<PAGE>
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(Mark One)
( X ) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended: September 30, 1996
OR
( ) Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from : to
Commission file number: 1-8133
XEROX CREDIT CORPORATION
(Exact name of Registrant as specified in its charter)
Delaware 06-1024525
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
100 First Stamford Place, Stamford, Connecticut 06904
(Address of principal executive offices) (Zip Code)
(203) 325-6600
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class Name of Each Exchange on Which Registered
10% Notes due 1999 New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes: X No:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the close of the latest practicable date.
Class Outstanding as of October 31, 1996
Common Stock 2,000
THE REGISTRANT MEETS THE CONDITIONS SET FORTH IN GENERAL INSTRUCTIONS H(1)(a)
AND (b) OF FORM 10-Q AND IS THEREFORE FILING THIS FORM WITH THE REDUCED
DISCLOSURE FORMAT.
THIS DOCUMENT CONSISTS OF 12 PAGES
(1)
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PART 1. FINANCIAL INFORMATION
Item 1. Financial Statements
XEROX CREDIT CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(In Millions)
Three Months Ended Nine Months Ended
September 30, September 30,
1996 1995 1996 1995
Earned income:
Contracts and notes receivable $ 83 $ 87 $ 256 $ 267
Expenses:
Interest 49 57 152 165
Operating and administrative 3 3 10 10
Total expenses 52 60 162 175
Income before income taxes 31 27 94 92
Provision for income taxes 13 11 38 37
Net income $ 18 $ 16 $ 56 $ 55
See accompanying notes.
(2)
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XEROX CREDIT CORPORATION
CONSOLIDATED BALANCE SHEETS
(In Millions)
ASSETS
September 30, December 31,
1996 1995
Cash and cash equivalents $ - $ -
Investments:
Contracts receivable 4,104 4,084
Notes receivable - Xerox and affiliates 134 189
Unearned income (509) (495)
Allowance for losses (107) (127)
Total investments 3,622 3,651
Net assets of discontinued operations 161 183
Deferred income taxes and other assets 1 3
Total assets $ 3,784 $ 3,837
LIABILITIES AND SHAREHOLDER'S EQUITY
Liabilities:
Notes payable within one year:
Commercial paper $ 1,030 $ 875
Current portion of notes payable after one year 909 868
Notes payable after one year 1,184 1,411
Notes payable after one year-Xerox and affiliates 75 75
Due to Xerox Corporation, net 47 52
Other liabilities 44 56
Total liabilities 3,289 3,337
Shareholder's Equity:
Common stock, no par value, 2,000 shares
authorized, issued, and outstanding 23 23
Additional paid-in capital 219 219
Retained earnings 253 258
Total shareholder's equity 495 500
Total liabilities and shareholder's equity $ 3,784 $ 3,837
See accompanying notes.
(3)
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XEROX CREDIT CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Millions)
Nine Months Ended
September 30,
1996 1995
Cash Flows from Operating Activities
Net income $ 56 $ 55
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Net change in operating assets and liabilities 40 (80)
Net cash provided by (used in) operating activities 96 (25)
Cash Flows from Investing Activities
Purchases of investments (1,364) (1,166)
Proceeds from investments 1,338 1,297
Net collections from discontinued operations 22 19
Net cash (used in) provided by investing activities (4) 150
Cash Flows from Financing Activities
Change in short-term debt, net 155 (703)
Proceeds from long-term debt 600 1,033
Principal payments of long-term debt (786) (400)
Dividends (61) (55)
Net cash used in financing activities (92) (125)
Increase in cash and cash equivalents - -
Cash and cash equivalents, beginning of period - -
Cash and cash equivalents, end of period $ - $ -
Supplemental disclosure of non-cash activities:
In 1995, the Company dividended its $74 million investment in Xerox
Financial Services Life Insurance Company to its parent company. The parent
company then made a capital contribution of $74 million by issuing a $74
million interest bearing note to the Company.
See accompanying notes.
