted by the
merger of SmithKline Beecham with Glaxo Welcome which was completed in December
2000.
Medical Information
The demand for comprehensive medical information continues to grow. Using
our extensive database as well as our core medical and analytical expertise, our
Quest Informatics division has developed a portfolio of information products
that enable customers to access a wide range of information critical to
healthcare and patient care decision making. These products can be used by
managed care organizations and other payers as well as large pharmaceutical
companies. These products maintain patient confidentiality and require patient
consent if patient identified information is provided to a third party.
We continue to explore ways to capitalize on the enormous potential of
providing healthcare information through opportunities ranging from
Internet-based health and information services to direct-to-consumer services.
During the second quarter of 2000, we began to provide laboratory results and
testing information directly to consumers who request it over the Internet
through Caresoft's consumer web site, TheDailyApple.com, enabling consumers,
without payment of any fee, to download these results into a secured personal
medical record. We believe that by providing customers with an easy-to-use and
rapid way to comprehensively analyze medical information, our customers will
increasingly want to use our services as both a testing company and information
provider. As more and more clinical laboratory customers continue to use
comprehensive medical information in their decision making, we are not only
positioned to become the information provider of choice, but to do so through
the most technologically advanced and customer friendly means.
Other Services and Products
We manufacture and market diagnostic test kits and systems primarily for
esoteric testing under the Nichols Institute Diagnostics brand name. These are
sold principally to hospital and clinical laboratories, both domestically and
internationally.
Payers and Customers
We provide testing services to a broad range of healthcare providers. We
consider a "payer" as the party that pays for the test. Depending on the billing
arrangement and applicable law, the payer may be (1) the physician or other
party (such as another laboratory or an employer) who referred the testing to
us, (2) the patient, or (3) a third party who pays the bill for the patient,
such as an insurance company, Medicare or Medicaid. Some states, including New
York, New Jersey and Rhode Island, prohibit us from billing physician clients.
We generally consider a "customer" to be the party who refers tests to us. We
also consider a managed care organization that contracts with us on an exclusive
or semi-exclusive basis on behalf of its patients as both our customer and
payer.
During 2000, no single customer or affiliated group of customers accounted
for more than 5% of our net revenues. We believe that the loss of any one of our
customers would not have a material adverse effect on our financial condition,
results of operations, or cash flow.
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Payers
The following table shows current estimates of the breakdown of the
percentage of our total volume of requisitions and total clinical laboratory
revenues during 2000 applicable to each payer group:
Revenue
as % of
Requisition Volume Total
as % of Clinical Laboratory
Total Volume Revenues
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Patient................................. 3%-- 5% 5%-- 10%
Medicare and Medicaid................... 10%-- 15% 10%-- 15%
Physicians, Hospitals, Employers and
Other Monthly-Billed Payers............. 30%-- 35% 25%-- 30%
Third Party Fee-for-Service............. 25%-- 30% 40%-- 45%
Managed Care-Capitated.................. 20%-- 25% 5%-- 10%
Customers
Physicians
Physicians requiring testing for patients whose tests are not covered by a
managed care contract are one of the primary sources of our clinical laboratory
testing volume. We typically bill physician accounts on a fee-for-service basis.
Fees billed to physicians are based on the laboratory's client fee schedule and
are typically negotiated. Fees billed to patients and third parties are based on
the laboratory's patient fee schedule, which may be subject to limitations on
fees imposed by third-party payers and negotiation by physicians on behalf of
their patients. Medicare and Medicaid reimbursements are based on fee schedules
set by governmental authorities.
Managed Care Organizations
Managed care organizations, which typically contract with a limited number
of clinical laboratories for their members, represent a substantial portion of
our business. Larger managed care organizations typically prefer to use large
independent clinical laboratories because they can provide services on a
national or regional basis and can manage networks of local or regional
laboratories. In addition, larger laboratories are better able to achieve the
low-cost structures necessary to profitably service large managed care
organizations and can provide test utilization data across their various plans.
Over the last decade, the number of patients participating in managed care
plans had grown significantly. In addition, the managed care industry has been
consolidating, resulting in fewer but larger managed care organizations with
significant bargaining power in negotiating fee arrangements with healthcare
providers, including clinical laboratories. Managed care organizations
frequently negotiate capitated payment contracts for a portion of their
business, which shift the risk and cost of testing from the managed care
organization to the clinical laboratory. Under a capitated payment contract, the
clinical laboratory and the managed care organization agree to a per member, per
month payment to cover all laboratory tests during the month, regardless of the
number or cost of the tests actually performed. Some services, such as various
esoteric tests, new technologies and anatomic pathology services, may be carved
out from a capitated rate and, if carved out, are charged on a fee-for-service
basis. Some capitated payment contracts include retroactive or future fee
adjustments if the number of tests performed for the managed care organization
exceeds or is less than the negotiated threshold levels. For their
fee-for-service testing, managed care organizations also typically negotiate
substantial discounts.
Capitated agreements with managed care organizations have historically
been priced aggressively, particularly for exclusive or semi-exclusive
arrangements. This practice was due to competitive pressures and the expectation
that a laboratory could capture not only the testing covered under the contract,
but also additional higher priced fee-for-service business from participating
physicians. However, as the number of patients covered under managed care
organizations increased, more patients were covered by capitated agreements and
there was less fee-for-service business, and therefore less profitable business
to offset the lower margin capitated managed care business. Furthermore,
physicians became increasingly affiliated with more than one managed care
organization, and, therefore, a clinical laboratory received little, if any,
additional fee-for-service testing from participating physicians.
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Recently, there has been a shift in the way major managed care
organizations contract with clinical laboratories. Managed care organizations
have begun to offer more freedom of choice to their affiliated physicians,
including greater freedom to determine which laboratory to use and which tests
to order. Accordingly, several agreements with major managed care organizations
have been renegotiated from exclusive contracts to non-exclusive contracts. As a
result, under these non-exclusive arrangements, physicians have more freedom of
choice in selecting laboratories, and laboratories are likely to compete more on
the basis of service and quality rather than price alone. As a result of this
emphasis on greater freedom of choice as well as our enhanced service network
and capabilities, and our focus on ensuring that overall arrangements are
profitable, pricing of managed care agreements has improved. Also, managed care
organizations have recently been giving patients greater freedom of choice and
patients have increasingly been selecting plans (such as preferred provider
organizations) that offer a greater choice of providers. Pricing for these
preferred provider organizations is typically negotiated on a fee-for-service
basis, which generally results in higher revenue per requisition than under a
capitated fee arrangement. We cannot assure investors that these trends will
continue, that we will be successful in obtaining business under non exclusive
arrangements or that we will continue to be successful in renegotiating our
contracts with managed care organizations. If managed care organizations resume
the pattern of negotiating for exclusive contracts that involve aggressively
priced capitated payments, it could have a material adverse effect on our
financial condition, results of operations and cash flow.
During 2000, we renegotiated several arrangements with managed care
organizations under which we are no longer responsible for all the costs of
clinical laboratory services provided to the members of the managed care
organizations, including the charges for tests performed by other laboratory
providers. As a result, net revenues and cost of services will no longer include
the cost of testing performed by third parties under these network management
arrangements. While this has the immediate effect of reducing our net revenues,
it reduces our risks associated with being financially responsible for the costs
of tests performed by other laboratories. In addition, we still have some
arrangements under which we are responsible for forming and managing for the
benefit of a managed care organization a network of subcontracted laboratories.
Under these arrangements we receive fees for the clinical laboratory services
that we perform as well as a fee for managing the laboratory network.
