SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
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FORM 10-K (Amendment No. 1)
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year ended December 31, 1996
Commission file number 1-12215
Quest Diagnostics Incorporated
(formerly known as Corning Clinical Laboratories Inc.)
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 New York Stock Exchange
with attached Preferred Share Purchase Right
10.75% Senior Subordinated Notes due 2006 New York Stock Exchange
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
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<PAGE>
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. X
As of March 31, 1997, the aggregate market value of the voting stock held by
non-affiliates of the registrant was approximately $432 million, based on the
closing price on such date of the Company's Common Stock on the New York Stock
Exchange.
As of March 31, 1997 there were outstanding 29,362,998 shares of Common Stock,
$.01 par value.
Documents Incorporated by Reference: None
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Part III of the Annual Report on Form 10-K of Quest Diagnostics
Incorporated (the "Company") for 1996 is amended in its entirety as set forth
below.
PART III
Item 10. Directors and Executive Officers of the Registrant
The Company's Board of Directors is divided into three classes. Certain
information with respect to the directors of the Company, including the annual
meeting of stockholders at which their term expires, is set forth below. The
Company does not intend to hold an annual meeting of stockholders until the
spring of 1998.
Name Expiration of Term Age
- ---- ------------------ ---
Kenneth D. Brody 1998 53
Van C. Campbell 1999 58
Mary A. Cirillo 1999 49
David A. Duke 1998 61
Kenneth W. Freeman 2000 46
Dan C. Stanzione 1999 51
Gail R. Wilensky 2000 53
Kenneth D. Brody is the founding partner in Winslow Partners LLC, a
Washington, D.C. private investment firm. From 1993 to early 1996, he was the
chairman and president of the Export-Import Bank of the U.S., a position to
which he was appointed by President Clinton. From 1971 to 1991, Mr. Brody was
with Goldman, Sachs & Co., where he was a partner and member of the management
committee. He is a director of Alex Brown Incorporated, Federal Realty
Investment Trust and Yuri Systems, Inc. Mr. Brody has been a director of the
Company since January 1997.
Van C. Campbell is the Vice Chairman of Corning, which he joined in
1964. He was elected assistant treasurer in 1971, treasurer in 1972, a vice
president in 1973, financial vice president in 1975 and senior vice president
for finance in 1980. He became general manager of the Consumer Products Division
in 1981. Mr. Campbell was elected vice chairman and a director in 1983 and
during 1995 was appointed to the additional position of chairman of Corning Life
Sciences Inc. He is a director of Armstrong World Industries, Inc., Corning,
Covance Inc. and General Signal Corporation. Mr. Campbell has been a director of
the Company since January 1991.
Mary A. Cirillo is Senior Vice President of Citibank, N.A., which she
joined in 1977. Since April 1994, Ms. Cirillo has been responsible for
Citibank's Global Relationship Banking Operations and Technology Group, which
supports the infrastructure and information technology needs of the North
America, Europe and Japan global markets. Ms. Cirillo previously served as the
Senior Corporate Officer for Citicorp's Business Evaluation and Corporate
Re-engineering Unit. Ms. Cirillo was elected a director of the Company on April
18, 1997.
David A. Duke is a Retired Vice Chairman of Corning. Dr. Duke joined
Corning in 1962 and served in a succession of research and management positions.
He was elected vice president-Telecommunications Products in 1980, elected a
senior vice president in 1984 and named director of Research and Development in
1985. He became responsible for Engineering in March 1987 and was elected as a
director and Vice Chairman of Corning in 1988. He resigned as a director of
Corning in April 1996 and retired in June 1996. Dr. Duke is a director of Armco,
Inc. Dr. Duke was a director of the Company from October 1994 to July 1996 and
was re-elected a director of the Company in October 1996.
Kenneth W. Freeman is Chairman of the Board, Chief Executive Officer
and President 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
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the Board in December 1996. Prior to 1995, he served in a variety of key
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, and general manager of the Science Products Division in 1989.
He was appointed president and chief executive officer of Corning Asahi Video
Products Company in 1990. In 1993, he was elected executive vice president of
Corning.
Dan C. Stanzione is President of both the Network Systems and Bell
Laboratories units of Lucent Technologies, the Murray Hill, NJ-based maker of
telecommunications equipment. Mr. Stanzione began his career in 1972 with Bell
Labs, where he led the teams working on the first microprocessors and digital
signal processors. He was appointed president of Network Systems, Lucent's
largest business unit, in 1996. Mr. Stanzione has been a director of the Company
since January 1997.
Gail R. Wilensky is the John M. Olin Senior Fellow at Project HOPE, an
international non-profit health foundation, which she joined in 1993. She is
currently the chair of the Physician Payment Review Commission which advises
Congress on physician payment and other Medicare issues. In 1992 and 1993, Dr.
Wilensky served as a deputy assistant to the President for policy development
relating to health and welfare issues. From 1990 to 1992, she was the
administrator of the Health Care Financing Administration where she directed the
Medicare and Medicaid programs. Dr. Wilensky is a director of Advance Tissue
Sciences Inc., Capstone Pharmacy Inc., Coram Healthcare Corp., Neopath Inc., St.
Jude Medical Corp., SMS Corporation, Syncor Corporation and United Healthcare
Corporation. Dr. Wilensky has been a director of the Company since January 1997.
Directors' Compensation. Each director of the Company, other than a
director who is an employee of the Company, receives $18,000 annually for
service as a director and is paid $1,000 for each meeting of the Board and $500
for each meeting of any committee thereof which he or she attends. In addition,
directors serving as committee chairs receive an additional annual retainer of
$1,500.
Under the Company's deferred compensation plan for directors, each
director may elect to defer until a date specified by him or her receipt of all
or a portion of his or her compensation. Such plan provides that amounts
deferred may be allocated to (i) a cash account upon which amounts deferred may
earn interest, compounded quarterly, at the base rate of Citibank, N.A. in
effect on certain specified dates, (ii) a market value account, the value of
which will be based upon the market value of the Company's common stock from
time to time, or (iii) a combination of such accounts. All non-employee
directors are eligible to participate in the plan. As of March 31, 1997, one
director had elected to defer compensation pursuant to the plan.
Under the Company's restricted stock plan for non-employee directors,
the Company issues to each non-employee elected as a director 750 shares of the
Company's common stock for each year specified in the term of service for which
such director was elected, subject to forfeiture and restrictions on transfer,
and an additional 5,000 shares upon such director's initial election as a
director, subject to forfeiture and restrictions on transfer.
Committees of the Board of Directors. The Board of Directors has four
standing committees: Audit and Finance Committee, a Compensation and Nominating
Committee ("Compensation Committee"), a Compliance Committee and an Executive
Committee. The Audit and Finance Committee, composed of Messrs. Campbell and
Stanzione and Dr. Duke, examines and considers matters relating to the financial
affairs of the Company, including reviewing the Company's annual financial
statements, the scope of the independent and internal audits and the independent
auditor's letter to management concerning the effectiveness of the Company's
internal financial and accounting controls. The Compensation Committee, composed
of Messrs. Brody and Stanzione and Ms. Cirillo, makes recommendations to the
Board with respect to programs for human resource development and management
organization and succession, and makes recommendations to the Board with respect
to compensation matters and policies and employee benefit and incentive plans,
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including the Company's stock option and equity based plans. The Compliance
Committee, composed of Dr. Duke and Dr. Wilensky, oversees the Company's
compliance program, which is administered by management's compliance council.
The council prepares for review and action by the Compliance Committee reports
on such matters as audits and investigations. See "Business-Compliance Program."
The Executive Committee, composed of Messrs. Brody, Campbell and Freeman, has
and may exercise all the powers and authority of the Board of Directors in the
management of the business and affairs of the Company except with respect to
certain major corporate matters, such as mergers, the election of directors, the
amendment of the Company's certificate of incorporation and by-laws, incurring
indebtedness in excess of $10 million and such matters as are delegated to other
committees of the Board of Directors.
Executive Officers. In addition to Mr. Freeman, the following persons
serve as executive officers of the Company:
Robert A. Carothers (60) is Vice President, Chief Financial Officer and
Treasurer. Mr. Carothers joined Corning in 1959 and has served in a number of
key financial positions in the United States and Japan. He was elected Assistant
Controller of Corning in 1991. In January 1996 he was appointed Assistant to the
President of the Company and in January 1997 assumed his current
responsibilities.
James D. Chambers (40) is Vice President-Billing and Investor
Relations. Mr. Chambers joined Corning in 1986 and has served in a variety of
managerial and financial positions for Corning and its subsidiaries, becoming
Assistant Treasurer in 1991. Mr. Chambers joined the Company in 1992 as
Treasurer and served as Chief Financial Officer from 1994 through 1995. In 1995
Mr. Chambers assumed his current responsibilities overseeing the Company's
billing process. In January 1997 Mr. Chambers also assumed responsibility for
investor relations.
Gregory C. Critchfield, M.D. (45) is Senior Vice President, and Chief
Medical and Science Officer. Dr. Critchfield joined the Company in 1995 as Chief
Laboratory Officer and assumed his current responsibilities in May 1996. Dr.
Critchfield has served as a consultant to the National Institutes of Health in
the capacity of a reviewer for more than ten years and was selected as Study
Section Chair of several Multidisciplinary Review Teams. Prior to joining the
Company, Dr. Critchfield was a clinical pathologist with Intermountain Health
Care ("IHC") for eight years and served in various director positions with IHC
Laboratory Services, including Director of Clinical Pathology. Dr. Critchfield
also served as Chairman of the Department of Pathology at Utah Valley Regional
Medical Center from 1994 through 1995.
Kurt R. Fischer (42) is Vice President-Human Resources. Mr. Fischer
joined Corning in 1976 and has served in a variety of Human Resources positions.
He was appointed Human Resource Manager for the Research, Development and
Engineering Group in 1986 and Director-Quality and Performance Management for
the Specialty Materials Group in 1991. Mr. Fischer assumed his present
responsibilities with the Company in December 1995.
