Section 240.14a-101 Schedule 14A.
Information required in proxy statement.
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(Amendment No. )
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240.14a-12
QUEST DIAGNOSTICS INCORPORATED
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..................................................................
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Quest Diagnostics
Incorporated
One Malcolm Avenue
Teterboro, NJ 07608
(201) 393-5000
----------------------------
LEO C. FARRENKOPF, JR.
Vice President and Secretary
[LOGO]
----------------------------------
NOTICE OF 2003 ANNUAL MEETING TO BE HELD ON MAY 13, 2003
--------------------------------
To the Stockholders of Quest Diagnostics Incorporated:
The 2003 Annual Meeting of Stockholders of Quest Diagnostics Incorporated will
be held on Tuesday, May 13, 2003 at 10:30 A.M., local time, at The Waldorf
Astoria, 301 Park Avenue, New York, NY 10022, for the purpose of considering and
voting upon the following matters:
1. To elect four directors for a three-year term.
2. To ratify the selection of PricewaterhouseCoopers LLP as the independent
accountants to audit the financial statements of Quest Diagnostics for the
year ending December 31, 2003.
3. To approve the Senior Management Incentive Plan.
4. To transact such other business as may properly come before the Annual
Meeting or any adjournment thereof.
These matters are more fully described in the Proxy Statement accompanying this
Notice.
Your Board of Directors has fixed the close of business on March 14, 2003, as
the record date for the determination of stockholders entitled to notice of, and
to vote at, the annual meeting, and any notice of adjournments or postponements
of the annual meeting.
By Order of the Board of Directors
Leo C. Farrenkopf, Jr.
Leo C. Farrenkopf, Jr.
Vice President and Secretary
March 28, 2003
ALL STOCKHOLDERS ARE INVITED TO ATTEND THE ANNUAL MEETING IN PERSON. WHETHER OR
NOT YOU EXPECT TO ATTEND THE ANNUAL MEETING IN PERSON, YOU ARE URGED TO
COMPLETE, DATE, SIGN AND PROMPTLY RETURN THE ENCLOSED PROXY IN THE POSTAGE-PAID
ENVELOPE PROVIDED. NO POSTAGE NEED BE AFFIXED IF MAILED IN THE UNITED STATES.
ALTERNATIVELY, STOCKHOLDERS OF RECORD MAY VOTE BY TELEPHONE BY CALLING
1-866-463-1148 OR ON THE INTERNET AT HTTP//WWW.COMPUTERSHARE.COM/US/PROXY. EACH
PROXY IS REVOCABLE AND WILL NOT AFFECT YOUR RIGHT TO VOTE IN PERSON IN THE EVENT
YOU ATTEND THE ANNUAL MEETING.
This notice and the proxy statement are dated March 28, 2003, and are first
being mailed to stockholders on or about March 31, 2003.
Proxy Statement
-----------------------------
ANNUAL MEETING OF STOCKHOLDERS TO BE HELD ON MAY 13, 2003
-----------------------------
This proxy statement is furnished in connection with the solicitation by the
Board of Directors of Quest Diagnostics Incorporated of proxies for use at the
2003 Annual Meeting of Stockholders of Quest Diagnostics to be held on Tuesday,
May 13, 2003, and at any adjournments or postponements of the annual meeting,
for the purposes set forth herein and in the accompanying Notice of Annual
Meeting. This proxy statement and the accompanying proxy card are first being
mailed to stockholders on or about March 31, 2003.
Only holders of record of shares of Quest Diagnostics common stock, par
value $.01 per share, at the close of business on March 14, 2003, are entitled
to notice of the annual meeting and to vote on all matters presented to the
annual meeting. On that date, there were issued, outstanding and entitled to
vote 105,237,682 shares of common stock held by approximately 6,200 stockholders
of record. Each share of common stock is entitled to one vote, voting as one
class. A majority of the shares issued and outstanding at March 14, 2003,
constitutes a quorum for the transaction of business.
All proxies on the enclosed card which are properly executed and returned to
Quest Diagnostics or are properly voted by telephone or Internet will be voted
as provided therein at the annual meeting and any and all adjournments thereof.
Signed, unmarked proxies will be voted FOR the election of the Board's nominees
(Proposal 1); FOR ratification of the selection of PricewaterhouseCoopers LLP as
the independent accountants to audit the financial statements of Quest
Diagnostics for the year ending December 31, 2003 (Proposal 2); and FOR approval
of the Senior Management Incentive Plan (Proposal 3). A stockholder executing
and returning a proxy may revoke it at any time before it has been voted by
filing with the Secretary of Quest Diagnostics a written notice of revocation or
a duly executed proxy bearing a later date or by attending the annual meeting
and voting in person.
The required vote for election of directors (Proposal 1) is a plurality of
the votes of the shares present in person or represented by proxy at the meeting
and entitled to vote on the election of directors. The required vote FOR
approval of ratification of the selection of auditors and FOR approval of the
Senior Management Incentive Plan (Proposals 2 and 3) is the affirmative vote of
a majority of the shares casting votes on the proposal (whether present in
person or represented by proxy) provided that the total votes cast on the
proposal represent over 50% of all shares entitled to vote on the proposal. Any
proxy that is properly executed and returned to Quest Diagnostics and marked
abstain as to any matter will, nevertheless, be counted in determining whether a
quorum is present at the annual meeting. The number of shares abstaining on each
proposal is counted and reported as a separate total. Broker non-votes are
included in the determination of the number of stockholders present at the
meeting for quorum purposes but are not counted in the tabulation of votes cast
on proposals presented to stockholders.
Quest Diagnostics management does not know of any matters to be brought
before the annual meeting other than Proposals 1, 2 and 3. Quest Diagnostics'
By-Laws generally provide that no matters may be brought before any stockholder
meeting by a stockholder unless the proponent is a stockholder as of the record
date and Quest Diagnostics has received notice of the proposed matter, no later
than February 15 of the year in which the annual meeting is held, at its
principal executive office. Quest Diagnostics has not received notice of a
proposal from any stockholder.
Officers and employees of Quest Diagnostics may solicit proxies by mail,
telephone, facsimile transmission or telegraph, or in person, for which they
will receive no special compensation. Quest Diagnostics will bear all expenses
for the preparation, printing and use of Quest Diagnostics proxy materials. In
addition, Quest Diagnostics has retained Georgeson Shareholder Communications
Inc. to assist in the solicitation for a fee of $12,000 and reimbursement of its
reasonable out-of-pocket
Quest Diagnostics Incorporated 2003 Proxy Statement 1
expenses. No portion of the proxy solicitor's fee is dependent on the number of
shares (as hereinbefore defined) voting in favor of (as opposed to those voting
against or abstaining) any matter being submitted for approval at the annual
meeting. Banks, brokerage houses and other institutions, nominees and
fiduciaries will be requested to forward the proxy materials to beneficial
owners of Quest Diagnostics stock, and to obtain authorizations for the
execution of proxies. Quest Diagnostics will, upon request, reimburse banks,
brokerage houses and other institutions, nominees and fiduciaries for their
reasonable expenses in forwarding proxy materials to beneficial owners.
Quest Diagnostics' 2002 Annual Report to Stockholders has been distributed
to stockholders and is not deemed a part of the materials for the solicitation
of proxies.
PROPOSAL NO. 1 ELECTION OF DIRECTORS
The Restated Certificate of Incorporation of Quest Diagnostics provides that
the Board of Directors shall consist of not less than three nor more than twelve
directors, the exact number to be determined from time to time by resolution of
the Board of Directors. The Board presently consists of twelve directors. The
Restated Certificate of Incorporation further provides for three classes of
directors having staggered terms of office, each class consisting, so far as
possible, of one-third of the number of directors required at the time to
constitute a full Board. If the number of directors may not be evenly divided
into thirds, the Board of Directors shall determine which class or classes shall
have one extra director.
At the annual meeting, four directors will be elected to hold office until
the 2006 annual meeting of stockholders and until their respective successors
shall have been duly elected and qualified.
Each of the nominees has consented to serve if elected. It is intended that
the accompanying form of proxy, unless otherwise specified, will be voted for
the election of the four nominees. Certain information concerning each of the
nominees and continuing directors and their business experience during the past
five years is provided following the tables below.
It is the intention of the persons named on the accompanying proxy card to
vote for the election of the nominees unless a stockholder has withheld such
authority. Management has no reason to believe that any nominee will not be
available to serve his or her prescribed term. However, the persons named on the
proxy card will have the discretionary authority to vote for substitutes if any
nominee is unable or unwilling to serve.
The following table identifies the four persons nominated for election to
the Board of Directors at the annual meeting.
NOMINEES FOR THE BOARD WITH TERMS EXPIRING AT THE 2006 ANNUAL MEETING
Position with
Name Quest Diagnostics Age
---- ----------------- ---
James F. Flaherty III......................... Director 46
Kenneth W. Freeman............................ Chairman of the Board, Chief 52
Executive Officer and Director
Gail R. Wilensky.............................. Director 59
John B. Ziegler............................... Director 57
The following tables list the seven directors whose terms will expire after
the annual meeting. Van C. Campbell, a director whose term expires in 2005, will
retire from the Board of Directors as of May 13, 2003, thus reducing the number
of directors to eleven. While he is not included in the tables below, his
biography does appear herein.
2 Quest Diagnostics Incorporated 2003 Proxy Statement
MEMBERS OF THE BOARD CONTINUING IN OFFICE WITH TERMS EXPIRING AT THE 2004 ANNUAL
MEETING
Position with
Name Quest Diagnostics Age
---- ----------------- ---
Kenneth D. Brody.................................... Director 59
Mary A. Cirillo..................................... Director 55
William R. Grant.................................... Director 78
Surya N. Mohapatra.................................. President, Chief Operating 53
Officer and Director
MEMBERS OF THE BOARD CONTINUING IN OFFICE WITH TERMS EXPIRING AT THE 2005 ANNUAL
MEETING
Position with
Name Quest Diagnostics Age
---- ----------------- ---
William F. Buehler.................................. Director 63
Rosanne Haggerty.................................... Director 42
Dan C. Stanzione.................................... Director 57
KENNETH D. BRODY is the co-founder and principal of Taconic Capital Advisors, a
New York private investment firm. He was also 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 has been a director of Quest Diagnostics
since January 1997.
WILLIAM F. BUEHLER retired in 2001 as Vice Chairman of Xerox Corporation, which
he joined in 1991. At Xerox, Mr. Buehler was responsible for five business
groups, Production Systems, Office Document Products, Document Services,
Channels and Supplies. He also oversaw Corporate Strategic Services, Business
Development and Systems Software and Architecture. Prior to joining Xerox, Mr.
Buehler spent 27 years with AT&T, primarily in sales, marketing and general
management positions. Mr. Buehler is a director of A.O. Smith. Mr. Buehler has
been a director of Quest Diagnostics since July 1998.
VAN C. CAMPBELL retired in 1999 as Vice Chairman of Corning Incorporated, which
he joined in 1965. He was elected 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. Mr. Campbell has been a
director of Quest Diagnostics since January 1991. He will retire from the Board
of Directors as of May 13, 2003.
MARY A. CIRILLO is Chairman and Chief Executive Officer of OPCENTER, which
provides help desk and network operations services. She was Chief Executive
Officer of Global Institutional Services of Deutsche Bank from July 1999 until
February 2000. Previously, she served as Executive Vice President and Managing
Director of Bankers Trust Company, which was acquired by Deutsche Bank, which
she joined in 1997. From 1977 to 1997, she was with Citibank, N.A., most
recently serving as Senior Vice President. Ms. Cirillo is a director of Digital
Island, Inc. Ms. Cirillo has been a director of Quest Diagnostics since April
1997.
