SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
- --------------------------------------------------------------------------------
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, 1998
Commission file number 1-12215
Quest Diagnostics Incorporated
One Malcolm Avenue
Teterboro, NJ 07608
(201)393-5000
Delaware
(State of Incorporation)
16-1387862
(I.R.S. Employer Identification Number)
- --------------------------------------------------------------------------------
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
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein. [x]
As of February 28, 1999, the aggregate market value of the voting and non-voting
common equity held by non-affiliates of the registrant was approximately $636
million, based on the closing price on such date of the Company's Common Stock
on the New York Stock Exchange.
As of February 28, 1999, there were outstanding 30,044,753 shares of Common
Stock, $.01 par value.
DOCUMENTS INCORPORATED BY REFERENCE
None.
Part III of the Annual Report on Form 10-K of Quest Diagnostics
Incorporated for 1998 is amended in its entirety as set forth below.
PART III
Item 10. Directors and Executive Officers of the Registrant
Directors
Quest Diagnostics' Board of Directors is divided into three classes.
The table below sets forth the names of the directors and the annual meeting of
stockholders at which their terms expire. Quest Diagnostics expects to hold its
next annual meeting of stockholders around the end of June 1999.
Expiration
Name of Term
---- ---------
Kenneth D. Brody 2001
William F. Buehler 1999
Van C. Campbell 1999
Mary A. Cirillo 2001
Kenneth W. Freeman 2000
Dan C. Stanzione 1999
Gail R. Wilensky 2000
Kenneth D. Brody (55) is the founding partner of 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 United States, 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. Mr. Brody is a director of Federal Realty Investment
Trust. Mr. Brody has been a director of Quest Diagnostics since January 1997.
William F. Buehler (59) is Vice Chairman and President, Industry
Solutions Operations of Xerox Corporation. He is responsible for Xerox
operations in North America and Europe. Prior to his current assignment, Mr.
Buehler was responsible for business operations and corporate strategic services
and oversaw business development and systems software and architecture. Prior to
joining Xerox in 1991, Mr. Buehler spent 27 years with AT&T. Mr. Buehler has
been a director of Quest Diagnostics since July 1998.
Van C. Campbell (60) is the Vice Chairman of Corning Incorporated,
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 and Covance Inc. Mr. Campbell has been a director of Quest Diagnostics
since January 1991.
Mary A. Cirillo (51) is Executive Vice President and Managing Director
of Bankers Trust Company, which she joined in 1997. From 1977 to 1997, she was
with Citibank, N.A., most recently serving as Senior Vice President. From April
1994 until she joined Bankers Trust Company, Ms. Cirillo was 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 is a director of Cisco Systems, Inc. Ms.
Cirillo has been a director of Quest Diagnostics since April 1997.
Kenneth W. Freeman (48) is Chairman of the Board, Chief Executive
Officer and President of Quest Diagnostics. Mr. Freeman joined Quest Diagnostics
in May 1995 as President and Chief Executive Officer, was elected a director in
July 1995 and was elected Chairman of the Board in December 1996. Prior to 1995,
he served in a variety of financial and managerial positions at Corning, which
he joined in 1972. He was elected Controller and a Vice President of Corning in
1985, Senior Vice President in 1987, General Manager of the Science Products
Division in 1989 and Executive Vice President in 1993. He was appointed
President and Chief Executive Officer of Corning Asahi Video Products Company in
1990.
Dan C. Stanzione (53) is Chief Operating Officer of Lucent
Technologies, the Murray Hill, NJ-based maker of telecommunications equipment.
Dr. Stanzione began his career in 1972 with Bell Labs, where he led the teams
working on the first microprocessors and digital signal processors. In 1996, he
was appointed President of Network Systems, Lucent's largest business unit and
was appointed Chief Operating Officer in 1997. Dr. Stanzione has been a director
of Quest Diagnostics since January 1997.
Gail R. Wilensky (55) 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 Administrative where she directed
the Medicare and Medicaid programs. Dr. Wilensky is a director of Advanced
Tissue Sciences Inc., HCR/Manor Care, Neopath Inc., PharMerica, Inc., St. Jude
Medical Corp., SMS Corporation,
2
Syncor Corporation and United Healthcare Corporation. Dr. Wilensky has been a
director of Quest Diagnostics since January 1997.
