Quest Diagnostics 2005 Annual Report Download - page 105

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QUEST DIAGNOSTICS INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(dollars in thousands unless otherwise indicated)
Company and are subject to any claims of the Company’s creditors. The Company’s expense for matching
contributions to this plan were $0.8 million, $0.7 million and $0.4 million for 2005, 2004 and 2003,
respectively.
13. RELATED PARTY TRANSACTIONS
At December 31, 2005, GlaxoSmithKline plc (“GSK’’), the result of the merger of Glaxo Wellcome and
SmithKline Beecham in December 2000, beneficially owned approximately 18% of the outstanding shares of
Quest Diagnostics common stock. During 2004, the Company repurchased approximately 7.8 million shares of
its common stock for approximately $355 million from GSK.
GSK has a long-term contractual relationship with Quest Diagnostics under which Quest Diagnostics is the
primary provider of testing to support GSK’s clinical trials testing requirements worldwide (the “Clinical Trials
Agreements’’). Net revenues, primarily derived under the Clinical Trials Agreements were $68,806, $73,894 and
$50,060 for 2005, 2004 and 2003, respectively.
In addition, under the SBCL acquisition agreements, SmithKline Beecham has agreed to indemnify Quest
Diagnostics, on an after tax basis, against certain matters primarily related to taxes and billing and professional
liability claims.
At both December 31, 2005 and 2004, accounts payable and accrued expenses included $28 million due to
SmithKline Beecham, primarily related to tax benefits associated with indemnifiable matters.
14. COMMITMENTS AND CONTINGENCIES
Minimum rental commitments under noncancelable operating leases, primarily real estate, in effect at
December 31, 2005 are as follows:
Year ending December 31,
2006 .................................................................................. $134,406
2007 .................................................................................. 105,705
2008 .................................................................................. 82,352
2009 .................................................................................. 67,499
2010 .................................................................................. 50,222
2011 and thereafter .................................................................... 146,842
Minimum lease payments ............................................................... 587,026
Noncancelable sub-lease income......................................................... (94)
Net minimum lease payments ........................................................... $586,932
Operating lease rental expense for 2005, 2004 and 2003 aggregated $140 million, $133 million and $121
million, respectively. Rent expense associated with operating leases that include scheduled rent increases and
tenant incentives, such as rent holidays, is recorded on a straight-line basis over the term of the lease.
The Company is subject to contingent obligations under certain leases and other instruments incurred in
connection with real estate activities and other operations associated with LabOne and certain of its predecessor
companies. The contingent obligations arise out of certain land leases with two Hawaiian trusts relating to land
in Waikiki upon which a hotel is built and a land lease for a parking garage in Reno, Nevada. While its title
and interest to the subject leases have been transferred to third parties, the land owners have not released the
original obligors, including predecessors of LabOne, from their obligations under the leases. In early February
2006, the subtenant of the hotel in Waikiki filed for Chapter 11 bankruptcy protection in Honolulu. The
subtenant has publicly indicated that the filing will have no impact on the operations of the hotel and therefore,
the Company believes the subtenant will continue to pay the rent and real estate taxes on the subject leased
property. Should the current subtenants of the leased properties fail to pay their rent and real estate taxes for
the subject leased property, the default could trigger liability for LabOne as well as other sublessors. The rent
payments under the Hawaiian land leases are subject to market value adjustments every ten years beginning in
2007. Given that the Hawaiian land leases are subject to market value adjustments, the total contingent
obligations under such leases cannot be precisely estimated, but are likely to total several hundred million
dollars. The contingent obligation of the Nevada lease is estimated to be approximately $6 million. The
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