Xerox 2004 Annual Report Download - page 62

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Note 10 – Liability to Subsidiary Trusts
Issuing Preferred Securities
The Liability to Subsidiary Trusts Issuing Preferred
Securities included in our Consolidated Balance
Sheets reflects the obligations to our subsidiaries that
have issued preferred securities. These subsidiaries
are not consolidated in our financial statements
because we are not the primary beneficiary of the
trusts. As of December 31, 2004 and 2003, the compo-
nents of our liabilities to the trusts were as follows:
2004 2003
Trust II $— $1,067
Trust I 629 665
Xerox Capital LLC 88 77
Total $ 717 $1,809
Trust II: In 2001, Xerox Capital Trust II (“Trust II”)
issued 20.7 million of 7.5 percent convertible trust pre-
ferred securities (the “Trust Preferred Securities”) to
investors for $1,035 and 0.6 million shares of common
securities to us for $32. With the proceeds from these
securities, Trust II purchased $1,067 of 7.5 percent con-
vertible junior subordinated debentures due 2021 of
one of our wholly-owned consolidated subsidiaries.
The subsidiary purchased $1,067 aggregate principal
amount of 7.5 percent convertible junior subordinated
debentures due 2021 of the Company. Trust II’s assets
consisted principally of our subsidiary’s debentures
and our subsidiary’sassets consisted principally of our
debentures. On a consolidated basis, we received net
proceeds of $1,004. Fees of $31 were capitalized as debt
issuance costs and were amortized to interest expense
over three years to the earliest put date. Interest expense
was $83 and $89 in 2004 and 2003, respectively.
The Trust Preferred Securities accrued and paid
cash distributions quarterly at a rate of 7.5 percent per
year of the stated amount of fifty dollars per security.
The Trust Preferred Securities were convertible at any
time, at the option of the investors, into 5.4795 shares
of our common stock per Trust Preferred Security
(equivalent share price of $9.125 per common share)
(“the Conversion Ratio”). The Trust Preferred
Securities were mandatorily redeemable upon the
maturity of the debentures on November 27, 2021 at
fifty dollars per Trust Preferred Security plus accrued
and unpaid distributions.
In December 2004, Trust II redeemed 20.7 million
of the issued and outstanding Trust Preferred
Securities. In lieu of cash redemption, holders of sub-
stantially all of the securities converted $1,035aggre-
gate principal amount of securities into 113,414,658
shares of Xerox common stock. As a result of the con-
version and redemption, there is no remaining
outstanding principal. The issuance of Xerox shares
upon conversion had no impact on diluted earnings
per share as they were previously included in the
company’s diluted EPS calculation in accordance with
the “if converted” accounting methodology.
Trust I: In 1997, Xerox Capital Trust I (“Trust I”) issued
650 thousand of 8.0 percent preferred securities (the
“Preferred Securities”) to investors for $644 ($650 liqui-
dation value) and 20,103 shares of common securities
to us for $20. With the proceeds from these securities,
Trust I purchased $670 principal amount of 8.0 percent
Junior Subordinated Debentures due 2027 of the
Company (“the Debentures”). The Debentures repre-
sent all of the assets of Trust I. On a consolidated basis,
we received net proceeds of $637 which was net of fees
and discounts of $13. Interest expense, together with
the amortization of debt issuance costs and discounts,
amounted to $54 and $52 in 2004 and 2003, respectively.
In the first quarter of 2004, we entered into pay variable
/receive fixed interest rate swaps with a notional
amount of $600 associated with the 2027 liability to
Trust I. These swaps were designated and accounted
for as fair value hedges and resulted in a fair value
adjustment to reduce the Trust I liability by$36 as of
December 31, 2004. Asof December 31, 2004, the inter-
est rates on these swaps ranged from approximately
5.28% to 5.68% and are based on the 6 month LIBOR
rate plus an applicable margin. Wehaveguaranteed
(the “Guarantee”), on a subordinated basis, distributions
and other payments due on the Preferred Securities.
The Guarantee and our obligations under the
Debentures and in the indenture pursuant to which
the Debentures were issued and our obligations
under the Amended and Restated Declaration of Trust
governing the trust, taken together, provide a full and
unconditional guarantee of amounts due on the
Preferred Securities. The Preferred Securities accrue
and pay cash distributions semiannually at a rate of 8
percent per year of the stated liquidation amount of one
thousand dollars per Preferred Security. The Preferred
Securities are mandatorily redeemable upon the matu-
rity of the Debentures on February 1, 2027, or earlier to
the extent of any redemption by us of any Debentures.
The redemption price in either such case will be one
thousand dollars per share plus accrued and unpaid
distributions to the date fixed for redemption.
Xerox Capital LLC: In 1996, Xerox Capital LLC,
issued 2 million deferred preferred shares for
Canadian (Cdn.) $50 ($42 U.S.) to investors and all of
its common shares to us. The total proceeds of Cdn.
$63 ($52 U.S.) were loaned to us. The deferred
preferred shares are mandatorily redeemable on
February 28, 2006 for Cdn. $90 (equivalent to $75 U.S.
at December 31, 2004). Our liability to the subsidiary
trust of $88includes the current amount of the
deferred preferred shares of $69.