Delbert A. Fisher, M.D. (68) is Vice President and also serves as
President of Academic Associates, a select group of eminent physicians and
scientists who advise the Company on new medical and scientific developments.
Dr. Fisher joined Nichols Institute in 1991 as President of its esoteric
laboratory facility and assumed his present responsibilities in 1993. Prior to
joining Nichols, he was a professor of pediatrics and the Associate Chairman of
the Department of Pediatrics of the UCLA School of Medicine for 23 years.
Raymond Gambino, M.D. (70) is Chief Medical Officer Emeritus. Dr.
Gambino joined the Company in 1983 as President of the Eastern Region. From 1984
to 1994, Dr. Gambino served as Chief Medical Officer and Executive Vice
President, at which time his appointment was changed to emeritus. He continues
to serve the Company as a senior medical advisor.
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Don M. Hardison, Jr. (46) is Senior Vice President-Sales and Marketing,
with overall responsibility for all commercial activities. Mr. Hardison joined
the Company in January 1996. Prior to joining the Company, Mr. Hardison had 18
years experience in health care with subsidiaries of SmithKline Beecham and its
predecessor entities, including seven years with the clinical laboratory
division of SmithKline, where he held a succession of positions including
Director of Marketing; Vice President of Sales-Northern; Vice President-General
Manager of the Atlanta Operation; and Vice President of Sales and Marketing.
Paul A. Krieger, M.D. (50) is Vice President-Anatomic Pathology. Dr.
Krieger joined the Company in 1975 and served as Vice President, Director of
Anatomic Pathology at the Company's regional laboratory in Teterboro, New Jersey
until 1995, when he was appointed to his present position. Concurrent with his
employment with the Company, Dr. Krieger has served as an Adjunct Assistant
Professor at the College of Physicians and Surgeons of Columbia University.
Since 1996 Dr. Krieger has been Adjunct Assistant Professor at Cornell Medical
School/New York Hospital.
Raymond C. Marier (52) is Vice President and General Counsel. Mr.
Marier joined Corning's Legal Department in 1973 as an Assistant Counsel, where
he worked with a number of Corning's operating units, including its Medical and
Science Products Divisions. He has held his present position since 1992.
C. Kim McCarthy (41) is Vice President-Compliance and Government
Affairs. Ms. McCarthy joined Corning in 1987 as Director of Federal Government
Affairs and Legislative Counsel. She became Vice President of Public Affairs of
the Company in 1992 and Senior Vice President of Corporate Affairs in 1994. Ms.
McCarthy assumed her present responsibilities in June 1996.
Alister W. Reynolds (39) is Vice President-Information Technology. Mr.
Reynolds joined the Company in 1982 and has served in a variety of staff,
executive and general management positions. Mr. Reynolds assumed his current
responsibilities in 1995.
Douglas M. VanOort (41) is Senior Vice President-Operations. Mr.
VanOort joined Corning in 1982 and has served in various finance, analysis and
control positions. He became Vice President and Chief Financial Officer of
Corning's Life Sciences division in 1990, Senior Vice President-Finance and New
Business Development of Corning's Life Sciences division in 1993 and Executive
Vice President and Chief Financial Officer of the Company in 1995. Mr. VanOort
assumed his current responsibilities in January 1997.
Item 11. Executive Compensation
Historical Compensation. The following table sets forth information
with respect to annual and long-term compensation paid or accrued by the Company
and its subsidiaries to each of the chief executive officers and the four other
most highly compensated executive officers (the "named executive officers") of
the Company for services rendered in all capacities during the years ended
December 31, 1996, December 31, 1995 and December 31, 1994. All references in
the following tables to stock and stock options relate to awards of, and options
to purchase, common stock of Corning.
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<TABLE>
<CAPTION>
Summary Compensation Table
Long-Term Compensation
-----------------------------------------------------
Annual Compensation Awards Payouts
---------------------------------------- ----------------------- ---------
Other Annual Restricted Securities Incentive
Name and Compensation Stock Underlying Plan All Other
Principal Position Year Salary Bonus (1) Awards (2) Options Payouts Compensation(3)
- ------------------ ---- ------ ------- ------------ ---------- ---------- ---------- ---------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Kenneth W. Freeman, 1996 379,167 153,500 10,440 608,094 0 0 117,050
Chairman of the Board 1995 316,667 249,918 7,200 326,926 87,000 0 14,057
and Chief Executive Officer 1994 240,000 244,634 6,900 406,766 20,000 162,679 13,376
Robert A. Carothers, 1996 197,548 156,451 1,800 104,844 0 0 63,206
Vice President and 1995 173,000 68,337 0 0 16,500 0 8,561
Chief Financial Officer 1994 165,250 84,180 0 0 6,092 0 7,557
Gregory C. Critchfield, 1996 300,847 155,000 40,909 0 2,000 0 188,957
Senior Vice President 1995 70,000 122,920 0 0 3,000 0 2,370
and Chief Medical and (4)
Science Officer
Don M. Hardison, Jr., 1996 237,295 82,225 1,440 167,750 24,000 0 77,964
Senior Vice President-
Sales and Marketing
Douglas M. VanOort, 1996 282,050 204,600 18,495 419,375 0 0 35,252
Senior Vice President- 1995 251,912 56,754 7,200 98,626 60,000 0 4,620
Operations 1994 228,333 165,969 6,900 109,652 20,000 0 4,178
</TABLE>
(1) Includes dividends on shares of restricted stock of Corning granted but
not earned within one year from date of grant and tax gross-up payments.
(2) At September 30, 1996, Messrs. Freeman, Carothers, Hardison and VanOort
held an aggregate of 97,930, 2,500, 4,000 and 43,627 shares of restricted
stock of Corning, respectively. Certain of such shares, net of
forfeitures, were subject to performance-based conditions on vesting and
were subject to forfeiture upon termination and restrictions on transfer
prior to stated dates. Certain other shares ("Career Shares") were subject
to restrictions on transfer until the executive officer retires at or
after age 60 and were subject to forfeiture prior to age 60 in whole if
such officer voluntarily terminates employment with the Company and in
part if such officer's employment is terminated by the Company. In
December 1996 (a) all forfeiture conditions and transfer restrictions were
removed from performance-based shares, (b) all restrictions on transfer
were removed from shares which are no longer subject to forfeiture and (c)
Career Shares which were subject to forfeiture conditions and transfer
restrictions, except for 50% of such shares held by Mr. Freeman, were
forfeited. At December 31, 1996, after giving effect to such forfeitures
and the termination of the restrictions on transfer, Messrs. Freeman,
Carothers, Hardison and VanOort held an aggregate of 55,114, 1,675, 2,680
and 16,515 shares of common stock of Corning, respectively, having an
aggregate value on December 31, 1996 of $2,142,557, $65,115, $104,185 and
$642,021 (based on a closing price of $38.875 per share). Dividends are
paid to such individuals on all shares of Corning common stock issued
under Corning's Incentive Stock Plans.
(3) Includes the following amounts contributed by the Company to the
Company's Profit Sharing Plan (as defined below) for 1996: $3,850 for Mr.
Freeman, $4,060 for Mr. Carothers, $4,898 for Mr. Hardison and $4,750 for
Mr. VanOort. Also includes $12,840 automobile allowance received by each
of Messrs. Freeman and Hardison, $10,320 for Dr. Critchfield and $13,750
for Mr. VanOort. Also includes 50% of a $100,000 interest-free loan made
by the Company to Dr. Critchfield together with imputed interest thereon,
which loan is to be forgiven over a two-year period provided Dr.
Critchfield continues to be employed by the Company and was made to assist
Dr. Critchfield in relocating to the New Jersey area. Includes relocation
assistance payments in the following amounts: $100,360 for Mr. Freeman,
$59,146 for Mr. Carothers, $120,387 for Dr. Critchfield, $60,226 for
Mr. Hardison, and $16,752 for Mr. VanOort.
(4) Dr. Critchfield commenced employment with the Company in October 1995.
Option Grants. The following table sets forth certain information
regarding options granted in 1996 to the named executive officers pursuant
to Corning's stock option plans. The Company's Stock Option Plan (as
hereinafter defined) did not become effective until January 1, 1997.
Employees of the Company who held at December 31, 1996 Corning stock
options other than those granted on December 1995 and in February 1996
continue to hold Corning stock options, but appropriate adjustments were
made to
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the number of shares subject to options and to the exercise prices to
reflect the Spin-Off Distribution. The Corning stock options granted in
December 1995 and in February 1996 were canceled. In January 1997 options
to purchase an aggregate of 725,497 shares of the Company's common stock
("Substitute Options") for an average exercise price of $10.56 per share
were issued under the Company's Stock Option Plan (as defined below) in
substitution for two-thirds of such canceled Corning options (of which
options to acquire 368,697 shares of the Company's common stock were
issued to the named executive officers). The exercise prices and the
number of shares of the Company's common stock subject to Substitute
Options were determined as of the time of the Spin-Off Distribution so as
to preserve the investment basis and intrinsic gain associated with the
canceled Corning options. Generally, the expiration dates and the dates on
which Substitute Options are exercisable are identical to those under the
corresponding Corning options at the time of the Spin-Off Distribution.
The Substitute Options also provide that an additional option may be
granted when the optionee uses shares of the Company's common stock to pay
the purchase price of an option. The additional option will be exercisable
for the number of shares tendered in payment of the option price, will be
exercisable at the then fair market value of the Company's common stock,
will become exercisable only after the lapse of twelve months and will
expire on the expiration date of the original option.
<TABLE>
<CAPTION>
Option/SAR Grants in 1996 (1)
Potential Realizable Value at
Assumed Annual Rates of Stock
Price Appreciation for
Individual Grants Option Term (3)
----------------------------------------------------------- -------------------------------------
Number of % of Total
Securities Options
Underlying Granted Gain
Options to Employees Exercise Expiration at Gain at Gain at
Name Granted in Fiscal Year Price Date 0% (4) 5% 10%
- --------------------------- -------------- -------------- -------- ---------- ------------ --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Kenneth W. Freeman 0
Robert A. Carothers 0
Gregory C. Critchfield 2,000 0.26% $34.44 4/24/2006 0 $ 43,320 $ 109,780
Don M. Hardison, Jr. 24,000 (2) 3.15% $33.69 2/6/2006 0 $508,560 $1,288,560
Douglas M. VanOort 0
</TABLE>
- ----------------
(1) No SARs were granted.
