Quest Diagnostics 2005 Annual Report Download - page 103

QUEST DIAGNOSTICS INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(dollars in thousands unless otherwise indicated)
“1999 EEPP’’) and 1996 (the “1996 EEPP’’). The ELTIP provides for three types of awards: (a) stock options,
(b) stock appreciation rights and (c) incentive stock awards. The ELTIP provides for the grant to eligible
employees of either non-qualified or incentive stock options, or both, to purchase shares of Quest Diagnostics
common stock at no less than the fair market value on the date of grant. The stock options are subject to
forfeiture if employment terminates prior to the end of the prescribed vesting period, as determined by the
Board of Directors. The stock options expire on the date designated by the Board of Directors but in no event
more than seven years from date of grant. Grants of stock appreciation rights allow eligible employees to
receive a payment based on the appreciation of Quest Diagnostics common stock in cash, shares of Quest
Diagnostics common stock or a combination thereof. The stock appreciation rights are granted at an exercise
price at no less than the fair market value of Quest Diagnostics common stock on the date of grant. Stock
appreciation rights expire on the date designated by the Board of Directors but in no event more than seven
years from date of grant. No stock appreciation rights have been granted under the ELTIP or the 1999 EEPP.
Under the incentive stock provisions of the plan, the ELTIP allows eligible employees to receive awards of
shares, or the right to receive shares, of Quest Diagnostics common stock, the equivalent value in cash or a
combination thereof. These shares are generally earned on achievement of financial performance goals and are
subject to forfeiture if employment terminates prior to the end of the prescribed vesting period, which ranges
primarily from three to four years. The fair market value of the shares awarded is recorded as unearned
compensation. The amount of unearned compensation is subject to adjustment based upon changes in earnings
estimates, if any, during the initial year of grant and is amortized to compensation expense over the prescribed
vesting period. Key executive, managerial and technical employees are eligible to participate in the ELTIP. The
provisions of the 1999 EEPP and the 1996 EEPP were similar to those outlined above for the ELTIP. Certain
options granted under the 1999 EEPP and the 1996 EEPP remain outstanding.
The ELTIP increased the maximum number of shares of Quest Diagnostics common stock that may be
optioned or granted to 48 million shares, after giving effect for the Company’s two-for-one stock split effected
on June 20, 2005 (see Note 2). In addition, any remaining shares under the 1996 EEPP are available for
issuance under the ELTIP.
In 2005, the Company established the Amended and Restated Director Long-Term Incentive Plan (the
“DLTIP’’), to replace the Company’s prior plan established in 1998. The DLTIP provides for the grant to non-
employee directors of non-qualified stock options to purchase shares of Quest Diagnostics common stock at no
less than the fair market value on the date of grant and incentive stock awards. The incentive stock awards are
generally earned on achievement of certain performance goals. The maximum number of shares that may be
issued under the DLTIP is 2 million shares, after giving effect for the Company’s two-for-one stock split
effected on June 20, 2005 (see Note 2). The stock options expire seven years from date of grant and generally
vest over three years. During 2005, 2004 and 2003, grants under the DLTIP totaled 110, 180 and 188 thousand
shares, respectively.
Transactions under the stock option plans were as follows (options in thousands, except per share amounts):
2005 2004 2003
Options outstanding, beginning of year ................................ 16,752 20,480 17,844
Options granted...................................................... 2,777 4,428 6,352
Options exercised .................................................... (3,990) (7,042) (3,232)
Options terminated ................................................... (491) (1,114) (484)
Options outstanding, end of year ..................................... 15,048 16,752 20,480
Exercisable .......................................................... 8,660 8,516 11,412
Weighted average exercise price:
Options granted ................................................... $ 49.66 $ 40.85 $ 26.67
Options exercised .................................................. 25.87 16.06 10.15
Options terminated ................................................ 24.48 29.65 29.16
Options outstanding, end of year ................................... 34.33 29.49 22.43
Exercisable, end of year ........................................... 28.81 23.95 17.01
Weighted average fair value of options at grant date ................... $ 14.15 $ 17.23 $ 11.61
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