JAMES F. FLAHERTY III is President, Chief Operating Officer and member of the
Board of Directors of Health Care Property Investors. Mr. Flaherty joined Health
Care Property Investors in October 2002 following a nineteen-year career with
Merrill Lynch & Co. Mr. Flaherty served in a variety of investment banking,
capital markets and private equity functions for Merrill Lynch in its New York,
London, and Los Angeles offices. Mr. Flaherty was elected Managing Director of
Merrill Lynch in January 1991 and was responsible for a number of investment
banking industry groups. Most significantly, Mr. Flaherty was head of Merrill
Lynch's Global Healthcare Group. Mr. Flaherty has been a director of Quest
Diagnostics since February 2003.
KENNETH W. FREEMAN is Chairman of the Board and Chief Executive Officer of Quest
Diagnostics. Mr. Freeman joined Quest Diagnostics in May 1995 as President and
Chief Executive Officer, was
Quest Diagnostics Incorporated 2003 Proxy Statement 3
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 Incorporated, 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.
WILLIAM R. GRANT has been Chairman of Galen Associates, a New York investment
firm, since 1989. From 1987 to 1989 he was Chairman of New York Life
International and from 1979 to 1987 of MacKay-Shields Financial Corp. He is also
a former director and Vice Chairman of SmithKline Beecham plc, and is currently
a director of Advanced Medical Sciences, Inc., Massey Energy Co., Ocular
Sciences and Vasogen Inc. He has been a director of Quest Diagnostics since
August 1999. Mr. Grant was designated by SmithKline Beecham to be a director of
Quest Diagnostics pursuant to the Stockholders Agreement with SmithKline
Beecham. See 'Certain Relationships and Related Transactions -- Stockholders
Agreement.'
ROSANNE HAGGERTY is the founder and Executive Director of Common Ground, a
not-for-profit housing development and management organization in New York City.
Prior to founding Common Ground, she was the coordinator of housing development
at Brooklyn Catholic Charities. Ms. Haggerty is a 2001 MacArthur Foundation
Fellow. Ms. Haggerty has been a director of Quest Diagnostics since February
2002.
SURYA N. MOHAPATRA, PH.D. is President and Chief Operating Officer of Quest
Diagnostics. Prior to joining the Company in February 1999 as Senior Vice
President and Chief Operating Officer, he was Senior Vice President of Picker
International, a worldwide leader in advanced medical imaging technologies,
where he served in various executive positions during his 18-year tenure. Dr.
Mohapatra was appointed President and Chief Operating Officer of Quest
Diagnostics in June 1999. Dr. Mohapatra is a director of Vasogen Inc. Dr.
Mohapatra has been a director of Quest Diagnostics since October 2002.
DAN C. STANZIONE is President Emeritus of Bell Laboratories at Lucent
Technologies Incorporated. Dr. 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 and was appointed Chief Operating Officer of
Lucent in 1997. Dr. Stanzione is a director of Avaya Inc. Dr. Stanzione has been
a director of Quest Diagnostics 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. From 1997
to 2001, she was the chair of the Medicare Payment Advisory Commission, which
advises Congress on all issues relating to Medicare. From 1995 to 1997 she
chaired the Physician Payment Review Commission, which advised 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 Cephalon Inc., Gentiva Health
Services, Inc., Manor Care Inc. and United Healthcare Corporation. Dr. Wilensky
has been a director of Quest Diagnostics since January 1997.
JOHN B. ZIEGLER is the President, Worldwide Consumer Healthcare, of
GlaxoSmithKline (the parent of SmithKline Beecham plc). Mr. Ziegler joined
SmithKline Beecham in 1991 as the head of SB Consumer Healthcare-North American
Division. He became Executive Vice President of SmithKline Beecham in 1996 and
assumed his current responsibilities in 1998. He has been a director of Quest
Diagnostics since May 2000. Mr. Ziegler was designated by SmithKline Beecham as
a director of Quest Diagnostics pursuant to the Stockholders Agreement with
SmithKline Beecham. See 'Certain Relationships and Related
Transactions -- Stockholders Agreement.'
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A VOTE 'FOR' THE ELECTION OF ALL
NOMINEES FOR DIRECTOR.
4 Quest Diagnostics Incorporated 2003 Proxy Statement
DIRECTORS
COMMITTEES OF THE BOARD OF DIRECTORS
The Board of Directors has four standing committees: an Audit and Finance
Committee, a Compensation and Nominating Committee, a Quality, Safety and
Compliance Committee and an Executive Committee.
The Audit and Finance Committee is currently composed of Mr. Campbell, Mr.
Flaherty, Mr. Grant and Dr. Stanzione. Mr. Flaherty joined the Committee after
becoming a director of Quest Diagnostics in February 2003. The Committee's
responsibilities are described in the Report of the Audit & Finance Committee.
The Compensation and Nominating Committee is currently composed of Mr.
Brody, Mr. Grant and Dr. Stanzione. Ms. Cirillo, who was a member of the
Compensation and Nominating Committee during 2002, resigned from the Committee
effective March 17, 2003. The primary purposes of the Compensation and
Nominating Committee are to (a) approve executive officer compensation including
salary and bonus, (b) approve the issuance of options and share grants under
Quest Diagnostics' 1999 Employee Equity Participation Program, (c) oversee the
financially efficient administration of the 1999 Employee Equity Participation
Program and other employee benefit plans, and (d) make recommendations to the
Board with respect to (i) programs for human resource development, (ii)
management organization and succession, and (iii) employee benefit and incentive
plans. Quest Diagnostics intends to separate the nominating function from the
Compensation Committee and establish a Nominating and Corporate Governance
Committee in accordance with the proposed New York Stock Exchange rules when
they are promulgated.
If the Senior Management Incentive Plan described under Proposal 3 below is
approved by our stockholders, the Compensation and Nominating Committee also
will oversee the administration of, or directly administer, that plan unless
otherwise determined by the Board of Directors.
The Quality, Safety and Compliance Committee, composed of Mr. Buehler, Mr.
Campbell, Ms. Haggerty, Mr. Ziegler and Dr. Wilensky, oversees Quest
Diagnostics' compliance program, which is administered by management's
Compliance Team and the Legal and Compliance Department, and oversees the
administration of Quest Diagnostics' Quality and Safety programs.
The Executive Committee, composed of Mr. Brody, Mr. Campbell and Mr.
Freeman, has and may exercise all the powers and authority of the Board of
Directors in the management of the business and affairs of Quest Diagnostics
except with respect to certain major corporate matters, such as mergers,
election of directors, amendment of Quest Diagnostics' certificate of
incorporation and By-laws, incurring indebtedness in excess of $20 million and
such matters as are delegated to other committees of the Board of Directors.
During 2002, there were eleven meetings of the Board of Directors, seven
meetings of the Audit and Finance Committee, ten meetings of the Compensation
and Nominating Committee and five meetings of the Quality, Safety and Compliance
Committee. There were no formal meetings of the Executive Committee. Several
actions were taken by unanimous written consent of the Executive Committee.
During the year, each director attended at least 75% of the meetings held by the
Board of Directors and the committees of which he or she was a member.
DIRECTORS' COMPENSATION
During 2002, each non-employee director was entitled to receive a fee in 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 $3,000,
payable in quarterly installments of $750. Effective April 1, 2003, each
non-employee director will receive a retainer fee in an annual sum of $35,000
payable in quarterly installments of $8,750. In addition, directors will receive
meeting fees of $1,500 per Board or Committee meeting attended at which a
majority of directors attend in person and $750 per meeting attended at which a
majority of directors attend telephonically. Each Director who serves as chair
of a Committee will receive an additional $6,000 annual retainer fee, except the
chair of the Audit & Finance Committee who will receive a $30,000 annual
retainer
Quest Diagnostics Incorporated 2003 Proxy Statement 5
fee. In addition, each non-employee director also participates in 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 up to 10,000 shares of common stock of
Quest Diagnostics 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 of Stockholders, the Board of Directors may grant to such director, on
his/her election, an option to acquire a number of shares (not to exceed 10,000)
that is proportional to the fraction of a year remaining until the next Annual
Meeting of Stockholders consistent with the most recent annual option grant to
other directors at the previous Annual Meeting of Stockholders.
A director may elect to receive his or her annual retainer in options in
lieu of cash. Currently, three directors have elected to receive options in lieu
of cash. The aggregate number of shares of common stock of Quest Diagnostics
which may be issued pursuant to the exercise of options granted under the plan
may not exceed 1,000,000 (subject to adjustments in certain circumstances). The
exercise price of all stock options issued under the plan is the fair market
value of Quest Diagnostics' common stock on the date of grant.
Under the 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. 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 Quest Diagnostics' common
stock from time to time, or (iii) a combination of such accounts. All
non-employee directors are eligible to participate in the plan. Currently, three
directors have elected to defer compensation pursuant to the plan.
COMPENSATION AND NOMINATING COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
During 2002, OPCENTER billed Quest Diagnostics approximately $1.4 million
for services provided in help desk and network operations as well as services in
connection with facility moves. Mary Cirillo, a director of Quest Diagnostics,
is the majority stockholder and the Chief Executive Officer of OPCENTER. During
2002, Ms. Cirillo was a member of the Company's Compensation & Nominating
Committee. Quest Diagnostics expects to continue to receive services from
OPCENTER during 2003.
PROPOSAL NO. 2 RATIFICATION OF APPOINTMENT OF PRICEWATERHOUSECOOPERS LLP
The Board of Directors recommends the ratification of its selection of
PricewaterhouseCoopers LLP as the independent accountants to audit the financial
statements of Quest Diagnostics for its current fiscal year, which ends December
31, 2003. PricewaterhouseCoopers LLP has served as Quest Diagnostics'
independent accountants since 1982. Should the selection of
PricewaterhouseCoopers LLP by the Board of Directors not be ratified, the Board
will consider the selection of a different firm to serve as independent
accountants of Quest Diagnostics.
It is expected that representatives of PricewaterhouseCoopers LLP will
attend the Annual Meeting, will have the opportunity to make a statement if they
elect to do so, and will be available to respond to appropriate questions.
During 2002, Quest Diagnostics was billed for the following services
provided by PricewaterhouseCoopers LLP:
Audit Fees.................................................. $731,666
Financial Information Systems Design and Implementation
Fees...................................................... 0
SEC Registrations........................................... $249,189
Statutory Audits of Foreign Subsidiaries and Audits of
Consolidated Joint Ventures............................... $242,594
All Other Fees.............................................. $158,104
6 Quest Diagnostics Incorporated 2003 Proxy Statement
The Audit and Finance Committee of the Board of Directors has considered the
non-audit services rendered and does not believe that they are incompatible with
PricewaterhouseCoopers LLP remaining independent.
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A VOTE 'FOR' RATIFICATION OF
THE APPOINTMENT OF PRICEWATERHOUSECOOPERS LLP.
PROPOSAL NO. 3 SENIOR MANAGEMENT INCENTIVE PLAN
Upon the recommendation of the Compensation and Nominating Committee, the
Board of Directors has unanimously approved the adoption of the Senior
Management Incentive Plan (the 'Incentive Plan'), subject to approval by our
stockholders at the Annual Meeting.
OVERVIEW
The Incentive Plan is being submitted to stockholders for their approval.
