Xerox 2003 Annual Report Download - page 44

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Note 1 – Summary of Significant
Accounting Policies
References herein to “we,” “us” or “our” refer to
Xerox Corporation and its subsidiaries unless the con-
text specifically requires otherwise.
Description of Business and Basis of Presentation: We
are a technology and services enterprise, as well as a
leader in the global document market, developing,
manufacturing, marketing, servicing and financing a
complete range of document equipment, software,
solutions and services.
Liquidity, Financial Flexibility and Funding Plans: We
manage our worldwide liquidity using internal cash
management practices which are subject to (1) the
statutes, regulations and practices of each of the local
jurisdictions in which we operate, (2) the legal require-
ments of the agreements to which we are parties and
(3) the policies and cooperation of the financial institu-
tions we utilize to maintain and provide cash manage-
ment services.
In June 2003, we completed a $3.6 billion recapi-
talization (the “Recapitalization”) that included the
offering and sale of 9.2 million shares of 6.25 percent
Series C Mandatory Convertible Preferred Stock,
46 million shares of Common Stock, $700 of 7.125 per-
cent Senior Notes due 2010 and $550 of 7.625 percent
Senior Notes due 2013 and the closing of our new
$1.0 billion credit agreement which matures on
September 30, 2008 (the “2003 Credit Facility”). The
2003 Credit Facility consists of a fully drawn $300 term
loan and a $700 revolving credit facility (which includes
a $200 sub-facility for letters of credit). The proceeds
from the Recapitalization were used to repay the
amounts outstanding under the Amended and
Restated Credit Agreement we entered into in June
2002 (the “2002 Credit Facility”). Upon repayment of
amounts outstanding, the 2002 Credit Facility was ter-
minated and we incurred a $73 charge associated with
unamortized debt issuance costs.
On December 31, 2003, we had $700 of borrowing
capacity under the 2003 Credit Facility, less $51 utilized
for letters of credit. The 2003 Credit Facility contains
affirmative and negative covenants, financial mainte-
nance covenants and other limitations. The indentures
governing our outstanding senior notes contain sever-
al affirmative and negative covenants. The senior
notes do not, however, contain any financial mainte-
nance covenants. The covenants and other limitations
contained in the 2003 Credit Facility and the senior
notes are more fully discussed in Note 10. Our U.S.
Loan Agreement with General Electric Capital
Corporation (“GECC”) (effective through 2010) relating
to our vendor financing program (the “Loan
Agreement”) provides for a series of monthly secured
loans up to $5 billion outstanding at any time. As of
December 31, 2003, $2.6 billion was outstanding
under the Loan Agreement. The Loan Agreement, as
well as similar loan agreements with GE in the U.K.
and Canada that are discussed further in Note 4, incor-
porates the financial maintenance covenants con-
tained in the 2003 Credit Facility and contains other
affirmative and negative covenants.
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 we expect to remain in full compli-
ance 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 finan-
cial maintenance covenants incorporated from the
2003 Credit Facility, would result in an event of termi-
nation 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 equip-
ment and this could materially adversely affect our
results of operations.
With $2.5 billion of cash and cash equivalents on
hand at December 31, 2003 and borrowing capacity
under our 2003 Credit Facility of $700, less $51 utilized
for letters of credit, we believe our liquidity (including
operating and other cash flows that we expect to gen-
erate) will be sufficient to meet operating cash flow
requirements as they occur and to satisfy all sched-
uled debt maturities for at least the next twelve
months. Our ability to maintain positive liquidity going
forward depends on our ability to continue to generate
cash from operations and access the financial mar-
kets, both of which are subject to general economic,
financial, competitive, legislative, regulatory and other
market factors that are beyond our control.
Our ability to obtain financing and the related cost
of borrowing is affected by our debt ratings, which are
periodically reviewed by the major credit rating agen-
cies. Our current credit ratings are below investment
Notes to the Consolidated Financial Statements
(Dollars in millions, except per-share data and unless otherwise indicated)