(2) This option was canceled as a result of the Spin-Off Distribution. As
discussed in the preceding paragraph, a substitute option to purchase
47,576 shares of the Company's common stock for $11.33 per share was issued
in January 1997 with respect to two-thirds of this canceled option.
One-half of the option will become exercisable on February 1, 1999 and the
balance will become exercisable on February 1, 2000 and the option will
expire on February 6, 2006. The potential realizable value of this
substitute option is $339,217 (assuming a 5% annual rate of stock
appreciation over the option term) or $859,223 (assuming a 10% annual rate
of stock appreciation over the option term). The agreement also provides
that an additional option may be granted when the optionee uses shares of
the Company's common stock to pay the purchase price of an option. The
additional option will be exercisable for the number of shares tendered in
payment of the option price, will be exercisable at the then fair market
value of the Company's common stock, will become exercisable only after the
lapse of twelve months and will expire on the expiration date of the
original option.
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(3) The dollar amounts set forth under these columns are the result of
calculations at 0% and at the 5% and 10% rates established by the
Commission and therefore are not intended to forecast future appreciation
of Corning common stock or the Company's common stock.
(4) A gain to the optionee is not possible without an appreciation in stock
price, an event which will also benefit all stockholders. If the stock
price does not appreciate, the optionee will realize no benefit.
Option Exercises and Fiscal Year-End Values. The following table sets forth
certain information regarding the exercise of stock options to acquire Corning
common stock during 1996 by each of the named executive officers and the number
of shares of Corning common stock covered by both exercisable and unexercisable
stock options as of December 31, 1996, for the named executive officers.
<TABLE>
<CAPTION>
Aggregated Option/SAR Exercises in 1996
and 1996 Year-End Option/SAR Values of Corning Options(1)
Number of Corning Securities
Underlying Unexercised Value of Unexercised
Options at In-the-Money Options
Year End At Year End (2)
---------------------------- -------------------------------
Shares
Acquired Value
Name on Exercise Realized Exercisable Unexercisable Exercisable Unexercisable
- -------------------------------- ----------- ------------- ------------ ------------- -------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Kenneth W. Freeman 0 0 147,933 23,952 $2,507,203 $331,136
Robert A. Carothers 0 0 14,951 896 $167,554 $11,079
Gregory C. Critchfield 1,500 $24,000 0 2,995 0 $40,729
Don M. Hardison, Jr. 0 0 0 0 0 0
Douglas M. VanOort 0 0 23,358 23,952 $300,901 $331,136
</TABLE>
(1) There are no SARs outstanding.
(2) Based on a price of $38.875 per share.
No stock options to acquire the Company's common stock were outstanding at
December 31, 1996. However, as discussed under "Option Grants" above, in January
1997 options to purchase shares of the Company's common stock for an average
exercise price of $10.56 per share were issued under the Company's Stock Option
Plan in substitution for two-thirds of the Corning options that were canceled as
a result of the Spin-Off Distribution. The following table sets forth for the
named executive officers certain information regarding the number of shares of
the Company's common stock covered by these substitute options as if they had
been issued on December 31, 1996.
<TABLE>
<CAPTION>
Aggregated 1996 Year-End Option/SAR Values of Company Options (1)
Number of Company Securities Value of Unexercised
Underlying Unexercised Options at In-the-Money Options
Year End At Year End (2)
--------------------------------- --------------------
Name Exercisable Unexercisable Exercisable Unexercisable
- ----------------------------- ---------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Kenneth W. Freeman 0 172,454 0 $795,875
Robert A. Carothers 0 29,733 0 $137,218
Gregory C. Critchfield 0 0 0 0
Don M. Hardison, Jr. 0 47,576 0 $180,551
Douglas M. VanOort 0 118,934 0 $548,880
</TABLE>
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(1) There are no SARs outstanding.
(2) Based on a price of $15.125 per share.
Corporate Performance Plan Activity. Awards of performance-based shares
of Corning common stock have been granted to the Company's executive officers
pursuant to a series of performance-based plans (the "Corporate Performance
Plan"). The Corporate Performance Plan provides the mechanisms to reward
improvement in corporate performance as measured by net income, earnings per
share and/or return on equity. Each year minimum, target and maximum goals were
set and shares awarded (at target levels) which are subject to forfeiture in
whole or in part if performance goals are not met. The percentage of awards that
could be earned ranges from 0% to 150% of target. Shares earned remain subject
to forfeiture and restrictions on transfer for two years following the end of
the performance period.
The following table sets forth the number of performance-based shares
awarded under the Corning Corporate Performance Plan. The dollar value of shares
earned for 1996 is reflected in the "Restricted Stock Awards" column of the
Summary Compensation Table.
In December 1996, the Compensation Committee of the Board of Directors
of Corning assessed performance against goals, determined the number of shares
earned of those granted on December 6, 1995 and February 7, 1996 and removed all
possibility of forfeiture and restrictions on transfer from such shares.
<TABLE>
<CAPTION>
Corporate Performance Plan Activity Table
Number Number Number
Name Grant of Shares Performance of Shares of Shares Vesting Date of
Year Date Granted Period Forfeited Earned Earned Shares+
- ---------------------------- ---- ------ --------- ----------- --------- --------- ---------------
<S> <C> <C> <C> <C> <C> <C> <C>
Kenneth W. Freeman 1996 12/95 14,500 1996 14,500 12/96
1995 12/94 10,000 1995 10,740 12/96
1994 12/93 10,000 1994 14,690 12/96
Robert A. Carothers 1996 12/95 2,500 1996 2,500 12/96
1995 0
1994 0
Gregory C. Critchfield 1996 0 12/96
1995 0
Don M. Hardison, Jr. 1996 2/96 4,000 1996 4,000 12/96
Douglas M. VanOort 1996 12/95 10,000 1996 10,000 12/96
1995 12/94 10,000 1995 6,760 3,240 12/96
1994 12/93 4,000 1994 40 3,960 12/96
</TABLE>
Variable Compensation. The Company maintains a variable compensation
plan (the "Plan"), an annual incentive cash compensation plan for approximately
950 supervisory, management and executive employees. The terms of the Plan are
as follows.
The performance-based annual cash incentive awards payable under the
Plan are grounded in financial goals such as net income, cash flow, operating
margin, return on equity, or earnings per share, or a combination thereof, and
quantifiable non-financial goals. Each participant is assigned a target award,
as a percentage of base salary in effect at the end of the performance year for
which the target is set, payable if the target is achieved. Actual results are
compared to the scale of targets with each gradation of desired result
corresponding to a percentage, which are multiplied by the employee's assigned
target award. If the actual result is below target, awards are to be less than
target, down to a point below which no awards are earned. If the desired result
is above target, awards are greater than target, up to a stated maximum award.
The maximum award assigned to the Chief Executive Officer may not exceed 200% of
base salary in effect on the date the Compensation Committee sets the target for
the performance year. The Compensation Committee retains the right to reduce any
award if it believes individual performance does not warrant the award
calculated by reference to the result.
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Employee Equity Participation Program. Effective January 1, 1997, the
Company adopted the Employee Equity Participation Program (the "Program")
consisting of two plans: (a) a stock option plan (the "Company Stock Option
Plan") and (b) an incentive stock plan (the "Company Incentive Stock Plan"). The
Program is designed to provide a flexible mechanism to permit key employees of
the Company and of any subsidiary to obtain significant equity ownership in the
Company, thereby increasing their proprietary interest in the growth and success
of the Company.
The Program, which is administered by the Compensation Committee,
provides for the grant to eligible employees of either non-qualified or
"incentive stock" options, or both, to purchase shares of the Company's common
stock at no less than fair market value on the date of grant. The Compensation
Committee may also provide that options may not be exercised in whole or in part
for any period or periods of time; provided, however, that (except in the case
of a change in control) no option will be exercisable until at least twelve
months from the date of grant. All options shall expire not more than ten years
from the date of grant. Options will not be assignable or transferable except
for limited circumstances on death. During the lifetime of the employee an
option may be exercised only by the employee. The option price is payable upon
exercise. The optionee may pay the option price in cash or with shares of the
Company's common stock owned by the optionee. The optionee will have no rights
as a stockholder with respect to the shares subject to option until shares are
issued upon exercise of the option. The Compensation Committee may grant options
pursuant to which an optionee who uses shares of the Company's common stock to
pay the purchase price of an option will receive automatically on the date of
exercise an additional option to purchase shares of the Company's common stock.
Such additional option will cover the number of shares tendered in payment of
the option price, will be exercisable at the then fair market value of the
Company's common stock, will become exercisable only after the lapse of twelve
months and will expire no later than the expiration date of the original option.
The Program also authorizes the Compensation Committee to award to
eligible employees shares, or the right to receive shares, of the Company's
common stock, the equivalent value in cash or a combination thereof (as
determined by the Compensation Committee). The Compensation Committee shall
determine the number of shares which are to be awarded to individual employees
and the number of rights covering shares to be issued upon attainment of
predetermined performance objectives for specified periods. The shares awarded
directly to individual employees may be made subject to certain restrictions
prohibiting sale or other disposition and may be made subject to forfeiture in
certain events. Shares may be issued to recognize past performance either
generally or upon attainment of specific objectives. Shares issuable for
performance (based upon specific predetermined objectives) will be payable only
to the extent that the Compensation Committee determines that an eligible
employee has met such objectives and will be valued as of the date of such
determination. Upon issuance, such shares may (but need not) be made subject to
the possibility of forfeiture or certain restrictions on transfer.
Key executive, managerial and technical employees (including officers
and employees who are directors) of the Company and of any subsidiary are
eligible to participate in the Program and the plans thereunder. The selection
of employees eligible to participate in any plan under the Program is within the
discretion of the Compensation Committee. At March 31, 1997, approximately 130
employees were eligible to participate in the plans under the Program.