Directors' Compensation
During 1998, each non-employee director received as cash compensation
an annual sum of $26,000, payable in quarterly installments of $6,500. Directors
who served as committee chairs received an additional annual sum of $1,500
payable in quarterly installments of $375.
Under Quest Diagnostics' 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 cash compensation. The plan provides that amounts
deferred may be allocated to (1) a cash account upon which amounts deferred may
earn interest, compounded quarterly, at the base rate of Citibank, N.A. in
effect on specified dates, (2) a market value account, the value of which will
be based upon the market value of Quest Diagnostics common stock from time to
time, or (3) a combination of these accounts. All non-employee directors are
eligible to participate in the plan. As of February 28, 1999, two directors had
elected to defer compensation as permitted by the plan.
The directors also participate in the Quest Diagnostics Stock Option
Plan for Non-Employee Directors. The option plan authorizes the grant on the
date of the annual meeting of stockholders of non-qualified stock options to
acquire 9,000 shares of Quest Diagnostics common stock to each non-employee
director. In the event that a person is elected as a director of Quest
Diagnostics other than on the date of the annual meeting, the Board may grant to
the director, on his or her election, an option to acquire a number of shares,
not to exceed 9,000, that is proportional to the fraction of a year remaining
until the next annual meeting. A director may elect to receive all or a portion
of his or her annual retainer in options in lieu of cash. The aggregate number
of shares of Quest Diagnostics common stock which may be issued to the directors
who exercise their options granted under the plan may not exceed 500,000,
subject to adjustments in certain circumstances. The exercise price of all stock
options issued under the plan is the average of the high and low share price of
Quest Diagnostics common stock on the date of grant.
Executive Officers
Officers of Quest Diagnostics are elected by the Board of Directors and
hold office until their respective successors are elected and qualified. In
addition to Mr. Freeman, the following persons serve as executive officers of
Quest Diagnostics:
James D. Chambers (42) is Senior Vice President and Chief Growth
Officer. Mr. Chambers joined Corning in 1986 and served in a variety of
managerial and financial positions for Corning and its subsidiaries, becoming
Assistant Treasurer in 1991. Mr. Chambers joined Quest Diagnostics in 1992 as
Treasurer and served as Chief Financial Officer from 1994 through 1995. In 1995,
he assumed responsibilities for overseeing Quest Diagnostics' billing process;
in January 1997, he was named Chief Administrative Officer with additional
responsibilities for Information
3
Systems, Communications and Investor Relations; and in February 1998 he was
named Marketing and Business Development Leader. In January 1999, Mr. Chambers
assumed his present responsibilities.
Kurt R. Fischer (44) is Vice President, Human Resources. Mr. Fischer
joined Corning in 1976 and 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 Quest Diagnostics in December 1995.
Robert A. Hagemann (42) is Vice President and Chief Financial Officer.
He joined Quest Diagnostics' predecessor entity, Corning Life Sciences, Inc., in
1992, where he held a variety of senior financial positions before being named
Vice President and Corporate Controller of Quest Diagnostics in 1996. Prior to
joining Quest Diagnostics, Mr. Hagemann was employed by Prime Hospitality, Inc.
and Crompton & Knowles, Inc. in senior financial positions. He was also
previously associated with Ernst & Young. Mr. Hagemann assumed his present
responsibilities with Quest Diagnostics in August 1998.
Bernard L. Kasten, M.D., FCAP (52) is Vice President and Chief
Laboratory Officer. Dr. Kasten joined Quest Diagnostics in July 1996 as Medical
Director of the Teterboro regional laboratory and assumed his current position
in 1998. Dr. Kasten is a member of the College of American Pathologists, in
which he participates in the Inspection and Accreditation Program, Strategic
Planning and Management Resource Committees and chairs their World Wide Web
Editorial Board. From 1987 through 1996, Dr. Kasten was Associate Director of
Pathology and Laboratory Services for Bethesda Hospitals, Inc. and TriState
Pathology Associates of Cincinnati, Ohio.
Raymond C. Marier (54) 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.
