APC 2002 Annual Report Download - page 46

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operating subsidiaries to the Corporate Treasury Center,
but do not create any additional market risk to our
consolidated results.
Under our policy, net material currency exposure is hedged.
Exposure is primarily hedged with forward exchange contracts
with a maturity of less than twelve months.
Commodity risk
We are exposed to commodity risk arising from changes in
the prices of purchased raw materials (copper, silver and
aluminum).
The purchasing departments of our operating entities are
responsible for assessing and reporting their forecasted
purchases to the Corporate Treasury Center twice a year.
The Corporate Treasury Center is responsible for hedging the
risk and periodically uses forward contracts, commodity swaps
and to a lesser extent options, to hedge commitments to
purchase raw materials.
Counterparty risk
Transactions involving foreign exchange hedging, interest rate
management or short-term investments are carried out using
selected counterparties. Our standards for determining
appropriate bank counterparties are based on an assessment
of the counterparty’s financial soundness as demonstrated
by shareholders’ equity, the availability of state guarantees,
aqualitative assessment of the counterparty’s importance
in our global relationships, and the counterparty’s short and
long-term rating.
An overall authorized credit limit is set for each counterparty,
and all the counterparty limits are reviewed periodically.
5 – Claims, litigation and other risks
In 2001, Schneider Electric made a public offer to purchase
Legrand in exchange for shares as part of a proposed merger
project. When the offer closed in July 2001, the Company held
98.1% of Legrand. In an initial decision dated October 10,
2001, the European Commission vetoed the merger, and in a
second decision dated January 30, 2002, it ordered the two
companies to separate as quickly as possible. As a result,
Schneider Electric sold its interest in Legrand to the KKR-
Wendel Investissement consortium even though the Court
of First Instance of the European Communities overruled
the Commission’s decisions on October 22, 2002.
Following the Court of First Instance’s ruling, the Commission
re-examined the Schneider-Legrand merger project and
decided to launch an in-depth (phase 2) review on December
4, 2002. Schneider Electric contests the Commission’s refusal
to approve the merger project on the basis of corrective
measures proposed during the new phase 1 investigation
in November 2002 and has filed a petition to annul the
December 4, 2002 decision. In addition, Schneider Electric
is preparing proceedings against the European Commission
to obtain damages for the prejudice caused.
In 1996, the Group became aware that an electronic
component contained in its Masterpact circuit breakers used
principally in large industrial installations and in other facilities
with substantial electricity requirements occasionally
malfunctioned. In 1997, the Group determined that a third
party manufactured the electronic component. In 1998,
the Group initiated a broad-based product recall campaign.
Because of its complexity, the Group created a special
company, Spring, to manage the recall program. Since 1998,
the Group has incurred product recall costs of  38.5 million
in addition to administrative costs associated with the
management of Spring of  6.7 million. The Group has replaced
or repaired a substantial number of the defective components
and anticipates that it will incur an additional  4.0 million
before terminating the recall program some time during 2003.
In April 2001, the Group became aware that an emergency
pushbutton installed on a wide range of machines, failed to
function in certain circumstances. The Group initiated a
comprehensive product recall program in cooperation with its
insurance companies. As of December 31, 2002, the Group