<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, 1998
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, 1998
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 14 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", "will" 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)
<PAGE>
XEROX CREDIT CORPORATION
Form 10-Q
September 30, 1998
Table of Contents
Page
Part I - Financial Information
Item 1. Financial Statements
Consolidated Statements of Income 4
Consolidated Balance Sheets 5
Consolidated Statements of Cash Flows 6
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Results of
Operations and Financial Condition
Continuing Operations 8
Discontinued Operations 9
Capital Resources and Liquidity 9
Part II - Other Information
Item 1. Legal Proceedings 11
Item 6. Exhibits and Reports on Form 8-K 11
Signature 12
Exhibits
Computation of Ratio of Earnings to Fixed Charges (Xerox
Credit Corporation) 13
Computation of Ratio of Earnings to Fixed Charges (Xerox
Corporation) 14
Financial Data Schedule (filed in electronic form only)
(3)
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
XEROX CREDIT CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(In Millions)
Three Months Ended Nine Months Ended
September 30, September 30,
1998 1997 1998 1997
Earned income:
Contracts and notes receivable $ 97 $ 85 $ 287 $ 263
Expenses:
Interest 61 54 178 162
Operating and administrative 3 2 8 8
Total expenses 64 56 186 170
Income before income taxes 33 29 101 93
Provision for income taxes 13 12 41 38
Net income $ 20 $ 17 $ 60 $ 55
See accompanying notes.
(4)
<PAGE>
XEROX CREDIT CORPORATION
CONSOLIDATED BALANCE SHEETS
(In Millions)
September 30, December 31,
1998 1997
(Unaudited)
ASSETS
Cash and cash equivalents $ - $ -
Investments:
Contracts receivable 5,366 4,796
Notes receivable - Xerox and affiliates 56 56
Unearned income (665) (623)
Allowance for losses (122) (131)
Total investments 4,635 4,098
Net assets of discontinued operations 41 58
Other assets 1 2
Total assets $ 4,677 $ 4,158
LIABILITIES AND SHAREHOLDER'S EQUITY
Liabilities:
Notes payable within one year:
Commercial paper $ 1,525 $ 1,428
Current portion of notes payable after one year 700 795
Notes payable - Xerox and affiliates 550 161
Notes payable after one year 1,251 1,191
Due to Xerox Corporation, net 26 21
Accounts payable and accrued liabilities 34 34
Deferred income taxes 23 20
Total liabilities 4,109 3,650
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 326 266
Total shareholder's equity 568 508
Total liabilities and shareholder's equity $ 4,677 $ 4,158
See accompanying notes.
(5)
<PAGE>
XEROX CREDIT CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In Millions)
Nine Months Ended
September 30,
1998 1997
Cash Flows from Operating Activities
Net income $ 60 $ 55
Adjustments to reconcile net income to net cash
provided by operating activities:
Net change in operating assets and liabilities 9 32
Net cash provided by operating activities 69 87
Cash Flows from Investing Activities
Purchases of investments (1,902) (1,462)
Proceeds from investments 1,365 1,274
Net collections from discontinued operations 17 61
Net cash used in investing activities (520) (127)
Cash Flows from Financing Activities
Change in commercial paper, net 97 320
Change in notes with Xerox and affiliates, net 389 (21)
Proceeds from long-term debt 635 648
Principal payments on long-term debt (670) (866)
Dividends - (41)
Net cash provided by financing activities 451 40
Increase in cash and cash equivalents - -
Cash and cash equivalents, beginning of period - -
Cash and cash equivalents, end of period $ - $ -
See accompanying notes.
(6)
<PAGE>
XEROX CREDIT CORPORATION
Notes to Consolidated Financial Statements
(1) The unaudited consolidated interim 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, 1997 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. Certain
prior year balances have been reclassified to conform to the current year
presentation.
(2) During the first nine months of 1998, the Company redeemed the following
term debt (in millions):
7.125% notes $100
15.00% notes 50
Variable rate notes 320
Total debt redeemed at maturity 470
Redeemed prior to maturity 200
Total debt redeemed $670
(3) During the first nine months of 1998, the Company sold at various dates a
total of $110 million of fixed and adjustable-rate notes which mature at
various dates in 2008, 2013, and 2018, and are first callable in 2000. The
company also sold $225 million of fixed rate notes which mature in 2000. The
interest rates on all of these notes have been swapped into LIBOR-based rates.
In addition, the Company sold $300 million of Libor-based notes which mature
in 1999.
(4) The terms of a Support Agreement with Xerox provide that the Company will
receive income maintenance payments from Xerox, 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) Effective January 1, 1998, the Company adopted Statement of Financial
Accounting Standards No. 130, "Reporting Comprehensive Income." This
Statement requires that companies disclose comprehensive income, which
includes net income, foreign currency translation adjustments, minimum pension
liability adjustments, and unrealized gains and losses on marketable
securities classified as available-for-sale. For the Company, comprehensive
income is the same as net income.
