Xerox 2005 Annual Report Download - page 67

Xerox Corporation
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Note 4 – Receivables, Net
Finance Receivables: Finance receivables result from installment
arrangements and sales-type leases arising from the marketing of
our equipment. These receivables are typically collateralized by a
security interest in the underlying assets. Finance receivables, net
at December 31, 2005 and 2004 were as follows (in millions):
2005 2004
Gross receivables $ 9,449 $10,267
Unearned income (1,458) (1,619)
Unguaranteed residual values 87 125
Allowance for doubtful accounts (229) (276)
Finance receivables, net 7,849 8,497
Less: Billed portion of finance
receivables, net (296) (377)
Current portion of finance receivables
not billed, net (2,604) (2,932)
Amounts due after one year,net $ 4,949 $ 5,188
Contractual maturities of our gross finance receivables
subsequent to December 31, 2005 wereas follows (including
those already billed of $296) (in millions):
There-
2006 2007 2008 2009 2010 after Total
$3,633 $2,590 $1,812 $1,004 $371 $39 $9,449
Secured Funding Arrangements
GE Secured Borrowings: We have an agreement in the U.S. (the
“Loan Agreement”) under which GE Vendor Financial Services, a
subsidiary of GE, is our primary third-party equipment financing
provider, through the funding of loans secured by new lease
originations. The maximum potential level of borrowing under the
Loan Agreement is a function of the size of the portfolio of finance
receivables generated by us that meet GE’s funding requirements
and cannot exceed $5 billion in any event. In October 2005,
we renegotiated the Loan Agreement, resulting in a reduction
in applicable interest rates and the elimination of the monthly
borrowing requirement. The interest rate reduction is applicable
to existing and new loans.
Under this agreement, GE funds a significant portion of new
U.S. lease originations at over-collateralization rates, which vary
over time, but areexpected to approximate 10% at the inception
of each funding. The secured loans are subject to interest rates
calculated at each loan funding at yield rates consistent with
average rates for similar market-based transactions as well
as our current debt ratings. Refer to Note 11 for further infor-
mation on interest rates. New lease originations, including the
bundled service and supply elements, aretransferred to a wholly
owned consolidated subsidiary which receives funding from GE.
The funds received under this agreement are recorded as secured
borrowings and together with the associated lease receivables
are included in our Consolidated Balance Sheet. We and GE intend
the transfers of the lease contracts to be “true sales at law” and
that the wholly owned consolidated subsidiary be bankruptcy
remote and have received opinions to that effect from outside legal
counsel. As a result, the transferred receivables are not available
to satisfy any of our other obligations. GE’s funding commitment
is not subject to our credit ratings. There are no credit rating
defaults that could impair future funding under this agreement.
This agreement contains cross-default provisions related to
certain financial covenants contained in the 2003 Credit Facility
and other significant debt facilities. Any cross-default would impair
our ability to receive subsequent funding until the default was cured
or waived but does not accelerate previous borrowings except
in the case of bankruptcy. However, in the event of a default, we
could be replaced as the maintenance service provider for the
associated equipment under lease.
We have similar long-term lease funding arrangements with
GE in both the U.K. and Canada. These agreements contain
similar terms and conditions as those contained in the U.S. Loan
Agreement with respect to funding conditions and covenants. The
final funding date for all facilities is currently December 2010.
France Secured Borrowings: In July 2003, we securitized $443 of
receivables in France using a three-year public secured financing
arrangement. The funds received in connection with this agree-
ment were recorded as secured borrowings. In September 2005,
we repaid the remaining balance associated with this arrange-
ment of $47. Wealso have an ongoing warehouse financing
facility in France with Merrill Lynch to fund new lease originations.
In October 2005, we amended this agreement resulting in an
increase in the size of the facility from €350 million to €420 million
($414 to $497 as of December 31, 2005), lower applicable
interest rates and an extension for an additional two years at our
option from the current expiration date of July 2007.
The DLL Secured Borrowings: In 2002, we formed a joint
venture with De Lage Landen Bank (“the DLL Joint Venture”)
which became our primary equipment financing provider for new
lease originations in the Netherlands through fundings from De
Lage Landen Bank. In 2003, the DLL Joint Venture was expanded
to include the leasing operations in Belgium and Spain. Our DLL
Joint Venture is consolidated, as we are deemed to be the primary
beneficiary of the Joint Venture’s financial results (Refer to Note
1 – “Basis of Consolidation”). In September 2005, we completed
atransaction with our DLL Joint Venture to purchase De Lage
Landen Bank’s 51% ownership interest in the Belgium and Spain
leasing operations. In connection with the purchase, the secured
borrowings from De Lage Landen Bank to these operations of
$120 were repaid and the related finance receivables are no
longer encumbered. Other than the repayment of the secured
debt, the effects from this transaction were immaterial.
Xerox Annual Report 2005