62 RISK  MANAGEMENT LEGAL RISKS In December 1997, Pitney Bowes France filed a complaint with the French competition authorities against all its French competitors, including Neopost, for anti-competitive practices relating to four-year rental contracts renewable for a further four years unless cancelled. Neopost believes that this complaint is groundless, and intends to defend itself strongly. In July 2002, 80 Neopost Inc distributors filed a complaint with the Court of the State of Illinois against Neopost Inc, particularly for failure to comply with contractual obligations.   These   distributors   also   sought   to   implicate Hasler  Inc  and  Neopost  SA.  One  of  the  distributors  had previously   filed   an   isolated   suit   against   Neopost   Inc   in Wisconsin on a similar basis. A satisfactory final settlement of these suits has been reached. Following  the  termination  of  Neopost  Online’s  activities, minority  shareholder  Packagenet  is  claiming  compensation for   failure   to   comply   with   contractual   obligations   from Neopost    Inc,    Neopost    Online    and    certain    directors, particularly   concerning   an   earn-out   payment   on   shares owned. Neopost    is    confident    regarding    the    outcome    of    these disputes. The Group has only booked provisions to cover the lawyers’ fees   and   procedural   costs   relating   to   these   disputes.  The amount of these provisions is not significant. At the present time, there are no other exceptional factors, disputes or litigation liable to have, or to have recently had, a significant  effect  on  the  Group’s  activity,  results,  financial position or assets. MARKET RISKS LIQUIDITY  RISK The Group’s liquidity requirements, together with its debt service costs, amount to a significant portion of its gross cash flow. Given the current level of activity, the Group believes that its gross cash flow will enable it to service its debt. However, this will  depend  on  the  Group’s  future  performance,  which  is partly related to the economic environment, over which the Group has no control. As a result, no guarantee can be given regarding     the     Group’s     ability     to     cover     its     financial commitments. The Group’s debts (the US Private Placement and  the  revolving  credit  facility)  are  subject  to  covenants concerning     items     such     the     net     debt/EBITDA     ratio, minimum net equity and EBITDA interest cover. Under these covenants, the Group’s net equity must not fall below €250m plus 50% of income generated as of the 2003 fiscal year. The net debt/EBITDA ratio used in the covenants is based on consolidated financial statements in which leasing companies  are  equity-accounted.  EBITDA  is  calculated  by adding the period’s depreciation and impairment charges to operating  income  before  employee  profit-sharing.  The  net debt/EBITDA ratio must be less than or equal to 3. EBITDA interest cover, which is not lease-adjusted, is calculated solely for  the  revolving  credit  facility  on  the  basis  of  the  Group’s consolidated financial statements, and must not be less than 4.5. Failure   to   comply   with   these   covenants   may   force   early repayment  of  the  debt.  At  31  January  2004,  the  Group complied with all these covenants. EXCHANGE  RATE  RISK The  Group  has  adopted  a  policy  of  hedging  exchange  rate risk (see page 35 of this financial report). However, no guarantee can be given about the Group’s ability to hedge effectively against exchange rate risk. On the basis of the 2004 budget, 42% of sales, 42% of the cost of sales, 38% of operating expenses and 38% of interest charges   are   dollar-denominated.   As   a   result,   the   Group benefits from a natural exchange rate hedge, and would be able   to   maintain   its   operating   margin   and   net   margin regardless of the dollar’s movements against the euro. If the dollar  were  to  move  from  the  projected  exchange  rate  of $1.15   to   the   euro   to   $1.20,   this   would   reduce   sales   by €13.8m, operating income by €2m and net income by €2m taking into account the hedging instruments used. INTEREST  RATE  RISK The Group has adopted a policy of hedging interest rate risk (see page 36 of this financial report). However, no guarantee can be given about the Group’s ability to hedge effectively against interest rate risk.