Gerald C. Marrone (56) is Senior Vice President and Chief Information
Officer. Prior to joining Quest Diagnostics in November 1997, Mr. Marrone was
with Citibank, N.A. for 12 years. During his tenure, he was most recently Vice
President, Division Executive for Citibank's Global Production Support Division.
While at Citibank, he was also the Chief Information Officer of Citibank's
Global Cash Management business. Prior to joining Citibank, he was the Chief
Information Officer for Memorial Sloan-Kettering Cancer Center in New York for 5
years.
C. Kim McCarthy (43) is Vice President, Government Relations and
Services. In this capacity, she directs the development of Quest Diagnostics'
legislative, regulatory and public policy initiatives and related issues at both
the state and federal levels. Ms. McCarthy joined Corning in 1987 as Director of
Federal Government Affairs and Legislative Counsel and became Vice
4
President of Public Affairs of Quest Diagnostics in 1992. From May 1996 through
May 1998, she directed Quest Diagnostics' compliance program. Ms. McCarthy
assumed her present responsibilities in May 1998 and also is currently involved
in the marketing and sale of compliance services.
Surya N. Mohapatra, Ph.D. (49) is Senior Vice President and Chief
Operating Officer. In this newly created position, Dr. Mohapatra is responsible
for all aspects of Quest Diagnostics' core clinical laboratory testing,
including its medical operations and commercial functions. Prior to joining
Quest Diagnostics in February 1999, he was Senior Vice President of Picker
International, a worldwide leader in advanced medical imaging technologies,
where he served in various executive positions during his 18-year tenure.
Alister W. Reynolds (41) is Vice President, Strategic Planning. Mr.
Reynolds joined Quest Diagnostics in 1982 and has served in a variety of staff,
general management and executive positions. Mr. Reynolds assumed his current
responsibilities in 1995.
Paul J. Traina (40) is Vice President, Compliance. In this capacity,
Mr. Traina has responsibility for the ongoing management of the corporate
integrity agreement, as well as internal compliance audits, management of
external audits and reimbursement issues and practices. Mr. Traina joined Quest
Diagnostics in 1989 as Associate General Counsel and became Chief Compliance
Officer in 1992. He assumed his present position in May 1998.
David M. Zewe (47) is Vice President, Sales. Mr. Zewe joined Quest
Diagnostics in 1994 as General Manager of the Philadelphia regional laboratory
and became Regional Vice President Sales and Marketing for the mid-Atlantic
region in August 1996. Mr. Zewe assumed company-wide responsibility for sales in
traditional market segments in October 1997. Prior to joining Quest Diagnostics,
Mr. Zewe was with the Squibb Diagnostics Division of Bristol Myers Squibb, most
recently serving as Vice President of Sales.
Item 11. Executive Compensation
Summary Compensation
The following table shows the compensation for the past three years of
the Chief Executive Officer and each of Quest Diagnostics' other four most
highly compensated executive officers in 1998.
5
Summary Compensation Table
Annual Compensation Long-Term Compensation
-------------------------------------- ---------------------------------------
Other Restricted Securities All
Base Annual Annual Stock Underlying LTIP Other
Name and Principal Position Year Salary Bonus (1) Comp. (2) Awards (3) Options Payouts Comp. (4)
- ------------------------------ ------ ----------- ------------ ------------ ------------- ------------- --------- -------------
Kenneth W. Freeman 1998 $ 500,000 $ 460,000 $ 183,292 $ 926,316 180,000 $ 0 $ 130,609
Chairman of the Board & 1997 500,000 187,485 125,403 145,002 137,000 0 320,474
Chief Executive Officer 1996 379,167 153,500 154,767 1,412,283 0 0 104,210
Douglas M. Van Oort 1998 $ 344,500 $ 217,896 $ 0 $ 385,965 75,000 $ 0 $ 7,416
Senior Vice President- 1997 325,000 115,913 0 60,325 57,000 0 48,937
Operations 1996 282,050 204,594 18,495 419,375 0 0 35,252
James D. Chambers 1998 $ 298,845 $ 189,751 $ 35,901 $ 257,310 50,000 $ 0 $ 56,239
Senior Vice President - 1997 226,160 105,411 0 32,290 30,500 0 6,880
Chief Growth Officer 1996 194,446 144,750 1,800 104,844 0 0 6,333
Gerald C. Marrone 1998 $ 300,000 $ 172,500 $ 100,000 $ 180,117 35,000 $ 0 $ 6,836
Senior Vice President - 1997 40,385 0 0 0 10,000 0 0
Chief Information Officer (5)
Bernard L. Kasten, M.D. 1998 $ 280,022 $ 146,306 $ 0 $ 48,031 7,000 $ 0 $ 61,303
Vice President -
Chief Laboratory Officer (6)
- --------------------
(1) 1997 Bonus includes 1997 Management Incentive Plan cash bonus, plus
performance shares earned based on 1997 performance that vested in
February 1998.