Under the Program, the maximum number of shares of the Company's common
stock which may be optioned or granted to eligible employees is 3,000,000,
excluding the Substitute Options. Shares from expired or terminated options
under the Company Stock Option Plan will be available again for option grant
under the Program. Shares which are issued but not earned, or which are
forfeited under the Company Incentive Stock Plan, will be available again for
issuance under the Program. At March 31, 1997, there were outstanding under the
Stock Option Plan options to acquire an aggregate of 966,500
11
<PAGE>
shares of common stock (excluding the 725,567 Substitute Options that were
issued in substitution for options issued by Corning, which options do not count
against the 3 million share limit) and 364,382 shares of common stock issued
under the Incentive Stock Plan. The Program provides for appropriate adjustments
in the aggregate number of shares subject to the Program and in the number of
shares and the price per share, or either, of outstanding options in the case of
changes in the capital stock of the Company resulting from any recapitalization,
stock or unusual cash dividend, stock distribution, stock split or any other
increase or decrease effected without receipt of consideration by the Company,
or a merger or consolidation in which the Company is the surviving corporation.
The Program has a term ending on December 31, 2001, after which no
shares may be optioned or awarded and no rights to receive shares may be granted
after the expiration of the Program. The Board is authorized to terminate or
amend the Program, except that it may not increase the number of shares
available thereunder, decrease the price at which options may be granted, change
the class of employees eligible to participate, or extend the term of the
Program or options granted thereunder without the approval of the holders of a
majority of the outstanding shares of the Company's common stock.
Pension Plans. None of the executive officers of the Company is
currently an active participant in a qualified defined benefit plan of the
Company.
Prior to June 1, 1995, December 1, 1996 and January 1, 1995,
respectively, Messrs. Freeman, Carothers and VanOort were eligible to
participate in, and accrue benefits under, Corning's Salaried Pension Plan (the
"Corning Salaried Pension Plan"), a defined benefit plan, contributions to which
are determined by Corning's actuaries and are not made on an individual basis.
Benefits paid under this plan are based upon career earnings (regular salary and
cash awards paid under Corning's variable compensation plans) and years of
credited service. The Corning Salaried Pension Plan provides that salaried
employees of Corning who retire on or after December 31, 1996 will receive
pension benefits equal to 1% of the first $27,000 of average earnings for the
highest five consecutive years in the ten years immediately prior to 1997 plus
1.5% of such average earnings in excess of $27,000 for all years of credited
service prior to 1997, and 1.5% of annual earnings up to the social security
wage base and 2% of annual earnings in excess of such base for 1997 and each
year of credited service thereafter. Salaried employees may contribute to the
Corning Salaried Pension Plan 2% of their annual earnings up to the social
security wage base. Such employees will receive for each year of credited
service after December 31, 1990, an additional amount of pension benefit
reflecting the value of the increased voluntary contribution.
Corning maintains a non-qualified Executive Supplemental Pension Plan
(the "Executive Supplemental Plan") pursuant to which it will pay to certain
executives amounts approximately equal to the difference between the benefits
provided for under the Corning Salaried Pension Plan and benefits which would
have been payable thereunder but for the provisions of the Employee Retirement
Income Security Act of 1974, as amended ("ERISA").
Effective as of January 1, 1997, the Company adopted a transferee
supplemental pension plan (the "Transferee Supplemental Plan"), a nonqualified,
unfunded defined benefit plan for the benefit of key employees and executive
officers of the Company who are former employees of Corning, including Messrs.
Freeman and VanOort. The Transferee Supplemental Plan provides benefits
approximately equal to the difference between the benefits provided for under
the Corning Salaried Pension Plan and the Executive Supplemental Plan and
benefits which would have been payable thereunder but for the termination of
employment with Corning of such employees.
Maximum annual benefits calculated under the straight life annuity
option form of pension payable to participants at age 65, the normal retirement
age specified in the Corning Salaried Pension Plan, are illustrated in the table
set forth below. The table below does not reflect any limitations on benefits
imposed by ERISA. It is estimated
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that Messrs. Freeman and VanOort, who have 25 and 15 years of credited service,
respectively, would receive each year if they worked to age 65, the normal
retirement age specified in the Corning Salaried Pension Plan, $256,170 and
$165,332, respectively, under the Corning Salaried Pension Plan, the Executive
Supplemental Plan and the Transferee Supplemental Plan.
<TABLE>
<CAPTION>
Years of Service
----------------------------------------------------------------------------------------------------
Average Final
Compensation 15 20 25 30 35 40
- -------------------- --------------- ---------------- --------------- --------------- --------------- --------------
<S> <C> <C> <C> <C> <C> <C>
$ 100,000 20,500 27,300 34,100 41,000 47,800 55,300
200,000 43,000 57,300 71,600 86,000 100,300 115,300
300,000 65,500 87,300 109,100 131,000 152,800 175,300
400,000 88,000 117,300 146,600 176,000 205,300 235,300
500,000 110,500 147,300 184,100 221,000 257,800 295,300
600,000 133,000 177,300 221,600 266,000 310,300 355,300
700,000 155,500 207,300 259,100 311,000 362,800 415,300
800,000 178,000 237,300 296,600 356,000 415,300 475,300
900,000 200,500 267,300 334,100 401,000 467,800 535,300
1,000,000 223,000 297,300 371,600 446,000 520,300 595,300
1,100,000 245,500 327,300 409,100 491,000 572,800 655,300
1,200,000 268,000 357,300 446,600 536,000 625,300 715,300
</TABLE>
Profit Sharing Plan. Most of the employees of the Company and its
subsidiaries have been eligible to participate in a tax-qualified, defined
contribution plan known as the Profit Sharing Plan (the "Profit Sharing Plan"),
which provides for investment of employee contributions, including tax-deferred
contributions under Section 401(k) of the Code, and matching contributions made
by the Company, in several investment funds. Effective as of January 1, 1997,
the Company's common stock was added as an investment fund. Currently, the
Company matches employee contributions up to an aggregate of 4.3% of eligible
compensation, of which 2.3% is automatically invested in the Company's common
stock and 2% may be invested at the direction of the participant in any
investment vehicle (including the Company's common stock) available under the
Profit Sharing Plan. Corning common stock is no longer available as an
investment fund except with respect to amounts already so invested under the
Profit Sharing Plan. The Profit Sharing Plan permits the Company to make
discretionary contributions, other than matching contributions, to the Profit
Sharing Plan for the benefit of such employees, which contributions may be
invested in the Company's common stock.
Employee Stock Ownership Plan. Effective January 1, 1997, the Company
adopted an employee stock ownership plan, as defined in Section 4975(e)(7) of
the Code and related regulations, intended to qualify as a retirement plan under
Section 401(a) of the Code, and known as the Company Employee Stock Ownership
Plan (the "the ESOP"). Approximately 800,000 shares of the Company's common
stock have been credited under the ESOP for the account of all active regular
employees of the Company and its domestic wholly owned subsidiaries as of
December 31, 1996, with 50 shares credited for all full time employees
(employees who are regularly scheduled to work 30 hours or more a week) and 25
shares credited for all part time employees.
Shares held in the ESOP for the benefit of participating employees will
be 100% vested at age 65, the normal retirement age specified in the Company
ESOP, or following completion of two years of credited service (excluding
service prior to January 1, 1997).
Employees Stock Purchase Plan. Effective January 1, 1997, the Company
adopted the Employees Stock Purchase Plan (the "the Stock Purchase Plan"),
pursuant to which the Company makes available for sale to employees shares of
the Company's common stock at a price equal to 85% of the market value on the
first or last day of each calendar quarter, whichever is lower. The Stock
Purchase Plan, which is administered by the Compensation Committee, is designed
to give eligible employees (generally, employees of the Company and its
subsidiaries) the opportunity to purchase shares of the Company's
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<PAGE>
common stock through payroll deductions up to 10% of compensation in a series of
quarterly offerings commencing January 1, 1997, and ending no later than
December 31, 2001.
Any eligible employee may elect to participate in the Stock Purchase
Plan on a quarterly basis and may terminate his or her payroll deduction at any
time or increase or reduce prospectively the amount of his or her deduction at
the beginning of any calendar quarter. At the end of each calendar quarter, a
participating employee will purchase shares of the Company's common stock with
the funds deducted. The number of shares purchased will be a number determined
by dividing the amount withheld by the lower of 85% of the closing price per
share of the Company's common stock as reported in The Wall Street Journal on
the first or last business day of the particular calendar quarter. An employee
will have no interest in any shares of the Company's common stock until such
shares are actually purchased.
The Stock Purchase Plan has a term of five years and no shares of the
Company's common stock may be offered for sale or sold under the Stock Purchase
Plan after December 31, 2001. The maximum number of shares of the Company's
common stock which may be purchased by eligible employees under the Stock
Purchase Plan is 2,000,000 shares, subject to adjustment in the case of changes
in the capital stock of the Company resulting from any recapitalization, stock
dividend, stock split or any other increase or decrease effected without receipt
of consideration by the Company. The Board is authorized to terminate or amend
the Stock Purchase Plan, except that it may not increase the number of shares of
the Company's common stock available thereunder, decrease the price at which
such shares may be offered for sale or change the designation of subsidiaries
eligible to participate in the plan without the approval of the holders of a
majority of the shares of the capital stock of the Company cast at a meeting at
which such matter is considered.
Employment Agreement. In December 1996, the Company entered into an
employment agreement with Mr. Freeman. The agreement, which has a term ending on
December 31, 1999, provides for an annual salary of no less than $500,000, with
increases subject to the discretion of the Board of Directors or the
Compensation Committee; annual target participation in the Variable Compensation
Plan in amounts no less than 65% of annual salary in effect at the time
performance goals are established; and severance payments following a
termination by Mr. Freeman for "Good Reason" or by the Company without cause, in
accordance with the severance policy described below, except that Mr. Freeman
would receive three times his base annual salary and three times his annual
award of variable compensation. "Good Reason" is defined as assignment of Mr.