Hospitals
We provide services to hospitals throughout the United States that vary
from esoteric testing to laboratory management. We believe that we are the
industry's market leader in servicing hospitals. Testing for hospitals accounts
for approximately 11% of our net revenues. Hospitals generally maintain an
on-site laboratory to perform testing on patients and refer less frequently
needed and highly specialized procedures to outside laboratories, which
typically charge the hospitals on a negotiated fee-for-service basis. We believe
that most hospital laboratories perform approximately 95% to 97% of their
patients' clinical laboratory tests. Many hospitals compete with independent
clinical laboratories by encouraging community physicians to send their testing
to the hospital's laboratory. In addition, hospitals that have purchased
physicians' practices generally require their physicians to send their tests to
the hospital's affiliated laboratory. As a result, hospital-affiliated
laboratories can be both customers and competitors for independent clinical
laboratories.
We have joint venture arrangements with leading integrated health delivery
networks in several metropolitan areas. These joint venture arrangements, which
provide testing for these hospitals as well as for unaffiliated physicians and
other healthcare providers in their geographic areas, serve as our principal
laboratory facilities in their service areas. Typically, we have either a
majority ownership interest in, or day-to-day management responsibilities for,
our hospital joint venture relationships. We also manage the laboratories at a
number of other hospitals.
Employers, Governmental Institutions and Other Clinical Laboratories
We provide testing services to governmental agencies, including the
Department of Defense and state and federal prison systems, and to large
employers. We believe we are the leader in the clinical laboratory industry in
providing testing to employers for substance abuse, occupational exposures, and
comprehensive wellness programs. Wellness programs enable employers to take an
active role in lowering their overall healthcare costs. Testing services for
employers account for approximately 6% of our net revenues. We also perform
esoteric testing services for other independent clinical laboratories that do
not have the full range of our testing capabilities. All of these customers are
charged on a fee-for-service basis.
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Sales and Marketing
We market to and service our customers through our direct sales force
sales representatives, customer service and patient service representatives and
couriers.
Since 1996, we have focused our sales efforts on pursuing and keeping
profitable accounts that generate an acceptable return. We have an active
account management process to evaluate the profitability of all of our accounts.
Where appropriate, we change the service levels, terminate accounts that are not
profitable, or adjust pricing.
Most sales representatives market routine laboratory services primarily to
physicians and hospitals. The remaining sales representatives focus on
particular market segments or on testing niches. For example, some
representatives concentrate on market segments such as hospitals or managed care
organizations, and others concentrate on testing niches such as substance-abuse
testing.
Customer service representatives perform a number of services for patients
and customers. They monitor services, answer questions and help resolve
problems. Our couriers pick up specimens from most clients daily.
Strategic Growth Opportunities
In addition to expanding our core clinical laboratory business through
internal growth and pursuing our strategy to become a leading provider of
medical information, we intend to continue to leverage our network in order to
capitalize on targeted growth opportunities both inside and outside our core
laboratory testing business.
o Selective Regional Acquisitions: The clinical laboratory industry is
still fragmented. Historically, regional acquisitions fueled our
growth. We expect to focus future clinical laboratory acquisition
efforts on laboratories that can be integrated into our existing
laboratories without impeding the integration of SBCL's operations
such as our acquisition of the assets of Clinical Laboratories of
Colorado in February 2001. This strategy will enable us to reduce
costs and gain other benefits from the elimination of redundant
facilities and equipment, and reductions in personnel. We may also
consider acquisitions of ancillary businesses as part of our overall
growth strategy.
o Genomics and Specialty Testing: We intend to remain a leading
innovator in the clinical laboratory industry by continuing to
introduce new tests, technology and services. We estimate that the
current United States market in gene based testing is approximately
$1 billion per year. We believe that we have the largest gene based
testing business in the United States, with more than $225 million
in annual revenues, and that this business will grow by at least 25%
per year over the next several years. We believe that, with the
unveiling of the human genome, the discovery of new genes and the
association of these genes with disease will result in more complex
and thorough diagnostic testing. We believe that we are well
positioned to capture this growth. We intend to focus on
commercializing diagnostic applications of discoveries in the areas
of functional genomics, or the analysis of genes and their
functions, and proteomics, or the discovery of new proteins made
possible by the human genome project.
o Medical Information: We believe that we have the largest private
clinical laboratory results database in the world. This database
continues to grow as we perform tests related to over 100 million
requisitions involving approximately 80 million patients each year.
We believe that this database has substantial value since a
significant portion of all healthcare decisions and spending are
impacted by laboratory testing results. Large customers of clinical
laboratories are increasingly interested in integrating our clinical
laboratory data with other healthcare information to answer quality,
marketing and financial related questions. In addition,
pharmaceutical manufacturers are increasing their use of the data to
expand their marketing efforts as well as to promote disease
management. In order to meet these emerging needs for medical
information, our Quest Informatics division has developed a
portfolio of information products including Internet-based health
and information services that provide customers secure access to our
extensive database, along with medical and analytical expertise. We
also provide customized services for pharmaceutical and health
product companies to support the development and implementation of
their business strategies. We intend to maintain the trust of
patients and providers by ensuring the security and confidentiality
of individual patient results.
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o Consumer Health: Currently, almost all the testing we perform is
ordered directly by a physician, who then receives the test results.
However, consumers are becoming increasingly interested in managing
their own health and health records. We believe that consumers will
increasingly want to order clinical laboratory tests themselves,
particularly for tests that measure levels of cholesterol, PSA
(prostate specific antigen), glucose, hemoglobin A1c (diabetes
monitoring), and TSH (thyroid disorders), even if they are
responsible for paying for the tests themselves. Instead of first
having to go to their treating physician to order a test, consumers
could order testing services directly through the Internet or our
network of patient service centers, which already services over
100,000 patients each day. We have initiated a pilot program
providing direct testing access to consumers in several test markets
and plan to expand this program in 2001 into additional test
markets. A consumer-focused web site will be integral to the
awareness and delivery of information content surrounding the
testing services provided in our facilities. Laws in a number of
states restrict the ability of consumers to order tests directly and
permit test results to be provided only to the ordering physician.
In order to serve consumers in these states and comply with
applicable law, we are utilizing a physician network to facilitate
the ordering of tests and reporting of results. We believe that
consumer demand may result, over time, in the re-examination of
regulatory restrictions on consumers' ability to order clinical
tests and to receive test results directly.
o Anatomic Pathology: While we are the leading provider of anatomic
pathology services in the United States, we have traditionally been
strongest in the less profitable segments of the business, such as
pap smears. During the last several years we have converted more
than 35% of our pap smear business to ThinPrep(TM), a higher
quality, higher margin product offering. We intend to continue to
expand our anatomic pathology business into higher profit margin
areas. We believe that the current United States market for anatomic
pathology services is approximately $5 billion per year and that we
perform approximately $300 million of such services each year,
representing a market position significantly less than our share of
the entire clinical laboratory market.
o Pharmaceutical and Biotechnology Services: Among our strengths are
our service relationships with more than half of the physicians in
the United States, our 100 million requisitions involving
approximately 80 million patients each year, and our clinical
laboratory results database, which we believe to be the largest
private database of its kind in the world. We believe that we can
leverage these strengths to assist the pharmaceutical and
biotechnology industries in the development and commercialization of
their products. Recently, the global pharmaceutical industry has
invested approximately $50 billion annually in research and
development of new products and an even greater amount in support of
their commercialization, of which approximately 50% is spent in the
United States. This spending is expected to grow in excess of 10%
per annum in support of the increasing need for new, innovative
pharmaceutical products. Beyond our existing clinical trials
business, profitable growth opportunities exist in the following
areas: post-marketing (Phase IV) research, patient recruitment,
genomics (drug discovery), over-the-counter drug testing and
pharmaceutical sales and product detailing.
Information Systems
Information systems are used in laboratory testing, billing, customer
service, logistics, management of medical data, and other aspects of our
business. We believe that the efficient handling of information involving
patients, payers, customers, and other parties will be critical to our future
success. Sustained or repeated system failures that interrupt our ability to
process test orders, deliver test results or perform tests in a timely manner
would adversely affect our reputation and result in a loss of customers.
During the 1980s and early 1990s when we acquired many of our laboratory
facilities, regional laboratories were operated as local, decentralized units.
