Pallet-Management-Services - AFM

comply with such laws and regulations can have serious consequences, including civil and
criminal fines and penalties, and orders to limit or shut down operations. We manage these risks
with strict internal procedures and through our internal management reporting tools.
Foreign currency risk
Foreign currency risk is the risk that we will incur economic losses due to adverse changes in
foreign currency exchange rates.
Our operating subsidiaries in countries other than those countries participating in the European
Monetary Union and adopting the Euro as their national currency use their local currency as their
functional currency. In North America we are using the US-Dollar.
During 2003, we entered into a forward exchange contract in order to offset the cash flow
variability related to changes in exchange rates on certain intercompany transactions. The
forward exchange contract expired at December 31, 2006.
We incur currency transaction risk whenever one of our operating subsidiaries enters into either
a purchase or sales transaction using a currency other than its functional currency. Our currency
risk arises from foreign currency receivables as well as from firm commitments to purchase
services and supplies in the future in currencies other than the subsidiary’s functional currency.
Additionally, the indirect intercompany financing from IFCO SYSTEMS N.V. via IFCO SYSTEMS
Hungary Kft. to IFCO SYSTEMS North America is subject to currency transaction risk.
Interest rate risk
The Company’s exposure to the risk of changes in market interest rates is limited because the
majority of the Company’s interest bearing debt (Senior Secured Notes) has fixed interest rates.
The Subsidiary’s exposure to the risk of changes in market interest rates is limited and relates
only to the working capital facility.
Commodity price risk
We are subject to market risk with respect to commodities since granulate is a significant
component of cost of goods sold for our RPCs. To the extent that we purchase new RPCs made
from new, virgin material instead of recycled RPCs, any increase in the cost of new granulate
will increase cost of goods sold resulting in decreased profitability unless there is a
corresponding increase in the prices we charge our customers. We may be limited in how much
of a cost increase, if any, we are able to pass along to customers or how quickly we are able to
pass along a cost increase to customers. In addition, increases in prices may result in a
decrease in revenues.
We do not enter into futures contracts on commodity markets to hedge our exposure to
granulate prices.
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