Xerox 2002 Annual Report Download - page 39

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37
Interest Rate Risk Management: Virtually all cus-
tomer-financing assets earn fixed rates of interest,
while a significant portion of our debt bears interest at
variable rates. Historically we have attempted to man-
age our interest rate risk by “match-funding” the
financing assets and related debt, including through
the use of interest rate swap agreements. However, as
our credit ratings declined, our ability to continue this
practice became constrained.
At December 31, 2002, we had $7 billion of variable
rate debt, including the $3.5 billion outstanding under
the New Credit Facility and the notional value of our
pay-variable interest-rate swaps. The notional value
of our offsetting pay-fixed interest-rate swaps was
$1.2 billion.
Our loans related to vendor financing, from parties
including GE, are secured by customer-financing
assets and are designed to mature ratably with our
collection of principal payments on the financing
assets which secure them. The interest rates on those
loans are fixed. As a result, the vendor financing loan
programs create natural match-funding of the financ-
ing assets to the related debt. As we implement addi-
tional finance receivable securitizations and continue
to repay existing debt, the portion of our financing
assets which is match-funded against related secured
debt will increase. On a consolidated basis, including
the impact of our hedging activities, weighted-aver-
age interest rates for 2002, 2001 and 2000 approximat-
ed 5.0 percent, 5.5 percent and 6.2 percent,
respectively.
Many of the financial instruments we use are sensi-
tive to changes in interest rates. Interest rate changes
result in fair value gains or losses on our term debt
and interest rate swaps, due to differences between
current market interest rates and the stated interest
rates within the instrument. The loss in fair value at
December 31, 2002, from a 10 percent change in mar-
ket interest rates would be approximately $201 mil-
lion for our interest rate sensitive financial
instruments. Our currency and interest rate hedging
are typically unaffected by changes in market condi-
tions as forward contracts, options and swaps are
normally held to maturity consistent with our objec-
tive to lock in currency rates and interest rate spreads
on the underlying transactions.
We anticipate continued volatility in our results of
operations due to market changes in interest rates
and foreign currency rates which we are currently
unable to hedge.
Forward-Looking Cautionary
Statements:
This Annual Report contains forward-looking state-
ments and information relating to Xerox that are
based on our beliefs, as well as assumptions made by
and information currently available to us. The words
“anticipate,” “believe,” “estimate,” “expect,”
“intend,” “will” and similar expressions, as they
relate to us, are intended to identify forward-looking
statements. Actual results could differ materially from
those projected in such forward-looking statements.
Information concerning certain factors that could
cause actual results to differ materially is included in
our 2002 Annual Report on Form 10-K filed with the
SEC. We do not intend to update these forward-
looking statements.