Quest Diagnostics 2006 Annual Report Download - page 116

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 December 31, 2006 and 2005, liabilities included $27 million and $28 million, respectively, 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, 2006 are as follows:
Year ending December 31,
2007 . . . ................................................................................. $154,046
2008 . . . ................................................................................. 127,787
2009 . . . ................................................................................. 104,911
2010 . . . ................................................................................. 76,971
2011 . . . ................................................................................. 52,466
2012 and thereafter. ...................................................................... 139,991
Minimum lease payments. . ............................................................... 656,172
Noncancelable sub-lease income .......................................................... (102)
Net minimum lease payments............................................................. $656,070
Operating lease rental expense for 2006, 2005 and 2004 aggregated $153 million, $140 million and $133
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 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 Company believes that the leasehold
improvements on the leased properties are significantly more valuable than the related lease obligations. Based on
the circumstances above, no liability has been recorded for any potential contingent obligations related to the land
leases.
The Company has certain noncancelable commitments to purchase products or services from various
suppliers, mainly for telecommunications and standing orders to purchase reagents and other laboratory supplies.
At December 31, 2006, the approximate total future purchase commitments are $72 million, of which $31 million
are expected to be incurred in 2007.
In support of its risk management program, the Company has standby letters of credit issued under its letter
of credit lines to ensure its performance or payment to third parties, which amounted to $67 million at December
31, 2006. The letters of credit, which are renewed annually, primarily represent collateral for current and future
automobile liability and workers’ compensation loss payments.
The Company has in the past entered into several settlement agreements with various government and
private payers relating to industry-wide billing and marketing practices that had been substantially discontinued.
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QUEST DIAGNOSTICS INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(dollars in thousands unless otherwise indicated)