(4)
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XEROX CREDIT CORPORATION
Notes to Consolidated Financial Statements
(1) The consolidated financial statements presented herein have been
prepared by Xerox Credit Corporation (the "Company") in accordance with
the accounting policies described in its Annual Report on Form 10-K for
the fiscal year ended December 31, 1995 and should be read in
conjunction with the Notes to Consolidated Financial Statements which
appear in that report.
In the opinion of management, all adjustments (consisting only of normal
recurring adjustments) which are necessary for a fair statement of the
operating results for the interim periods presented have been made.
Interim financial data presented herein are unaudited.
Certain prior year balances have been reclassified to conform to the
current year presentation.
(2) During the first nine months of 1996, the Company redeemed the following
notes (in millions):
At Maturity
6.25% Notes $ 200
5.27% Notes 25
5.28% Notes 25
5.20% Notes 50
Variable Rate Notes 285
Prior to Maturity, at par
10.125% Notes 150
Variable Rate Notes 50
Total debt redeemed $785
(3) During the first nine months of 1996, the Company sold an aggregate of
$600 million in principal amount of medium-term notes. Of this amount,
$200 million are floating rate notes which mature in 1998 and bear an
interest rate based on a spread to the U.S. Federal Funds Rate. Of the
remaining $400 million, $250 million are fixed-rate notes which mature
in 1997, 2001, and 2011, and $150 million are fixed-rate Euronotes which
mature in 1999. The interest rates on all of this debt have been
swapped into commercial paper or Libor-based rates.
(4) The terms of a Support Agreement with Xerox provide that the Company
will receive from Xerox income maintenance payments, to the extent
necessary, so that the Company's earnings shall not be less than 1.25
times its fixed charges. For purposes of this calculation, both
earnings and fixed charges are as defined in Section 1404 (formerly
Section 81(2)) of the New York Insurance Law. In addition, the
agreement requires that Xerox retain 100 percent ownership of the
Company's voting capital stock.
(5)
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Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
RESULTS OF OPERATIONS
Continuing Operations
Contracts receivable income represents income earned under an agreement
with Xerox pursuant to which the Company purchases long-term accounts
receivable associated with Xerox' sold equipment. The Company purchases from
Xerox all contract receivables due from the Federal Government and commercial
customers. These receivables arise primarily from Xerox equipment sold under
installment sales and sales-type leases. New receivables are purchased
monthly. The purchase price of the receivables is calculated as the present
value of the future cash flows. The interest rate utilized to discount the
cash flows is determined by certain referenced interest rates plus a
prescribed spread. The interest rate utilized for the cost calculation is
adjusted monthly as each new portfolio of receivables is purchased.
Earned income from contracts receivable for the third quarter of 1996
was $83 million versus $87 million in the corresponding period in 1995, and
$256 million and $267 million for the nine-month periods ended September 30,
1996 and 1995, respectively. The decrease is primarily due to a smaller
average portfolio of contracts receivable in, 1996 than in 1995 and a
reduction in the interest rate spread on purchased contracts. The smaller
portfolio is primarily due to relatively lower equipment sales by Xerox in
the second half of 1995 resulting from a realignment of the Xerox United
States Customer Operations sales force.
Third quarter interest expense decreased to $49 million in the third
quarter of 1996 from $57 million in the same period in 1995. For the nine-
month period ended September 30, 1996, interest expense decreased to $152
million from $165 million in 1995. This decrease is principally
attributable to a more favorable interest rate environment and debt
reductions related to smaller Xerox and third-party portfolios. Since
substantially all of the Company's contracts receivable earn fixed rates of
interest, the Company "match funds" the contracts by swapping variable-rate
commercial paper and medium term notes into fixed rates of interest for
specified maturities. This process is employed because it effectively "locks
in" a spread and eliminates the risk of shrinking interest margins in a
rising interest rate environment. Conversely, this practice effectively
eliminates the opportunity to increase margins when interest rates are
declining. The Company intends to continue to match its contracts receivable
and indebtedness in order to ensure an adequate spread between interest
income and interest expense.
Operating and administrative expenses were $3 million for both the
third quarter of 1996 and the third quarter of 1995. For each of the nine-
month periods ended September 30, 1995 and 1994, operating and administrative
expenses totaled $10 million. These expenses are primarily the costs to
administer the contracts receivable purchased from Xerox.