(2) Includes $81,586 and $35,901 in tax gross-up payments on forgiven loan
amounts for Messrs. Freeman and Chambers, respectively. Includes tax and
financial planning assistance payments of $62,178 for Mr. Freeman. Other
Annual Compensation for 1996 includes dividends on shares of restricted
stock of Corning granted but not earned within one year from date of
grant, automobile allowances and tax gross-up payments. Includes $100,000
signing bonus for Mr. Marrone.
(3) 1998 values are based on a per share price of $19.06 at February 3, 1999
and represent shares of incentive stock that were awarded based on 1998
financial performance results, subject to forfeiture and transfer
restrictions until vested. Messrs. Freeman, Van Oort, Chambers, Marrone
and Kasten earned 48,600, 20,250, 13,500, 9,450 and 2,520 shares,
respectively. The shares will vest in three equal annual installments
beginning February 2000. The total shares of incentive stock, subject to
forfeiture and transfer restrictions, held by Messrs. Freeman, Van Oort,
Chambers, Marrone and Kasten are 90,064, 24,050, 15,534, 9,450 and 2,520
shares, respectively. At December 31, 1998, based on a per share price of
$17.8125, their total shares of incentive stock had a value of $1,604,265,
$428,391, $276,699, $168,328 and $44,888, respectively. 1996 values
represent awards of shares of Corning common stock granted prior to the
1996 spin-off.
(4) Includes relocation assistance payments of $22,017 and $54,423 for Mr.
Freeman and Dr. Kasten, respectively. Includes $80,000 forgiven principal
on a $400,000 interest-free loan made by the Company to Mr. Freeman, which
loan was made to assist Mr. Freeman in relocating to the New Jersey area,
which loan is to be forgiven over five years. Includes $50,000 forgiven
principal on a $150,000 interest-free loan made by the Company to Mr.
Chambers, which loan was made to assist Mr. Chambers in relocating to the
New Jersey area, which loan is to be forgiven over three years. Includes
payments of $21,712 and $2,042 to Messrs. Freeman and Van Oort
respectively, and a payment of $641 by Mr. Chambers, consistent with the
Transferee Supplemental Plan (as defined below). Includes $6,880, $5,374,
$6,880, $6,836 and $6,880 contributed to the Company's Profit Sharing Plan
(as defined below) for 1998 for Messrs. Freeman, Van Oort, Chambers,
Marrone and Dr. Kasten, respectively.
(5) Mr. Marrone began employment and was elected an executive officer in
November 1997.
(6) Dr. Kasten began employment in July 1996, and was appointed an executive
officer in 1998.
6
Option Grants
The following table sets forth information regarding options granted in
1998 to the named executive officers in compliance with the stock option plans:
Options/SAR Grants in 1998 (1)
Potential Realizable Value at
Assumed Annual Rates of Stock
Individual Grants (2) Price Appreciation for Option Term (3)
------------------------------------------------------- --------------------------------------
Number of % of Total
Securities Options
Underlying Granted
Options to Employees Exercise Expiration Gain
Name Granted in Fiscal Year Price($/sh) Date at 0% Gain at 5% Gain at 10%
- ------------------------- ------------- -------------- ------------ ------------ ------------ --------------- -------------
Kenneth W. Freeman 180,000 14.0% $16.06 1/13/2008 $0 $1,818,009 $4,607,191
Douglas M. Van Oort 75,000 5.8% $16.06 1/13/2008 0 757,504 1,919,663
James D. Chambers 50,000 3.9% $16.06 1/13/2008 0 505,002 1,279,775
Gerald S. Marrone 35,000 2.7% $16.06 1/13/2008 0 353,502 895,843
Bernard L. Kasten, M.D. 7,000 0.5% $16.06 1/13/2008 0 70,700 179,169
Named Exec. Officers 347,000 27.0% $16.06 0 3,504,717 8,881,641
- --------------------
(1) No SARs were granted.