Under the Incentive Plan, if approved, payments of bonuses will constitute
'qualified performance-based compensation' under the provisions of section
162(m) of the Internal Revenue Code (the 'Code'), which limits the deductibility
of compensation in excess of $1 million paid by a publicly traded corporation to
certain 'covered employees', unless the compensation is 'qualified
performance-based compensation.'
Under Treasury Regulations promulgated pursuant to section 162(m) of the
Code, certain conditions must be satisfied in order for compensation to qualify
as performance-based, including:
(i) the compensation must be payable on account of the attainment of one or more
pre-established, objective performance goals and (ii) the material terms of the
compensation and the performance goals must be disclosed to and approved by
stockholders before payment. In an effort to structure the compensation paid to
covered employees so as to qualify as 'performance-based compensation' under
section 162(m) of the Code, the Board of Directors adopted the Incentive Plan
subject to stockholder approval at the Annual Meeting. Notwithstanding the
adoption of the Incentive Plan and its submission to stockholders, Quest
Diagnostics reserves the right to pay its employees, including participants in
the Incentive Plan, other amounts which may or may not be deductible under
section 162(m) or other provisions of the Code.
The following summary of the material terms of the Incentive Plan is
qualified in its entirety by reference to the complete text of the Incentive
Plan, which is attached hereto as Appendix A.
ADMINISTRATION
The Incentive Plan generally will be administered by a committee of the
Board of Directors made up of at least two directors, each of whom is an
'outside director' within the meaning of section 162(m) of the Code (the
'Committee'). Unless otherwise determined by the Board of Directors, the
Compensation and Nominating Committee will constitute the Committee. The Board
of Directors may, at any time, terminate or amend the Incentive Plan. The Board
of Directors may (but is not required to) seek stockholder approval of
amendments to the Incentive Plan.
ELIGIBILITY AND PARTICIPATION
Executive officers and officers selected by the Committee are eligible to
participate in the Incentive Plan. Individuals will be selected to participate
in the Incentive Plan for a one fiscal year cycle (or portion of a fiscal year
cycle) (each a 'Performance Period'). No more than ten officers may be
Participants in the Plan during any Performance Period. Participants who are
selected to participate in the Incentive Plan will be paid a Bonus (as defined
below) based upon Quest Diagnostic's 'Earnings' (as defined below).
The Committee selected six executive officers to participate in the
Incentive Plan for the current Performance Period, which began on January 1,
2003 and will run through December 31, 2003. In connection with the commencement
of each subsequent Performance Period, the Committee will select individuals to
participate in the Incentive Plan. In its discretion, the Committee may add
participants to, or remove participants from, the Incentive Plan at any time
during a Performance Period or otherwise, except that no participant may be
added after the 90th
Quest Diagnostics Incorporated 2003 Proxy Statement 7
day after the beginning of a Performance Period or otherwise unless consistent
with the requirements of section 162(m) of the Code.
BONUS AWARDS
Each participant in the Incentive Plan may be paid a bonus of up to 1% of
Quest Diagnostics' Earnings in such Performance Period, reduced in the
discretion of the Committee by such amount, if any, as the Committee deems
appropriate (a participant's bonus amount for each Performance Period, as so
reduced, the 'Bonus').
Bonuses will be payable, as determined by the Committee, in cash and/or
equity-based awards. To the extent that equity-based awards are granted in lieu
of cash they will be granted under another plan maintained by Quest Diagnostics.
The cash equivalent value of such awards shall be determined by the Committee,
provided that in determining the number of restricted or deferred stock units
(payable in cash or shares of our common stock), restricted shares of our common
stock or unrestricted shares of our common stock that is equivalent to a dollar
amount, that dollar amount shall be divided by the average of the high and low
sales prices of our common stock on the date of grant by the Committee (with
fractional shares being rounded to the nearest whole share). Any equity-based
award will be subject to such terms and conditions (including vesting
requirements) as the Committee may determine.
Unless the Committee indicates otherwise, if a participant's employment with
Quest Diagnostics terminates for any reason before the end of a Performance
Period, the Committee will have the discretion to determine whether such
participant's Bonus will be forfeited or reduced on a pro-rata basis to reflect
the portion of such fiscal year the participant was employed by Quest
Diagnostics, or to make other arrangements as the Committee deems appropriate.
Quest Diagnostics' Earnings means Quest Diagnostics' income before taxes and
extraordinary gains and losses as reported in its audited consolidated financial
statements for the relevant fiscal year, adjusted to eliminate, with respect to
such fiscal year, the following items included in such audited statements:
losses related to the impairment of goodwill and other intangible assets;
restructuring and other unusual non-recurring items separately reported;
gains or losses that are the direct result of a major casualty or natural
disaster;
losses resulting from any newly-enacted law, regulation or judicial order;
and
the cumulative effect of accounting changes.
Following the completion of each Performance Period and prior to any Bonus
payment, the Committee will certify in writing the Earnings for such Performance
Period.
NEW PLAN BENEFITS
The amount of each participant's Bonus for the current Performance Period
(which runs from January 1, 2003 through December 31, 2003) will be determined
based on Earnings for the Performance Period and, in addition, will be subject
to the Committee's right to reduce any participant's Bonus by any amount in its
sole discretion. As a result, we cannot determine the amount that would be
payable under the Incentive Plan to any participant for the current Performance
Period. Moreover, because the Committee can reduce each participant's Bonus
determined under the Incentive Plan's formula by any amount in its discretion,
we cannot determine the amount that would have been paid to any person under the
Incentive Plan had it been in effect in the 2002 fiscal year. In this regard, if
the Incentive Plan had been in effect in the 2002 fiscal year, the maximum bonus
derived under the Incentive Plan's formula would have been $5.4 million for each
of the six executive officers and other participants who would be eligible to
participate in the Incentive Plan in the 2003 fiscal year. If the Incentive Plan
had been in effect for the 2002 fiscal year, the Compensation and Nominating
Committee believes it would have exercised its discretion to reduce each
participant's Bonus and that the Bonuses that would have been paid would have
been essentially the same as those actually earned in 2002, which were
8 Quest Diagnostics Incorporated 2003 Proxy Statement
substantially lower than the maximum bonus derived under the Incentive Plan's
formula. The Compensation and Nominating Committee does not currently intend to
materially change its criteria for awarding Bonuses. See the Summary
Compensation Table on the following page for the bonuses the Committee actually
determined to pay to our Named Executive Officers for the 2002 fiscal year.
Adoption of the Incentive Plan, upon the recommendation of the Compensation
and Nominating Committee, was approved by the Board of Directors subject to the
receipt of stockholder approval. If the Incentive Plan is not approved by
stockholders, no amounts will be payable under the Incentive Plan.
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A VOTE FOR THE ADOPTION OF THE
INCENTIVE PLAN.
OTHER MATTERS
As of the date hereof, the Board does not know of any matter that will come
before the annual meeting other than Proposals 1, 2 and 3. If any other matter
is properly presented at the annual meeting or any adjournment or postponement
of the annual meeting, it is intended that the persons named in the accompanying
proxy will vote thereon in accordance with their best judgment. Quest
Diagnostics' By-Laws generally provide that no matters may be brought before any
stockholder meeting by a stockholder unless the proponent is a stockholder as of
the record date and Quest Diagnostics has received notice of the proposed
matter, no later than the February 15 preceding the date of an annual meeting,
at its principal executive office at One Malcolm Avenue, Teterboro, NJ 07608.
Quest Diagnostics has not received notice of any such proposal.
EXECUTIVE COMPENSATION INFORMATION
EQUITY COMPENSATION PLAN INFORMATION
The following table provides information as of December 31, 2002 about Quest
Diagnostics common stock that may be issued upon the exercise of options,
warrants and rights under our existing equity compensation plans:
Number of Securities
Remaining Available
Number of Securities for Future Issuance
to be Issued upon Weighted-Average under Equity
Exercise of Exercise Price of Compensation Plans
Outstanding Outstanding (excluding Securities
Options, Warrants Options, Warrants Reflected in the
Plan Category and Rights and Rights Second Column)
------------- ---------- ---------- --------------
Equity compensation plans approved by
security holders(1).................. 8,921,609 $38.83 7,220,964
Equity compensation plans not approved
by security holders(2)............... -- not applicable 1,680,316
--------- -------------- ---------
Total.............................. 8,921,609 $38.83 8,901,280
========= ============== =========
(1) There are two equity compensation plans approved by our stockholders under
which securities remain available for issuance: The 1999 Employee Equity
Participation Program and the Stock Option Plan for Non-Employee Directors.
These plans are described in Note 14 to the Company's financial statements
included in the Company's annual report on Form 10-K for the year ended
December 31, 2002.
(2) The only equity compensation plan that has not been approved by the
Company's stockholders is the Company's Employee Stock Purchase Plan
('ESPP'). The ESPP permits employees to purchase the Company's common stock
each calendar quarter through payroll deductions. The purchase price is 85%
of the closing market price on the last business day of the calendar quarter
(or, if lower, the closing market price on the first business day of the
calendar quarter). The ESPP, which was adopted prior to the spinoff of the
Company in 1996, authorizes the issuance of 4 million shares of the
Company's common stock. The number of securities reflected in the table
above for the ESPP includes the share allocation for the fourth quarter of
2002, which were purchased in January 2003.
Quest Diagnostics Incorporated 2003 Proxy Statement 9
SUMMARY COMPENSATION TABLE. 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 (the 'named executive
officers').
SUMMARY COMPENSATION TABLE
Annual Compensation Long-Term Compensation
-------------------------------- ---------------------------------
Awards
-----------------------
Other Restricted Securities All
Name and Annual Stock Underlying LTIP Other
Principal Position Year Salary Bonus(1) Comp.(2) Awards(3) Options Payouts Comp.(4)
------------------ ---- ------ -------- -------- --------- ------- ------- --------
Kenneth W. Freeman 2002 $785,200 $1,356,512 $228,237 0 200,000 0 $101,915
Chairman & CEO 2001 784,523 1,158,600 230,870 0 200,000 0 154,399
2000 747,116 1,623,300 257,175 0 300,000 0 128,946
Surya N. Mohapatra 2002 $520,000 $ 513,344 $ 36,913 0 81,618 0 $ 91,893
President & 2001 519,615 438,500 38,704 0 78,975 0 101,825
Chief Operating 2000 498,077 618,400 40,493 $2,564,877 0 0 91,508
Officer
David M. Zewe(5) 2002 $375,000 $ 277,650 0 0 38,000 0 $ 27,097
Senior Vice
President
Diagnostic Testing
Operations
Gerald C. Marrone 2002 $345,800 $ 256,030 $125,000 0 31,496 0 $ 27,367
Senior Vice 2001 345,535 218,700 125,000 0 35,055 0 35,262
President 2000 331,587 282,300 125,000 $1,154,195 0 0 32,364
Administration
Robert A. Hagemann 2002 $312,000 $ 289,140 0 0 36,516 0 $ 24,590
Corporate Vice 2001 311,769 197,300 0 0 37,875 0 27,265
President & 2000 298,878 255,090 0 $ 833,585 0 0 23,518
Chief Financial
Officer
(1) Represents Management Incentive Plan amounts using a target payout factor of
1.234x based on earnings per share and other financial and non-financial
goals. Includes additional $58,150 performance bonus for Mr. Hagemann.
(2) Includes $36,913 in tax gross-up payments on forgiven loan amounts for Dr.
Mohapatra. The loan was provided in connection with the relocation of Dr.
