Risk factors
RISKS RELATING TO OUR INTERNAL CONTROLS
RISKS RELATING TO CURRENCY EXCHANGE AND
INTEREST RATE FLUCTUATIONS
liquidity. For a further discussion of these legal proceedings,
see Note 35 to our consolidated financial statements
included in this annual report.
We may have indemnification obligations that could
have a material adverse effect on our financial position,
results of operations and liquidity.
We have indemnified various current and former directors,
officers and employees, as well as those of some of our
subsidiaries, for expenses they have incurred as a result of
the pending and possible future investigations and legal
proceedings discussed above and we expect to incur further
expenses for indemnification of expenses and any possible
fines, liabilities or fees that they may face, and to advance
to or reimburse such persons for defense costs, including
attorneys' fees. Such indemnification obligations could
ultimately have a material adverse effect on our financial
position, results of operations and liquidity.
We may not be able to strengthen our internal controls.
In 2005, we continued the project initiated in 2004 to
prepare for compliance with the requirements of Section
404 of the Sarbanes-Oxley Act, including documenting,
reviewing and, in certain required aspects, improving our
internal controls over financial reporting.
The status of Sarbanes-Oxley Act activities by the end of
2005 varies per arena and certain required aspects for the
evaluation pursuant to Section 404 of the Sarbanes-Oxley
Act have yet to be completed. We have taken and are taking
steps to strengthen our internal controls. The process of
ensuring compliance with Section 404 of the Sarbanes-
Oxley Act may require significant costs and time to
complete. For a further discussion regarding our internal
controls, see "Internal control" in this annual report. Any
failure to strengthen our internal controls could result in
accounting errors or misstatements in our financial
statements and could harm the reliability of our financial
statements, which could in turn adversely affect investor
confidence and the prices of our common shares and ADSs.
We are exposed to currency exchange and interest rate
fluctuations, which could have a material adverse effect
on our financial position, results of operations and
liquidity.
Currency translation risk. We are exposed to foreign currency
exchange translation risk because we operate businesses in
a variety of countries in Europe and the United States.
A substantial portion of our net sales, assets, liabilities and
results of operations are denominated in foreign currencies,
primarily the U.S. dollar. As a result, we are subject to
foreign currency exchange risks due to exchange rate
movements in connection with the translation of the
operating income and the assets and liabilities of our foreign
subsidiaries into euros for inclusion in our consolidated
financial statements.
Currency transaction risk. We are exposed to foreign currency
exchange transaction risk, including lease payment
obligations and firm purchase commitments denominated
in foreign currencies. We attempt to manage our foreign
currency exchange exposure by borrowing in local currency
and entering into currency swaps, but we cannot eliminate
such exposure and, therefore currency exchange rate
movements can affect our transaction costs. Furthermore,
if a particular currency becomes highly volatile, that could
have a material adverse impact on our financial position,
results of operations and liquidity.
Interest rate risk. We are also exposed to fluctuations in
interest rates. As of January 1, 2006, approximately EUR
1.0 billion, or 22%, of our long-term borrowings (excluding
our finance lease liabilities, financing obligations, and
cumulative preferred financing shares, but including interest
rate swaps) bear interest on a floating rate basis.
Accordingly, changes in interest rates can affect the cost of
these interest-bearing borrowings. As a result, our financial
position, results of operations and liquidity could be
materially adversely affected by interest rate fluctuations.
It is our policy to attempt to mitigate interest rate risk by
financing a targeted percentage of our borrowings in fixed
interest rate instruments and by the use of derivative
financial instruments, such as interest rate swaps. Our
attempts to manage our risk could result in our failure to
realize savings, if interest rates fall.
40