The effective income tax rate for continuing operations for the
first nine months of 1996 and 1995, was 40.4 percent and 40.2 percent,
respectively.
(6)
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XEROX CREDIT CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
(Continued)
Discontinued Operations
Since their discontinuance in 1990, the Company has made substantial
progress in disengaging from the real estate and third-party financing
businesses. Through September 30, 1996, the Company received net cash
proceeds of $2,467 million from the sale of discontinued business units,
asset securitizations, sales, and runoff collection activities. The amounts
received have been consistent with the Company's estimates in the disposal
plan and were primarily used to reduce the Company's short-term indebtedness.
During the first nine months of 1996, the Company reduced its net assets
of discontinued operations by approximately $22 million, primarily through
contractual maturities and the sale of one of its subsidiaries.
Since approximately $51 million of the remaining assets represent
passive lease receivables, many with long-duration contractual maturities and
unique tax attributes, the Company expects that the wind-down of the
portfolio will continue to be a gradual process. The Company believes that
the liquidation of the remaining assets will not result in a net loss.
CAPITAL RESOURCES AND LIQUIDITY
The Company's principal sources of funds are cash from the collection
of Xerox contracts receivable and borrowings.
At September 30, 1996 the Company and Xerox have joint access to a $5
billion revolving credit agreement with various banks, which expires in 2000
and is used to support commercial paper issuance. Any amounts borrowed under
this facility would be at rates based, at the borrower's option, on spreads
above certain reference rates such as Libor and Federal funds rates.
At September 30, 1996, the Company had registered domestic shelf debt
capacity of $1 billion of which $550 million remained unused. In addition, a
$2 billion Euro-debt facility is available to both Xerox and the Company of
which $1,397 million remained unused at September 30, 1996.
Cash provided by operating activities was $96 million in the first nine
months of 1996, compared to $25 million used in operating activities during
the same period in 1995. The change is primarily due to increased
intercompany receipts in 1996.
Cash used by investing activities was $4 million during the first nine
months of 1996, compared with $150 million provided during the same period in
1995. The change primarily results from increased net purchases of assets
from Xerox in the first nine months of 1996 over the first nine months of
1995. The increase is primarily due to relatively higher equipment sales by
Xerox in 1996 resulting from the stabilization of Xerox' United States
Customer Operations sales force after its 1995 realignment.
Cash used in financing activities was $92 million in the first nine
months of 1996 compared to $125 million during the same period in 1995. This
change results from the increase in contracts receivable purchased from Xerox
in 1996 offset by the higher intercompany receipts.
(7)
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XEROX CREDIT CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
(Continued)
The Company believes that cash provided by continuing operations, cash
available under its commercial paper program supported by its credit
facility, and its readily available access to the capital markets are more
than sufficient for its funding needs. New borrowing associated with the
financing of customer purchases of Xerox equipment will continue and
decisions regarding the size and timing of any new term debt financing will
be made based on cash flows, refinancing requirements and capital market
conditions.
The Company intends to continue to match fund its contracts receivable.
To assist in managing its interest rate exposure, the Company has entered
into a number of interest rate swap agreements. In general, the Company's
objective is to hedge its variable-rate debt by paying fixed rates under the
swap agreements while receiving variable-rate payments in return.
Additionally, in order to better match the duration of its assets, the
Company issues variable-rate and fixed-rate medium term notes which are
swapped to commercial paper or Libor or Libor-based rates.
(8)
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XEROX CREDIT CORPORATION
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
None.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit 3 (a) Articles of Incorporation of Registrant filed
with the Secretary of State of Delaware on
June 23, 1980.
Incorporated by reference to Exhibit 3(a)
to Registration Statement No. 2-71503.
(b) By-Laws of Registrant, as amended through
July 18, 1991.
Incorporated by reference to Exhibit 3(b) to
Registrant's Quarterly Report on Form 10-Q
for the quarter ended June 30, 1991.
Exhibit 12 (a) Computation of the Company's Ratio of Earnings
to Fixed Charges.