Mohapatra, bears no interest and is forgiven over a five year period. The
principal balance of the loan to Dr. Mohapatra was $100,000 at January 1,
2002 and $50,000 at December 31, 2002. Includes $187,296 in tax and
financial planning assistance and legal counseling for Mr. Freeman. Also
includes Information Technology bonus of $125,000 for Mr. Marrone. All loans
pre-date the Sarbanes-Oxley Act and have not been modified since its
passage.
(3) Reflects value of restricted stock as of date of grant.
(4) Includes forgiven principal on relocation loans of $50,000 for Dr.
Mohapatra. Includes $91,935 to Mr. Freeman under the Transferee Supplemental
Supplemental Pension Plan. Includes $7,980, $7,362, $8,000, $7,855 and
$8,000 contributed to the Company's Profit Sharing Plan for Mr. Freeman, Dr.
Mohapatra, Mr. Zewe, Mr. Marrone, and Mr. Hagemann, respectively. Includes
$32,531, $17,097, $17,512, and $14,590 contributed to the Company's
Supplemental Deferred Compensation Plan for Dr. Mohapatra, Mr. Zewe, Mr.
Marrone, and Mr. Hagemann, respectively. Includes ESOP contribution of
$2,000, $2,000, $2,000, $2,000 and $2,000 for Mr. Freeman, Dr. Mohapatra,
Mr. Zewe, Mr. Marrone, and Mr. Hagemann, respectively.
(5) Mr. Zewe became an executive officer in December 2002.
10 Quest Diagnostics Incorporated 2003 Proxy Statement
OPTION GRANTS. The following table sets forth certain information regarding
options granted in 2002 to the named executive officers pursuant to stock option
plans. No stock appreciation rights (SARs) were granted in 2002.
OPTION/SAR GRANTS IN 2002*
Potential Realizable Value at
Assumed Annual Rates of Stock
Individual Grants Price Appreciation for Option Term
-------------------------------------------------- ----------------------------------
% of
Total
Number of Options
Securities Granted to
Underlying All Employees Gain Gain Gain
Options in Fiscal Exercise Expiration at at at
Executive Granted Year Price Date 0% 5% 10%
--------------------------------------------------------------------------------------------------------------------
Kenneth W. Freeman 200,000(1) 10.2% $71.07 2/27/12 $0 $8,939,108 $22,653,455
Surya N. Mohapatra 76,000(1) 3.9% $71.07 2/27/12 0 3,396,861 8,608,313
Surya N. Mohapatra 5,618(2) 0.3% $93.79 1/13/08 0 167,923 377,642
David M. Zewe 38,000(1) 1.9% $71.07 2/27/12 0 1,698,431 4,304,157
Gerald C. Marrone 28,000(1) 1.4% $71.07 2/27/12 0 1,251,475 3,171,484
Gerald C. Marrone 1,713(2) 0.1% $93.79 1/13/08 0 44,388 98,086
Gerald C. Marrone 1,783(2) 0.1% $93.79 11/10/07 0 44,129 97,009
Robert A. Hagemann 34,000(1) 1.7% $71.07 2/27/12 0 1,519,648 3,851,087
Robert A. Hagemann 2,516(2) 0.1% $89.24 7/30/08 0 70,258 157,629
All Employees 1,962,818 100%
* No SARs were granted.
(1) The options vest in three equal annual installments beginning February 27,
2003 and vest immediately upon a change of control (as defined). The options
have a reload feature.
(2) These are reload options exercisable on and after the first anniversary of
the date of grant.
OPTION EXERCISES AND FISCAL YEAR-END VALUES. The following table sets forth
certain information regarding stock option exercises by the named executive
officers during 2002 and the number of shares of Quest Diagnostics' common stock
covered by both exercisable and unexercisable stock options as of December 31,
2002, for the named executive officers.
AGGREGATE OPTION/SAR EXERCISES IN FISCAL YEAR 2002
& 2002 FISCAL YEAR-END OPTION/SAR VALUES(1)
Number of Securities
Underlying Value of Unexercised
Unexercised Options at In-the-Money Options at
Shares 12/31/02 12/31/02(2)
Acquired Value --------------------------- ---------------------------
Name on Exercise Realized(3) Exercisable Unexercisable Exercisable Unexercisable
-----------------------------------------------------------------------------------------------------------------------
Kenneth W. Freeman 200,000 $13,961,538 1,043,855 606,667 $43,964,446 $11,792,368
Surya N. Mohapatra 40,000 3,224,600 175,141 165,452 7,028,789 1,567,612
David M. Zewe 22,500 1,698,675 43,583 92,417 1,473,869 1,330,431
Gerald C. Marrone 40,000 3,423,600 97,721 78,830 3,664,308 1,296,787
Robert A. Hagemann 22,000 1,738,686 87,791 80,600 3,324,631 988,999
------- ----------- --------- --------- ----------- -----------
Totals 324,500 $24,047,099 1,448,091 1,023,966 $59,456,043 $16,976,197
(1) There are no SARs presently outstanding
(2) Based on the closing price of a share of common stock on December 31, 2002
($56.90 per share).
(3) 'Value Realized' is calculated by determining the difference between the
fair market value of the securities underlying the options and the exercise
price of the options at exercise. 'Value of Unexercised In-the-Money
Options' is the aggregate, calculated on a grant-by-grant basis, of the
product of the number of unexercised Options at the end of the fiscal 2002
(taking into account grants made in respect of the 2002 fiscal year)
multiplied by the difference between the exercise price for the grant and
the closing price of a share of common stock on December 31, 2002 ($56.90).
Grants for which the exercise price is greater than the closing price of a
share of common stock on that day are valued at zero.
Quest Diagnostics Incorporated 2003 Proxy Statement 11
VARIABLE COMPENSATION. Quest Diagnostics maintains a Management Incentive Plan,
which is an annual incentive cash compensation plan for approximately 1,600
supervisory, management and executive employees. The terms of the Management
Incentive Plan are described below.
The performance-based annual cash incentive awards payable under the
Management Incentive 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 his target annual bonus. The Compensation and
Nominating Committee retains the right to reduce any award if it believes that
individual performance does not warrant the award calculated by reference to the
result. The Company expects that beginning in 2003, executive officers will not
participate in the Management Incentive Plan, but will be covered by the Senior
Management Incentive Plan described in Proposal 3.
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 Transferred
Executive Supplemental Retirement Plan (SRP), a nonqualified, unfunded defined
benefit plan for the benefit of key employees and executive officers of Quest
Diagnostics who are former employees of Corning Incorporated, including Mr.
Freeman. The SRP is intended to provide benefits approximately equal to the
difference between the benefits provided for under the Corning Salaried Pension
Plan and the Executive Supplemental Pension Plan and the benefits which would
have been payable thereunder but for the termination of employment with Corning
of such employees.
Prior to June 1, 1995, Mr. Freeman was 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 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 non-qualified supplemental pension plans pursuant to which
it will pay amounts approximately equal to the difference between the benefits
provided under the Corning Salaried Pension Plan and benefits which would have
been paid thereunder but for the limitations of the Employee Retirement Income
Security Act of 1974 and the Internal Revenue Code. Certain employees including
Mr. Freeman, participate in the Corning Executive Supplemental Pension Plan
which pays benefits based upon final average compensation (the highest five
consecutive calendar years in the ten calendar years immediately preceding
termination) and years of service.
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 with at least five years of
credited service, are illustrated in the table set forth below.
12 Quest Diagnostics Incorporated 2003 Proxy Statement
The table below does not reflect any limitations on benefits imposed by ERISA.
It is estimated that Mr. Freeman would receive each year if he worked to age 65,
$716,100 under the Corning Salaried Pension Plan, the Corning non-qualified
supplemental pension plans and the Transferred Executive Supplemental Retirement
Plan. Mr. Freeman has 31 years of credited service and $1,553,100 in
compensation covered under the Transferee Executive Supplemental Retirement
Plan.
Annual Pension Benefit at Various Years of Service
5-Year
Average Years of Service
Final ---------------------------------------------------------------------
Compensation 15 20 25 30 35 40
(AFC) Years Years Years Years Years Years
------------------------------------------------------------------------------------
$1,500,000 $334,600 $446,100 $557,600 $ 669,200 $ 780,700 $ 893,200
1,600,000 357,100 476,100 595,100 714,200 833,200 953,200
1,700,000 379,600 506,100 632,600 759,200 885,700 1,013,200
1,800,000 402,100 536,100 670,100 804,200 938,200 1,073,200
1,900,000 424,600 566,100 707,600 849,200 990,700 1,133,200
2,000,000 447,100 596,100 745,100 894,200 1,043,200 1,193,200
2,100,000 469,600 626,100 782,600 939,200 1,095,700 1,253,200
2,200,000 492,100 656,100 820,100 984,200 1,148,200 1,313,200
2,300,000 514,600 686,100 857,600 1,029,200 1,200,700 1,373,200
2,400,000 537,100 716,100 895,100 1,074,200 1,253,200 1,433,200
2,500,000 559,600 746,100 932,600 1,119,200 1,305,700 1,493,200
EMPLOYMENT AGREEMENT
Mr. Freeman entered into a three-year employment agreement with Quest
Diagnostics dated January 1, 2003, which provides for:
an annual base salary of no less than $1,100,000, with any increases
subject to the discretion of the Board of Directors or the Compensation and
Nominating Committee (2003 salary has been set at $1,100,000);
an annual target participation in the Management Incentive Plan in amounts
no less than 140% of annual base salary in effect at the time performance
goals are established (2003 target has been set at 140%);
a grant of 700,000 stock options and a grant of 100,000 restricted shares
of common stock, each vesting monthly over a three-year period or sooner in
the event of termination by death or disability, termination by the Company
without cause or termination by Mr. Freeman for 'good reason' (except under
certain conditions, the stock options may not be exercised prior to
December 31, 2006);
modification of the provisions of the Transferred Executive Supplemental
Retirement Plan to provide that the overall retirement pension benefits
payable to Mr. Freeman from the Transferred Executive Supplemental
Retirement Plan, Corning's qualified salaried pension plan and Corning's
non-qualified executive supplemental pension plan will be based on not less
than 37 years of Credited Service in the event of termination for reasons
other than for cause and his 3-Year Average Final Compensation (AFC).
Application of these modifications results in an estimated annual pension
benefit of $1,120,300, which represents the benefits payable from the
Transferred Executive Supplemental Retirement Plan, Corning's qualified
salaried pension plan and Corning's non-qualified executive supplemental
pension plan;
severance payments in an amount equal to three times his base salary and
three times his target annual bonus award (and gross-up payments for excise
taxes, if applicable) plus continued coverage for three years under the
Company's insurance and medical plans in the event Mr. Freeman terminates
his employment for 'good reason' or the Company terminates his employment
without cause;
a one year non-compete and a one year nonsolicit of customers and employees
following termination for any reason; and
Quest Diagnostics Incorporated 2003 Proxy Statement 13
good reason would include (1) a material change in Mr. Freeman's duties or
responsibilities, (2) removal or 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, (4) a reduction in
compensation or benefits, (5) a change in control or (6) material breach by
the Company of the agreement. Change of control would include (1) a sale or
disposition of all or substantially all of Quest Diagnostics' assets or a
partial or complete liquidation of Quest Diagnostics, (2) a merger of
consolidation in which the surviving entity becomes a subsidiary of a
publicly traded parent and Mr. Freeman is not the Chairman and Chief
Executive Officer of such parent, (3) the acquisition by any third party of
at least 51% of the outstanding shares of capital of Quest Diagnostics in a
transaction not covered by clause (2) following which Quest Diagnostics
ceases to be an independent public company or (4) 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.
