Philips 2007 Annual Report Download - page 229

Philips Annual Report 2007 235
of 2007, the total fair value of guarantees was EUR 3 million (2006: EUR
by Philips for the benet of unconsolidated companies and third parties
on the Company’s consolidated nancial position and consolidated
Provided below are disclosures of the more signicant cases:
allegations of personal injury from alleged asbestos exposure.
62
According to the Study, as of September 25, 2006, the estimated cost
of disposing of pending and estimated future claims led through 2016,
excluding future defense and processing costs, totaled USD 507 million
(EUR 396 million). The Study also found that estimates based upon
other calibration metrics, none of which were considered more reliable
than the metrics used, were narrowly grouped within 6 percent in
excess of this projection. Approximately 19 percent of the estimated
liability related to pending claims and approximately 81 percent related
to future claims. As a result, in accordance with IAS 37, the subsidiary
increased its accrual for loss contingencies related to asbestos product
liability to EUR 313 million, which represents the discounted estimate
of indemnity costs for claims asserted through 2016, without taking
account of any potential insurance recoveries. This resulted in a pre-tax
charge to earnings of EUR 252 million for 2006 (a pre-tax charge of
EUR 18 million was recorded in 2005).
During 2007, the subsidiary reviewed its accrual for loss contingencies
for asbestos product liability and concluded that the accrual continued
to represent the subsidiary’s liability for pending and estimated future
claims led through 2016 in accordance with IAS 37. At December 31,
2007, the subsidiary’s recorded accruals for loss contingencies for
asbestos product liability amounted to EUR 261 million (EUR 299 million
at December 31, 2006) which is reected in the Company’s consolidated
balance sheet.
Projections of future asbestos costs are subject to numerous variables
and uncertainties that are dif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.
The Company intends to continue to evaluate the subsidiary’s
asbestos-related loss exposure and the adequacy of its reserves in
order to identify trends that may become evident and to assess their
impact on the range of liability that is probable and reliably estimable.
The estimate of the subsidiary’s liability for pending and unasserted
potential claims does not include future litigation and claim
administration costs. During 2007, the subsidiary incurred asbestos
litigation and claim administration costs totaling EUR 15 million
(EUR 12 million in 2006 and EUR 12 million in 2005).
The subsidiary does not have any signicant assets other than amounts
recoverable under insurance policies that are shared with other
Company subsidiaries. It is not expected that amounts recoverable
under such policies will be sufcient to settle the subsidiary’s liability
for asbestos- related claims. During 2007, the subsidiary and its parent
explored certain steps that may result in a resolution of pending
asbestos claims and claims that may be asserted in the future, including
the possibility of the subsidiary ling for bankruptcy. In this regard,
the subsidiary and its parent have held discussions with several
constituencies regarding the terms of a proposed reorganization
that implements a channeling injunction under section 524 (g) of
the United States federal bankruptcy code. Generally, if such a
reorganization was successful, a Trust would be established to resolve
asbestos related injury claims brought against the subsidiary, and a
channeling injunction would require that all such claims be presented
to the Trust rather than asserted in the court system. Channeling
injunctions under section 524 (g) proceedings also generally provide
that claimants may not in the court system assert asbestos personal
injury claims against other parties which have contributed to the Trust
and met other requirements.
As part of exploring a possible reorganization, the subsidiary and its
parent engaged an independent third party to serve as a putative
representative of future claimants (the “Futures’ Representative”)
and discussed matters with him such as the value of asbestos-related
claims expected to be led in the future, the funding of the Trust,
asbestos claims review process and distribution procedures.
Additionally, similar discussions have been held with counsel
representing a majority of known asbestos claimants. Negotiations
have been held with insurance carriers, pursuant to which the carriers
would potentially make contributions to the Trust in order to benet
from the protection of the channeling injunction.