(2) The options vest in three equal annual installments in January 1999,
2000 and 2001. The options provide that an additional option may be
granted when the optionee uses shares of Quest Diagnostics 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 Quest
Diagnostics common stock, will become exercisable only after the lapse
of twelve months and will expire on the expiration date of the original
option.
(3) The dollar amounts set forth under these columns are the result of
calculations at the 5% and 10% rates established by the Securities and
Exchange Commission and therefore are not intended to forecast future
appreciation of Quest Diagnostics common stock.
Option Exercises and Year-End Values
The following table sets forth information regarding the number of
shares of Quest Diagnostics common stock covered by both exercisable and
unexercisable stock options as of December 31, 1998, for the named executive
officers. No options were exercised by any of the named executive officers
during 1998.
7
Aggregated Option/SAR Exercises in 1998
and 1998 Year-End Option/SAR Values of Options (1)
Number of Securities Value of Unexercised
Underlying Unexercised In-the-Money Options
Options at Year End At Year End (2)
-------------------------------- ------------------------
Shares
Acquired Value
Executive Officer on Exercise Realized Exercisable Unexercisable Exercisable Unexercisable
- ----------------- --------------- ---------------- --------------- --------------- ---------------- ---------------
Kenneth W. Freeman 0 $0 45,666 443,788 $ 62,220 $1,699,238
Douglas M. Van Oort 0 0 19,000 231,934 25,888 1,051,729
James D. Chambers 0 0 10,166 100,067 13,851 332,470
Gerald S. Marrone 0 0 5,000 40,000 5,463 66,800
Bernard L. Kasten, 0 0 5,000 12,000 7,253 19,520
M.D.
Named Exec. Officers 0 $0 84,832 827,789 $ 114,675 $3,169,757
- ---------------------
(1) There are no SARs outstanding. All options not presently exercisable will
fully vest on the closing of the purchase of SmithKline Beecham Clinical
Laboratories, Inc., except for certain options of Messrs. Freeman, Van
Oort and Chambers, which number 86,227, 59,467 and 14,866, respectively.
(2) Based on a price of $17.8125 per share.
Variable Compensation
Quest Diagnostics maintains a Management Incentive Plan, which is an
annual incentive cash compensation plan for approximately 950 supervisory,
management and executive employees. The terms of the Management Incentive Plan
are as follows.
The performance-based annual cash incentive awards payable under the
Management Incentive Plan are grounded in financial goals like net income, cash
flow, operating margin, return on equity or earnings per share, or any
combination of the above, 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 a scale with each level of desired
result corresponding to a percentage, which are multiplied by the employee's
individual 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 and Nominating
Committee sets the target for the performance year. The Compensation and
Nominating Committee retains the right to reduce any award if it believes
individual performance does not warrant the calculated award.
8
Pension Plans
None of the executive officers of Quest Diagnostics is currently an
active participant in a qualified defined benefit plan of Quest Diagnostics.
Effective as of January 1, 1997, Quest Diagnostics adopted a Transferee
Supplemental Pension Plan, a non-qualified, unfunded defined benefit plan for
the benefit of key employees and executive officers of Quest Diagnostics who are
former employees of Corning Incorporated ("Corning"), including Messrs. Freeman,
Van Oort and Chambers. The Transferee Supplemental Pension Plan is intended to
provide benefits approximately equal to the difference between the benefits
provided for under the Corning Salaried Pension Plan and the Supplemental
Pension Plans and the benefits which would have been payable thereunder but for
the termination of employment with Corning of these employees.
Prior to June 1, 1995, Mr. Freeman was eligible, and, prior to January
1, 1995, Messrs. Chambers and Van Oort were eligible, to participate in, and
accrue benefits under, Corning's 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 annual 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 the 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 the 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. These 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 also maintains non-qualified Supplemental Pension Plans under
which it will pay to 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.