SEVERANCE ARRANGEMENTS
Quest Diagnostics has a severance policy for all executive officers, other
than Mr. Freeman, whereby:
Severance is paid to an executive officer if his or her employment is
terminated by Quest Diagnostics (1) other than for cause and (2) upon a
determination that the business needs of Quest Diagnostics require the
replacement of the executive officer, in an amount equal to two times the
executive officer's annual base salary at the annual rate in effect on the
date of termination of employment and 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 (or a comparable plan after 18-month COBRA eligibility lapses), 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.
If, however, an executive officer's employment is terminated by Quest
Diagnostics, other than for cause, during the 12-month period following a
change in control, the severance benefit will be equal to three times the
executive officer's annual base 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. Certain executive
officers will receive gross-up payments for applicable excise taxes. The
executive officer would also be entitled to participate in Quest
Diagnostics' health and welfare plans (or a comparable plan after 18-month
COBRA eligibility lapses), to the extent permitted by the terms of these
plans and applicable 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. A 'Change of Control' is defined in the policy to include the
following: the acquisition by a person of 40% or more of the voting stock
of the Company; the membership of the Board of Directors changes as a
result of a contested election such that a majority of the Board members at
any particular time was 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.
COMPENSATION AND NOMINATING COMMITTEE
REPORT ON EXECUTIVE COMPENSATION
The Compensation and Nominating Committee of the Board of Directors
determines the compensation of Quest Diagnostics' executive officers. Currently,
the Committee has three members, each of whom is independent of management. None
of the Committee members has any insider or interlocking relationship with the
Company, and each of them is a non-employee director, as these terms are defined
in applicable rules and regulations of the Securities and Exchange Commission.
During 2002, Mary Cirillo was a member of the Committee. Ms. Cirillo
14 Quest Diagnostics Incorporated 2003 Proxy Statement
resigned from the Committee effective March 17, 2003 because of her interlocking
relationship with the Company resulting from her being the majority stockholder,
a director and Chief Executive Officer of OPCENTER. (See 'Compensation of
Directors and Officers -- Compensation Committee Interlocks and Insider
Participation.') The Committee and Board of Directors are committed to the
highest standards of good corporate governance, sound business planning and the
establishment of best practices. The Committee believes that these values are
reflected in all aspects of the Board's actions.
COMPENSATION PHILOSOPHY
The Compensation and Nominating Committee is responsible for ensuring that
executive compensation is aligned with the Quest Diagnostics' values and
strategic objectives and is based on corporate, applicable business unit, and
individual performance measures. The Committee intends to design and administer
its compensation plans to:
Be competitive in design and potential to attract and retain talented
executives who have the skills and experience required to achieve our
strategic intent.
Incent executives to balance appropriately the interests of our employees,
customers and stockholders in accordance with our satisfaction model.
Pay for performance, with above-market pay opportunity only for performance
that exceeds targets and delivers significant value to stockholders.
Be flexible to adjust for changing business conditions as well as the
growth and diversification of the Company.
Be fiscally responsible and aligned with the Company's budget.
Create long term value for the Company and its stockholders.
The key elements of executive compensation are base salary, annual incentive
awards, and equity participation. Each year the Committee evaluates Quest
Diagnostics' performance and executive target and actual compensation levels
compared to an executive compensation peer group and a broader group of U.S.
corporations comparable in scope of operations.
BASE SALARY
Quest Diagnostics sets salaries for most executive officers to approximate
median levels in its executive compensation peer group and broader surveys of
U.S. corporate executive salary levels. Base salary adjustments are determined
following an assessment of each executive officer's position, performance,
potential, and current salary level in relation to market data for similar
positions with comparable scope of responsibilities. For critical positions and
high-performance and high-potential executives, salary levels may be set above
median competitive levels.
ANNUAL INCENTIVES
Quest Diagnostics' Management Incentive Plan is designed to reward
executives for the achievement of objectives linked to the Company's critical
success factors. Individual incentive targets are established for plan
participants based on competitive levels in the compensation peer group of
companies. Incentive target levels are set so as to result in annual cash
compensation in the range of 50th to 75th percentile of competitive practice,
depending on an executive's responsibilities, future potential, individual
performance, and Quest Diagnostics' performance.
For the Chief Executive Officer and all other named executive officers, the
2002 Management Incentive Plan award was based 84% on financial performance
results of the Company and 16% on quantitative operational performance results
relative to objective performance targets set at the beginning of the year.
LONG-TERM INCENTIVES
Long-term incentive compensation is based on annual grants of stock options
under the terms of the Employee Equity Participation Program. The Committee
believes that these grants directly align stockholder and executive officer
interests.
Quest Diagnostics Incorporated 2003 Proxy Statement 15
Stock option grant levels and terms are established to deliver executive
total compensation ranging from 50th to 90th percentile competitive levels,
depending upon an executive's responsibilities, future potential, individual
performance, and Company performance.
In 2002, the Committee approved the grant of time-vested non-qualified stock
options for the Chief Executive Officer and each named executive officer
disclosed in the Summary Compensation Table.
COMPENSATION OF THE CHAIRMAN OF THE BOARD &
CHIEF EXECUTIVE OFFICER
The compensation of Mr. Freeman consists of base salary, annual incentive,
and grants of stock options. The Committee determined the level for each of
these elements using methods consistent with those used for other executive
officers as well as being consistent with the need to create long term value for
the Company and its stockholders.
For 2002, in connection with a Company-wide effort to manage costs
effectively, Mr. Freeman did not receive a salary increase. Also for 2002, the
Committee authorized an annual incentive payout under the terms of the
Management Incentive Plan. The Committee also authorized an award of 200,000
time-vested stock options.
The terms of Mr. Freeman's three-year employment agreement dated January 1,
2003 are described above. The Board looked at past performance, market
conditions and plans for the future and established four criteria to guide the
development of Mr. Freeman's contract:
Create long term value for the Company
Align compensation with performance
Provide for succession, should the need arise
Subscribe to the highest standards of accountability and good corporate
governance
The Board believes it has met these standards in developing Mr. Freeman's
contract.
2002 COMPENSATION ACTIONS: OTHER EXECUTIVE OFFICERS
In connection with a Company-wide effort to manage costs effectively, none
of the other executive officers received a base salary increase in 2002. The
Committee authorized annual incentive awards under the terms of the Management
Incentive Plan to each named executive officer based on the achievement of key
financial and operational goals as described above. In addition, each named
executive received grants of time-vested non-qualified stock options in 2002 as
shown in the Option Grant Table on page 11.
INTERNAL REVENUE CODE SECTION 162(m)
Section 162(m) of the Internal Revenue Code of 1986, as amended, precludes a
public corporation from taking a tax deduction for annual compensation in excess
of $1 million paid to its chief executive officer and the next four most highly
paid executive officers, unless certain specific and detailed criteria are
satisfied.
The Committee considers the anticipated tax treatment to Quest Diagnostics
and to the executive officers in its review and establishment of compensation
programs and payments. The deductibility of compensation payments can depend
upon numerous factors, including the nature of the payment and the time when
income is recognized under various awards, and certain compensation paid or
awarded in prior years may not be fully deductible. Interpretations of and
changes in applicable tax laws and regulations as well as other factors beyond
the control of the Committee also can affect deductibility of compensation.
Quest Diagnostics' general policy is to preserve the tax deductibility of
compensation paid to its executive officers, including annual incentive awards
paid under the Management Incentive Plan and grants of stock options and shares
of incentive stock under the terms of the Employee Equity Participation Program.
For 2003, the Board of Directors has submitted a request for stockholder
approval of the Senior Management Incentive Plan. It is anticipated that all
incentive compensation payments made under this Plan will be deductible.
The Committee will continue to monitor developments and assess alternatives
for preserving the deductibility of compensation payments and benefits to the
extent reasonably practicable,
16 Quest Diagnostics Incorporated 2003 Proxy Statement
consistent with its compensation policies and as determined to be in the best
interests of Quest Diagnostics and its stockholders.
THE COMPENSATION AND NOMINATING COMMITTEE:
Kenneth D. Brody, Chairman
William R. Grant
Dan C. Stanzione
REPORT OF THE AUDIT AND FINANCE COMMITTEE
The audit activities of the Audit and Finance Committee of the Board of
Directors are focused on three areas:
The adequacy of Quest Diagnostics' internal controls and financial
reporting process and the reliability of Quest Diagnostics' financial
statements.
The independence and performance of Quest Diagnostics' internal auditors
and independent auditors.
Quest Diagnostics' compliance with legal and regulatory requirements
relating to securities and financial reporting.
The Audit and Finance Committee meets with management periodically to
consider the adequacy of Quest Diagnostics' internal controls and the
objectivity of it's financial reporting. The Committee discusses these matters
with Quest Diagnostics' independent accountants and with appropriate Quest
Diagnostics' financial personnel and internal auditors. The Committee regularly
meets privately with both the independent accountants and the internal auditors,
each of whom has unrestricted access to the Committee. The Committee also
appoints the independent accountants and reviews periodically their performance
and independence from management.
In addition, as part of the Committee's finance activities, the Committee
reviews Quest Diagnostics' financing plans and other significant financial
policies and actions, and makes recommendations to the full Board of Directors
for approval of certain actions.
The Directors who served on the Committee during 2002 were all 'independent'
for purposes of the New York Stock Exchange listing standards currently in
effect. In that regard, the Board of Directors has determined that none of such
Committee members had a relationship to Quest Diagnostics that would have
interfered with the Committee's independence from Quest Diagnostics and its
management.
The Board of Directors has adopted a written charter setting out the
functions the Committee is to perform, a copy of which was included in the
Company's 2002 proxy statement. The Committee has been closely monitoring recent
developments regarding the role and composition of audit committees and intends
to modify its charter as necessary to comply with new securities and New York
Stock Exchange requirements as they become finalized and effective.
Management has primary responsibility for Quest Diagnostics' financial
statements and the overall reporting process, including Quest Diagnostics'
system of internal controls.
The independent accountants audit the annual financial statements prepared
by management, express an opinion as to whether those financial statements
fairly present the financial position, results of operations and cash flows of
Quest Diagnostics in conformity with accounting principles generally accepted in
the United States of America and discuss with the Committee any issues they
believe should be raised.
This year, the Committee reviewed Quest Diagnostics' audited financial
statements and met with both management and PricewaterhouseCoopers LLP, the
independent accountants, to discuss those financial statements. Management has
represented to the Committee that the financial statements were prepared in
accordance with generally accepted accounting principles.
The Committee has received from and discussed with PricewaterhouseCoopers
LLP, the written disclosure and the letter required by Independence Standards
Board Standard No. 1 (Independence Discussions with Audit Committees). These
items relate to that firm's independence from Quest Diagnostics. In addition,
the Committee reviewed all services provided by PricewaterhouseCoopers LLP to
Quest Diagnostics, and the corresponding fees, in considering
Quest Diagnostics Incorporated 2003 Proxy Statement 17
whether non-audit services were compatible with maintaining
PricewaterhouseCoopers' independence from Quest Diagnostics. The Committee also
discussed with PricewaterhouseCoopers LLP any matters required to be discussed
by Statement on Auditing Standards No. 61 (Communication with Audit Committees).
Based on these reviews and discussions, the Committee recommended to the
Board of Directors that Quest Diagnostics audited financial statements be
included in the Annual Report on Form 10-K for the fiscal year ended December
31, 2002 and the Board of Directors gave its approval.
