Xerox 2002 Annual Report Download - page 37

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over the next five years (in millions): 2003 – $331;
2004 – $320; 2005 – $311; 2006 – $299; 2007 – $288.
The estimated payments are the result of an EDS and
Xerox Global Demand Case process that has been in
place for eight years. Twice a year, using this estimat-
ing process based on historical activity, the parties
agree on a projected volume of services to be provid-
ed under each major element of the contract. Pricing
for the base services (which are comprised of global
mainframe system processing, application mainte-
nance and enhancements, desktop services and help
desk support, voice and data management) were
established when the contract was signed in 1994
based on our actual costs in preceding years. The
pricing was modified through comparisons to indus-
try benchmarks and through negotiations in subse-
quent amendments. Prices and services for the period
July 1, 2004 through June 30, 2009 are currently being
negotiated and should be finalized by December 31,
2003. As such, the amounts above are subject to
change. We can terminate the contract with six
months notice, as defined in the contract, with no ter-
mination fee. We have an option to purchase the
assets placed in service under the EDS contract,
should we elect to terminate such contract and either
operate those assets ourselves or enter a separate
contract with a similar service provider.
Pension and Other Post-Retirement Benefit Plans:
We sponsor pension and other post-retirement bene-
fit plans. As discussed in Note 13 to the Consolidated
Financial Statements, our collective pension plans
were underfunded by $2.0 billion at December 31,
2002. Our post-retirement plan, which is a non-funded
plan, had a benefit obligation of $1.6 billion at
December 31, 2002. Our 2002 cash outlays for these
plans were $138 million for pensions and $102 million
for other post-retirement plans. Our anticipated cash
outlays for 2003 are $170 million for pensions and
$115 million for other post-retirement plans.
Other Funding Arrangements:
Special Purpose Entities: From time to time, we have
generated liquidity by selling or securitizing portions
of our finance and accounts receivable portfolios. We
have typically utilized qualified special-purpose enti-
ties (“SPEs”) in order to implement these transactions
in a manner that isolates, for the benefit of the securi-
tization investors, the securitized receivables from our
other assets which would otherwise be available to
our creditors. These transactions are typically credit-
enhanced through over-collateralization. Such use of
SPEs is standard industry practice, is typically
required by securitization investors and makes the
securitizations easier to market. None of our officers,
directors or employees or those of any of our sub-
sidiaries or affiliates hold any direct or indirect owner-
ship interests in, or derive personal benefits from, any
of these SPEs. We typically act as service agent and
collect the securitized receivables on behalf of the
securitization investors. Under certain circumstances,
we can be terminated as servicing agent, in which
event the SPEs may engage another servicing agent
and we would cease to receive a servicing fee,
although no such circumstances have occurred to
date. We are not liable for non-collection of securi-
tized receivables, or otherwise required to make pay-
ments to the SPEs except to the limited extent that the
securitized receivables did not meet specified eligibili-
ty criteria at the time we sold the receivables to the
SPEs or we fail to observe agreed upon credit and col-
lection policies and procedures.
Substantially all of our SPE transactions were
accounted for as borrowings, with the debt and relat-
ed assets remaining on our balance sheets.
Specifically, in addition to the U.S. and Canadian
loans from GE and the ML loan in France discussed
above, which utilized SPEs as part of their structures,
we have entered into the following similar transactions:
• In 2000 through 2002, Xerox Corporation and
Xerox Canada Limited (“XCL”) operated securitiza-
tion facilities that engaged in continuous sales of
certain accounts receivable in the U.S. and Canada.
The facility allowed up to $315 million and $38 mil-
lion, respectively, of receivables to be outstanding
to investors in the facility. As these receivables
were collected, new receivables were purchased. In
May 2002, a Moody’s downgrade constituted an
event of termination under the U.S. agreement,
which we allowed to terminate in October 2002. In
February 2002, a downgrade of our Canadian debt
by Dominion Bond Rating Service caused the event
of termination, in turn causing the remaining
Canadian facility to no longer purchase receivables,
with collections used to repay previously repur-
chased receivables. This facility was fully repaid in
2002.
• In 1999, XCL securitized certain finance receivables,
generating gross proceeds of $345 million. At
December 31, 2002, approximately $30 million was
outstanding.
In summary, at December 31, 2002, amounts owed
by these receivable-related SPEs to their investors
totaled $3,195 million, $3,165 million of which is
reported as debt in our Consolidated Balance Sheet. A
detailed description of these transactions is included