When the laboratories were acquired, we did not make significant changes in
their method of operations and we did not standardize their billing, laboratory,
and some of their other information systems. As a result, by the end of 1995 we
had many different information systems for billing, test results reporting, and
other transactions. Over time, the growth in the size and network of our
customers and the increasing complexity of billing demonstrated a greater need
for standardized systems.
Prior to the acquisition of SBCL, we had chosen our proprietary SYS system
as our standard billing system and our QuestLab system (which is licensed from a
third party) as our standard laboratory information system, and had begun to
convert our laboratories to these standard systems. SBCL had standardized
billing and laboratory information systems (which are different from our
existing systems) throughout its laboratory network. During 2001 we plan to
begin implementing a new laboratory information system and a new billing system
that combine the functionality of the existing systems of Quest Diagnostics and
SBCL. We expect that this standardization process will take several years to
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complete and result in significantly more centralized systems than we have
today. We expect the integration of these systems will improve operating
efficiency and provide management with more timely and comprehensive information
with which to make management decisions. However, failure to properly implement
this standardization process could materially adversely impact us. During system
conversions of this type, workflow is temporarily interrupted, which may cause
backlogs. In addition, the implementation process, including the transferring of
databases and master files to a new data center, presents significant conversion
risks which could have a material adverse impact on our business.
We continue to invest in the development and improvement of our
connectivity products for customers and providers by developing differentiated
products that will provide friendlier, easier access to information. During the
second quarter of 2000 we introduced a new service offering physicians secure
access to their patients' confidential laboratory results via the Internet
through our own web site. During the fourth quarter of 2000 we introduced a new
service enabling physicians to order tests (as well as receive results) through
our web site. This new service will allow us to replace desktop products that we
currently provide to most physicians. During the second quarter of 2000, we
entered into an agreement with MedPlus to market MedPlus' ChartMaxx and E. Maxx
patient record systems, which support the creation and management of an
electronic patient record, by bringing together in one patient-centric view
information from various sources, including the physician's records and
laboratory and hospital data. MedPlus has agreed not to market these systems
with other laboratories. We intend to consider other strategic arrangements
that will enhance our ability to introduce electronic services to a broader
variety of customers across all spectrums.
Billing
Billing for laboratory services is complicated. Laboratories must bill
various payers, such as patients, insurance companies, Medicare, Medicaid,
doctors and employer groups, all of which have different requirements.
Additionally, auditing for compliance with applicable laws and regulations as
well as internal compliance policies and procedures adds complexity to the
billing process.
Most of our bad debt expense is the result of issues that are not
credit-related, primarily missing or incorrect billing information on
requisitions. In general, we perform the requested tests and report test results
regardless of whether the billing information is incorrect or missing. We
subsequently attempt to obtain any missing information and rectify incorrect
billing information received from the healthcare provider. Missing or incorrect
information on requisitions adds complexity to and slows the billing process,
creates backlogs of unbilled requisitions, and generally increases the aging of
accounts receivable. When all issues relating to the missing or incorrect
information are not resolved in a timely manner, the related receivables are
written-off to the allowance for doubtful accounts.
Among many other factors that complicate billing are (1) pricing
differences between our fee schedules and those of the payers, (2) disputes with
payers as to which party is responsible for payment and (3) disparity in
coverage among various payers. Adjustments impacting receivables as a result of
these billing related matters are generally accounted for as revenue adjustments
and not written-off to the allowance for doubtful accounts.
We have implemented "best practices" for billing that have significantly
reduced the percentage of requisitions with missing billing information from
approximately 16% at the beginning of 1996 to approximately 5.5% immediately
prior to the acquisition of SBCL. These initiatives, together with progress in
dealing with Medicare medical necessity documentation requirements and
standardizing billing systems, have significantly reduced bad debt expense since
1996. During the twelve months ended July 31, 1999 (immediately prior to the
acquisition of SBCL), our bad debt expense was about 6% of net revenues
(adjusted to exclude the effect of testing performed by third parties under our
laboratory network management arrangements), while SBCL, which had not
implemented procedures similar to ours, had bad debt expense of about 10% of net
revenues (adjusted to exclude the effect of testing performed by third parties
under SBCL's laboratory network management arrangements). Since the acquisition,
we have begun to implement our pre-acquisition billing practices at the former
SBCL facilities, which we believe should enable us to lower overall bad debt
expense (including that of SBCL) to or below the levels immediately prior to the
acquisition. As a result of implementing these billing practices, bad debt
expense improved to about 7% of net revenues during 2000, from about 8% of net
revenues (adjusted to exclude the effect of testing performed by third parties
under our laboratory network management arrangements) just after completion of
the SBCL acquisition.
Changes in laws and regulations could negatively impact our ability to
bill our clients. Currently the Health Care Financing Administration (HCFA) is
considering the adoption of a HCFA-approved advance beneficiary notice, or ABN,
which would require Medicare beneficiaries to read and sign a lengthy two-page
form in order to make an informed decision whether to personally assume
financial liability for laboratory tests which are likely to be not covered by
Medicare because they are deemed to not be medically necessary. We are generally
permitted to bill Medicare patients for clinical laboratory tests which Medicare
does not pay because of lack of "medical necessity" only if the patient signs an
ABN in advance of the testing being performed. We do not have any direct contact
with most of these
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patients and, in such cases, cannot control the proper use of the ABN by the
physician or the physician's office staff. If the ABN is not timely completed or
is not completed properly, we end up performing tests that we cannot
subsequently bill to the patient if they are not reimbursable by Medicare.
Adoption of the new separate two-page ABN form could result in even fewer valid
ABNs and consequently prevent us from billing additional beneficiaries for
services denied by Medicare for lack of medical necessity.
Competition
The clinical laboratory testing business is fragmented and highly
competitive. We compete with three types of providers: hospital-affiliated
laboratories, other independent clinical laboratories, and physician-office
laboratories. We are the leading clinical laboratory provider in the United
States, with net revenues of approximately $3.4 billion during 2000 and
facilities in substantially all of the country's major metropolitan areas. Our
largest competitor is Laboratory Corporation of America Holdings, or LabCorp,
which had net revenues of approximately $1.9 billion during 2000. In addition,
we compete with many smaller regional and local independent clinical
laboratories, as well as with laboratories owned by physicians and hospitals.
We believe that healthcare providers often consider the following factors,
among others, in selecting a laboratory:
o service capability and quality;
o accuracy, timeliness and consistency in reporting test results;
o number and type of tests performed by the laboratory;
o number, convenience and geographic coverage of patient service
centers;
o reputation in the medical community; and
o pricing.
We believe that we compete favorably in each of these areas.
We believe that large independent clinical laboratories may be able to
increase their share of the overall clinical laboratory testing market due to
their large service networks and lower cost structures. These advantages should
enable larger clinical laboratories to more effectively serve large managed care
organizations and more effectively deal with Medicare reimbursement reductions
and utilization controls. In addition, we believe that consolidation in the
clinical laboratory testing business will continue.
Quality Assurance
Our goal is to continually improve the processes for collection, storage
and transportation of patient specimens, as well as the precision and accuracy
of analysis and result reporting. Our quality assurance efforts focus on
proficiency testing, process audits, statistical process control and personnel
training for all of our laboratories and patient service centers. We are
implementing a Six Sigma process to help achieve our goal of becoming recognized
as the undisputed quality leader in the healthcare services industry.
Internal Proficiency Testing, Quality Control and Audits. Quality control
samples are processed in parallel with the analysis of patient specimens. The
results of tests on quality control samples are then monitored to identify
drift, shift or imprecision in the analytical processes. In addition, we
administer an internal proficiency testing program, where proficiency testing
samples are processed through our systems as routine patient samples and
reported. We also perform internal process audits as part of our comprehensive
quality assurance program.
External Proficiency Testing and Accreditation. All our laboratories
participate in various quality surveillance programs conducted externally. These
programs supplement all other quality assurance procedures. They include
proficiency testing programs administered by the College of American
Pathologists ("CAP"), as well as some state agencies.