THE AUDIT AND FINANCE COMMITTEE:
Van C. Campbell, Chairman
William R. Grant
Dan C. Stanzione
PERFORMANCE COMPARISON
Set forth below is a line graph comparing the cumulative total stockholder
return on Quest Diagnostics' common stock since December 31, 1997, based on the
market price of the Company's common stock and assuming reinvestment of
dividends, with the cumulative total stockholder return of companies on the
Standard & Poor's 500 Stock Index and the S&P 500 Healthcare Equipment &
Services Index.
QUEST DIAGNOSTICS INCORPORATED PROXY PERFORMANCE GRAPH
[PERFORMANCE GRAPH]
Total Shareholder Return Performance Graph Values
------------------------------------ ---------------------------------------
S&P S&P
Closing S&P 500 S&P 500
Date DGX Price(1) DGX 500 H.C. DGX 500 H.C.
---- ------------ --- --- ---- --- --- ----
12/31/1997 $ 8.4375 $100.00 $100.00 $100.00
12/31/1998 $ 8.9063 5.56% 28.58% 17.26% $105.56 $128.58 $117.26
12/31/1999 $15.2813 71.58% 21.04% -20.90% $181.11 $155.63 $ 92.75
12/31/2000 $71.00 364.62% -9.10% 56.58% $841.48 $141.46 $145.23
12/31/2001 $71.71 1.00% -11.89% -4.29% $849.90 $124.65 $139.00
12/31/2002 $56.90 -20.65% -22.10% -13.53% $674.37 $ 97.10 $120.19
(1) All values are adjusted to reflect the two-for-one stock split dividend that
occurred on May 31, 2001.
18 Quest Diagnostics Incorporated 2003 Proxy Statement
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, 2003 by (1) each person who
is known to Quest Diagnostics to own beneficially more than 5% of the 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.
Number of Shares Percentage
Name Beneficially Owned of Class (2)(5)
---- ------------------ ---------------
GlaxoSmithKline plc...................................... 22,128,672(1) 21.0%
Bank of America Corporation.............................. 10,366,742(2) 9.9%
Kenneth D. Brody......................................... 35,945(3) --
William F. Buehler....................................... 38,333(3) --
Van C. Campbell.......................................... 22,639(3)(4) --
Mary A. Cirillo.......................................... 53,945(3)(4) --
James F. Flaherty III.................................... 110(3)
Kenneth W. Freeman....................................... 1,576,663(5) 1.5%
William R. Grant......................................... 33,959(3)(6) --
Robert A. Hagemann....................................... 152,967(5) --
Rosanne Haggerty......................................... 833(3)
Gerald C. Marrone........................................ 170,669(5) --
Surya N. Mohapatra....................................... 312,431(5) --
Dan C. Stanzione......................................... 23,945(3) --
Gail R. Wilensky......................................... 35,945(3) --
David M. Zewe............................................ 103,257(5)
John B. Ziegler.......................................... 9,643(3)(7) --
All Directors, Nominees and Executive Officers as a Group
(16 persons)........................................... 2,668,644(3)(5)(8) 2.5%
---------
(1) The business address of GlaxoSmithKline plc is Glaxo Wellcome House,
Berkeley Avenue, Greenford, Middlesex UB6/ONN, England. The ownership
information is based solely on the information contained on a Schedule 13D
filed by GlaxoSmithKline plc with the Securities and Exchange Commission in
May 2002. SmithKline Beecham Corporation, a wholly owned subsidiary of
GlaxoSmithKline plc, holds the shares of record.
(2) The business address of Bank of America Corporation is 100 North Tryon
Street, Charlotte, NC 28255. The ownership information is based solely on
the information contained on a Schedule 13G filed by Bank of America on
behalf of itself and certain affiliates with the Securities and Exchange
Commission on February 14, 2003.
(3) Includes options issued under the Stock Option Plan for Non-Employee
Directors that are presently exercisable or exercisable within 60 days. Mr.
Brody, Mr. Buehler, Mr. Campbell, Ms. Cirillo, Mr. Flaherty, Mr. Grant, Ms.
Haggerty, Dr. Stanzione, Dr. Wilensky and Mr. Ziegler have the right to
purchase 33,333, 33,333, 21,333, 51,333, 110, 33,959, 833, 21,333, 33,333,
and 9,643 shares, respectively, pursuant to such presently exercisable
options.
(4) In addition, Mr. Campbell and Ms. Cirillo have credited to their accounts
the equivalent of 11,068 and 7,989 shares, respectively, 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 current value of Quest Diagnostics common stock.
(5) Includes shares of common stock which are subject to options issued under
Quest Diagnostics 1999 Employee Equity Participation Program that are
presently exercisable or exercisable within 60 days. Mr. Freeman, Mr.
Hagemann, Mr. Marrone, Dr. Mohapatra, and Mr. Zewe have the right to
purchase 1,168,854, 111,557, 115,221, 222,641 and 67,332 shares,
respectively, pursuant to such presently exercisable options.
(6) Mr. Grant was nominated to be a director of the Company by SmithKline
Beecham plc, a subsidiary of GlaxoSmithKline plc, pursuant to the
Stockholders Agreement discussed below. Mr. Grant, a former director of
SmithKline Beecham, disclaims beneficial ownership of the shares of common
stock owned by SmithKline Beecham.
(footnotes continued on next page)
Quest Diagnostics Incorporated 2003 Proxy Statement 19
(footnotes continued from previous page)
(7) Mr. Ziegler was nominated to be a director of the Company by SmithKline
Beecham plc, a subsidiary of GlaxoSmithKline plc, pursuant to the
Stockholders Agreement discussed below. Mr. Ziegler, President, Worldwide
Consumer Healthcare of GlaxoSmithKline, disclaims beneficial ownership of
the shares of common stock owned by SmithKline Beecham.
(8) Includes 932 shares owned by the spouses and children of certain executive
officers and directors as to which such officers and directors disclaim
beneficial ownership.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
OPCENTER
During 2002, OPCENTER billed Quest Diagnostics approximately $1.4 million
for services provided in help desk and network operations as well as services in
connection with facility moves. Mary Cirillo, a director of Quest Diagnostics,
is the majority stockholder and the Chief Executive Officer of OPCENTER. Quest
Diagnostics expects to continue to receive such services from OPCENTER during
2003.
GLAXOSMITHKLINE
SmithKline Beecham Corporation, a subsidiary of GlaxoSmithKline plc, owns
22,128,672 shares of Quest Diagnostics' common stock which it obtained on
August 16, 1999 as consideration, together with $1.025 billion in cash (prior to
giving effect to a $95 million post-closing purchase price reduction), for its
sale of SmithKline Beecham Clinical Laboratories, Inc. ('SBCL') to Quest
Diagnostics.
STOCKHOLDERS AGREEMENT
Quest Diagnostics entered into a stockholders agreement with SmithKline
Beecham upon the closing of the purchase of SBCL. During the ten-year term of
the stockholders agreement, SmithKline Beecham has the right to designate two
nominees to the Quest Diagnostics' Board of Directors (or, if required by UK
GAAP, three nominees if the Company's Board of Directors consists of more than
ten directors) as long as SmithKline Beecham owns at least 20% of the
outstanding common stock of Quest Diagnostics. The stockholders agreement
imposes limitations on the right of SmithKline Beecham to sell or vote its
shares and prohibits SmithKline Beecham from acquiring in excess of 29.5% of the
outstanding common stock of Quest Diagnostics.
DATA ACCESS AGREEMENT
At the closing of the acquisition of SBCL, Quest Diagnostics entered into a
data access agreement under which SmithKline Beecham would have the right to use
Quest Diagnostics' laboratory data. The agreement restricted disclosure of data
that would identify the patient or payor without appropriate authorization. The
agreement was terminated as of December 31, 2002 and GlaxoSmithKline paid Quest
Diagnostics $3 million in connection with the termination.
CLINICAL TRIALS AGREEMENT
At the closing of the acquisition of SBCL, SmithKline Beecham and Quest
Diagnostics had entered into a global clinical trials testing agreement, under
which SmithKline Beecham would use Quest Diagnostics as the primary provider of
SmithKline Beecham's clinical trials testing requirements for ten years. In
December 2002, Quest Diagnostics entered into a new long term agreement with
GlaxoSmithKline plc (formed from the SmithKline Beecham and Glaxo Wellcome
merger in December 2000) under which Quest Diagnostics will be the exclusive
provider of central laboratory testing services to support GlaxoSmithKline's
global clinical testing requirements in North America and Europe. In addition,
on a selected basis, Quest Diagnostics will provide support for other early
stage research and development activity. SmithKline Beecham will pay Quest
Diagnostics fees based upon a fee schedule attached to the global clinical
trials agreement, subject to adjustment. Quest Diagnostics billed approximately
$33 million to SmithKline Beecham with respect to services performed during
2002.
20 Quest Diagnostics Incorporated 2003 Proxy Statement
INDEMNIFICATION
The stock and asset purchase agreement for the acquisition of SBCL provides
that SmithKline Beecham will indemnify Quest Diagnostics against monetary
payments required to be made to the United States government or any state
government, or any agency or subdivision of any of them, arising out of alleged
violations of applicable federal fraud and healthcare statutes and relating to
billing practices, in any case, that have been settled prior to or are pending
as of the closing date. SmithKline Beecham will also indemnify Quest Diagnostics
against monetary payments required to be made to private parties, such as
insurance companies, relating to or arising out of the governmental claims
described in the prior sentence. The indemnification with respect to
governmental claims is for 100% of these claims while the indemnification with
respect to the private party claims is for 100% of those claims, up to an
aggregate amount of $80 million, 50% of those claims to the extent they exceed
$80 million but are less than $130 million and 100% of such claims to the extent
that the aggregate amount exceeds $130 million. The indemnification also covers
80% of out-of-pocket costs and expenses relating to investigations of the claims
indemnified against by SmithKline Beecham.
The special indemnification does not cover:
Governmental claims that arise after the closing date from service of a
subpoena or other notice of such investigation after the closing date;
private claims unrelated to the indemnified governmental claims or
investigations; or
any consequential or incidental damages relating to the billing claims,
including losses of revenues and profits as a consequence of exclusion from
participation in federal or state health care programs.
SmithKline Beecham is also required to indemnify Quest Diagnostics against
any action, matter or claim arising from SmithKline Beecham's conduct of its
business prior to the closing date (including medical professional liability
claims) to the extent that these claims are covered by its insurance policies or
would have been covered by policies if not for existing alternative arrangements
made by SmithKline Beecham for the payment of such claims. SmithKline Beecham is
also required to indemnify Quest Diagnostics and its affiliates for the
out-of-pocket costs of the counseling and testing, for liabilities arising out
of the civil actions, and for other losses arising out of the conduct of an SBCL
employee at a patient service center in Palo Alto, California who, at times,
reused certain needles when drawing blood from patients, other than
consequential damages.
At December 31, 2002, accounts payable and accrued expenses included $26
million due to SmithKline Beecham, primarily related to tax benefits associated
with indemnifiable matters. At December 31, 2002, other assets included $1.8
million due from SmithKline Beecham, primarily related to management's best
estimate of the amounts required to satisfy certain professional liability
claims indemnifiable by SmithKline Beecham.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the U.S. Securities Exchange Act of 1934 requires our
directors and executive officers, and persons who own more than 10% of a
registered class of our equity securities, to file reports of ownership of, and
transactions in, our equity securities with the SEC. Such directors, executive
officers and 10% stockholders are also required to furnish us with copies of all
Section 16(a) reports they file.