Freeman without his consent to mutually inconsistent duties or responsibilities,
a failure to re-elect Mr. Freeman to the position of President and Chief
Executive Officer, a greater than 75 mile office relocation without his consent
or a Change of Control (as detailed in the following paragraph). In the event
the agreement is not renewed upon its expiration, Mr. Freeman is entitled to a
payment equal to two times the highest annual cash compensation paid to Mr.
Freeman during the term of the agreement and health benefits for eighteen months
following expiration of the agreement. Mr. Freeman is entitled under the
agreement to a retirement pension benefit equivalent to benefits under the
Corning Salaried Pension Plan and the Executive Supplemental Plan based on not
less than 34 years of credited service in the event of termination for reasons
other than cause. Mr. Freeman's pension benefits are secured by a letter of
credit issued under the Credit Facility. In addition, Mr. Freeman is entitled to
certain grants of stock options and restricted shares under the Program, which
grants were made during the first quarter of 1997.
Severance Arrangements. The Company has a severance policy pursuant to
which it will provide to each executive officer other than Mr. Freeman and Drs.
Fisher and Gambino upon the termination of employment by the Company other than
for cause, upon a determination that the business needs of the Company require
the replacement of such executive officer and other than in connection with a
change of control, compensation equal to two times the executive officer's base
annual salary at the annual rate in
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<PAGE>
effect on the date of termination and two times the annual award of variable
compensation at the most recent target level. Such executive officer would also
be entitled to participate in the Company's health and benefits plans (to the
extent permitted by the administrative provisions of such plans and applicable
federal and state law) for a period of up to two years or until such officer is
covered by a successor employer's benefit plans, whichever first occurs.
Pursuant to such policy, upon a change of control the Company would provide to
each such executive officer upon the termination of employment by the Company,
other than for cause during the twelve months following a change in control,
compensation equal to three times annual base salary and three times the award
of annual variable compensation at the most recent target level and such officer
would be entitled to participate in the Company's health and benefit plans for a
period of up to three years or until such officer is covered by a successor
employer's benefits plans, whichever first occurs (to the extent permitted by
the administrative provisions of such plans and applicable federal and state
law). A "Change in Control" is defined in the policy to include the following:
the acquisition by a person of 20% or more of the voting stock of the Company;
the membership of the Board changes as a result of a contested election such
that a majority of the Board members at any particular time were initially
placed on the Board as a result of such contested election; approval by the
Company's stockholders of a merger or consolidation in which the Company ceases
to be an independent public company; or a sale or disposition of all or
substantially all of the Company's assets or a plan of partial or complete
liquidation.
Item 12. Security Ownership by Certain Beneficial Owners and Management
The following table sets forth the number of shares of the Company's
common stock beneficially owned as of March 31, 1997 by the directors, by the
named executive officers and by all directors and executive officers of the
Company as a group, excluding shares held under the Corning Investment Plans. To
the best knowledge of the Company, as of March 31, 1997, no person beneficially
owned more than five percent of any class of capital stock of the Company,
except for Corning Incorporated, which owns all 1,000 outstanding shares of the
Company's voting cumulative preferred stock.
Number of Shares Percentage
Name Beneficially Owned of Class(5)
- ---- ------------------ -----------
Kenneth D. Brody 5,750(2) ---
Van C. Campbell 17,718(2)(3) ---
Robert A. Carothers 15,925(1) ---
Mary A. Cirillo 0 ---
Gregory C. Critchfield 21,050(1) ---
David A. Duke 11,398(2) ---
Kenneth W. Freeman 129,785(1) ---
Don M. Hardison, Jr. 21,447(1) ---
Dan C. Stanzione 6,500(2) ---
Douglas M. VanOort 31,301(1) ---
Gail R. Wilensky 7,250(2) ---
All Directors and Executive ---
Officers as a Group 335,142(1)(2)(3)(4) 1.1%
(1) Includes shares of common stock, subject to forfeiture and restrictions on
transfer, granted pursuant to the Company's Incentive Stock Plan.
(2) Includes shares of common stock, subject to forfeiture and restrictions on
transfer, issued pursuant to the Company's Restricted Stock Plans for
Non-Employee Directors.
(3) In addition, Mr. Campbell has credited to his account the equivalent of 296
shares of common stock under the Company's Deferred Compensation Plan for
Directors. Deferred fees will be paid solely in cash at or following termination
of service as a director, with the amount of the payment based on the then value
of the Company's common stock.
15
<PAGE>
(4) Includes 3,897 shares owned by the spouses and minor children of certain
executive officers and directors as to which such officers and directors
disclaim beneficial ownership.
(5) Unless otherwise indicated, does not exceed 1% of the Class of common stock.
Item 13. Certain Relationships and Related Transactions
Corning owns all of the 1,000 outstanding shares of the Company's
voting cumulative preferred stock, which shares were issued to CLSI and
subsequently transferred to Corning during the fourth quarter of 1996. Prior to
December 31, 1996, the Company was a wholly owned subsidiary of Corning. During
1996 the Company purchased approximately $8.9 million of laboratory supplies
from a subsidiary of Corning, and the Company paid Corning approximately $2.7
million in corporate fees and $72.9 million in interest expense on borrowings
from Corning. During the fourth quarter of 1996, the Company paid Corning
approximately $495 million from the net proceeds of borrowings from the
Company's Credit Agreement and the senior subordinated notes due 2006. In
addition, Corning contributed to the capital of the Company approximately $712
million primarily through the forgiveness of inter-company indebtedness and
$119.1 million through the funding of the Damon settlement. Also during the
fourth quarter of 1996, the Company issued to Corning additional shares of
common stock, and Corning distributed all of the outstanding common stock of the
Company to Corning's stockholders pursuant to the Spin-Off Distribution. See
"Market for the Registrant's Common Stock and Related Security Holder Matters."
In addition, during 1996 the Company had other transactions with Corning that
are not material.
As a result of the Spin-Off Distribution (see "Business-Overview"), the
Company ceased to be a subsidiary of Corning. In connection with the Spin-Off
Distribution, the Company, Corning and Covance entered into several agreements
as described below.
Transaction Agreement
The Company, Corning and Covance entered into a Transaction Agreement
(the "Transaction Agreement") providing for among other things, certain
corporate transactions required to effect the Spin-Off Distribution and other
arrangements between the Company, Corning and Covance subsequent to the Spin-Off
Distribution.
The Transaction Agreement provides among other things, assumptions of
liabilities and cross-indemnities designed to allocate generally, effective as
of December 31, 1996 (the "Distribution Date"), financial responsibility for the
liabilities arising out of or in connection with (i) the clinical laboratory
business to the Company and its subsidiaries, (ii) the contract research
business to Covance and its subsidiaries and (iii) all other business conducted
by Corning prior to the Distribution Date to Corning and its subsidiaries other
than the Company and Covance. In addition to the specific indemnity described
below, the Company, Corning and Covance are obligated under the Transaction
Agreement to indemnify and hold harmless each other in respect of Indemnifiable
Losses (as defined therein) arising out of or otherwise relating to the
management or conduct of the respective businesses or the breach of any
provision of the Transaction Agreement; provided however, that the Company will
have no obligation to indemnify or hold harmless Corning in respect of
Indemnifiable Losses arising out of any governmental claims or investigations
described in the next paragraph.
As discussed under "Business-Government Investigations and Related
Claims", the Company is subject to several governmental investigations. Any
amounts paid by the Company to settle these investigations, or as a result of
judgment relating to these investigations, will be indemnified by Corning under
the Transaction Agreement. Under the Transaction Agreement Corning has agreed to
indemnify the Company against all monetary penalties, fines or settlements
arising out of any governmental criminal, civil or administrative investigations
or claims that have been settled prior to or are pending as of the Distribution
Date, pursuant to service of subpoena or other notice of such investigation to
the Company, as well as any "qui tam" proceeding for
16
<PAGE>
which a complaint was filed prior to the Distribution Date whether or not the
Company has been served with such complaint or otherwise been notified of the
pendency of such action, to the extent that such investigations or claims arise
out of or are related to alleged violations of federal fraud and heath care
statutes identified in the Transaction Agreement by reason of the Company or any
company acquired by the Company billing any federal program or agency for
services rendered to beneficiaries of such program or agency. Corning also
agreed to indemnify the Company for 50% of the aggregate of all judgment or
settlement payments made by the Company that are in excess of $42.0 million in
respect of claims by private parties (i.e., non-governmental parties such as
private insurers) that relate to indemnified or previously settled governmental
claims and that allege overbillings by the Company or any existing subsidiaries
of the Company for services provided prior to the Distribution Date; provided,
however, such indemnification for private claims will terminate five years after
the Distribution Date (whether or not settled) and will not exceed $25.0 million
in the aggregate (reduced by certain tax benefits as described below).
Corning will not indemnify the Company against any governmental claims
that arise after the Distribution Date, even though relating to events prior to
the Distribution Date, or to any private claims that do not relate to the
indemnified or previously settled governmental claims or investigations or
investigations that relate to post-Distribution Date billings. Corning will not
indemnify the Company against consequential or incidental damages relating to
the billing claims, including losses of revenues and profits as a consequence of
any exclusion from participation in federal or state health care programs or the
fees and expenses of the litigation, including attorneys' fees and expenses. All
amounts indemnified against by Corning for the benefit of the Company will be
calculated on a net after-tax basis by taking into account any deductions and
other tax benefits realized by the Company (or a consolidated group of which the
Company is a member (the "Company Group")) in respect of the underlying
settlement, judgment payment, or other loss (or portion thereof) indemnified
against by Corning generally at the time and to the extent such deductions or
tax benefits are deemed to reduce the tax liability of the Company or the
Company Group under the Transaction Agreement.
