01—Abstract
Summary
Summary of the 10-K/A filed April 30, 1999. Cited figures are marked; the original filing is the authoritative source.
This is Amendment No. 1 to Quest Diagnostics' (DGX) Form 10-K for fiscal 1998, filed April 30, 1999.
It amends only Part III (Items 10 through 13) and contains no financial statements, revenue, earnings, or balance sheet data, so investors should not draw financial conclusions from it. The filing covers the board of directors, executive officers, executive pay, stock ownership, and related-party arrangements. As of February 28, 1999, there were 30,044,753 common shares outstanding and non-affiliate market value of about $636 milliona.
Governance and pay are the main takeaways. The board is split into three classes, and Kenneth W. Freeman serves as Chairman, CEO, and President.
His 1998 compensation was a $500,000b base salary, a $460,000 bonus, and options on 180,000 shares. He also holds an employment agreement through December 31, 1999, with generous severance and change-of-control protections. Many executive options fully vest when the pending purchase of SmithKline Beecham Clinical Laboratories closes, which links a meaningful part of management's equity to completion of that transaction.
Ownership is concentrated among institutional holders. Wellington Management (10.3%c), FMR Corp. (10.2%), and Mellon Bank (9.4%) are the largest holders. All directors and executive officers together hold about 2.9%.
Corning Incorporated, which spun off Quest in 1996, owns all 1,000 outstanding preferred shares and continues to indemnify Quest for certain pre-1997 government and private billing claims, subject to limits and arbitration provisions. Corning also remains party to a tax sharing agreement covering 1996 and prior years.
02—Key points
Key Highlights
- Filing scope: Amendment No. 1 amends only Part III (Items 10-13) of the FY1998 10-K. It contains no financial statements or operating results.
- Share base and float: 30,044,753 common shares outstanding as of February 28, 1999; non-affiliate market value of approximately $636 million.
- CEO compensation: Kenneth W. Freeman earned a $500,000 base salary and a $460,000 bonus in 1998, plus a $926,316 restricted stock award and options on 180,000 shares at $16.06. His employment agreement runs through December 31, 1999.
- Deal-linked vesting: Most unvested executive options vest upon closing of the purchase of SmithKline Beecham Clinical Laboratories, tying management incentives to that transaction.
- Concentrated ownership: Wellington (10.3%), FMR Corp. (10.2%), and Mellon Bank (9.4%) are the largest holders. Directors and executive officers as a group own about 2.9%.
- Corning ties: Corning owns all 1,000 preferred shares, pays preferred dividends of about $117,500 a year, and provides indemnification for certain pre-1997 billing claims, with Quest receiving about $15 million from Corning in 1998 for indemnified claims.
- Change-of-control protections: Freeman's agreement defines change of control to include SmithKline Beecham acquiring more than 29.5% or Premier, Inc. acquiring more than 33 1/3% of voting stock, and other executives have 2x or 3x salary and bonus severance depending on timing.
03—Questions
Frequently Asked Questions
Does this amendment include Quest Diagnostics' 1998 financial results?
No. Amendment No. 1 replaces only Part III of the 10-K (directors, executive compensation, security ownership, and related transactions). Financial statements and results of operations are not included, so readers need the original 1998 10-K for revenue, earnings, and balance sheet data.
How is Kenneth Freeman, the CEO, paid?
For 1998, Freeman received a $500,000 base salary, a $460,000 annual bonus, and a $926,316 restricted stock award tied to 1998 performance, which vests in three annual installments starting February 2000. He was also granted options on 180,000 shares at $16.06, exercisable in installments through 2001. His employment agreement guarantees a minimum $500,000 salary and provides severance of three times salary plus target bonus if he is terminated without cause or for good reason.
Who are the major shareholders and how much do insiders own?
The largest outside holders are Wellington Management (3,096,900 shares, 10.3%), FMR Corp. (3,057,700 shares, 10.2%), and Mellon Bank (2,836,588 shares, 9.4%). All directors, nominees, and executive officers as a group beneficially own 901,396 shares, or 2.9%, including options exercisable within 60 days. Freeman individually holds 353,891 shares (1.2%).
What does the pending SmithKline Beecham Clinical Laboratories transaction mean for executives?
The filing says most of the executives' unvested stock options will fully vest when Quest closes its purchase of SmithKline Beecham Clinical Laboratories, except for certain options held by Freeman, Van Oort, and Chambers. The acquisition is therefore a significant event for executive equity, and the filing also references SmithKline Beecham's 29.5% voting-stock threshold within the change-of-control definition in Freeman's agreement.
What financial ties remain between Quest Diagnostics and Corning?
Corning owns all 1,000 outstanding preferred shares, and Quest paid about $117,500 in preferred dividends to Corning in 1998. Corning agreed to indemnify Quest for certain government fraud and billing claims pending as of December 31, 1996, and for 50% of private overbilling settlements above $42 million through 2001, capped at $25 million. Quest also received about $15 million from Corning in 1998 for indemnified claims. Under the tax sharing agreement, Corning generally pays the consolidated federal income taxes for 1996 and prior years.
04—Continue