For the purpose of potential bankruptcy proceedings and the
establishment of the section 524 (g) Trust , outside counsel for the
subsidiary engaged Timothy Wyant, Ph.D. , an independent third party
expert, to project the value of asbestos-related claims pending as of
July 1, 2007, as well as the value of such claims that may be asserted
in the future. Mr. Wyant projected the value of such pending and
estimated future claims through the end of 2050 to range from USD
515.3 million to USD 660.2 million (EUR 350 million to EUR 448
million) on a discounted basis. The current position of counsel to the
Futures’ Representative and counsel representing a majority of known
asbestos claimants is that the estimated liability for present and future
asbestos claims is materially higher than Mr. Wyant’s estimate.
In case a bankruptcy implementing a section 524 (g) injunction cannot
be negotiated on reasonable terms, the subsidiary and its parent are
exploring other possibilities to resolve asbestos liabilities, including other
lings by the subsidiary under the United States federal bankruptcy
code in which payments have not been negotiated prior to ling.
There is no assurance that any form of bankruptcy petition will be
led by the subsidiary. If a bankruptcy implementing a section 524 (g)
trust is led, the amount of the Trust and the potential contribution to
the Trust by the subsidiary’s parent is uncertain and cannot reliably be
estimated at this time, but it may be different from the amount of the
Company’s recorded accrual for loss contingencies. A bankruptcy ling
by the subsidiary would not include any other Company entity as a debtor.
The Company believes that it and its subsidiaries have a signicant
amount of insurance coverage for asbestos product liability. In prior
years, legal proceedings were commenced against certain third-party
insurance carriers which had provided various types of product
liability coverage. During 2007 and the last several years, 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 27 million in 2007 (EUR 34
million was paid in 2006 and EUR 20 million was paid in 2005) for
asbestos-related defense and indemnity costs. At December 31, 2007,
the subsidiary’s recorded receivable from insurance carriers, for which
settlement agreements have been reached amounted to EUR 56.4
million (EUR 80 million at December 31, 2006 and EUR 48 million
at December 31, 2005) 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 reected in the Company’s consolidated balance sheet.
At December 31, 2007, an additional EUR 10.6 million, for which a
receivable has not been recorded, is payable to the subsidiary on July
5, 2008, provided asbestos legislation in a certain form is not passed by
the US Congress by that date. The subsidiary has not recorded a
receivable from non-settling insurance carriers. The subsidiary continues
to pursue its litigation against non-settling insurance carriers and to
hold settlement discussions with various insurance carriers in 2008.
The subsidiary’s recorded accrual for loss contingencies related to
asbestos product liability is based on an estimate of claims through
2016. If actual experience differs signi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 signicant, if insurance coverage is
ultimately less than anticipated, or if a section 524 (g) Trust is established
or some other course of action is pursued to resolve asbestos
liabilities, the Company’s consolidated nancial position and results
of operations could be materially affected.
MedQuist
The Company holds approximately 70% of the common stock in MedQuist.
During 2007, MedQuist became current in its nancial lings with the
U.S. Securities and Exchange Commission (‘SEC’) for the rst time
since the ling of its Form 10-Q for the third quarter of 2003.
Two putative class actions are pending against MedQuist arising from
allegations of, among other things, inappropriate billing by MedQuist for
its transcription services. One putative class action has been brought
against MedQuist by current and former customers. The other putative
class action was led on behalf of MedQuist’s medical transcriptionists.
In 2007, a shareholder putative class action that had been pending
against MedQuist was settled, with MedQuist agreeing to pay USD
7.75 million to settle all claims throughout the class period against all
defendants in the action. Neither MedQuist nor any of the individuals
named in the action admitted to liability or any wrongdoing in
connection with the settlement.
The pending litigation matters are in various preliminary stages and are
being defended by MedQuist. On the basis of current knowledge, the
Company has concluded that potential future losses cannot be reliably
estimated. MedQuist also is the subject of ongoing investigations by the
SEC and the U.S. Department of Justice (DOJ) relating to its billing practices.
Group nancial statements
Notes to the IFRS nancial statements
Company nancial statements 250 Corporate governance246 Reconciliation of
non-US GAAP information 258 The Philips Group in the last ten years 260
Investor information