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CAP is an independent non-governmental organization of board certified
pathologists. CAP is approved by the Health Care Financing Administration to
inspect clinical laboratories to determine compliance with the standards
required by the Clinical Laboratory Improvement Amendments of 1988. CAP offers
an accreditation program to which laboratories may voluntarily subscribe. All of
the Company's major regional laboratories are accredited by the CAP.
Accreditation includes on-site inspections and participation in the CAP (or
equivalent) proficiency testing program.
Regulation of Clinical Laboratory Operations
The clinical laboratory industry is subject to significant federal and
state regulation, including inspections and audits by governmental agencies.
Governmental authorities may impose fines or criminal penalties or take other
enforcement actions to enforce laws and regulations, including revoking a
clinical laboratory's right to conduct business. Changes in regulation may
increase the costs of performing clinical laboratory tests or increase the
administrative requirements of claims.
CLIA. All of our laboratories and patient service centers are licensed and
accredited by applicable federal and state agencies. The Clinical Laboratory
Improvement Amendments of 1988 ("CLIA") regulates virtually all clinical
laboratories by requiring they be certified by the federal government to ensure
that all clinical laboratory testing services are uniformly accurate, reliable
and timely. CLIA permits states to adopt regulations that are more stringent
than federal law. For example, state laws may require additional personnel
qualifications, quality control, record maintenance and proficiency testing.
Drug Testing. The Substance Abuse and Mental Health Services
Administration ("SAMHSA") regulates drug testing for public sector employees and
employees of certain federally regulated businesses. SAMHSA has established
detailed performance and quality standards that laboratories must meet to
perform drug testing on federal employees and contractors and other regulated
entities. All laboratories that perform such testing must be certified as
meeting SAMHSA standards.
Controlled Substances. The federal Drug Enforcement Administration (the
"DEA") regulates access to controlled substances used to perform drugs of abuse
testing. Laboratories that use controlled substances are licensed by the DEA.
Medical Waste, Hazardous Waste and Radioactive Materials. Clinical
laboratories are also subject to federal, state and local regulations relating
to the handling and disposal of regulated medical waste, hazardous waste and
radioactive materials. We generally use outside suppliers for specimen disposal.
FDA. The Food and Drug Administration (the "FDA") has regulatory
responsibility over instruments, test kits, reagents and other devices used by
clinical laboratories. The FDA recently issued a final rule clarifying that
certain reagents used in many tests internally developed and performed by
clinical laboratories will not require FDA clearance or approval. The FDA is
also evaluating new criteria for certain tests that would not be subject to
comprehensive CLIA requirements ("waived tests") and is studying whether it
should adopt standards for regulation of genetic testing.
Occupational Safety. The federal Occupational Safety and Health
Administration ("OSHA") has established extensive requirements relating
specifically to workplace safety for healthcare employers. This includes
protecting workers from exposure to blood-borne pathogens, such as HIV and
hepatitis B and C. OSHA recently amended its regulations to require employers to
develop a program to reduce or eliminate needlestick injuries. During the fourth
quarter of 2000, we began to provide safety needles to our employees, which are
more expensive than regular needles, throughout our patient service center
network.
Specimen Transportation. Transportation of infectious substances such as
clinical laboratory specimens is subject to regulation by the Department of
Transportation, the Public Health Service ("PHS"), the United States Postal
Service and the International Civil Aviation Organization.
Corporate Practice of Medicine. Several states, including Colorado and
Texas, in which several of our principal laboratories are located, prohibit
corporations from the practice of medicine, including the provision of anatomic
pathology services. These restrictions may affect our ability to provide
services directly to consumers.
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Confidentiality of Health Information
Pursuant to the Health Insurance Portability and Accountability Act of
1996 ("HIPAA"), on December 28, 2000, the Secretary of the Department of Health
and Human Services ("HHS") issued final regulations that would establish
comprehensive federal standards with respect to the use and disclosure of
protected health information by a health plan, healthcare provider or healthcare
data clearinghouse. The regulations establish a complex regulatory framework on
a variety of subjects, including (a) the circumstances under which disclosures
and uses of protected health information require a general patient consent,
specific authorization by the patient, or no patient consent or authorization,
(b) the content of notices of privacy practices for protected health
information, (c) patients' rights to access, amend and receive an accounting of
the disclosures and uses of protected health information and (d) administrative,
technical and physical safeguards required of entities that use or receive
protected health information. The regulations establish a "floor" and would not
supersede state laws that are more stringent. Therefore, we will be required to
comply with both federal privacy standards and certain varying state privacy
laws. In addition, for healthcare data transfers relating to citizens of other
countries, we will need to comply with the privacy and security requirements of
individual countries or, where applicable, the European Data Protection
Directive (through adherence to the Safe Harbor Agreement between the European
Union and the United States). The comment period was reopened for the federal
privacy regulations, but they are anticipated to become effective in April 2003
for healthcare providers and most other covered entities. In addition, final
standards for electronic transactions were issued in August 2000 and will become
effective in October 2002. These regulations provide uniform standards for code
sets and electronic claims, remittance advice, enrollment, eligibility and other
electronic transactions. Finally, the proposed security and electronic signature
regulations issued by the Secretary of HHS in August, 1998 pursuant to HIPAA are
expected to be finalized this year. HIPAA provides for significant fines and
other penalties for wrongful disclosure of protected health information.
Compliance with the HIPAA requirements, when finalized, will require significant
capital and personnel resources from all healthcare organizations, including us.
However, we will not be able to estimate the cost of complying with all of these
regulations until after they all are finalized. The regulations, when finalized
and effective, could adversely affect us.
Regulation of Reimbursement for Clinical Laboratory Services
Overview. The healthcare industry has been undergoing significant changes
in the past several years. Governmental payers, such as Medicare (which
principally serves patients aged 65 years and older) and Medicaid (which
principally services indigent patients), as well as private insurers and large
employers have taken steps to control the cost, utilization and delivery of
healthcare services. Principally as a result of recent reimbursement reductions
and measures adopted by the Health Care Financing Administration ("HCFA") to
reduce utilization described below, the percentage of our aggregate net revenues
derived from Medicare programs declined from 20% in 1995 to 13% in 2000. We
believe that our other business may significantly depend on continued
participation in the Medicare and Medicaid programs, because many clients may
want a single laboratory to perform all of their clinical laboratory testing
services, regardless of whether reimbursements are ultimately made by
themselves, Medicare, Medicaid or other payers.
Billing and reimbursement for clinical laboratory testing is subject to
significant and complex federal and state regulation. Penalties for violations
of laws relating to billing federal healthcare programs and for violations of
federal fraud and abuse laws include: (1) exclusion from participation in
Medicare/Medicaid programs; (2) asset forfeitures; (3) civil and criminal
penalties and fines; and (4) the loss of various licenses, certificates and
authorizations necessary to operate some or all of a clinical laboratory's
business. Civil monetary penalties for a wide range of violations are not more
than $10,000 per violation plus three times the amount claimed and, in the case
of kickback violations, not more than $50,000 per violation plus up to three
times the amount of remuneration involved. A parallel civil remedy under the
federal False Claims Act provides for damages not more than $11,000 per
violation plus up to three times the amount claimed.
Reduced Reimbursements. In 1984, Congress established a Medicare fee
schedule payment methodology for clinical laboratory services performed for
patients covered under Part B of the Medicare program. Congress then imposed a
national ceiling on the amount that carriers could pay under their local
Medicare fee schedules. Since then, Congress has periodically reduced the
national ceilings. The Medicare national fee schedule limitations were reduced
in 1996 to 76% of the 1984 national median and in 1998 to 74% of the 1984
national median. In addition, Congress also eliminated the provision for annual
fee schedule increases based on the consumer price index through 2002. The
Clinton Administration's original proposed budget for fiscal year 2001 sought to
reduce by 1% the scheduled annual fee schedule increases based on the consumer
price index for 2003, 2004 and 2005; and to reduce by 30% the reimbursement for
four commonly ordered tests. However, no fee reductions were included in the
final budget that was passed for fiscal year 2001. We cannot predict if future
legislation will reduce reimbursement for clinical laboratory testing. During
the 2000 presidential campaign, President Bush proposed changes to the Medicare
program, particularly regarding payment for
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pharmaceutical products. However, President Bush has not announced any details
regarding reimbursement of clinical laboratories.