Based solely on a review of Forms 3 and 4 and amendments thereto furnished
to Quest Diagnostics during 2002, and Forms 5 and amendments thereto furnished
to Quest Diagnostics with respect to 2002, Quest Diagnostics believes that all
reports required by Section 16(a) of the Exchange Act were filed on a timely
basis, except that, in October 2002, Forms 4 for Van Campbell, Mary Cirillo,
William Grant and John Ziegler were filed on the first business day following
the due date with respect to one transaction and in February 2003, Forms 5 for
all directors and executive officers were filed on the first business day
following the due date. Among those reports on Form 5, the reports of Richard
Bevan and Thomas Bongiorno each related to three transactions, the report of
Rosanne Haggerty to two transactions and the reports of each of Dan Stanzione
and Gail Wilensky to one transaction.
Quest Diagnostics Incorporated 2003 Proxy Statement 21
STOCKHOLDER PROPOSALS FOR 2004 ANNUAL MEETING
Stockholders who, in accordance with the SEC's Rule 14a-8, wish to present
proposals for inclusion in the proxy material to be distributed by us in
connection with our 2004 annual meeting must submit their proposal to our
Secretary on or before November 20, 2003. As the rules of the SEC make clear,
simply submitting a proposal does not guarantee its inclusion.
In accordance with our By-laws, in order to be properly brought before the
2004 annual meeting, a stockholder's notice of the matter the stockholder wishes
to present must be delivered to the Secretary of Quest Diagnostics at its
principal executive offices at One Malcolm Avenue, Teterboro, NJ 07608. As a
result, any notice given by or on behalf of a stockholder pursuant to these
provisions of our By-laws (and not pursuant to the SEC's Rule 14a-8) must be
received between January 1 and February 15 of 2004.
VOTING VIA THE INTERNET OR BY TELEPHONE
Provision has been made for you to vote your shares of common stock via the
Internet or by telephone. You may also vote your shares by mail. Please see the
proxy card or voting instruction form accompanying this proxy statement for
specific instructions on how to cast your vote by any of these methods.
Votes submitted via the Internet or by telephone must be received by 12:00
midnight, New York City time, on May 12, 2003. Submitting your vote via the
Internet or by telephone will not affect your right to vote in person should you
decide to attend the annual meeting.
The Internet and telephone voting procedures are designed to authenticate
stockholders' identities, to allow stockholders to give their voting
instructions and to confirm that stockholders' instructions have been recorded
properly. We have been advised that the Internet and telephone voting procedures
that have been made available to you are consistent with the requirements of
applicable law. Stockholders voting via the Internet and by telephone should
understand that there may be costs associated with voting in these manners, such
as usage charges from Internet access providers and telephone companies, that
must be borne by the stockholder.
ADDITIONAL INFORMATION
Quest Diagnostics files annual, quarterly and special reports, proxy
statements and other information with the Securities and Exchange Commission.
You may read and copy any reports, statements or other information that we file
at the Securities and Exchange Commission's public reference rooms in
Washington, D.C., New York, New York and Chicago, Illinois. Please call the
Securities and Exchange Commission at 1-800-SEC-0330 for further information on
the public reference rooms. Our Securities and Exchange Commission filings are
also available to the public from commercial document retrieval services and at
the Internet web site maintained by the Securities and Exchange Commission at
http://www.sec.gov. Reports, proxy statements and other Information should also
be available for inspection at the offices of the New York Stock Exchange.
The annual report to stockholders is being sent in connection with this
proxy statement and includes (other than the signature page and the exhibits
thereto) the entire annual report on Form 10-K for the year ended December 31,
2002. UPON REQUEST, THE COMPANY WILL PROVIDE WITHOUT CHARGE A COPY OF ITS ANNUAL
REPORT ON FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 2002 TO EACH RECORD OR
BENEFICIAL OWNER OF ITS COMMON STOCK. Such requests should be directed to:
Quest Diagnostics Incorporated
One Malcolm Avenue
Teterboro, New Jersey 07608
Attn: Investor Relations
(201) 393-5000
By: Order of the Board of Directors
Leo C. Farrenkopf, Jr.
Vice President and Secretary
22 Quest Diagnostics Incorporated 2003 Proxy Statement
APPENDIX A
QUEST DIAGNOSTICS INCORPORATED
SENIOR MANAGEMENT INCENTIVE PLAN
SECTION 1. PURPOSES
The purpose of the Quest Diagnostics Incorporated Senior Management
Incentive Plan (the 'Plan') is to attract, retain and motivate selected
employees of Quest Diagnostics Incorporated (the 'the Company') and its
subsidiaries and affiliates who are executive officers or officers of the
Company in order to promote the Company's long-term growth and profitability. It
is also intended that all Bonuses (as defined in Section 5(a)) payable under the
Plan be considered 'performance-based compensation' within the meaning of
Section 162(m)(4)(C) of the Internal Revenue Code of 1986, as amended (the
'Code'), and the regulations thereunder, and the Plan shall be interpreted
accordingly.
SECTION 2. ADMINISTRATION
(a) Subject to Section 2(d), the Plan shall be administered by a committee
(the 'Committee') appointed by the Board of Directors of the Company (the
'Board'), whose members shall serve at the pleasure of the Board. The Committee
at all times shall be composed of at least two directors of the Company, each of
whom is an 'outside director' within the meaning of Section 162(m) of the Code
and Treasury Regulation Section 1.162-27(e)(3) and a 'non-employee director'
within the meaning of Rule 16b-3 promulgated under the Securities Exchange Act
of 1934, as amended. Unless otherwise determined by the Board, the Committee
shall be the Compensation and Nominating Committee of the Board.
(b) The Committee shall have complete control over the administration of the
Plan, and shall have the authority in its sole and absolute discretion to: (i)
exercise all of the powers granted to it under the Plan; (ii) construe,
interpret and implement the Plan; (iii) prescribe, amend and rescind rules and
regulations relating to the Plan, including rules and regulations governing its
own operations; (iv) make all determinations necessary or advisable in
administering the Plan (including, without limitation, calculating the size of
the Bonus payable to each Participant (as defined in Section 4(a))); (v) correct
any defect, supply any omission and reconcile any inconsistency in the Plan; and
(vi) amend the Plan to reflect changes in or interpretations of applicable law,
rules or regulations.
(c) The determination of the Committee on all matters relating to the Plan
and any amounts payable thereunder shall be final, binding and conclusive on all
parties.
(d) Notwithstanding anything to the contrary contained herein, the Committee
may allocate among its members and may delegate some or all of its authority or
administrative responsibility to such individual or individuals who are not
members of the Committee as it shall deem necessary or appropriate; provided,
however, the Committee may not delegate any of its authority or administrative
responsibility hereunder (and no such attempted delegation shall be effective)
if such delegation would cause any Bonus payable under the Plan not to be
considered performance-based compensation within the meaning of Section
162(m)(4)(C) of the Code.
(e) No member of the Board or the Committee or any employee of the Company
or any of its subsidiaries or affiliates (each such person a 'Covered Person')
shall have any liability to any person (including, without limitation, any
Participant) for any action taken or omitted to be taken or any determination
made in good faith with respect to the Plan or any Bonus. Each Covered Person
shall be indemnified and held harmless by the Company against and from any loss,
cost, liability or expense (including attorneys' fees) that may be imposed upon
or incurred by such Covered Person in connection with or resulting from any
action, suit or proceeding to which such Covered Person may be a party or in
which such Covered Person may be involved by reason of any action taken or
omitted to be taken under the Plan and against and from any and all
Quest Diagnostics Incorporated 2003 Proxy Statement 23
amounts paid by such Covered Person, with the Company's approval, in settlement
thereof, or paid by such Covered Person in satisfaction of any judgment in any
such action, suit or proceeding against such Covered Person, provided that the
Company shall have the right, at its own expense, to assume and defend any such
action, suit or proceeding and, once the Company gives notice of its intent to
assume the defense, the Company shall have sole control over such defense with
counsel of the Company's choice. The foregoing right of indemnification shall
not be available to a Covered Person to the extent that a court of competent
jurisdiction in a final judgment or other final adjudication, in either case,
not subject to further appeal, determines that the acts or omissions of such
Covered Person giving rise to the indemnification claim resulted from such
Covered Person's bad faith, fraud or willful criminal act or omission. The
foregoing right of indemnification shall not be exclusive of any other rights of
indemnification to which Covered Persons may be entitled under the Company's
Restated Certificate of Incorporation or Amended and Restated Bylaws, as a
matter of law, or otherwise, or any other power that the Company may have to
indemnify such persons or hold them harmless.
SECTION 3. PERFORMANCE PERIOD
The Plan shall operate for successive periods (each a 'Performance Period').
The first Performance Period shall commence on January 1, 2003 and shall
terminate on December 31, 2003. Thereafter, each Performance Period shall be one
full fiscal year and/or portions of fiscal years of the Company, as determined
by the Committee.
SECTION 4. PARTICIPATION
(a) Prior to the 90th day after the beginning of a Performance Period, or
otherwise in a manner not inconsistent with Treasury Regulation Section
1.162-27(e)(2) (the 'Participation Date'), the Committee shall designate those
individuals who shall participate in the Plan for the Performance Period (the
'Participants'). Notwithstanding the foregoing, in any Participation Period
there shall not be more than ten Participants.
(b) Except as provided below, the Committee shall have the authority at any
time (i) during the Performance Period to remove Participants from the Plan for
that Performance Period and (ii) prior to the Participation Date (or later in a
manner consistent with the requirements of Section 162(m) of the Code) to add
Participants to the Plan for a particular Performance Period.
SECTION 5. BONUS AMOUNTS
(a) Each Participant shall be paid a bonus amount equal to 1% of the
Company's 'Earnings' (as defined in Section 5(c)) with respect to each
Performance Period. Notwithstanding anything to the contrary in this Plan, the
Committee may, in its sole discretion, reduce (but not increase) the bonus
amount for any Participant for a particular Performance Period at any time prior
to the payment of bonuses to Participants pursuant to Section 6 (a Participant's
bonus amount for each Performance Period, as so reduced, the 'Bonus').
(b) If a Participant's employment with the Company terminates for any reason
before the end of a Performance Period, the Committee shall have the discretion
to determine whether (i) such Participant shall be entitled to any Bonus at all,
(ii) such Participant's Bonus shall be reduced on a pro-rata basis to reflect
the portion of such Performance Period the Participant was employed by the
Company or (iii) to make such other arrangements as the Committee deems
appropriate in connection with the termination of such Participant's employment.
(c) For purposes of this Section 5, 'Earnings' means the Company's income
before taxes and extraordinary gains and losses as reported in its audited
consolidated financial statements for the relevant fiscal year, adjusted to
eliminate, with respect to such fiscal year, the following items included in
such audited statements: (i) losses related to the impairment of goodwill and
other intangible assets; (ii) restructuring and other unusual non-recurring
items separately reported; (iii) gains or losses that are the direct result of a
major casualty or natural disaster; (iv) losses resulting
24 Quest Diagnostics Incorporated 2003 Proxy Statement
from any newly-enacted law, regulation or judicial order; and (v) the cumulative
effect of accounting changes. Following the completion of each Performance
Period, the Committee shall certify in writing the Company's Earnings for such
Performance Period.
