<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, 1997
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, 1997
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 13 PAGES
(1)
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To the extent that this Form 10-Q Report contains forward-looking statements
and information relating to the Registrant, such statements are based on the
beliefs of management as well as assumptions made by and information
currently available to management. The words "anticipate," "believe,"
"estimate," "expect," "intends" and similar expressions, as they relate to
the Registrant or the Registrant's management, are intended to identify
forward-looking statements. Such statements reflect the current views of the
Registrant with respect to future events and are subject to certain risks,
uncertainties and assumptions. Should one or more of these risks or
uncertainties materialize, or should underlying assumptions prove incorrect,
actual results may vary materially from those described herein as
anticipated, believed, estimated or expected. The Registrant does not intend
to update these forward-looking statements.
(2)
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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,
1997 1996 1997 1996
Earned income:
Contracts and notes receivable $ 85 $ 83 $ 263 $ 256
Expenses:
Interest 54 49 162 152
Operating and administrative 2 3 8 10
Total expenses 56 52 170 162
Income before income taxes 29 31 93 94
Provision for income taxes 12 13 38 38
Net income $ 17 $ 18 $ 55 $ 56
See accompanying notes.
(3)
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XEROX CREDIT CORPORATION
CONSOLIDATED BALANCE SHEETS
(In Millions)
ASSETS
September 30, December 31,
1997 1996
Cash and cash equivalents $ - $ -
Investments:
Contracts receivable 4,499 4,272
Notes receivable - Xerox and affiliates 56 130
Unearned income (580) (534)
Allowance for losses (116) (123)
Total investments 3,859 3,745
Net assets of discontinued operations 91 152
Deferred income taxes and other assets 2 2
Total assets $ 3,952 $ 3,899
LIABILITIES AND SHAREHOLDER'S EQUITY
Liabilities:
Notes payable within one year:
Commercial paper $ 1,446 $ 1,126
Current portion of notes payable after one year 691 886
Notes payable - Xerox and affiliates - 20
Notes payable after one year 1,215 1,238
Notes payable after one year-Xerox and affiliates - 75
Due to Xerox Corporation, net 44 16
Accounts payable and accrued liabilities 37 31
Deferred income taxes 29 31
Total liabilities 3,462 3,423
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 248 234
Total shareholder's equity 490 476
Total liabilities and shareholder's equity $ 3,952 $ 3,899
See accompanying notes.
(4)
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XEROX CREDIT CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Millions)
Nine Months Ended
September 30,
1997 1996
Cash Flows from Operating Activities
Net income $ 55 $ 56
Adjustments to reconcile net income to net cash
provided by operating activities:
Net change in operating assets and liabilities 11 40
Net cash provided by operating activities 66 96
Cash Flows from Investing Activities
Purchases of investments (1,501) (1,364)
Proceeds from investments 1,313 1,338
Net collections from discontinued operations 61 22
Net cash used in investing activities (127) (4)
Cash Flows from Financing Activities
Change in commercial paper, net 320 155
Proceeds from long-term debt 648 600
Principal payments on long-term debt (866) (786)
Dividends (41) (61)
Net cash provided by (used in) financing activities 61 (92)
Increase in cash and cash equivalents - -
Cash and cash equivalents, beginning of period - -
Cash and cash equivalents, end of period $ - $ -
See accompanying notes.
(5)
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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, 1996 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.
(2) During the first nine months of 1997, the Company redeemed the
following notes (in millions):
5.69% Notes $ 25
5.76% Notes 31
5.79% Notes 25
5.81% Notes 25
5.82% Notes 25
Variable Rate Notes ("VRNs") 580
Total debt redeemed at maturity 711
Redeemed prior to maturity 155
Total debt redeemed $866
(3) During the first nine months of 1997, the Company sold a total of
$648 million of medium-term notes. Of this amount, $50 million are
fixed-rate notes which mature in 1998, $148 million are Eurodollar
medium-term notes maturing in 2000, $250 million are cash exchangeable
equity-linked notes maturing in 2002, $25 million are fixed-rate notes
maturing in 2007, and $175 million are fixed- and adjustable-rate notes
maturing in 2012. The interest rates on all of this debt have been
swapped into LIBOR-based rates.