There have been several recent developments favorably impacting
reimbursement by Medicare of clinical laboratory testing. As part of the 1999
Balanced Budget Refinement Act, the reimbursement by Medicare for Pap smear
tests was increased by almost 100%. As part of Medicare/Medicaid "giveback"
legislation finalized in December 2000, Medicare will begin to cover screening
Pap smears on a biennial basis (previously Medicare covered one screening Pap
smear every three years) effective in July 2001. As part of this same
legislation, Congress directed the Secretary of HHS to obtain public input on
coding and payment determinations for new clinical diagnostic laboratory tests
and to set the national limitation amount for new clinical laboratory tests at
100% (rather than 74%) of the national median for such tests. Finally, this
legislation also required the Secretary to study whether Medicare should cover
routine thyroid screenings.
Laboratories must bill the Medicare program directly and must accept the
carrier's fee schedule amount as payment in full for most tests performed on
behalf of Medicare beneficiaries. In addition, 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:
o "Client" fees charged to physicians, hospitals, and institutions to
which a laboratory supplies services on a wholesale basis and which
are billed on a monthly basis. These fees are generally subject to
negotiation or discount.
o "Patient" fees charged to individual patients and third-party
payers, like Medicare and Medicaid. These generally require separate
bills for each requisition.
The fee schedule amounts established by Medicare are typically
substantially lower than patient fees otherwise charged by us, but are higher
than our fees actually charged to many clients. During 1992, the Office of the
Inspector General (the "OIG") of the Department of Health and Human Services
("HHS") issued final regulations that prohibited charging Medicare fees
substantially in excess of a provider's usual charges. The OIG, however,
declined to provide any guidance concerning interpretation of these rules,
including whether or not discounts to non-governmental clients and payers or the
dual-fee structure might be inconsistent with these rules.
A proposed rule released in September 1997 would authorize the OIG to
exclude from participation in the Medicare program providers, including clinical
laboratories, that charge Medicare and other programs fees that are
"substantially in excess of . . . usual charges . . . to any of [their]
customers, clients or patients." This proposal was withdrawn by the OIG in 1998.
However, the 1997 Balanced Budget Act permits HCFA to adjust statutorily
prescribed fees for some medical services, including clinical laboratory
services, if the fees are "grossly excessive." In January 1998, HCFA issued an
interim final rule setting forth criteria to be used by HCFA in determining
whether to exercise this power. Among the factors listed in the rule are whether
the statutorily prescribed fees are "grossly higher or lower than the payment
made for the. . . services by other purchasers in the same locality." In
November 1999, the OIG issued an advisory opinion which indicated that a
clinical laboratory that offers discounts on client bills may violate the "usual
charges" regulation if the "charge to Medicare substantially exceeds the amount
the laboratory most frequently charges or has contractually agreed to accept
from non-Federal payors." The OIG subsequently issued a letter clarifying that
the usual charges regulation is not a blanket prohibition on discounts to
private pay customers. We cannot provide any assurances to investors that fees
payable by Medicare could not be reduced as a result of the application of this
rule or that the government might not assert claims for reimbursement by
purporting to apply this rule retroactively.
Currently, there are no co-insurance or co-payments required for clinical
laboratory testing. However, The Clinton Administration's original proposed
budget for fiscal year 2001 called for reinstatement of 20% co-insurance for
clinical laboratories. However, no co-insurance was included in the final budget
approved for fiscal year 2001. When co-insurance was last in effect in 1984,
clinical laboratories received from Medicare carriers only 80% of the Medicare
allowed amount and were required to bill Medicare beneficiaries for the unpaid
balance of the Medicare allowed amount. If enacted, a coinsurance proposal could
adversely affect the revenues of the clinical laboratory industry, including us,
by exposing the testing laboratory to the credit of individuals and by
increasing the number of bills. In addition, a laboratory could be subject to
potential fraud and abuse violations if adequate procedures to bill and collect
the co-insurance payments are not established and followed.
Reduced Utilization of Clinical Laboratory Testing. In recent years, HCFA
has taken several steps to reduce utilization of clinical laboratory testing.
Since 1995, 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 diagnostic code
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supporting the medical necessity of the test. Physicians are required by law to
provide diagnostic information when they order clinical tests for Medicare and
Medicaid patients. However, there is no penalty prescribed for violations of
this law.
In March 1996, HCFA eliminated its prior policy under which Medicare paid
for all tests contained in an automated chemistry panel when at least one of the
tests in the panel is medically necessary. HCFA indicated that under the new
policy, Medicare will only pay for those individual tests in a chemistry panel
that are medically necessary. Subsequently the American Medical Association
("AMA"), in conjunction with HCFA, eliminated the existing automated chemistry
panel series (CPT Codes 80002-80019) and designated four new panels of
"clinically relevant" automated chemistry panels. HCFA adopted these panels in
1998, and in 1999 and 2000 amended these new panels or created additional
panels.
We are generally permitted to bill patients directly for some statutorily
excluded clinical laboratory services. We are also generally permitted to bill
patients for clinical laboratory tests that Medicare does not pay for due to
"medical necessity" limitations (these tests include limited coverage tests for
which a carrier-approved diagnosis code is not provided by the ordering
physician) if the patient signs an advance beneficiary notice (ABN). See
"Billing".
Inconsistent Practices. Currently, many different local carriers
administer Medicare. They have inconsistent policies on matters such as: (1)
test coverage; (2) automated chemistry panels; (3) diagnosis coding; (4) claims
documentation; and (5) fee schedules (subject to the national limitations).
Inconsistent regulation has increased the complexity of the billing process for
clinical laboratories. As part of the 1997 Balanced Budget Act, HHS was required
to adopt uniform policies on the above matters by January 1, 1999 and replace
the current local carriers with no more than five regional carriers. Although
HHS has finalized a number of uniform policies, it has not taken any final
action to replace the local carriers with five regional carriers. However, in
November 2000, HCFA published a solicitation in the Commerce Business Daily
seeking two contractors to process Part B clinical laboratory claims. In the
solicitation, HCFA stated that the Secretary has decided to limit the number of
carriers processing clinical diagnostic laboratory test claims to two
contractors. The solicitation indicated that the Request for Proposal (RFP)
would be released on or before December 31, 2000 but as of March 14, 2001, it
had not been issued; the solicitation did not indicate the effective date for a
final transition to the regional carrier model.
HCFA plans to achieve standardization through the help of a single claims
processing system for all carriers. This initiative, however, was suspended due
to HCFA's Year 2000 compliance priorities.
Competitive Bidding. The 1997 Balanced Budget Act requires HCFA to conduct
five Medicare bidding demonstrations involving various types of medical services
and complete them by 2002. HCFA is expected to include a clinical laboratory
demonstration project in a metropolitan statistical area as part of the
legislative mandate. If competitive bidding were implemented on a regional or
national basis for clinical laboratory testing, it could materially adversely
affect the clinical laboratory industry and us.
Future Legislation. Future changes in federal, state and local regulations
(or in the interpretation of current regulations) affecting governmental
reimbursement for clinical laboratory testing could adversely affect us. We
cannot predict, however, whether and what type of legislative proposals will be
enacted into law or what regulations will be adopted by regulatory authorities.
Fraud and Abuse Regulations. Medicare and Medicaid anti-kickback laws
prohibit clinical laboratories from making payments or furnishing other benefits
to influence the referral of tests billed to Medicare, Medicaid or other federal
programs.
