Operating and Financial Review and Prospects
86
Ahold Annual Report 2003
Operating and Financial Review and Prospects
subsidiaries and certain of our current and former
directors, officers and employees have been named in a
number of civil lawsuits and purported class actions. In
addition, criminal and civil investigations and inquiries
have been initiated involving us, including investigations
by the U.S. Department of Justice, the U.S. Department
of Labor, the SEC, the NYSE, the NASD, the Dutch
Public Prosecutor, AFM and Euronext, among others.
We are cooperating fully with the investigations and
are defending the civil claims filed against us. However,
we cannot predict when these investigations or legal
proceedings will be completed or what likely outcomes
of these investigations or legal proceedings may be.
It is possible that they could lead to, among other
things, criminal indictments, regulatory enforcement
proceedings, additional civil lawsuits, settlements,
judgments and/or consent decrees against us (and our
subsidiaries) and that, as a result, we could be required
to pay fines, consent to injunctions on future conduct
or suffer other substantial penalties, damages and
monetary remedies, each of which could have a material
adverse affect on our financial condition, results of
operations, and liquidity. We may also lose the ability
to enter into new government contracts or renew existing
government contracts (or other contracts which are
funded with federal government funds) in the U.S.,
as a result of which our sales revenues would be
reduced, which could have a material adverse effect on
our financial condition, results of operations and liquidity.
In addition, we have indemnified various current and
former directors, officers and employees, as well as those
of some of our subsidiaries for expenses that they have
incurred as a result of the pending and possible future
legal proceedings and investigations fines, liabilities, fees
or expenses that they may face, and we expect to incur
further expenses for indemnification of such persons or
to reimburse such persons for defense costs, including
attorneys' fees. We have directors' and officers' liability
insurance, but one or more of our insurance carriers may
decline to pay our policies or such coverage may be
insufficient. One such carrier has initiated proceedings in
The Netherlands relating to one such policy. In addition,
our insurance carriers may increase the rates to renew
coverage, or our coverage may be insufficient to cover
our expenses and liability in some or all of these matters.
Because of the difficulty of predicting the outcome
of these investigations and legal proceedings, in
accordance with Dutch GAAP and US GAAP, we have
not established a provision for the costs, if any, that
may be associated with any such outcomes.
We are also party to various other legal proceedings
and investigations relating to our businesses.
For a more detailed discussion of the various
investigations and legal proceedings in which we are
involved, please see "Risk Factors - Results of pending
and possible future investigations and legal proceedings
could have a material adverse effect on our financial
condition, results of operations, liquidity and the prices
of our common shares and ADSs", and Note 30 to our
consolidated financial statements included in this
annual report.
Quantitative and Qualitative Disclosure about Market Risk
The following discussion about our risk management
activities includes "forward-looking statements" that
involve risk and uncertainties. Actual results could differ
materially from those provided in the forward-looking
statements, depending on market conditions.
Our funding, liquidity and exposure to interest rate
and foreign exchange rate risks are managed by our
treasury department. The treasury department uses a
combination of derivative and conventional financial
instruments to manage market risk exposure.
Our primary market risk exposures are related to
currency exchange rates and interest rate fluctuations
and to a lesser extent, commodity price fluctuations.
Currency risk
Since we have operations in a variety of countries
throughout the world, a substantial portion of our assets,
liabilities and operating income are denominated in
foreign currencies, primarily the US dollar. As a result,
we are subject to foreign currency exchange risk due to
exchange rate movements, which affect our transaction
costs and the translation of the results and underlying
net assets of our foreign subsidiaries into Euros. It is our
policy to cover substantially all foreign exchange
transaction exposure, although we do not use financial
instruments to hedge the translation risk related to
equity and earnings of foreign subsidiaries and non-
consolidated companies.
The following analysis sets out the sensitivity of the
fair value of our derivative financial instruments from
hypothetical changes in market rates. The fair values are
estimated by discounting the future cash flows to net
present values using appropriate market rates prevailing
at year-end. The sensitivity analysis assumes an
immediate 10% change in all foreign currency exchange
rates against the Euro as of the year-end of 2003, with
all other variables held constant. A +10% change
indicates a strengthening of the currency in which our
financial instruments are denominated (primarily the
US dollar) against the Euro, and a -10% change
indicates a weakening of the currency in which our
financial instruments are denominated against the
Euro. Such analysis is for illustrative purposes only,
as in practice, market rates rarely change in isolation
of other factors that also affect our results.