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 the Employee Retirement Income Security Act of 1974. It is estimated
that Messrs. Freeman, Van Oort and Chambers, who have 27, 17 and 13 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,
$335,947, $213,691 and $145,061, respectively, under the Corning Salaried
Pension Plan, the Executive Supplemental Pension Plan and the Transferee
Supplemental Pension Plan.
9
Years of Service
--------------------------------------------------------------------------------------------------
Average Final
Compensation 15 20 25 30 35 40
- ---------------------- --------------- ---------------- --------------- ---------------- --------------- ----------------
$ 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
Employment Agreement
Mr. Freeman entered into an employment agreement with Quest Diagnostics
in December 1996 which provides for:
o a term ending December 31, 1999;
o an annual salary of no less than $500,000, with increases subject to
the discretion of the Board of Directors or the Compensation and
Nominating Committee;
o an annual target participation in the Management Incentive Plan in
amounts no less than 65% of annual salary in effect at the time
performance goals are established;
o a retirement pension benefit, which is secured by a letter of credit,
equivalent to benefits under Corning's qualified salaried pension plan
and Corning's non-qualified executive supplemental pension plan based
upon not less than 34 years of credited service in the event of
termination for reasons other than for cause;
o some grants of stock options and restricted shares under the 1997
Employee Equity Participation Program under which grants were made
during the first quarter of 1997;
o severance payments in the event of a termination by Mr. Freeman for
good reason or by Quest Diagnostics without cause in an amount equal to
three times his base annual salary and three times his targeted annual
award of variable compensation; and
10
o 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
18 months following expiration of the agreement in the event the
agreement is not renewed upon its expiration.
Good reason, for purposes of this agreement, would be (1) an assignment
of Mr. Freeman without his consent to mutually inconsistent duties or
responsibilities, (2) a failure to re-elect Mr. Freeman to the position of
Chairman of the Board and Chief Executive Officer, (3) a greater than 75 mile
relocation without his consent or (4) a change in control.
Change of control, for purposes of this agreement, would be (1) the
acquisition by a person other than SmithKline Beecham or Premier, Inc. of 20% or
more of the voting stock of Quest Diagnostics, (2) the acquisition by SmithKline
Beecham of more than 29.5% or by Premier, Inc. of more than 33 1/3% of the
voting stock of Quest Diagnostics, (3) a change in the membership of the Quest
Diagnostics Board of Directors 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, (4) approval by Quest
Diagnostics' stockholders of a merger or consolidation in which Quest
Diagnostics ceases to be an independent public company or (5) a sale or
disposition of all or substantially all of Quest Diagnostics' assets or a plan
of partial or complete liquidation.
Severance Arrangements
Quest Diagnostics has a severance policy for executive officers, other
than Mr. Freeman, whereby:
o Severance is paid to an executive officer if his or her employment is
terminated by Quest Diagnostics (1) other than for cause, (2) upon a
determination that the business needs of Quest Diagnostics require the
replacement of the executive officer and (3) for any other reasons
other than in connection with a change of control, as determined by the
Board of Directors in an amount not to exceed two times the executive
officer's base annual salary at the annual rate in effect on the date
of termination of employment and an amount not to exceed two times the
annual award of variable compensation at the most recent target level.
The executive would also be entitled to participate in Quest
Diagnostics' health and welfare plans, to the extent permitted by the
terms of the plans and applicable law, for a period of up to two years
or until the officer is covered by a successor employer's benefit
plans, whichever occurs first.
o Severance is paid to an executive officer if his or her employment is
terminated by Quest Diagnostics other than for cause as determined by
the Board of Directors, during the 12-month period following a change
in control, in an amount not to exceed three times the executive
officer's base annual salary at the annual rate in effect on the date
of termination of employment and three times the annual award of
variable compensation at the most recent target level. The executive
officer would also be entitled to participate in Quest Diagnostics'
health and welfare plans, to the extent permitted by the terms of these
plans and applicable
11
law, for a period of up to three years or until the officer is covered
by a successor employer's benefit plans, whichever is first.