Various federal enforcement agencies, including the Federal Bureau of
Investigations ("FBI") and the OIG, liberally interpret and aggressively enforce
statutory fraud and abuse provisions. According to public statements by the
Department of Justice ("DOJ"), during the last several years healthcare fraud
has been elevated to one of the highest priorities of the DOJ, and substantial
prosecutorial and other law enforcement resources have been committed to
investigating healthcare provider fraud. The OIG also is involved in
investigations of healthcare fraud and has, according to recent workplans,
targeted certain laboratory practices for study, investigation and prosecution.
As noted above, the penalties for violation of these laws may include criminal
and civil fines and penalties and exclusion from participation in federal
programs. Many of the anti-fraud statutes and regulations, including those
relating to joint ventures and alliances, are vague or indefinite and have not
been interpreted by the courts. We cannot predict if some of the fraud and abuse
rules will be interpreted contrary to our practices.
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In November 1999, the OIG issued an advisory opinion concluding that the
industry practice of discounting client bills may constitute a kickback if the
discounted price is below a laboratory's overall cost (including overhead) and
below the amounts reimbursed by Medicare. Advisory opinions are not binding but
may be indicative of the position that prosecutors may take in enforcement
actions. The OIG's opinion, if enforced, could result in fines and possible
exclusion and could require us to eliminate offering discounts to clients below
the rates reimbursed by Medicare. The OIG subsequently issued a letter
clarifying that it did not intend to imply that discounts are a per se violation
of the federal anti-kickback statute, but may merit further investigation
depending on the facts and circumstances presented.
In addition, since 1992, a federal anti-"self-referral" law, commonly
known as the "Stark" law, prohibits, with certain exceptions, Medicare payments
for laboratory tests referred by physicians who have, personally or through a
family member, an investment interest in, or a compensation arrangement with,
the testing laboratory. Since January 1995, these restrictions have also applied
to Medicaid-covered services. Many states have similar anti-"self-referral" and
other laws that also affect investment and compensation arrangements with
physicians who refer other than government-reimbursed laboratory testing to us.
We cannot predict if some of the state laws will be interpreted contrary to our
practices.
Government Investigations and Related Claims
Quest Diagnostics and SBCL have each settled government claims that
primarily involved industry-wide billing and marketing practices that were
substantially discontinued by the mid-1990s. The most recent settlement was
finalized in December 2000, when we entered into a civil settlement under which
we paid a total of approximately $13 million to settle similar claims with
respect to Nichols Institutes' former regional laboratories. This settlement was
covered by the indemnification from Corning Incorporated as described in Note 17
to the Consolidated Financial Statements. However, there remain pending against
Quest Diagnostics and SBCL private claims arising out of the settlement of the
governmental claims, including several class actions brought against SBCL.
Our aggregate reserves with respect to billing-related claims (including
pre-acquisition claims of SBCL) were about $88 million at December 31, 2000. The
reserves represent amounts for future government and private settlements of
pending matters or matters deemed probable as a result of the government and
private settlements and self-reporting. Most of the claims are generally subject
to indemnification from SmithKline Beecham as described in Note 17 to the
Consolidated Financial Statements. SmithKline Beecham has also agreed to
indemnify us with respect to pending actions relating to a former SBCL employee
that at times reused certain needles when drawing blood from patients. Although
management believes that established reserves for both indemnified and
non-indemnified claims are sufficient, it is possible that additional
information may become available that may cause the final resolution of these
matters to exceed established reserves by an amount which could be material to
our results of operations and cash flows in the period in which such claims are
settled. We do not believe that these issues will have a material adverse effect
on our overall financial condition. However, we understand that there may be
pending qui tam claims brought by former employees or other "whistle blowers" as
to which we have not been provided with a copy of the complaint and accordingly
cannot determine the extent of any potential liability.
As an integral part of our compliance program discussed below, we
investigate all reported or suspected failures to comply with federal healthcare
reimbursement requirements. Any non-compliance that results in Medicare or
Medicaid overpayments is reported to the government and reimbursed by us. As a
result of these efforts, we have periodically identified and reported
overpayments. While we have reimbursed these overpayments and have taken
corrective action where appropriate, we cannot assure investors that in each
instance the government will necessarily accept these actions as sufficient.
Compliance Program
Compliance with all government rules and regulations has become a
significant concern throughout the clinical laboratory industry because of
evolving interpretations of regulations and the national debate over healthcare.
We began a compliance program early in 1993.
We emphasize the development of training programs intended to ensure the
strict implementation and observance of all applicable laws, regulations and
company policies. Further, we conduct in-depth reviews of procedures, personnel
and facilities to assure regulatory compliance throughout our operations. The
quality, safety and compliance committee of the board of directors requires
periodic reporting of compliance operations from management. Government
officials have publicly cited this program as a model for the industry.
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In October 1996, we signed a five-year corporate integrity agreement with
the OIG. Under the agreement, we agreed to take steps to demonstrate our
integrity as a provider of services to federally sponsored healthcare programs.
These include steps to:
o maintain our corporate compliance program;
o adopt pricing guidelines;
o audit laboratory operations; and
o investigate and report instances of noncompliance, including any
corrective actions and disciplinary steps.
This agreement also gives us the opportunity to seek clearer guidance on
matters of compliance and to resolve compliance issues directly with the OIG.
SBCL also entered into a five-year corporate integrity agreement with the OIG
that became effective in 1997. As a result of our acquisition of SBCL, SBCL is
now covered under our corporate integrity agreement.
None of the undertakings included in our corporate integrity agreement are
expected to have any material adverse effect on our business, financial
condition, results of operations, cash flow, and prospects. We believe we comply
in all material respects with all applicable statutes and regulations. However,
we cannot assure you that no statutes or regulations will be interpreted or
applied by a prosecutorial, regulatory or judicial authority in a manner that
would adversely affect us. Potential sanctions for violation of these statutes
include significant damages, penalties, and fines, exclusion from participation
in governmental healthcare programs and the loss of various licenses,
certificates and authorization necessary to operate some or all of our business.
Insurance
We maintain various liability and property insurance programs (subject to
maximum limits and self-insured retentions) for claims that could result from
providing or failing to provide clinical laboratory testing services, including
inaccurate testing results and other exposures. Management believes that present
insurance coverage and reserves are sufficient to cover currently estimated
exposures, but we cannot assure you that we will not incur liabilities in excess
of the policy limits. Similarly, although we believe that we will be able to
obtain adequate insurance coverage in the future at acceptable costs, we cannot
assure you that we will be able to do so.
Employees
At both December 31, 2000 and 1999, we employed approximately 27,000
people. Approximately 25,000 of our employees were full-time at December 31,
2000. These totals exclude employees of the joint ventures in which we do not
have a majority interest. We have no collective bargaining agreements with any
unions, and we believe that our overall relations with our employees are good.
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CAUTIONARY STATEMENT FOR PURPOSES OF THE "SAFE HARBOR" PROVISIONS OF THE PRIVATE
SECURITIES LITIGATION REFORM ACT OF 1995
Some statements and disclosures in this document are forward-looking
statements. Forward-looking statements include all statements that do not relate
solely to historical or current facts and can be identified by the use of words
such as "may", "believe", "will", "expect", "project", "estimate", "anticipate",
"plan" or "continue". These forward-looking statements are based on our current
plans and expectations and are subject to a number of risks and uncertainties
that could significantly cause our plans and expectations, including actual
results, to differ materially from the forward-looking statements. The Private
Securities Litigation Reform Act of 1995 provides a "safe harbor" for
forward-looking statements to encourage companies to provide prospective
information about their companies without fear of litigation.
We would like to take advantage of the "safe harbor" provisions of the
Litigation Reform Act in connection with the forward-looking statements included
in this document. Investors are cautioned not to unduly rely on such
forward-looking statements when evaluating the information presented in this
document. The following important factors could cause our actual financial
results to differ materially from those projected, forecasted or estimated by us
in forward-looking statements:
(a) Heightened competition, including increased pricing pressure and
competition from hospitals for testing for non-patients. See
"Business - Competition."