(4) On October 6 and on October 29, 1997, the Company issued $25 million
each of 7.0% notes due 2012. Also, on October 7, 1997, the Company
issued, at a premium, $25 million of 15.0% notes due 1998. Interest
obligations on all of these transactions have been swapped to LIBOR-
based rates.
(5) 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.
(6)
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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. These receivables arise
primarily from Xerox equipment sold under installment sales and sales-type
leases.
Earned income from contracts and notes receivable for the third quarter
of 1997 was $85 million versus $83 million in the corresponding period in
1996, and $263 million and $256 million for the nine-month periods ended
September 30, 1997 and 1996, respectively. The increase in earned income
resulted from a higher average contracts receivable portfolio in 1997
partially offset by a lower average interest rate.
Third quarter interest expense increased to $54 million in 1997 from
$49 million in the same period in 1996. For the nine-month period ended
September 30, 1997, interest expense increased to $162 million from $152
million in 1996. These increases are principally attributable to higher
debt balances related to a larger contracts receivable portfolio in 1997.
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 when interest rates rise. Conversely, this practice effectively
eliminates the opportunity to increase margins when interest rates decline.
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 $2 million and $3 million
for the third quarter of 1997 and 1996, respectively. For the nine-month
periods ended September 30, 1997 and 1996, operating and administrative
expenses totaled $8 million and $10 million, respectively. These expenses
are incurred primarily to administer the contracts receivable purchased from
Xerox. The decrease is attributable mainly to improvements in systems
processing and other productivity measures that have occurred during the
year.
The effective income tax rate for the first nine months of 1997 and
1996 was 40.9 percent and 40.4 percent, respectively.
(7)
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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, 1997, the Company received net cash
proceeds of $2,537 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 its disposal
plan and were primarily used to reduce the Company's short-term indebtedness.
During the first nine months of 1997, the Company reduced net assets of
discontinued operations by approximately $61 million, primarily through
contractual maturities and cash sales.
Since a significant portion of the remaining $91 million portfolio
represents passive lease receivables, some 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 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.
Net cash provided by operating activities was $66 million in the first
nine months of 1997, compared to $96 million provided by operating activities
during the same period in 1996. The decrease is primarily due to a change in
the timing of intercompany settlements.
Net cash used in investing activities was $127 million during the first
nine months of 1997, compared with $4 million used during the same period in
1996. The change primarily resulted from increased net purchases of
contracts receivable from Xerox in the first nine months of 1997 over the
first nine months of 1996.
Net cash provided by financing activities was $61 million in the first
nine months of 1997 compared to $92 million of usage in the first nine months
of 1996. Cash provided by financing has grown due to a higher level of
contract purchases from Xerox and the year-end 1996 change in the Company's
leverage guideline from 6.5 to 1 to 7.0 to 1.
At September 30, 1997, the Company had registered domestic shelf debt
capacity of $2 billion, of which $1,950 million remained unused. In
addition, a $2 billion Euro-debt facility is available to Xerox, Xerox
Capital (Europe) Plc and the Company, of which $1,219 million remained unused
at September 30, 1997.
In October 1997, the Company and Xerox replaced the then-existing $5
billion revolving credit agreement with a $7 billion revolving credit
agreement maturing in 2002. This new Revolver is also accessible (up to a $4
billion limit) by Xerox Capital (Europe) Plc and Xerox Overseas Holdings PLC.
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.
(8)
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The Company believes that cash provided by continuing operations, cash
available under its commercial paper program supported by its credit
facility, and its access to the capital markets are more than sufficient to
ensure its funding needs will be met. New borrowing associated with the
financing of customer purchases of Xerox equipment will continue in 1997 and
decisions regarding the size and timing of any new term debt financing will
be made based on cash flows, match funding needs, 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 manage its outstanding commercial paper, the
Company opportunistically issues variable- and fixed-rate medium term notes
which are swapped to attractive commercial paper or LIBOR-based rates.