Item 12. Security Ownership by Certain Beneficial Owners and Management
The following table sets forth the number of shares of Quest
Diagnostics common stock beneficially owned as of February 28, 1999 by (1) each
person who is known to Quest Diagnostics to own beneficially more than 5% of the
outstanding shares of Quest Diagnostics common stock, (2) each director of Quest
Diagnostics and each nominee, (3) each named executive officer and (4) all
directors, nominees and executive officers of Quest Diagnostics as a group,
excluding shares held under the investment plans relating to Corning. Corning
owns all 1,000 outstanding shares of Quest Diagnostics preferred stock.
Number of Shares Percentage
Name Beneficially Owned of Class(8)
- ---- -------------------------- -----------
Wellington Management Company, LLP 3,096,900 (1) 10.3%
FMR Corp. 3,057,700 (2) 10.2%
Mellon Bank Corporation 2,836,588 (3) 9.4%
Pzena Investment Management, LLC 2,048,695 (4) 6.8%
Vanguard Specialized Funds - Vanguard
Healthcare Fund 1,637,300 (5) 5.5%
Kenneth D. Brody 4,306 (6) --
William F. Buehler 2,250 (6) --
Van C. Campbell 15,808 (6)(7) --
James D. Chambers 72,927 (8) --
Mary A. Cirillo 4,306 (6) --
Kenneth W. Freeman 353,891 (8) 1.2%
Bernard L. Kasten 14,209 (8) --
Gerald C. Marrone 26,531 (8) --
Dan C. Stanzione 4,306 (6)
Douglas M. Van Oort 149,981 (8)
Gail R. Wilensky 4,306 (6) --
All Directors, Nominees and Executive
Officers as a Group (18 persons) 901,396 (6)(8)(9) 2.9%
- --------------------
(1) The business address of Wellington Management Company, LLP is 75 State
Street, Boston, MA 02109. Wellington Management Company has shared
dispositive power, but not shared voting power, over all these shares.
This information is based solely on the information contained in an
amended Schedule 13-G filed by Wellington Management Company with the
Securities and Exchange Commission on February 26, 1999.
(2) The business address of FMR Corp., which is the parent of Fidelity
Management & Research Corporation, is 82 Devonshire Street, Boston, MA
02109. FMR Corp. has sole dispositive power, but does not have voting
power, over all these shares. This information is based solely on the
information contained in a Schedule 13-G filed by FMR Corp. with the
Securities and Exchange Commission on January 7, 1999.
(3) The business address of Mellon Bank Corporation is One Mellon Bank Center,
Pittsburgh, PA 15258. Mellon Bank beneficially owns all these shares,
together with Boston Group Holdings, Inc. and The Boston Company, Inc.
This information is based solely on the information contained in a
Schedule 13-G filed by Mellon Bank with the Securities and Exchange
Commission on January 26, 1999.
12
(4) The business address of Pzena Investment Management LLC is 830 Third
Avenue, 14th Floor, New York, NY 10022. Pzena Investment Management has
sole dispositive power, but not sole voting power, over all these shares.
This information is based solely on the information contained in a
Schedule 13-G filed by Pzena Investment Management with the Securities and
Exchange Commission on January 19, 1999.
(5) The business address of Vanguard Specialized Funds - Vanguard Healthcare
Fund is P.O. Box 2600 Valley Forge, PA 19482. Vanguard beneficially owns
all these shares and has sole voting power, but not sole dispositive
power. This information is based solely on the information contained in a
Schedule 13-G filed by Vanguard with the Securities and Exchange
Commission on February 11, 1999.
(6) Includes options issued under Quest Diagnostics' Stock Option Plan that
are presently exercisable or exercisable within 60 days.
(7) In addition, Mr. Campbell has credited to his account the equivalent of
3,284 shares of Quest Diagnostics common stock under Quest Diagnostics'
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 Quest Diagnostics
common stock.
(8) Includes shares of Quest Diagnostics common stock, subject to forfeiture
and restrictions on transfer, granted in compliance with Quest
Diagnostics' Incentive Stock Plan. Messrs. Chambers, Freeman, Kasten,
Marrone and Van Oort have been granted 14,534, 107,916, 8,333, 8,750 and
22,550 shares, respectively. Includes shares of Quest Diagnostics common
stock which are subject to options issued under Quest Diagnostics' Stock
Option Plan that are presently exercisable or exercisable within 60 days.