(b) Impact of changes in payer mix, including any shift from
traditional, fee-for-service medicine to capitated managed-cost
healthcare. See "Business - Payers and Customers - Customers -
Managed Care Organizations."
(c) Adverse actions by government or other third-party payers, including
unilateral reduction of fee schedules payable to us and a resumption
by managed care organizations of the practice of negotiating for
exclusive contracts that involve aggressively priced capitated
payments. See "Business--Regulation of Reimbursement for Clinical
Laboratory Services" and "Business - Payers and Customers -
Customers - Managed Care Organizations."
(d) The impact upon our volume 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 the likelihood that
third-party payers will increasingly adopt similar
requirements;
(2) the policy of HCFA to limit Medicare reimbursement for tests
contained in automated chemistry panels to the amount that
would have been paid if only the covered tests, determined on
the basis of demonstrable "medical necessity," had been
ordered;
(3) continued inconsistent practices among the different local
carriers administering Medicare; and
(4) Proposed changes by HCFA to the ABN form.
See "Business - Regulation of Reimbursement for Clinical laboratory
Services" and "Business - Billing".
(e) Adverse results from pending or future government investigations or
private actions. These include, in particular:
(1) significant monetary damages and/or exclusion from the
Medicare and Medicaid programs and/or other significant
litigation matters;
(2) the absence of indemnification from Corning for private claims
unrelated to the indemnified government claims or
investigations and for private claims that are not settled by
December 31, 2001. See "Business--Government Investigations
and Related Claims;"
(3) the absence of indemnification from SmithKline Beecham for:
(a) governmental claims against SBCL that arise after August
16, 1999; and
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(b) private claims unrelated to the indemnified governmental
claims or investigations; and
(4) the absence of indemnification for consequential damages from
either SmithKline Beecham or Corning.
(f) Failure to obtain new customers at profitable pricing or failure to
retain existing customers, and reduction in tests ordered or
specimens submitted by existing customers.
(g) Failure to efficiently integrate acquired clinical laboratory
businesses, particularly SBCL's, or to efficiently integrate
clinical laboratory businesses from joint ventures and alliances
with hospitals, and the costs related to any such integration, or to
retain key technical and management personnel. See
"Business - Aquisition and Integration of SBCL Operations."
(h) Inability to obtain professional liability insurance coverage or a
material increase in premiums for such coverage. See "Business -
Insurance."
(i) Denial of CLIA certification or other license for any of Quest
Diagnostics' clinical laboratories under the CLIA standards, by HCFA
for Medicare and Medicaid programs or other federal, state and local
agencies. See "Business - Regulation of Clinical Laboratory
Operations."
(j) Adverse publicity and news coverage about us or the clinical
laboratory industry.
(k) Computer or other system failures that affect our ability to perform
tests, report test results or properly bill customers, including
potential failures resulting from systems conversions, including
from the integration of the systems of Quest Diagnostics and SBCL,
telecommunications failures, malicious human act (such as electronic
break-ins or computer viruses) or natural disasters. See "Business -
Information Systems" and "Business - Billing."
(l) Development of technologies that substantially alter the practice of
laboratory medicine, including technology changes that lead to the
development of more cost-effective tests such as (1) point-of-care
tests that can be performed by physicians in their offices and (2)
home testing that can be carried out without requiring the services
of clinical laboratories.
(m) Issuance of patents or other property rights to our competitors or
others that could prevent, limit or interfere with our ability to
develop, perform or sell our tests or operate our business. See
"Business--The United States Clinical Laboratory Testing Market."
(n) Development of tests by our competitors or others which we may not
be able to license or use of our technology or similar technologies
or our trade secrets by competitors, any of which could negatively
affect our competitive position.
(o) Development of an Internet based electronic commerce business model
that does not require an extensive logistics and laboratory network.
(p) The impact of the privacy and security regulations issued under
HIPAA on our operations (including its medical information services)
as well as the cost to comply with the regulations. See
"Business - Confidentiality of Health Information."
(q) Changes in interest rates causing a substantial increase in our
effective borrowing rate.
(r) An ability to hire and retain qualified personnel or the loss of the
services of one or more of our key senior management personnel.
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Item 2. Properties
Our principal laboratories (listed alphabetically by state) are located in or
near the following metropolitan areas. In certain areas (indicated by the number
(2)), we have two principal laboratories as a result of the acquisition of SBCL.
Except in the case of the Chicago area, we intend to close or reduce in size one
of the duplicate facilities.
Location Leased or Owned
-------- ---------------
Phoenix, Arizona Leased by Joint Venture
Los Angeles, California Owned
San Diego, California Leased
San Francisco, California Owned
San Juan Capistrano, California Owned
Denver, Colorado Leased
New Haven, Connecticut Owned
Miami, Florida (2) Leased
Tampa, Florida Owned
Atlanta, Georgia Owned
Chicago, Illinois (2) One owned, one leased
Indianapolis, Indiana Leased by Joint Venture
Lexington, Kentucky Owned
New Orleans, Louisiana Owned
Baltimore, Maryland Owned
Boston, Massachusetts Leased
Detroit, Michigan Leased
St. Louis, Missouri Owned
Lincoln, Nebraska Leased
New York, New York (Teterboro, New Jersey) Owned
Long Island, New York Leased
Oklahoma City, Oklahoma Leased by Joint Venture
Portland, Oregon Leased
Philadelphia, Pennsylvania (2) One owned, one leased
Pittsburgh, Pennsylvania Leased
Nashville, Tennessee Leased
Dallas, Texas (2) Leased
Houston, Texas Leased
Seattle, Washington Leased
Our executive offices are located in Teterboro, New Jersey, in the
facility that also serves as our regional laboratory in the New York City
metropolitan area. We also lease under a capital lease an administrative office
(which served as the executive office of SBCL) in Collegeville, Pennsylvania. We
also lease a facility near Collegeville that will serve as our national revenue
service center. We own our laboratory facility in Mexico City and lease a
laboratory facility near London, England. We are currently assessing our need
for additional space near the Teterboro facility. We believe that, in general,
our laboratory facilities are suitable and adequate for our current and
anticipated future levels of operation. We believe that if we were unable to
renew a lease on any of our testing facilities, we could find alternative space
at competitive market rates and relocate our operations to such new location.
Item 3. Legal Proceedings
In addition to the investigations described in "Business-Government
Investigations and Related Claims," we are involved in various legal proceedings
arising in the ordinary course of business. Some of the proceedings against us
involve claims that are substantial in amount. Although we cannot predict the
outcome of such proceedings or any claims made against us, we do not anticipate
that the ultimate liability of such proceedings or claims will have a material
adverse effect on our financial position or results of operations as they
primarily relate to professional liability for which we believe we have adequate
insurance coverage. See "Business-Insurance."
Item 4. Submission of Matters to a Vote of Security Holders
None.
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PART II
Item 5. Market for Registrant's Common Stock and Related Stockholder Matters
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 Tape:
High Low
---- ---
1998
First Quarter $ 17.13 $ 15.06
Second Quarter 23.06 16.13
Third Quarter 22.00 16.00
Fourth Quarter 18.63 14.50
1999
First Quarter 22.81 17.75
Second Quarter 27.50 21.50
Third Quarter 28.13 23.75
Fourth Quarter 32.94 22.56
2000
First Quarter 40.38 29.13
Second Quarter 74.75 37.00
Third Quarter 141.00 73.25
Fourth Quarter 146.25 82.75
As of February 28, 2001, we had approximately 6,800 record holders of our
common stock.
We have not paid dividends in 2000 and 1999, and do not expect to pay
dividends on our common stock in the foreseeable future. Our bank credit
facility prohibits us from paying cash dividends on our common stock. The
Indenture relating to our 10 3/4% senior subordinated notes due 2006 restrict
our ability to pay cash dividends based primarily on a percentage of our
earnings, as defined.
Item 6. Selected Financial Data
See page 29.
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
See pages 32.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
See Management's Discussion and Analysis of Financial Condition and
Results of Operations.