SECTION 6. PAYMENT OF BONUS AMOUNT; VOLUNTARY DEFERRAL
Each Participant's Bonus shall be payable by such Participant's
Participating Employer (as defined in Section 7(j)), or in the case of a
Participant employed by more than one Participating Employer, by each such
employer as determined by the Committee. The Bonus shall be payable in the
discretion of the Committee in cash and/or an equity-based award of equivalent
value. To the extent that equity-based awards are granted in lieu of cash they
will be granted under another plan maintained by the Company. The cash value of
such awards shall be determined by the Committee provided that in determining
the number of Company restricted or deferred stock units payable in cash or
shares of the Company's common stock, restricted shares of the Company's common
stock or unrestricted shares of the Company's common stock that is equivalent to
a dollar amount, that dollar amount shall be divided by the average of the high
and low sales prices of the Company's common stock on the date of grant by the
Committee (with fractional shares being rounded to the nearest whole share). The
cash portion of the Bonus shall be paid at such time as bonuses are generally
paid by the Participating Employer(s) for the relevant fiscal year. Subject to
approval by the Committee and to any requirements imposed by the Committee in
connection with such approval, each Participant may be entitled to defer
receipt, under the terms and conditions of any applicable deferred compensation
plan of the Company, of part or all of any payments otherwise due under this
Plan. Any equity-based award shall be subject to such terms and conditions
(including vesting requirements) as the Committee and the administrative
committee of the plan under which such equity-based award is granted may
determine.
SECTION 7. GENERAL PROVISIONS
(a) Amendment, Termination, etc. The Board reserves the right at any time
and from time to time to modify, alter, amend, suspend, discontinue or terminate
the Plan, including in any manner that adversely affects the rights of
Participants. No Participant shall have any rights to payment of any amounts
under this Plan unless and until the Committee determines the amount of such
Participant's Bonus, that such Bonus shall be paid and the method and timing of
its payment. No amendment that would require stockholder approval in order for
Bonuses paid pursuant to the Plan to constitute performance-based compensation
within the meaning of Section 162(m)(4)(C) of the Code shall be effective
without the approval of the stockholders of the Company as required by Section
162(m) of the Code and the regulations thereunder.
(b) Nonassignability. No rights of any Participant (or of any beneficiary
pursuant to this Section 7(b)) under the Plan may be sold, exchanged,
transferred, assigned, pledged, hypothecated or otherwise disposed of (including
through the use of any cash-settled instrument), either voluntarily or
involuntarily by operation of law, other than by will or by the laws of descent
and distribution. Any sale, exchange, transfer, assignment, pledge,
hypothecation or other disposition in violation of the provisions of this
Section 7(b) shall be void. In the event of a Participant's death, any amounts
payable under the Plan shall be paid in accordance with the Plan to a
Participant's estate. A Participant's estate shall have no rights under the Plan
to receive such amounts, if any, as may be payable under this Section 7(b), and
all of the terms of this Plan shall be binding upon any such Participant's
estate.
(c) Plan Creates No Employment Rights. Nothing in the Plan shall confer upon
any Participant the right to continue in the employ of the Company for the
Performance Period or thereafter or affect any right which the Company may have
to terminate such employment.
(d) Dispute Resolution. Any dispute, controversy or claim between the
Company and any Participant arising out of or relating to or concerning the
provisions of the Plan shall be heard
Quest Diagnostics Incorporated 2003 Proxy Statement 25
only in a United States federal court or a New Jersey state court having subject
matter jurisdiction located in New Jersey.
(e) Governing Law. All Rights and Obligations under the Plan shall be
governed by and construed in accordance with the laws of the State of New
Jersey, without regard to principles of conflict of laws.
(f) Tax Withholding. In connection with any payments to a Participant or
other event under the Plan that gives rise to a federal, state, local or other
tax withholding obligation relating to the Plan (including, without limitation,
FICA tax), (i) the Company and any Participating Employer may deduct or withhold
(or cause to be deducted or withheld) from any payment or distribution to such
Participant whether or not pursuant to the Plan or (ii) the Committee shall be
entitled to require that such Participant remit cash (through payroll deduction
or otherwise), in each case in an amount sufficient in the opinion of the
Company to satisfy such withholding obligation.
(g) Right of Offset. The Company and any Participating Employer shall have
the right to offset against the obligation to pay a Bonus to any Participant,
any outstanding amounts (including, without limitation, travel and entertainment
or advance account balances, loans or amounts repayable to it pursuant to tax
equalization, housing, automobile or other employee programs) such Participant
then owes to it.
(h) Severability; Entire Agreement. If any of the provisions of this Plan is
finally held to be invalid, illegal or unenforceable (whether in whole or in
part), such provision shall be deemed modified to the extent, but only to the
extent, of such invalidity, illegality or unenforceability and the remaining
provisions shall not be affected thereby. This Plan shall not supersede any
other agreement, written or oral, pertaining to the matters covered herein,
except to the extent of any inconsistency between this Plan and any prior
agreement, in which case this Plan shall prevail.
(i) No Third Party Beneficiaries. The Plan shall not confer on any person
other than the Company and any Participant any rights or remedies hereunder.
(j) Participating Employers. Each subsidiary or affiliate of the Company
that employs a Participant shall adopt this Plan by executing Schedule A (a
'Participating Employer'). Except for purposes of determining the amount of each
Participant's Bonus, this Plan shall be treated as a separate plan maintained by
each Participating Employer and the obligation to pay the Bonus to each
Participant shall be the sole liability of the Participating Employer(s) by
which the Participant is employed, and neither the Company nor any other
Participating Employer shall have any liability with respect to such amounts.
(k) Successors and Assigns. The terms of this Plan shall be binding upon and
inure to the benefit of the Company, each Participating Employer and their
successors and assigns and each permitted successor or assign of each
Participant as provided in Section 7(b).
(l) Plan Headings. The headings in this Plan are for the purpose of
convenience only and are not intended to define or limit the construction of the
provisions hereof.
(m) Construction. In the construction of this Plan, the singular shall
include the plural, and vice versa, in all cases where such meanings would be
appropriate. Nothing in this Plan shall preclude or limit the ability of the
Company, its subsidiaries and affiliates to pay any compensation to a
Participant under any other plan or compensatory arrangement whether or not in
effect on the date this Plan was adopted.
(n) Plan Subject to Stockholder Approval. The Plan is adopted subject to the
approval of the stockholders of the Company at the Company's 2003 Annual Meeting
in accordance with Section 162(m)(4)(C) of the Code and Treasury Regulation
Section 1.162-27(e)(4), and no Bonus shall be payable hereunder absent such
stockholder approval.
26 Quest Diagnostics Incorporated 2003 Proxy Statement
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MI1097
Appendix 1
QUEST DIAGNOSTICS INCORPORATED
Proxy for Annual Meeting of Stockholders - May 13, 2003
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
OF QUEST DIAGNOSTICS INCORPORATED
The undersigned hereby appoints Kenneth W. Freeman, Michael E. Prevoznik and Leo
C. Farrenkopf, Jr., and each of them, proxies for the undersigned, with full
power of substitution and revocation, to vote all shares of the Quest
Diagnostics Incorporated Common Stock, par value $.01 per share, which the
undersigned is entitled to vote, with all powers the undersigned would possess
if personally present at the Annual Meeting of Stockholders of Quest Diagnostics
Incorporated, to be held on Tuesday, May 13, 2003 at 10:30 a.m., local time, in
New York, New York, and at any adjournments or postponements thereof. The
undersigned hereby acknowledges receipt of the Notice of Annual Meeting of
Stockholders and accompanying Proxy Statement and the Annual Report to
Stockholders and hereby instructs said proxies to vote said shares as indicated
herein. In their discretion, the proxies are authorized to vote upon such other
business as may properly come before the Annual Meeting.
A majority of the proxies present and acting at the Annual Meeting in
person or by substitute (or, if only one shall be so present, then that one)
shall have and may exercise all of the power and authority of said proxies
hereunder. The undersigned hereby revokes any proxy previously given.
PLEASE COMPLETE, DATE AND SIGN THIS PROXY ON THE REVERSE
SIDE AND RETURN IT IN THE ENCLOSED, POSTAGE-PAID ENVELOPE, TO
QUEST DIAGNOSTICS INCORPORATED
c/o Computershare Investor Services
P.O. Box 2702
Chicago, Illinois 60690-9402
PLEASE INDICATE YOUR VOTE BY AN "X" IN THE APPROPRIATE BOX
ON THE REVERSE SIDE
This proxy, if properly executed, will be voted in the manner directed
by the undersigned stockholders. If no direction is made, this proxy will be
voted, FOR the election of the Board's nominees, FOR ratification of the
selection of the independent public accountants, and FOR approval of the Senior
Management Incentive Plan.
Internet and Telephone Voting Instructions
NOW YOU CAN VOTE YOUR SHARES BY TELEPHONE OR INTERNET!
QUICK * EASY * IMMEDIATE * AVAILABLE 24 HOURS A DAY * 7 DAYS A WEEK
QUEST DIAGNOSTICS INCORPORATED encourages you to take advantage of the new and
convenient ways to vote your shares. If voting by proxy, you may vote by mail,
or choose one of the two methods described below. Your telephone or Internet
vote authorizes the named proxies to vote your shares in the same manner as if
you marked, signed, and returned your proxy card. To vote by telephone or
Internet, read the accompanying proxy statement and then follow these easy
steps:
To vote using the Telephone (within U.S. and Canada)
Call toll free 1-866-463-1148 in the United
States or Canada any time on a touch tone
telephone. There is NO CHARGE to you for the
call.
Enter the Holder Account Number (excluding the
letter "C") and Proxy Access Number located
below.
Follow the simple recorded instructions.
Option 1: To vote as the Board of Directors
recommends on ALL proposals: Press 1
When asked, please confirm your vote by
pressing 1.
Option 2: If you choose to vote on EACH
proposal separately, press 0 and follow the
simple recorded instructions.
To vote using the Internet
Go to the following Website:
WWW.COMPUTERSHARE.COM/US/PROXY
--------------------------------------------------------------------------------
Enter the information requested on your
computer screen and follow the simple
instructions.
HOLDER ACCOUNT NUMBER PROXY ACCESS NUMBER
If you vote by telephone or the Internet, DO NOT mail back the proxy card.
Proxies submitted by telephone or the Internet must be received by 12:00
midnight, on May 12, 2003.
THANK YOU FOR VOTING
A. Election of Directors PLEASE REFER TO THE REVERSE SIDE
FOR INTERNET AND TELEPHONE
VOTING INSTRUCTIONS.
The Board of Directors recommends a vote FOR the listed nominees for terms
expiring in 2006.
For Withhold
01 - James F. Flaherty III
02 - Kenneth W. Freeman
03 -Gail R. Wilensky
04 - John B. Ziegler
B. Issues
The Board of Directors recommends a vote FOR the following resolutions.
2. Ratification of the selection of PricewaterhouseCoopers LLP as independent
accountants to audit the financial statements of Quest Diagnostics for the
year ending December 31, 2003. For Against Abstain
3. Approval of Senior Management Incentive Plan. For Against Abstain
Mark this box with an X to discontinue mailing
duplicate Annual Reports. [ ]
Mark this box with an X if you plan to attend the meeting. [ ]
C Authorized Signatures - Sign Here - This section must be completed for your
instructions to be executed.
NOTE: Please sign above exactly as your name appears on this Proxy Card. If
shares are registered in more than one name, the signatures of all such persons
are required. A corporation should sign in its full corporate name by a duly
authorized officer stating his or her title. Trustees, guardians, executors and
administrators should sign in their official capacity giving their full title as
such. If a partnership, please sign in partnership name by authorized person(s).
Signature 1 - Please keep signature within the box. ________________________
Signature 2 - Please keep signature within the box. ________________________
Date (mm/dd/yyyy) ________________________