Quest Diagnostics 2007 Annual Report Download - page 99

reissued 4.2 million shares in connection with employee benefit plans. For the year ended December 31, 2005,
the Company repurchased 7.8 million shares of its common stock at an average price of $49.98 per share for
$390 million, and reissued 5.6 million shares and 4.3 million shares, respectively, in connection with the
conversion of its Debentures and for employee benefit plans. At December 31, 2007, $104 million of the share
repurchase authorization remained available.
13. STOCK OWNERSHIP AND COMPENSATION PLANS
Employee and Non-employee Directors Stock Ownership Programs
In 2005, the Company established the ELTIP to replace the Company’s prior Employee Equity Participation
Programs established in 1999 (the “1999 EEPP”) and 1996, as amended (the “1996 EEPP”). The ELTIP provides
for three types of awards: (a) stock options, (b) stock appreciation rights and (c) 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 a price of 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 for those granted subsequent to
January 1, 2005. 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 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, as determined by the Board of Directors. The actual amount of
performance share awards is based on the Company’s earnings per share growth for the performance period
compared to that of a peer group of companies. 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. 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 stock awards. The stock awards are generally earned on
achievement of certain performance goals specified in the awards. The maximum number of shares that may be
issued under the DLTIP is 2 million shares. The stock options expire seven years from date of grant and
generally become exercisable in three equal annual installments beginning on the first anniversary date of the
grant of the option regardless of whether the optionee remains a director of the Company. During 2007, 2006 and
2005, grants under the DLTIP totaled 81, 95 and 110 thousand shares, respectively.
In general, the Company’s practice has been to issue shares related to its stock-based compensation program
from shares of its common stock held in treasury. See Note 12 for further information regarding the Company’s
share repurchase program.
The fair value of each stock option award granted was estimated on the date of grant using a lattice-based
option valuation model. The expected volatility under the lattice-based option-valuation model was based on the
current and the historical implied volatilities from traded options of the Company’s stock. The dividend yield was
based on the approved annual dividend rate in effect and current market price of the underlying common stock at
the time of grant. The risk-free interest rate of each stock option granted was based on the U.S. Treasury yield
curve in effect at the time of grant for bonds with maturities ranging from one month to seven years. The
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QUEST DIAGNOSTICS INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(dollars in thousands unless otherwise indicated)