Messrs. Chambers, Freeman, Kasten, Marrone and Van Oort have the right to
purchase 51,865, 237,559, 8,333, 16,666 and 122,467 shares, respectively,
according to presently exercisable options. Does not include options that
will vest upon closing of the transaction between Quest Diagnostics and
SmithKline Beecham.
(9) Includes 1,016 shares owned by the spouses and minor children of certain
executive officers and directors as to which such officers and directors
disclaim beneficial ownership.
13
Item 13. Certain Relationships and Related Transactions
Corning owns all of the 1,000 outstanding shares of Quest Diagnostics
preferred stock, which shares were issued to Corning Life Sciences Inc. and
subsequently transferred to Corning during the fourth quarter of 1996. Prior to
December 31, 1996, Quest Diagnostics was a wholly owned subsidiary of Corning.
During 1998, Quest Diagnostics paid to Corning, its subsidiaries or divisions,
approximately $117,500 in preferred stock dividends. In connection with the
transaction agreement described below, Quest Diagnostics received in 1998
approximately $15,000,000 from Corning in satisfaction of indemnified claims.
Corning Transaction Agreement
Under the Corning transaction agreement entered into in connection with
the 1996 spin-off of Quest Diagnostics, Corning has agreed to indemnify Quest
Diagnostics against all monetary penalties, fines or settlements for any
government claims that (1) arise out of alleged violations of applicable federal
fraud and health care statutes; (2) relate to billing practices of Quest
Diagnostics and its predecessors; and (3) were pending on December 31, 1996.
Corning has also agreed to indemnify Quest Diagnostics in respect of
private claims relating to indemnified or previously settled government claims
that alleged overbillings by Quest Diagnostics or any of its existing
subsidiaries for services provided before January 1, 1997. Corning will
indemnify Quest Diagnostics for 50% of the aggregate of all judgment or
settlement payments made by December 31, 2001 that exceed $42 million. The 50%
share will be limited to a total amount of $25 million and will be reduced to
take into account any deductions or tax benefits realized by Quest Diagnostics,
or a consolidated group of which Quest Diagnostics is a member, to the extent
that the deductions or tax benefits are deemed to actually reduce the tax
liability of Quest Diagnostics. Corning will not indemnify Quest Diagnostics
against damages suffered as a result of or incidental to the billing claims and
the fees and expenses of litigation.
Quest Diagnostics will control the defense of any government claim or
investigation unless Corning elects to assume the defense. However, in the case
of all non-government claims related to indemnified government claims of alleged
overbillings, Quest Diagnostics will control the defense. All disputes relating
to the Corning indemnification agreement are subject to binding arbitration.
Corning Tax Sharing Agreement
In connection with their 1996 spin-off from Corning, Quest Diagnostics
and another former Corning subsidiary entered into a tax sharing agreement with
Corning which allocates responsibility for federal income and various other
taxes for 1996 and prior years among the three companies. The Corning tax
sharing agreement provides that, generally, Corning is liable for and will pay
the federal income taxes of the consolidated group that includes Quest
Diagnostics and its subsidiaries, provided, however, that Quest Diagnostics is
required to reimburse Corning for various 1996 taxes based on the hypothetical
separate federal tax liability of Quest Diagnostics and various subsidiaries,
calculated on
14
a separate consolidated basis, subject to various adjustments. Under the tax
sharing agreement, in the case of adjustments by a taxing authority of the
consolidated federal income tax or other tax returns prepared by Corning which
include Quest Diagnostics, then, subject to various exceptions, Corning is
liable for and will pay any tax assessments, and is entitled to any tax refunds,
resulting from the audit. The tax sharing agreement further provides in general
that if the 1996 spin-off becomes taxable, this tax is allocated among Corning,
Quest Diagnostics and the other former Corning subsidiary in such a manner as
will take into account the extent to which the actions or inactions of each may
have caused the tax and each will indemnify and hold harmless the other from and
against the taxes so allocated.
15
Signatures
Pursuant to the requirements of Sections 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
Quest Diagnostics Incorporated
/s/ Leo C. Farrenkopf, Jr. April 30, 1999
- ----------------------------------
Leo C. Farrenkopf, Jr.
Vice President and Secretary