Item 8. Financial Statements and Supplementary Data
See Item 14 (a) 1 and 2.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
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PART III
Item 10. Directors and Executive Officers of the Registrant
Information concerning the directors of the Company is incorporated by
reference to the information in the Company's Proxy Statement to be filed on or
before April 30, 2001 (the "Proxy Statement") appearing under the caption
"Election of Directors."
Executive Officers of the Registrant
Officers of the Company are elected annually by the Board of Directors and
hold office at the discretion of the Board of Directors. The following persons
serve as executive officers of the Company:
Kenneth W. Freeman (50) is Chairman of the Board and Chief Executive
Officer of the Company. Mr. Freeman joined the Company in May 1995 as President
and Chief Executive Officer, was elected a director in July 1995 and was elected
Chairman of the Board in December 1996. Prior to 1995, he served in a variety of
financial and managerial positions at Corning, which he joined in 1972. He was
elected Controller and a Vice President of Corning in 1985, Senior Vice
President in 1987, General Manager of the Science Products Division in 1989 and
Executive Vice President in 1993. He was appointed President and Chief Executive
Officer of Corning Asahi Video Products Company in 1990.
Surya N. Mohapatra, Ph.D. (51) is President and Chief Operating Officer.
Prior to joining the Company in February 1999 as Senior Vice President and Chief
Operating Officer, he was Senior Vice President of Picker International, a
worldwide leader in advanced medical imaging technologies, where he served in
various executive positions during his 18-year tenure.
Richard L. Bevan (41) is Corporate Vice President for Human Resources.
From 1982 until August 1999, Mr. Bevan served in a variety of human resources
positions for SmithKline Beecham's pharmaceutical and clinical laboratory
businesses, most recently serving as Vice President and Director of Human
Resources-Operations for SBCL. Mr. Bevan was appointed Corporate Vice President
for Human Resource Strategy and Development in August 1999, and to his present
position in January 2001.
Julie A. Clarkson (40) is Corporate Vice President for Communications and
Public Affairs. Ms. Clarkson has overall responsibility for internal and
external communications and government affairs. Ms. Clarkson has more than 12
years of experience in sales and operations with the Company, most recently
serving as Vice President for Business Development in Europe. She assumed her
current responsibilities in August 1999.
Kenneth R. Finnegan (41) is Corporate Vice President for Business
Development. Mr. Finnegan has overall responsibility for business development
activities, including strategy development, acquisitions and investments. Mr.
Finnegan joined the Company in July 1997 as Vice President and Treasurer and
assumed his current responsibilities in July 2000. Prior to joining the Company,
Mr. Finnegan served as Assistant Treasurer at General Signal Corporation.
Robert A. Hagemann (44) is Corporate Vice President and Chief Financial
Officer. He joined Corning Life Sciences, Inc., in 1992, where he held a variety
of senior financial positions before being named Vice President and Corporate
Controller of the Company in 1996. Prior to joining the Company, Mr. Hagemann
was employed by Prime Hospitality, Inc. and Crompton & Knowles, Inc. in senior
financial positions. He was also previously associated with Ernst & Young. Mr.
Hagemann assumed his present responsibilities in August 1998.
Gerald C. Marrone (58) is Senior Vice President, Administration and Chief
Information Officer. Prior to joining the Company in November 1997 as Chief
Information Officer, Mr. Marrone was with Citibank, N.A. for 12 years. During
his tenure he was most recently Vice President, Division Executive for
Citibank's Global Production Support Division. While at Citibank, he was also
the Chief Information Officer of Citibank's Global Cash Management business.
Prior to joining Citibank, he was the Chief Information Officer for Memorial
Sloan-Kettering Cancer Center in New York for five years.
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Michael E. Prevoznik (39) is Corporate Vice President for Legal and
Compliance and General Counsel. Prior to joining SBCL in 1994 as its Chief Legal
Compliance Officer, Mr. Prevoznik was with Dechert Price & Rhodes. In 1996, he
became Vice President and Chief Legal Compliance Officer for SmithKline Beecham
Healthcare Services. In 1998, he was appointed Vice President, Compliance for
SmithKline Beecham, assuming additional responsibilities for coordinating all
compliance activities within SmithKline Beecham worldwide. Mr. Prevoznik assumed
his current responsibilities with the Company in August 1999.
Item 11. Executive Compensation
The information called for by this Item is incorporated by reference to
the information under the caption "Executive Compensation" appearing in the
Proxy Statement. The information contained in the Proxy Statement under the
captions "Compensation Committee Report on Executive Compensation" and
"Performance Graph" is not incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The information called for by this Item is incorporated by reference to
the information under the caption "Security Ownership of Certain Beneficial
Owners and Management" appearing in the Proxy Statement.
Item 13. Certain Relationships and Related Transactions
The information called for by this Item is incorporated by reference to
the information under the caption "Certain Relationships and Related
Transactions" appearing in the Proxy Statement.
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PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) Documents filed as part of this report:
1. Index to financial statements and supplementary data filed as part
of this report:
Item Page
Report of Independent Accountants............................. F-1
Consolidated Balance Sheets................................... F-2
Consolidated Statements of Operations......................... F-3
Consolidated Statements of Cash Flows......................... F-4
Consolidated Statements of Stockholders' Equity............... F-5
Notes to Consolidated Financial Statements.................... F-6
Supplementary Data: Quarterly Operating Results (unaudited)... F-33
2. Financial Statement Schedule:
Item Page
Schedule II - Valuation Accounts and Reserves................. F-34
3. Exhibits filed as part of this report:
See (c) below.
(b) Reports on Form 8-K filed during the last quarter of 2000:
On October 31, 2000, the Company filed a current report on Form 8-K
with respect to the acquisition of SBCL.
(c) Exhibits filed as part of this report:
Exhibit
Number Description
2.1 Form of Transaction Agreement among Corning Incorporated, Corning Life
Sciences Inc., Corning Clinical Laboratories Inc. (Delaware), Covance
Inc. and Corning Clinical Laboratories Inc. (Michigan), dated as of
November 22, 1996 (filed as an exhibit to the Company's Registration
Statement on Form 10 (File No. 1-12215) and incorporated herein by
reference)
3.1 Certificate of Incorporation of the Registrant (filed as an exhibit to
the Company's Registration Statement on Form 10 (File No. 1-12215) and
incorporated herein by reference)
3.2 Amendment of the Certificate of Incorporation of the Registrant (filed
as an Exhibit to the Company's proxy statement for the 2000 annual
meeting of shareholders and incorporated herein by reference)
3.3 Amended and Restated By-Laws of the Registrant
4.1 Form of Rights Agreement dated December 31, 1996 (the "Rights
Agreement") between
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Corning Clinical Laboratories Inc. and Harris Trust and Savings Bank as
Rights Agent (filed as an Exhibit to the Company's Registration
Statement on Form 10 (File No. 1-12215) and incorporated herein by
reference)
4.2 Form of Amendment No. 1 effective as of July 1, 1999 to the Rights
Agreement (filed as an exhibit to the Company's current report on Form
8-K (Date of Report: August 16, 1999)and incorporated herein by
reference)
4.3 Form of Amendment No. 2 to the Rights Agreement (filed as an Exhibit to
the Company's 1999 annual report on Form 10-K and incorporated herein
by reference)
4.4 Form of Amendment No. 3 to the Rights Agreement
10.1 Form of Tax Sharing Agreement among Corning Incorporated, Corning
Clinical Laboratories Inc. and Covance Inc. (filed as an Exhibit to the
Company's Registration Statement on Form 10 (File No. 1-12215) and
incorporated herein by reference)
10.2 Form of Spin-Off Distribution Tax Indemnification Agreement between
Corning Incorporated and Corning Clinical Laboratories Inc. (filed as
an Exhibit to the Company's Registration Statement on Form 10 (File No.
1-12215) and incorporated herein by reference)
10.3 Form of Spin-Off Distribution Tax Indemnification Agreement between
Corning Clinical Laboratories Inc. and Covance Inc. (filed as an
Ex