(b) Computation of Xerox' Ratio of Earnings
to Fixed Charges.
Exhibit 27 Financial Data Schedule (Electronic Form Only)
(b) Reports on Form 8-K.
None
(9)
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Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
XEROX CREDIT CORPORATION
BY: /s/ George R. Roth
George R. Roth, Vice President,
Treasurer and Chief Financial Officer
November 7, 1996
(10)
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Exhibit 12 (a)
XEROX CREDIT CORPORATION
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
(In Millions)
Nine Months Ended
September 30, Year Ended December 31,
1996 1995 1995 1994 1993 1992 1991
Income before income taxes $ 94 $ 92 $ 119 $ 147 $ 154 $ 158 $ 164
Fixed Charges:
Interest expense
Xerox debt 4 4 6 5 4 2 -
Other debt 148 161 213 197 205 210 200
Total fixed charges 152 165 219 202 209 212 200
Earnings available for
fixed charges $ 246 $ 257 $ 338 $ 349 $ 363 $ 370 $ 364
Ratio of earnings to
fixed charges (1) 1.62 1.56 1.54 1.73 1.74 1.75 1.82
(1) The ratio of earnings to fixed charges has been computed based on the
Company's continuing operations by dividing total earnings available
for fixed charges by total fixed charges. Debt had been assigned to
discontinued operations based on the net assets of the discontinued
operations and the debt to equity ratios that existed at the time the
assets were acquired. Beginning in 1995, the amount of interest expense
that would have been allocated to discontinued operations is
insignificant and therefore is now reported within continuing
operations. The discontinued operations consist of the Company's real
estate development and related financing operations and its third-party
financing leasing businesses.
(11)
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Exhibit 12(b)
XEROX CORPORATION
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
(In Millions)
Nine Months ended
September 30, Year ended December 31,
1996 1995 1995 1994 1993* 1992 1991
Fixed charges:
Interest expense $ 446 $ 452 $ 605 $ 520 $ 540 $ 627 $ 596
Rental expense 110 120 142 170 180 187 178
Total fixed charges
before capitalized
interest 556 572 747 690 720 814 774
Capitalized interest - - - 2 5 17 3
Total fixed charges $ 556 $ 572 $ 747 $ 692 725 $ 831 $ 777
Earnings available for fixed
charges:
Earnings ** $1,318 $1,296 $1,979 $1,602 (193)$1,183 $1,035
Less undistributed
income in minority
owned companies (91) (99) (90) (54) (51) (52) (70)
Add fixed charges before
capitalized interest 556 572 747 690 720 814 774
Total earnings available
for fixed charges $1,783 $1,769 $2,636 $2,238 $ 476 $1,945 $1,739
Ratio of earnings to
fixed charges (1)(2) 3.21 3.09 3.53 3.23 0.66 2.34 2.24
(1) The ratio of earnings to fixed charges has been computed based on
Xerox' continuing operations by dividing total earnings available for
fixed charges, excluding capitalized interest, by total fixed charges.
Fixed charges consist of interest, including capitalized interest, and
one-third of rent expense as representative of the interest portion of
rentals. Debt has been assigned to discontinued operations based on
historical levels assigned to the businesses when they were continuing
operations adjusted for subsequent paydowns. The discontinued
operations consist of Xerox' Insurance and Other Financial Services
businesses and its real estate development and third-party financing
businesses.
(2) Xerox' ratio of earnings to fixed charges includes the effect of,
Xerox' finance subsidiaries, which primarily finance Xerox equipment.
Financing businesses are more highly leveraged and, therefore, tend to
operate at lower earnings to fixed charges ratio levels than do non-
financial businesses.
* 1993 earnings were inadequate to cover fixed charges. The coverage
deficiency was $249 million.
** Sum of "Income (Loss) before Income Taxes, Equity Income and Minorities'
Interests" and "Equity in Net Income of Unconsolidated Affiliates."
(12)
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM XEROX
CREDIT CORPORATION'S SEPTEMBER 30, 1996 FINANCIAL STATEMENTS AND IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
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