Philips 2006 Annual Report Download - page 159

Philips Annual Report 2006 159
The Company believes that it and its subsidiaries have a substantial
amount of insurance coverage for asbestos product liability. In prior
years, a subsidiary commenced legal proceedings against certain third-
party insurance carriers who had provided various types of product
liability coverage. During 2004 and 2005, agreements were reached
with certain insurance carriers resolving disputes with respect to the
interpretation and available limits of the policies, amounts payable to
the subsidiaries and terms under which future settlements and related
defense costs are reimbursable. Pursuant to these settlements, insurers
paid EUR 34 million in 2006 (EUR 20 million was paid in 2005 and
EUR 19 million was paid in 2004) for asbestos-related defense and
indemnity costs. At December 31, 2006, the subsidiary recorded a
receivable from insurance carriers, for which settlement agreements
have been reached, in the amount of EUR 80 million (EUR 48 million
in 2005 and EUR 24 million in 2004) for the reimbursement of incurred
defense and indemnity costs as well as for probable recoveries of
accrued projected settlement costs with respect to pending and future
claims, which is refl ected in the Company’s consolidated balance sheet.
Insurance recoveries included in pre-tax earnings amounted to EUR
78 million in 2006 (EUR 38 million in 2005 and EUR 44 million in
2004). At December 31, 2006, an additional EUR 23 million, for which
a receivable has not been recorded, is payable to the subsidiary over
the next two years, provided asbestos legislation in a certain form is
not passed by the US Congress by certain dates. The subsidiary has
not recorded a receivable from non-settling insurance carriers. The
subsidiary plans to pursue its litigation against non-settling insurance
carriers and continue settlement discussions with various insurance
carriers in 2007.
Projections of future asbestos costs are subject to numerous variables
and uncertainties that are diffi cult to predict including the number of
claims that might be received, the type and severity of the disease
alleged by each claimant, future settlement and trial results, future
claim dismissal rates, uncertainties surrounding the litigation process
from jurisdiction to jurisdiction, and the impact of potential changes
in legislative or judicial standards. Accordingly, actual claims asserted
against the Company’s subsidiaries and related settlement amounts
may in fact be lower or higher than the amount currently estimated.
As a result of its limited asbestos claims experience and the inherent
uncertainties involved in long-term forecasts, the Company does not
believe it can reasonably forecast indemnity costs that may be incurred
for claims asserted after 2016. The Company intends to continue
to evaluate the subsidiary’s asbestos-related loss exposure and the
adequacy of its reserves periodically in order to identify trends that
may become evident and to assess their impact on the range of liability
that is probable and reasonably estimatable. If actual experience differs
signifi cantly from the assumptions made in forecasting future liabilities,
if the assumptions used to determine the estimate prove to be
erroneous, if the costs of settling claims asserted after 2016 are
signifi cant, or if insurance coverage is ultimately less than anticipated,
the Company’s consolidated fi nancial position and results of
operations could be materially affected.
MedQuist
As announced earlier, MedQuist, in which Philips holds 70.1% of the
common stock and which is consolidated in Philips’ fi nancial
statements, is conducting a review of the company’s billing practices
and related matters.
MedQuist has not been able to complete the audit of its fi scal years
2003, 2004, and 2005, and has postponed the fi ling of its reports
covering the fi scal years 2003 to 2005 and fi rst three quarters of 2006.
As previously announced, the MedQuist board has stated that the
company’s previously issued fi nancial statements included in its annual
report for fi scal year 2002 and its quarterly reports during 2002 and
2003, and all earnings releases and similar communications relating to
those periods, should no longer be relied upon. MedQuist also has
stated that it was unable to assess whether the results of the review
of its billing practices and related litigation would have a material
impact on its reported revenues, results and fi nancial position.
During 2004, various plaintiffs, including current and former customers,
shareholders and transcriptionists, fi led four putative class actions
arising from allegations of, among other things, inappropriate billing by
MedQuist for its transcription services. These litigations all are in
various preliminary stages and are being defended by MedQuist. All of
these actions remain pending and, on the basis of current knowledge,
Philips’ management has concluded that potential future losses cannot
be reliably estimated. A previously fi led putative shareholder derivative
action brought on behalf of MedQuist against, among others, several
MedQuist board members and Philips, was dismissed in September
2005. The plaintiff fi led an appeal from that decision, which appeal
remains pending.
MedQuist also is the subject of an ongoing investigation by the U.S.
Securities and Exchange Commission relating to its billing practices
and has received a subpoena from the U.S. Department of Justice
relating to these practices and other matters.
During 2006, MedQuist continued its previously announced program
of offering accommodations to customers potentially affected by the
billing issues under review. MedQuist’s board authorized the company
to make accommodation offers to certain customers in an aggregate
amount of USD 65 million to resolve any issues concerning prior
billing by MedQuist to those customers. As of December 31, 2006,
MedQuist has paid or credited an aggregate of USD 50.8 million as
an accommodation to those customers, which represents 78% of the
USD 65 million authorized amount. Also, in the third quarter of 2006,
to resolve concerns over billing-related issues, the MedQuist board
authorized the company to establish an accommodation program for
certain other customers that involves the issuance of credits
(“accommodation credits”) that can be used as an offset against the
future purchase of goods and services from MedQuist. MedQuist’s
board authorized the company to make accommodation credit offers
up to an additional USD 8.7 million beyond the original cash payment
program of USD 65 million. As of December 31, 2006, MedQuist has
entered into agreements with certain of its customers who have accepted
accommodation credit offers with a total value of USD 4.1 million to
resolve concerns over billing-related issues under this program.
As of December 31, 2006, Philips has a total accrual of USD 16.4
million with respect to the billing-related issues at MedQuist. It is
not possible to estimate the level and timing of the other costs and
expenses related to these matters. Therefore, no other accruals can
be made presently. As in previous years, MedQuist has continued to
provide fi nancial information to Philips for consolidation purposes.
Key fi nancial information as reported by MedQuist
(preliminary and unaudited)
in millions of USD
2004 2005 2006
Net sales 456 411 370
Operating result 25 (98 ) (10 )
Philips has periodically reviewed the carrying value of its investment
in MedQuist, which amounted to approximately EUR 250 million at
December 31, 2006, as required by applicable accounting standards.
In view of the uncertainties with respect to the impact of the ongoing
review of MedQuist’s billing practices, Philips can give no assurance
that further impairment of intangibles or other assets related to its
investment in MedQuist will not be required in the future.
NXP indemnifi cation
In the context of Philips’ sale of Philips Semiconductors International B.V.
(“Philips Semiconductors”) in September 2006, Philips has indemnifi ed
Philips Semiconductors (now NXP B.V.) for all costs it may incur relating
to a claim initiated by a signifi cant customer of Philips Semiconductors
in a request for arbitration fi led with the ICC International Court of
Arbitration in 2005. The arbitration relates to a product warranty
claim that arose in March 2002 over the reliability of certain of Philips
Semiconductors’ integrated circuit products. The products were
delivered between 1999 and 2002 and were used by the customer in
its products. The claims relate to a molding compound supplied to
Philips Semiconductors by one of its suppliers. The customer asserts
that over time all affected products supplied
by Philips Semiconductors will fail and, as a result, the customer
alleges it will incur very large damages, which it claims from Philips
Semiconductors in the arbitration. Philips Semiconductors has stated
226 Corporate governance224 Reconciliation of
non-US GAAP information
234 The Philips Group
in the last ten years
236 Investor information