The Transaction Agreement provides that, in the case of any claims for
which the Company or Covance are entitled to indemnification, the indemnified
party will control the defense of any claim unless the indemnifying party elects
to assume such defense. However, in the case of all private claims related to
indemnified governmental claims related to alleged overbillings, the Company
will control the defense. Disputes under the Transaction Agreement are subject
to binding arbitration. The Transaction Agreement provides that, except as
otherwise set forth therein or in any other agreement all costs or expenses
incurred on or prior to the Distribution Date in connection with the Spin-Off
Distribution will be allocated among the parties. Except as set forth in the
Transaction Agreement or any related agreement, each party bears its own costs
and expenses incurred after the Distribution Date.
Spin-Off Tax Indemnification Agreements
Corning and the Company entered into a tax indemnification agreement
(the "Spin-Off Tax Indemnification Agreement") pursuant to which (1) the Company
represented that to the best of its knowledge, the materials relating to the
Company submitted to the Internal Revenue Service ("IRS") in connection with the
request for ruling submitted to the IRS were complete and accurate in all
material respects, (2) the Company represented that it had no present intention
to undertake the transactions described in part (3) (iii) hereafter or cease to
engage in the active conduct of providing clinical laboratory testing services,
(3) the Company agreed that for a period of two years following the Distribution
Date (the "Restricted Period"), (i) the Company will continue to engage in the
clinical laboratory testing business, (ii) the Company will continue to manage
and own at least 50% of the assets which it owns directly and indirectly
immediately after the Distribution Date and (iii) neither the Company, nor
17
<PAGE>
any related corporation nor any of their respective directors, officers or other
representatives will undertake, authorize, approve, recommend, permit,
facilitate, or enter into any contract, or consummate any transaction with
respect to: (A) the issuance of the Company's common stock (including options
and other instruments convertible into the Company's common stock) which would
exceed fifty percent (50%) of the outstanding shares of the Company's common
stock immediately after the Distribution Date; (B) the issuance of any other
instrument that would constitute equity for federal tax purposes ("Disqualified
Stock"); (C) the issuance of options and other instruments convertible into
Disqualified Stock; (D) any repurchases of the Company's common stock, unless
such repurchases satisfy certain requirements; (E) the dissolution, merger, or
complete or partial liquidation of the Company or any announcement of such
action; or (F) the waiver, amendment, termination or modification of any
provision of the Company's Rights Plan (as defined therein) in connection with
or in order to permit or facilitate, any acquisition of the Company's common
stock or other equity interest in the Company; and (4) the Company agreed to
indemnify Corning for Taxes (as defined below) arising from violations of (1),
(2) or (3) above and for Taxes arising as a result of (A) an acquisition of 20%
or more of the stock of the Company by a person or related persons during the
Restricted Period or (B) the commencement of a tender or purchase offer by a
third party of 20% or more of the Company's stock. If obligations of the Company
under this agreement were breached and as a result thereof the Spin-Off
Distribution does not qualify for the treatment stated in the ruling Corning
received from the IRS (the "IRS Ruling"), the Company would be required to
indemnify Corning for Taxes imposed and such indemnification obligations could
exceed the net asset value of the Company at such time.
The Spin-Off Tax Indemnification Agreement requires the Company to take
such actions as Corning may reasonably request to preserve the favorable tax
treatment provided for in any rulings obtained from the IRS in respect of the
Spin-Off Distribution. The Company and Covance also entered into two reciprocal
Spin-Off tax indemnification agreements similar to the Spin-Off Tax
Indemnification Agreement.
Tax Sharing Agreement
The Company, Corning and Covance entered into a tax sharing agreement
(the "Tax Sharing Agreement") which allocates responsibility for federal income
and various other taxes ("Taxes") among the three companies. The Tax Sharing
Agreement provides that, except for Taxes arising as a result of the failure of
the Spin-Off Distribution to qualify for the treatment stated in the IRS Ruling
(which Taxes are allocated either pursuant to the Spin-Off Tax Indemnification
Agreement or as described below), Corning is liable for and will pay the federal
income taxes of the consolidated group that includes the Company and Covance and
their subsidiaries, provided, however, that the Company and Covance are required
to reimburse Corning for taxes for periods beginning after December 31, 1995 in
which they are members of the Corning consolidated group and for which tax
returns have not been filed as of the Distribution Date. This reimbursement
obligation is based on the hypothetical separate federal tax liability of the
Company and Covance, including their respective subsidiaries, calculated on a
separate consolidated basis, subject to certain adjustments. Under the Tax
Sharing Agreement, in the case of adjustments by a taxing authority of a
consolidated federal income tax or certain other tax returns prepared by Corning
which includes the Company or Covance, then, subject to certain exceptions,
Corning is liable for and will pay any tax assessments, and is entitled to any
tax refunds, resulting from such audit.
The Tax Sharing Agreement further provides that if the Spin-Off
Distribution fails to qualify for the tax treatment stated in the IRS Ruling
(for reasons other than those indemnified against under one or more of the
Spin-Off Tax Indemnification Agreements), Taxes imposed upon or incurred by the
Company, Corning or Covance are to be allocated in such a manner as will take
into account the extent to which the actions or inaction's of each may have
contributed to such failure, and, the Company, Corning, or Covance will
indemnify and hold harmless the other from and against the taxes so allocated.
If it
18
<PAGE>
is determined that none of the companies contributed to the failure of such
distribution to qualify for the tax treatment stated in the IRS Ruling, the
liability for taxes will be borne by each in proportion to its relative average
market capitalization as determined by the average closing price for the common
stock of each during the 20 trading-day period immediately following the
Distribution Date. In the event that the Spin-Off Distribution fails to qualify
for the tax treatment stated in the IRS Ruling and the liability for taxes as a
result of such failure is allocated among the Company, Corning and Covance, the
liability so allocated to the Company or Covance could exceed the net asset
value of the Company or Covance, respectively.
19
<PAGE>
Signatures
Pursuant to the requirements of Sections 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this Amendment to its report on Form
10-K to be signed on its behalf by the undersigned, thereunto duly authorized.
Quest Diagnostics Incorporated
<TABLE>
<CAPTION>
<S> <C> <C>
By Kenneth W. Freeman Chairman of the Board and April 18, 1997
------------------------- Chief Executive Officer
Kenneth W. Freeman
By Robert A. Carothers Vice President and April 18, 1997
------------------------- Chief Financial Officer
Robert A. Carothers
By Robert A. Hagemann Vice President and April 18, 1997
------------------------- Controller
Robert A. Hagemann
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and on the dates indicated.
Capacity Date
-------- ----
Kenneth W. Freeman Chairman of the Board and April 18, 1997
- --------------------------- Chief Executive Officer
Kenneth W. Freeman
Kenneth D. Brody Director April 18, 1997
- ---------------------------
Kenneth D. Brody
Van C. Campbell Director April 18, 1997
- ---------------------------
Van C. Campbell
Mary A. Cirillo Director April 18, 1997
- ---------------------------
Mary A. Cirillo
David A. Duke Director April 18, 1997
- ---------------------------
David A. Duke
Dan C. Stanzione Director April 18, 1997
- ---------------------------
Dan C. Stanzione
- ---------------------------
Gail R. Wilensky Director April 18, 1997
</TABLE>
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Exhibit Index
10.8 QUEST DIAGNOSTICS INCORPORATED
EMPLOYEE EQUITY PARTICIPATION PROGRAM
(Filed Herewith)
Exhibit 10.8
QUEST DIAGNOSTICS INCORPORATED
EMPLOYEE EQUITY PARTICIPATION PROGRAM
1. Purpose
The Employee Equity Participation Program (the "Program") is intended to
encourage executive, managerial, technical and other employees of (i) Quest
Diagnostics Incorporated (the "Corporation"), (ii) any "subsidiary corporation"
of the Corporation within the meaning of Section 424 of the Internal Revenue
Code of 1986, as amended (the "Code") or of any successor section, or (iii) any
other entity in which the Corporation holds beneficially at least one-half of
the ownership interest (such entity or "subsidiary corporation" being referred
to herein as a "Subsidiary") to become owners of stock of the Corporation in
order to increase their proprietary interest in the Corporation's success; to
stimulate the efforts of certain key executive, managerial, technical and other
employees by giving suitable recognition to services which contribute materially
to the Corporation's success; and to provide such employees with additional
incentive and reward opportunity based, in part, upon the attainment of
predetermined goals over specified periods. The Program shall consist of two
plans: (a) the Stock Option Plan and (b) the Incentive Stock Plan.
2. Administration
The Program shall be administered by a committee appointed by the Board of
Directors of the Corporation, to be known as the "Compensation Committee" (the
"Committee"), consisting of not less than two members of the Corporation's Board
of Directors, each member of which shall be a "non-employee director" within the
meaning of Rule 16b-3(b)(3)(i) promulgated under the Securities Exchange Act of
1934 (the "1934 Act") or any successor thereto and an "outside director" within
the meaning set forth in regulations promulgated under Section 162(m) of the
Code. Without limiting the foregoing, unless and to the extent those definitions
are amended, no member of the Committee shall be an officer or employee of the
Corporation or a subsidiary thereof, a former officer of the Corporation, a
former employee of the Corporation who receives compensation for prior services
(other than benefits under a tax-qualified retirement plan) during the taxable
year, any other person who receives directly or indirectly in any capacity
(other than as a director) remuneration in excess of the lesser of $60,000 or 5
percent of the gross income realized by the entity employing such member during
such entity's taxable year ending with or within the Corporation's taxable year
or any person who is a member of a law firm retained by, or a partner or
executive officer of an investment banking firm that performs services for, the
Corporation. No member of the Committee shall have been eligible to participate
in the Program in the preceding year nor be eligible to participate in the
Program while serving on the Committee. The Committee shall select periodically
the executive, managerial, technical and other employees who shall participate
in the Program and the extent of their participation in any particular Plan
under the Program and shall report such selections and levels of participation
to the Board of Directors.
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The Committee's interpretation and construction of any provisions of this
Program or any Plan or any right, option or award granted or contract executed
under it shall be final unless otherwise determined by the Board of Directors,
which determination shall be final. No member of the Board of Directors or the
Committee shall be liable for any action or determination made in good faith.
