Xerox 2008 Annual Report Download - page 73

Notes to the Consolidated
Financial Statements
(in millions, except per share data and
unless otherwise indicated)
indebtedness and rank equally with our other existing senior
unsecured indebtedness. Proceeds from the offering were used to
repay borrowings under the Credit Facility and for general
corporate purposes.
Guarantees
At December 31, 2008, we have issued guarantees of $139 to our
foreign subsidiaries. Of this amount, $67 is related to indebtedness
of our foreign subsidiaries and is included in our Consolidated
Balance Sheet as of December 31, 2008 with the remainder
primarily representing letters of credit. In addition, as of December
31, 2008, $55 of letters of credit have been issued in connection
with insurance guarantees.
Interest
Interest paid on our short-term debt, long-term debt and liabilities
to subsidiary trusts issuing preferred securities amounted to $527,
$552 and $512 for the years ended December 31, 2008, 2007 and
2006, respectively.
Interest expense and interest income for the three years ended
December 31, 2008 was as follows:
2008 2007 2006
Interest expense(1) $567 $579 $544
Interest income(2) $833 $877 $909
(1) Includes Equipment financing interest expense, as well as, non-financing interest expense
included in Other expenses, net in the Consolidated Statements of Income.
(2) Includes Finance income, as well as, other interest income that is included in Other
expenses, net in the Consolidated Statements of Income.
Equipment financing interest is determined based on an estimated
cost of funds, applied against the estimated level of debt required
to support our net finance receivables. The estimated cost of funds
is based on a blended rate for term and duration comparable to
available borrowing rates for a BBB rated company, which are
reviewed at the end of each period. The estimated level of debt is
based on an assumed 7 to 1 leverage ratio of debt/equity as
compared to our average finance receivable balance during the
applicable period.
Net cash proceeds on debt other than secured borrowings as
shown on the Consolidated Statements of Cash Flows for the three
years ended December 31, 2008 was as follows:
2008 2007 2006
Cash payments on notes payable,
net $ (238) $ (143) $ (19)
Net cash proceeds from issuance of
long-term debt 1,883 2,254 1,502
Cash payments on long-term debt (719) (297) (207)
Net cash proceeds on other debt $ 926 $1,814 $1,276
Note 12 – Liability to Subsidiary Trust Issuing
Preferred Securities
The Liability to Subsidiary Trust Issuing Preferred Securities included
in our Consolidated Balance Sheets of $648 and $632 as of
December 31, 2008 and 2007, respectively, reflects our obligations
to Xerox Capital Trust I (“Trust I”) as a result of their loans to us from
proceeds related to their issuance of preferred securities. This
subsidiary is not consolidated in our financial statements because
we are not the primary beneficiary of the trust.
In 1997, Trust I issued 650 thousand of 8.0% preferred securities
(the “Preferred Securities”) to investors for $644 ($650 liquidation
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% Junior Subordinated Debentures due
2027 of the Company (“the Debentures”). The Debentures
represent 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, was $54 in 2008, 2007 and 2006. We
have guaranteed, on a subordinated basis, distributions and other
payments due on the Preferred Securities. The guarantee, our
obligations under the Debentures, 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% per
year of the stated liquidation amount of one thousand dollars per
Preferred Security. The Preferred Securities are mandatorily
redeemable upon the maturity 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.
Note 13 – Financial Instruments
We are exposed to market risk from changes in foreign currency
exchange rates and interest rates, which could affect operating
results, financial position and cash flows. We manage our exposure
to these market risks through our regular operating and financing
activities and, when appropriate, through the use of derivative
financial instruments. These derivative financial instruments are
utilized to hedge economic exposures as well as to reduce earnings
and cash flow volatility resulting from shifts in market rates. We
enter into limited types of derivative contracts, including interest
rate swap agreements, foreign currency spot, forward and swap
contracts and net purchased foreign currency options to manage
interest rate and foreign currency exposures. Our primary foreign
Xerox 2008 Annual Report 71