Xerox 2003 Annual Report Download - page 36

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base rate plus a spread that varies between 0.75 per-
cent and 2 percent) depending on the then-current
leverage ratio, as defined, in the 2003 Credit Facility.
This rate was 3.42 percent at December 31, 2003.
The 2003 Credit Facility contains affirmative and
negative covenants including limitations on: issuance
of debt and preferred stock; investments and acquisi-
tions; mergers; certain transactions with affiliates; cre-
ation of liens; asset transfers; hedging transactions;
payment of dividends and certain other payments and
intercompany loans. The 2003 Credit Facility contains
financial maintenance covenants, including minimum
EBITDA, as defined, maximum leverage (total adjusted
debt divided by EBITDA), annual maximum capital
expenditures limits and minimum consolidated net
worth, as defined. These covenants are more fully dis-
cussed in Note 10.
The 2003 Credit Facility generally does not affect
our ability to continue to securitize receivables under
additional or existing third-party vendor financing
arrangements. Subject to certain exceptions, we can-
not pay cash dividends on our common stock during
the term of the 2003 Credit Facility, although we can
pay cash dividends on our preferred stock, provided
there is then no event of default under the 2003 Credit
Facility. Among defaults customary for facilities of this
type, defaults on our other debt, bankruptcy of certain
of our legal entities, or a change in control of Xerox
Corporation, would all constitute events of default
under the 2003 Credit Facility.
2010 and 2013 Senior Notes: We issued $700 million
aggregate principal amount of Senior Notes due
2010 and $550 million aggregate principal amount of
Senior Notes due 2013 in connection with the June
2003 Recapitalization. Interest on the Senior Notes due
2010 and 2013 accrues at the rate of 7.125 percent and
7.625 percent, respectively, per year and is payable
semiannually on each June 15 and December 15. In
conjunction with the issuance of the 2010 and 2013
Senior Notes, debt issuance costs of $32 million were
deferred. These notes, along with our Senior Notes
due 2009, are guaranteed by our wholly-owned sub-
sidiaries Intelligent Electronics, Inc. and Xerox
International Joint Marketing, Inc. Financial informa-
tion of these guarantors is included in Note 19 to the
Consolidated Financial Statements. The senior notes
also contain negative covenants (but no financial
maintenance covenants) similar to those contained in
the 2003 Credit Facility. However, they generally
provide us with more flexibility than the 2003 Credit
Facility covenants, except that payment of cash
dividends on the 6.25 percent Series C Mandatory
Convertible Preferred Stock is subject to certain
conditions. See Note 10 to the Consolidated Financial
Statements for a description of the covenants.
Financing Business: We implemented third-party ven-
dor financing programs in the United States, Canada,
the U.K., France, The Netherlands, the Nordic coun-
tries, Italy, Brazil and Mexico through major initiatives
with GE, Merrill Lynch and other third-party vendors
to fund our finance receivables in these countries.
These initiatives include the completion of the U.S.
Loan Agreement with General Electric Capital
Corporation (“GECC”) (the “Loan Agreement”). See
Note 4 to the Consolidated Financial Statements for a
discussion of our vendor financing initiatives.
GECC U.S. Secured Borrowing Arrangement: In
October 2002, we finalized an eight-year Loan
Agreement with GECC. The Loan Agreement provides
for a series of monthly secured loans up to $5 billion
outstanding at any time ($2.6 billion outstanding at
December 31, 2003). The $5 billion limit may be
increased to $8 billion subject to agreement between
the parties. Additionally, the agreement contains
mutually agreed renewal options for successive two-
year periods. The Loan Agreement, as well as similar
loan agreements with GE in the U.K. and Canada,
incorporates the financial maintenance covenants
contained in the 2003 Credit Facility and contains
other affirmative and negative covenants.
Under the Loan Agreement, we expect GECC to
fund a significant portion of new U.S. lease origina-
tions at over-collateralization rates, which vary over
time, but are expected to approximate 10 percent at
the inception of each funding. The securitizations are
subject to interest rates calculated at each monthly
loan occurrence at yield rates consistent with average
rates for similar market based transactions. The funds
received under this agreement are recorded as
secured borrowings and the associated finance receiv-
ables are included in our Consolidated Balance Sheet.
GECC’s commitment to fund under this agreement is
not subject to our credit ratings.
Loan Covenants and Compliance: At December 31,
2003, we were in full compliance with the covenants
and other provisions of the 2003 Credit Facility, the
senior notes and the Loan Agreement and expect to
remain in full compliance for at least the next twelve
months. Any failure to be in compliance with any
material provision or covenant of the 2003 Credit
Facility or the senior notes could have a material
adverse effect on our liquidity and operations. Failure
to be in compliance with the covenants in the Loan
Agreement, including the financial maintenance
covenants incorporated from the 2003 Credit Facility,
would result in an event of termination under the Loan
Agreement and in such case GECC would not be
required to make further loans to us. If GECC were to
make no further loans to us and assuming a similar
facility was not established, it would materially
adversely affect our liquidity and our ability to fund our
customers’ purchases of our equipment and this could