3. Eligibility
The Committee shall from time to time select the executive, managerial,
technical and other employees (including officers and employees who are
directors) of the Corporation and of any Subsidiary who shall be eligible to
participate in any Plan under the Program.
4. Stock
The shares subject to options, grants or incentive stock rights under the
Program shall be shares of the Corporation's Common Stock par value $.01 per
share, either authorized but unissued or issued and held in treasury or such
other securities as may be issued by the Corporation in substitution therefor.
The total amount of the Common Stock of the Corporation which may be (i) sold
pursuant to options granted under the Stock Option Plan and (ii) granted, or
issued pursuant to incentive stock rights awarded, under the Incentive Stock
Plan shall not exceed 3,000,000 shares. There may be awarded under the Incentive
Stock Plan in lieu of shares the cash equivalent thereof valued at the date that
the Committee determines whether, or to what extent, performance objectives have
been met. In each case, the number of shares shall be subject to adjustment in
accordance with the provisions of Section 5.
Shares from the unexercised portion of the options which expire or of the
options which are terminated during the period when options may be granted and
shares forfeited or not earned under the Incentive Stock Plan may again either
(i) be the subject of an option under the Stock Option Plan or (ii) be awarded
or be the subject of rights granted under the Incentive Stock Plan. Shares of
the Common Stock of the Corporation used by an optionee as full or partial
payment to the Corporation for the purchase price of shares subject to an option
agreement, the terms of which explicitly provide for the grant of an additional
option as contemplated by Section 6(a)(i) hereof, shall again be made available
for use under the Program. Shares otherwise surrendered upon the exercise of
stock options may not again be the subject of options or awards granted under
the Program. Shares surrendered under the Program in payment of taxes due upon
the exercise of stock options or upon the recognition of income for shares
issued under the Incentive Stock Plan may not be issued again under the Program.
No single eligible employee under the Stock Option Plan may receive grants of
stock options covering in excess of 600,000, or 20% of the total, shares
authorized under the Program.
5. Recapitalization
The number of shares of Common Stock which may be granted, awarded or earned
under the Incentive Stock Plan or made subject to options granted under the
Stock Option Plan in the
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aggregate and to any single eligible employee, the number of shares covered by
each outstanding option, and the price per share thereunder, and the number of
shares granted or subject to incentive stock rights under the Incentive Stock
Plan shall all be proportionally adjusted for any increase or decrease in the
number of issued shares of Common Stock of the Corporation resulting from a
subdivision or consolidation of shares or other capital adjustment, the
distribution of shares of capital stock to stockholders of the Corporation, the
payment of a stock dividend or other increase or decrease in such shares
effected without receipt of consideration by the Corporation, or any
distribution or spin-off of assets (other than a normal cash dividend) to the
stockholders of the Corporation.
Subject to any required action by the stockholders, if the Corporation shall be
the surviving corporation in any merger or consolidation, any option granted
under the Stock Option Plan and any incentive stock right granted under the
Incentive Stock Plan shall apply to the securities to which a holder of the
number of shares of Common Stock subject to the option or such right, as the
case may be, would have been entitled before the occurrence of such event. A
dissolution or liquidation of the Corporation, or a merger or consolidation in
which the Corporation is not the surviving corporation, shall cause every option
outstanding under the Stock Option Plan to terminate, except that the surviving
corporation may, in its absolute and uncontrolled discretion, tender an option
or options to purchase its shares on terms and conditions, both as to number of
shares and otherwise, which will substantially preserve the rights and benefits
of any option then outstanding under the Stock Option Plan. Upon the dissolution
or liquidation of the Corporation, or upon the effective date of any merger or
consolidation in which the Corporation is not the survivor and in which the
survivor has not tendered options as provided in the preceding sentence, the
Corporation shall deliver to each optionee whose incentive stock options are
being terminated an amount in cash equal to the difference between the option
price and the fair market value of a share of the Corporation's Common Stock
determined in good faith by the Committee. In the case of such a merger or
consolidation in which the Corporation is not the survivor, the Corporation
shall also deliver to each person whose incentive stock options are being
terminated and to each person who had exercised an incentive stock option and
who was holding the shares so purchased for long-term capital gains treatment an
amount equal to the difference between the federal income tax which the person
would be required to pay as a result of being unable to hold such shares for
long-term capital gains purposes (assuming a sale price equal to the fair market
value as provided above) and the tax such person is required to pay as a result
of having to dispose of shares on account of such merger or consolidation.
In the event of a change in the Corporation's presently authorized Common Stock
which is limited to a change of authorized shares with par value into the same
number of shares with a different par value or into the same number of shares
without par value, the shares resulting from any such change shall be deemed to
be Common Stock within the meaning of the Program.
6. Stock Option Plan
(a) The Committee may from time to time grant options, including but not limited
to performance-based stock options and to incentive stock options permitted
by Section 422 of the Code, to purchase shares of Common Stock, evidenced
by agreements in such form
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as the Committee may, from time to time, approve, containing in substance the
following terms and conditions:
(i) The option price shall be payable in full upon the exercise of the
option and may be paid either in United States dollars, or under
rules established and maintained from time to time by the Committee,
in shares of the Common Stock of the Corporation owned by the
optionee, or a combination of cash and shares. Under such rules, an
optionee paying the purchase price of an option in already-owned,
freely transferable, unencumbered shares of Common Stock of the
Corporation may receive new options to purchase shares of Common
Stock of the Corporation at the then current market price (being the
mean between the high and low selling prices of the Corporation's
Common Stock on the on the date of exercise as reported in the Wall
Street Journal on the next business day) for the same number of
shares surrendered upon exercise of the original option. In no
circumstance will the total number of shares subject to the new
option granted exceed the number of shares surrendered upon exercise
of the original option, will the new option be exercisable within
twelve months of the date of exercise or will the new option have a
life beyond that of the original option.
Shares of the Corporation's Common Stock shall be valued at the mean
between the high and low selling prices of the Corporation's Common
Stock on the date of exercise (as reported in the Wall Street Journal
on the next business day).
(ii) The option shall state the total number of shares to which it
pertains.
(iii) The option price shall be not less than 100% of the fair market value
of the shares on the date of the granting of the option, which
valuation shall be the mean between the high and low selling prices
on the date of grant as reported in the Wall Street Journal on the
next business day.
(iv) Each option granted under the Stock Option Plan shall expire on the
date designated by the Committee but in no event more than ten years
from the date the option is granted.
(v) The Committee may in its discretion provide that an option may
not be exercised in whole or in part for any period or periods of
time specified by the Committee. Except as may be so provided by the
Committee and except as otherwise provided herein, any option may be
exercised in whole at any time or in part from time to time after the
option has vested in accordance with the terms of the applicable
agreement and during its term; provided, however, that, except in the
event of a change of control (as determined by the Committee) in no
circumstance will an option under the Stock Option Plan become
exercisable in less than twelve months from the date of grant.
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(vi) The aggregate fair market value (determined as of the time the
option is granted) of the stock for which any employee may be granted
incentive stock options under this Plan or any other plans of the
Corporation or any subsidiary of the Corporation shall not exceed
$100,000 (or such other limit as may be in effect from time to time
under Section 422 of the Code or any statutory successor thereto) in
any calendar year in which such option or any portion thereof first
becomes exercisable pursuant to the terms of the agreement between
such employee and the Corporation.
(vii) If, in the opinion of counsel for the Corporation, the listing,
registration or qualification of the shares subject to option under
any securities exchange or under any state or Federal law, or the
consent or approval of any governmental regulatory body, or an
exemption from registration, is necessary or desirable, each option
shall be subject to the requirement that such option may not be
exercised in whole or in part unless such listing, registration,
qualification, consent, approval or exemption shall have been
effected or obtained free of any conditions not acceptable to the
Committee.
(viii) An optionee shall have no rights as a stockholder with respect
to shares covered by his option to purchase until the date of the
issuance or transfer of the shares to him and only after such shares
are fully paid. No adjustment will be made for dividends or other
rights for which the record date is prior to the date of such
issuance or transfer, except as provided in Section 5.
(ix) The option agreements authorized under the Stock Option Plan
shall contain such other provisions not inconsistent with this
Program as the Committee may deem advisable.
(b) Options may be granted under the Stock Option Plan from time to time in
substitution for (i) stock options held by consultants to or directors or
employees of other corporations who are about to become and who do
concurrently with the grant of such options become consultants to or
directors or employees of the Corporation or a Subsidiary as the result of
a merger or consolidation of the employing corporation with the Corporation
or a Subsidiary, or the acquisition by the Corporation or a Subsidiary of
the assets of the employing corporation, or the acquisition by the
Corporation or a Subsidiary of stock of the employing corporation as the
result of which it becomes a Subsidiary or (ii) stock options to acquire
common stock of Corning Incorporated ("Corning"), which options are held by
employees of the Corporation and are canceled as a result of the spinoff
distribution by Corning of all of the Corporation's outstanding common
stock to the stockholders of Corning. The terms and conditions of the
substitute options so granted may vary from the terms and conditions set
forth in Section 6 of this Program to such extent as the Committee at the
time of grant may deem appropriate to conform, in whole or in part, to the
provisions of the stock options in substitution for which they are granted.
Options granted under this paragraph (b) or pursuant to the terms of the
agreements contemplated by Section 6(a)(i) hereof shall not reduce the
shares available for options, grants or incentive stock rights under the
Program as set forth in Section 4 hereof.
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(c) If the optionee's employment by the Corporation or a Subsidiary shall
terminate, his option shall terminate unless otherwise determined by the
Committee, or specific provision has been otherwise made as evidenced by
the terms of the option agreement approved by the Committee. The Committee
shall have full power and authority to determine whether, to what extent
and under what circumstances any option shall be exercisable, suspended or
canceled in the event of an optionee's termination of employment.
If an optionee dies while in the employ of the Corporation or a Subsidiary,
or within three months after termination of employment with options
exercisable pursuant to action taken by the Committee or otherwise in
accordance with the preceding sentences, the optionee's estate, personal
representative or beneficiary shall have the right to exercise such option
in accordance with the terms of the option agreement with respect to all
shares subject to option on the date of death.
