Philips 2006 Annual Report Download - page 215

Philips Annual Report 2006 215
(“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 that it believes that the defect rate
will be substantially smaller than anticipated by the customer and
disputes its liability on that basis, as well as on the basis of the limited
warranty provision the customer has invoked. Philips Semiconductors
also believes that, even if the customer were to be successful in the
arbitration, Philips Semiconductors would not be liable to the extent
of the damages claimed by the customer. Philips Semiconductors has
also stated it intends to defend the case vigorously.
In order to recover for any potential amount of damages that it may
be held liable for, Philips Semiconductors in 2006 initiated arbitration
proceedings against the supplier of molding products used in the
integrated circuits that allegedly caused the failures in the customer’s
products. This arbitration has been stayed temporarily.
Philips does not believe it can reasonably estimate the amount of
possible loss in connection with the claims against Philips Semiconductors.
Philips, however, does not expect the outcome to have a material
adverse effect on its fi nancial position, but cannot predict the effect
of the ultimate loss from this matter on the operating results in any
particular fi nancial period.
LG.Philips LCD
On December 11, 2006, LG.Philips LCD, an equity-accounted investee
in which Philips holds 32.9% of the common stock, announced that
offi cials from the Korean Fair Trade Commission visited the offi ces of
LG.Philips LCD and that it had received a subpoena from the United
States Department of Justice and similar notice from the Japanese Fair
Trade Commission in connection with inquiries by those regulators
into possible anticompetitive conduct in the LCD industry.
Subsequent to the public announcement of these inquiries certain
Philips group companies were named as defendants in several class
action antitrust complaints fi led in the United States courts, seeking
damages on behalf of purchasers of products incorporating thin-fi lm
transistor liquid crystal display panels, based on alleged anticompetitive
conduct by manufacturers of such panels. The complaints assert claims
under federal antitrust law, as well as various state antitrust and unfair
competition laws.
These matters are in their initial stages and, on the basis of current
knowledge, the Company cannot establish whether a loss is probable
with respect to these actions.
58
Assets received in lieu of cash from the sale of businesses
During 2006 several ownership interests were received in connection
with certain sale and transfer transactions.
At the beginning of June Philips transferred its Optical Pick Up
activities to Arima Devices receiving a 12% interest in Arima
Devices of EUR 8 million.
In the same period, the merger was completed of Philips Mobile Display
Systems with Toppoly Optoelectronics Corporation of Taiwan to
form a new company named TPO. Philips obtained a 17.5% stake in
TPO as a consideration for the transaction valued at EUR 180 million.
In 2005, a 15% ownership interest in TPV and a convertible bond of
EUR 220 million were received in connection with the sale and transfer
of certain activities within the Company’s monitor and fl at TV business.
During 2006, the ownership interest in TPV was diluted to 13.55%.
In 2004, shares in Computer Access Technology Corporation were
sold in two tranches. In March 2004 shares were sold for an amount
of EUR 9 million. In December 2004, the remaining shares were sold
for EUR 8 million of which the proceeds were collected in 2005.
Furthermore, shares in Openwave Systems (EUR 6 million) were
received in connection with the sale of Magic4.
59
Fair value of fi nancial assets and liabilities
The estimated fair value of fi nancial instruments has been determined
by the Company using available market information and appropriate
valuation methods. The estimates presented are not necessarily
indicative
of the amounts that will ultimately be realized by the
Company upon maturity or disposal. The use of different market
assumptions and/or estimation methods may have a material effect
on the estimated fair value amounts.
5858
5959
226 Corporate governance224 Reconciliation of
non-US GAAP information
234 The Philips Group
in the last ten years
236 Investor information