Quest Diagnostics 2006 Annual Report Download - page 115

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In the fourth quarter of 2006, the Company revised its estimate of the number of performance share units
expected to be earned at the end of the performance periods as a result of revising its estimates of projected
performance and reduced the number of performance share units by 0.6 million.
As of December 31, 2006, there was $12 million of unrecognized stock-based compensation cost related to
nonvested incentive stock awards, which is expected to be recognized over a weighted average period of 1.9
years. Total fair value of shares vested was $2.1 million and less than $0.1 million for the year ended December
31, 2006 and 2005, respectively. The amount of unrecognized stock-based compensation cost is subject to change
based on revisions, if any, to management’s best estimates of the achievement of the performance goals specified
in such awards and the resulting number of shares that will be earned at the end of the performance periods.
For the years ended December 31, 2006, 2005 and 2004, stock-based compensation expense totaled $55
million, $2.0 million and $1.4 million, respectively. Income tax benefits related to stock-based compensation
expense totaled $22 million for the year ended December 31, 2006. Income tax benefits related to stock-based
compensation for 2005 and 2004 were not material.
Employee Stock Purchase Plan
Under the Company’s Employee Stock Purchase Plan (“ESPP”), which was approved by the Company’s
shareholders at the 2006 Annual Meeting of Shareholders, substantially all employees can elect to have up to
10% of their annual wages withheld to purchase Quest Diagnostics common stock. The purchase price of the
stock is 85% of the market price of the Company’s common stock on the last business day of each calendar
month. Under the ESPP, the maximum number of shares of Quest Diagnostics common stock which may be
purchased by eligible employees is 5 million. Approximately 474, 409 and 460 thousand shares of common stock
were purchased by eligible employees in 2006, 2005 and 2004, respectively.
Defined Contribution Plan
The Company maintains a qualified defined contribution plan covering substantially all of its employees, and
matches employee contributions up to a maximum of 6%. The Company’s expense for contributions to its
defined contribution plan aggregated $69 million, $64 million and $62 million for 2006, 2005 and 2004,
respectively.
Supplemental Deferred Compensation Plan
The Company’s supplemental deferred compensation plan is an unfunded, non-qualified plan that provides
for certain management and highly compensated employees to defer up to 50% of their eligible compensation in
excess of their defined contribution plan limits. In addition, certain members of senior management have an
additional opportunity to defer up to 95% of their variable incentive compensation. The compensation deferred
under this plan, together with Company matching amounts, are credited with earnings or losses measured by the
mirrored rate of return on investments elected by plan participants. Each plan participant is fully vested in all
deferred compensation, Company match and earnings credited to their account. Although the Company is
currently contributing all participant deferrals and matching amounts to a trust, the funds in the trust, totaling
$30.0 million and $25.7 million at December 31, 2006 and 2005, respectively, are general assets of the Company
and are subject to any claims of the Company’s creditors. The Company’s expense for matching contributions to
this plan were approximately $1 million for 2006, 2005 and 2004.
13. RELATED PARTY TRANSACTIONS
At December 31, 2006, GlaxoSmithKline plc (“GSK”), the result of the merger of Glaxo Wellcome and
SmithKline Beecham in December 2000, beneficially owned approximately 19% of the outstanding shares of
Quest Diagnostics common stock.
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 $87 million, $69 million and $74 million for 2006, 2005 and 2004, respectively.
F-28
QUEST DIAGNOSTICS INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(dollars in thousands unless otherwise indicated)