If an optionee shall be transferred from the Corporation to a Subsidiary or
from a Subsidiary to the Corporation or from a Subsidiary to another
Subsidiary, his employment shall not be deemed to have terminated. If an
optionee shall be employed by a corporation or an entity which ceases to be
a Subsidiary, the Committee may, subject to the provisions of clauses (iv)
and (v) of Paragraph (a) of this Section 6, permit the participant to
exercise options held for such period of time as it determines with respect
to all shares which were available for purchase by the optionee on the date
the corporation or entity ceased to be a Subsidiary.
7. Incentive Stock Plan
The Committee may from time to time award shares of Incentive Stock and grant
incentive stock rights, or either, to eligible employees on the terms set forth
herein.
(a) "Incentive Stock" shall be shares of the Corporation's Common Stock awarded
pursuant to the terms of the Incentive Stock Plan.
(b) An "incentive stock right" shall, subject to the terms, conditions and
limitations of this Section 7, give the holder thereof the right to receive
in consideration of services performed for, but without payment of cash to,
the Corporation such shares of Common Stock, cash or a combination of the
two as the Committee may determine.
(c) Subject to the limitations of Section 4, the Committee shall from time to
time select, and report to the Board of Directors, (i) the individual
employees who are to receive shares of Incentive Stock or incentive stock
rights, or a combination thereof, (ii) the number of shares of Incentive
Stock a designated employee is to receive, either directly or upon
maturation of an incentive stock right, (iii) whether ownership of, or any
portion of, such shares of Incentive Stock is to be vested in the
designated employee without the possibility of forfeiture or other
restrictions at the time of the Committee's action or at one or more
specified dates in the future, (iv) whether ownership of such, or any
portion of such, shares
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of Incentive Stock is to be vested in the designated employee at the time
of the Committee's action, but subject to the possibility of forfeiture or
other restrictions, and (v) the specific dates from the date of the
Committee's award over which the possibility of forfeiture or other
restrictions are to lapse.
Shares of Incentive Stock shall be issued in the name of, and distributed
to, those employees from time to time designated by the Board as recipients
of Incentive Stock as follows:
(1) Each employee designated as a recipient of shares of Incentive
Stock shall receive, promptly after the date or dates the
Committee determines the number of such shares which such employee
is to receive not subject to the possibility of forfeiture and
other restrictions, one or more stock certificates registered in
the name of the designated employee for such number of shares, the
ownership of which is vested non-forfeitably and without
restriction in such employee; and
(2) Certificates covering shares of Incentive Stock subject to the
possibility of forfeiture and other restrictions shall be issued
promptly after the date or dates the Committee determines the
number of such shares to be issued in the name of the designated
employee but held by the Corporation as provided in clause (e)
below.
(d) The shares which are granted subject to restrictions and the possibility of
forfeiture (and all shares issued or distributed by means of dividends,
splits, combinations, reclassifications, or other capital changes thereon)
(i) may not be sold, assigned, transferred, pledged or otherwise
encumbered, except (a) for gifts to a spouse, ancestors, or descendants, or
to trusts for their benefit and (b) pursuant to the qualified domestic
relations orders referred to in Section 9 hereof, subject, however, in each
such case to the restrictions and possibility of forfeiture applicable to
such shares and (ii) except as otherwise provided in an agreement approved
by the Committee are to be forfeitable to the Corporation upon termination
of employment for any reason other than death, disability approved by the
Corporation or retirement with the consent of the Corporation. The
restrictions and possibility of forfeiture imposed by this clause (d) shall
lapse at such time and in such proportions as the Committee shall, subject
to limitations of clause (c) above, determine.
(e) Each certificate issued in respect of shares granted under the Incentive
Stock Plan subject to restrictions on transfer and the possibility of
forfeiture shall be registered in the name of the employee but shall be
held by the Corporation in safekeeping for the employee and until such
restrictions and the possibility of forfeiture shall lapse. Such
certificates shall bear a legend substantially as follows:
"The transferability of this certificate and the shares of stock
represented hereby are restricted and the shares are subject to the further
terms and conditions (including forfeiture) contained in the Incentive
Stock Plan of Quest Diagnostics Incorporated and an agreement executed
pursuant thereto. A copy of such Plan and such agreement are on file in the
office of the Secretary of Quest Diagnostics Incorporated, Teterboro, New
Jersey."
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(f) An employee who is to receive shares of Incentive Stock only upon the
expiration of certain specified periods or who is the holder of an
incentive stock right shall have no rights as a stockholder with respect
to any shares which may become vested in, or be awarded to, him, as the
case may be, until such shares have been actually issued.
(g) The value of shares of the Incentive Stock or the value of the shares of
Common Stock granted by the Corporation to the holder of an incentive
stock right shall be the mean between the high and low selling prices of
the Corporation's Common Stock on the date the Committee determines that
the applicable performance objectives were met or the date the
possibility of forfeiture shall terminate, as the case may be, in each
case as reported in the Wall Street Journal on the next business day.
(h) At the time an incentive stock right is granted, the Committee shall
establish with respect to each holder one or more performance periods and
performance objectives. If the objectives have been met and are being
maintained at the end of the applicable performance period to the
satisfaction of the Committee, the holder of the incentive stock right
shall receive promptly the shares and/or cash which are subject to the
agreement referred to below.
(i) Any provisions hereof the contrary notwithstanding, the Committee shall
have the authority and the power to adjust performance periods,
performance objectives and the number of shares which may be awarded
pursuant to an incentive stock right if it determines that conditions so
warrant. Such conditions may include, but need not be limited to, changes
in functional responsibilities of a holder of an incentive stock right,
changes in laws or government regulations, changes in accounting
treatment or in generally accepted accounting principles, acquisitions,
dispositions or distributions deemed to be material, or extraordinary
events which significantly impact consolidated financial performance.
(j) Incentive stock rights shall be evidenced by agreements in such form and
not inconsistent with the Incentive Stock Plan as the Committee shall
approve from time to time, which agreements shall, among other things,
contain in substance the following terms, conditions and provisions:
(i) The number of shares to which the incentive stock right relates
and whether such rights are to be paid in shares, in cash or in
a combination or the two;
(ii) The length of the performance period or periods;
(iii) The performance objectives applicable to an individual granted
an incentive stock right, which objectives may relate, but shall
not be limited, to overall corporate performance measures, such
as earnings per share, return on stockholders' equity and return
on capital, or to divisional, subsidiary or other business unit
performance measures, or to a combination of each; and
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(iv) Such other rules, as determined by the Committee, governing the
continuation of an incentive stock right after the holder
terminates, either voluntarily or involuntarily, his employment
with the Corporation.
(k) Unless otherwise determined by the Committee or set forth in the
agreement contemplated by subsection (j) above, if the holder of an
incentive stock right shall cease to be employed by the Corporation or a
Subsidiary, his incentive stock right shall terminate immediately.
However, if employment is terminated on account of death, retirement or
termination of employment with the consent of the Corporation (including
termination by reason of retirement, disability or a Subsidiary ceasing
to be such), the Committee may award to such employee such shares or cash
at such time and under such conditions as it shall in its sole discretion
determine.
8. Amendment and Administration of the Program
The Board of Directors may, upon the recommendation of the Committee, from time
to time alter, amend, suspend, or discontinue the Program or either Plan
thereunder, except that no alteration or amendment shall, without the approval
of the holders of a majority of the outstanding shares entitled to vote thereon,
increase the total number of shares which may be sold or awarded under the
Program, decrease the price at which options may be granted, change the
standards of eligibility of employees eligible to participate, materially
increase the benefits of the Program or either Plan thereunder to participants,
or extend the term of the Program or of options granted thereunder. Adjustments
in the total number of shares purchasable or awardable under the Program or
optioned to any individual and adjustments of the option price may be made,
however, without stockholder approval pursuant to the adjustment provisions
described under the provisions of Section 5 hereof. No amendment or modification
shall apply to affect adversely any employee with respect to incentive stock or
incentive stock rights already awarded to him or an option already granted.
Anything to the contrary in this Section 8 notwithstanding, should the
provisions of Rule 16b-3, or any successor rule, under the 1934 Act be amended,
the Board may amend the Program in accordance with any modifications to such
Rule.
With respect to persons subject to Section 16 of the 1934 Act, transactions
under the Program are intended to comply with all applicable conditions of Rule
16b-3, or any successor rule, under the 1934 Act. To the extent any provision of
the Program or action by the Committee, the Board of Directors or any
administrator fails to so comply, it shall be deemed null and void, to the
extent permitted by law and deemed advisable by the Committee or the Board of
Directors.
9. Assignability
No option or right granted under the Program shall be assignable or transferable
except by Will, by the laws of descent and distribution, or except for an
incentive stock option pursuant to domestic relations orders as defined in or
meeting the requirements of the Code or Title I of the Employee Retirement
Income Security Act of 1974, as amended. During the lifetime of an optionee, an
option shall be exercisable only by him and any shares purchased upon the
exercise of an option shall be issued in the name of the optionee alone.
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10. Effective Date and Term of Program.
The Program shall become effective when approved by a majority of the votes cast
at a meeting of the Corporation's stockholders by stockholders entitled to vote
thereon. No shares may be optioned or awarded (except upon the attainment of
performance goals contemplated by Section 7(h) hereof) and no incentive stock
rights may be granted under the Program after the fifth anniversary, plus 60
calendar days, of the Program's effective date.
11. Use of Proceeds
Proceeds from the sale of stock under the Program shall constitute general funds
of the Corporation.
12. Withholding
Whenever under the Program shares are to be issued in satisfaction of options,
awards or rights granted thereunder, the Corporation shall have the right to
require the employee to remit to it an amount in cash, in shares of the
Corporation's Common Stock, or though the reduction of options, awards or rights
to be issued thereof, necessary to satisfy federal, state and local withholding
tax requirements prior to the delivery of any certificate or certificates for
shares. Whenever under the Program payments are to be made in cash, such payment
shall be net of an amount necessary to satisfy federal, state and local
withholding tax requirements.
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