During the first nine months of 1997, the Company entered into interest
rate swap agreements which effectively converted $1,023 million of variable-
rate debt into fixed-rate debt. These agreements mature at various dates
through 2002 and result in a weighted average fixed-rate of interest of 6.34
percent. The Company also entered into interest rate swap agreements during
the first nine months of 1997 which effectively converted $648 million of
fixed- and adjustable-rate debt into variable-rate debt indexed to LIBOR
rates. These agreements mature in 1998, 2000, 2002, 2007 and in 2012. The
agreements which mature in 2007 and 2012 are cancelable by the respective
counterparties on interest payment dates beginning in 1999 and 2001.
Cancellation dates within the swap agreements conform to the exercise dates
of call options embedded in the Company's fixed- and adjustable-rate debt.
As of September 30, 1997, the Company's overall debt-to-equity ratio
was 6.84 to 1. The Company's practice is to maintain a debt-to-equity ratio
of approximately 7.0 to 1. Prior to December 31, 1996, the Company's
practice was to maintain a debt-to-equity ratio of approximately 6.5 to 1.
(9)
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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
September 1, 1992.
Incorporated by reference to Exhibit 3 (b)
to Registrant's Quarterly Report
for the Quarter ended March 31, 1997.
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
(10)
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SIGNATURE
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 12, 1997
(11)
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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,
1997 1996 1996 1995 1994 1993 1992
Income before income taxes $ 93 $ 94 $ 123 $ 119 $ 147 $ 154 $ 158
Fixed Charges:
Interest expense
Xerox debt 3 4 5 6 5 4 2
Other debt 159 148 199 213 197 205 210
Total fixed charges 162 152 204 219 202 209 212
Earnings available for
fixed charges $ 255 $ 246 $ 327 $ 338 $ 349 $ 363 $ 370
Ratio of earnings to
fixed charges (1) 1.57 1.62 1.60 1.54 1.73 1.74 1.75
(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.
(2) 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 has since been reported
within continuing operations and therefore included in the fixed
charges. Discontinued operations consist of the Company's real
estate development and related financing operations and its third-party
financing and leasing businesses.
(12)
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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,
1997 1996 1996 1995 1994 1993* 1992
Fixed charges:
Interest expense $ 450 $ 446 $ 592 $ 603 $ 520 $ 540 $ 627
Rental expense 92 110 140 142 170 180 187
Preferred stock divi-
dend of subsidiary 37 - - - - - -
Total fixed charges
before capitalized
interest 579 556 732 745 690 720 814
Capitalized interest - - - - 2 5 17
Total fixed charges $ 579 $ 556 $ 732 $ 745 $ 692 $ 725 $ 831
Earnings available for
fixed charges:
Earnings ** $1,480 $1,318 $2,067 $1,980 $1,602 $(193) $1,183
Less undistributed
income in minority
owned companies (101) (91) (84) (90) (54) (51) (52)
Add fixed charges before
capitalized interest
and preferred stock
dividend of
subsidiary 542 556 732 745 690 720 814
Total earnings available
for fixed charges $1,921 $1,783 $2,715 $2,635 $2,238 $ 476 $1,945
Ratio of earnings to
fixed charges (1)(2) 3.32 3.21 3.71 3.54 3.23 .66 2.34
(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, and preferred stock dividend requirements of subsidiaries. Debt
has been assigned to discontinued operations based on historical levels
assigned to the businesses when they were continuing operations,
adjusted for subsequent paydowns. 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 before Income Taxes, Equity Income and Minorities'
Interests" and "Equity in Net Income of Unconsolidated Affiliates."
(13)
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM XEROX
CREDIT CORPORATION'S SEPTEMBER 30, 1997 FINANCIAL STATEMENTS AND IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
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