(7)
<PAGE>
XEROX CREDIT CORPORATION
Item 2. Management's Discussion and Analysis of Results of Operations and
Financial Condition
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 was $97 million and $85
million for the third quarter of 1998 and 1997, respectively, and $287 million
and $263 million for the first nine months of 1998 and 1997, respectively.
The increase was due to a higher average portfolio of contracts receivable in
1998 than in 1997, which was partially offset by a lower average interest
rate.
Interest expense was $61 million and $54 million for the third quarter of 1998
and 1997, respectively, and $178 million and $162 million for the first nine
months of 1998 and 1997, respectively. The increase was primarily due to the
increase in debt related to the larger average portfolio of contracts
receivable in 1998, which was partially offset by a decrease in the cost of
funds.
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 interest rates for specified
maturities. This practice 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
to ensure an adequate spread between interest income and interest expense.
Operating and administrative expenses were $8 million for the first nine
months of both 1998 and 1997. These expenses include billing, collection and
other administrative costs related to the administration of the contracts
receivable purchased from Xerox.
The effective income tax rate was 40.5 percent and 40.9 percent for the first
nine months of 1998 and 1997, respectively.
The Year 2000 problem is the result of computer programs written in two
digits, rather than four, to define the applicable year. As a result, many
information systems are unable to properly recognize and process date-
sensitive information beyond December 31, 1999. The Company has no Information
Technology or Non-Information Technology systems of its own which might
require remediation. The Company contracts with Xerox to provide billing and
collection services for all of the receivables that it purchases from Xerox.
In addition, the Company's business is significantly dependent on the
continuing ability of Xerox to sell and lease products to customers. As with
all major companies, certain of the information systems and products of Xerox
require remediation over the next year in order to render these systems Year
2000 compliant. For detailed information regarding Xerox' Year 2000
readiness, reference is made to the Form 10-Q of Xerox for the fiscal quarter
(8)
<PAGE>
ended September 30, 1998 as filed with the Securities and Exchange Commission.
The Company has no independent readiness or contingency plans and does not
intend to create any. If Xerox' remediation plans or replacements are not
completed in a timely manner, the Year 2000 problem could potentially have a
material adverse impact on the Company's operations. Possible worst case
consequences could include: an interruption in our ability to bill and apply
collections on the accounts receivable owned by the Company; an interruption
in our ability to meet our cash requirement needs; and a significant reduction
in the amount of accounts receivable purchased from Xerox causing a reduction
in the Company's income.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 requires companies to
recognize all derivatives as assets or liabilities measured at their fair
value. Gains or losses resulting from changes in the values of those
derivatives would be accounted for depending on the use of the derivative and
whether it qualifies for hedge accounting. The Company's interest rate swap
contracts hedge cash flow exposures. The accounting for such cash flow hedges
under SFAS No. 133 will require the Company to record adjustments to other
comprehensive income, including an adjustment at transition. The Company does
not expect the implementation of this Statement to have a material effect on
its results of operations or financial condition, although shareholders' equity
volitility will increase. This Statement is effective for fiscal years
beginning after June 15, 1999. The Company will adopt this accounting standard
beginning January 1, 2000.
Discontinued Operations
Since their discontinuance in 1990, the Company has made substantial progress
in disengaging from the third party financing and real estate businesses.
Through September 30, 1998, the Company has received net cash proceeds of
$2,588 million from the sale of discontinued business units, asset
securitizations, asset sales, and run-off 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 indebtedness.
During the first nine months of 1998 and 1997, the Company reduced net assets
of discontinued operations by $17 million and $61 million, respectively,
primarily through contractual maturities and cash sales.
The remaining $41 million portfolio represents passive lease receivables with
long-duration contractual maturities and unique tax attributes as well as
other third party financing investments. Accordingly, 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.
Net cash provided by operating activities was $69 million and $87 million in
the first nine months of 1998 and 1997, respectively. The decline in 1998
resulted from an increase in intercompany settlements partially offset by
higher net income.
Net cash used in investing activities was $520 million and $127 million during
the first nine months of 1998 and 1997, respectively. The increase was the
(9)
<PAGE>
result of more contracts receivable purchased in 1998 than in 1997. The net
proceeds from contracts grew at a slower rate than the growth in purchases of
contracts primarily due to an increase in the length of the average contract
originated in 1998 versus the prior year. Cash collections related to
discontinued assets were lower as the asset base continued to decline due to
sales and contractual maturities.
Net cash provided by financing activities was $451 million and $40 million in
the first nine months of 1998 and 1997, respectively. The increase was
largely a result of lower principal repayments. Higher amounts of notes
payable to Xerox and affiliates more then offset lower cash provided by
commercial paper borrowings. Also contributing to the increase was the
absence of dividend payments to Xerox during the first nine months of 1998
given the Company's need for equity capital to support its accelerated growth.
At September 30, 1998, the Company had registered domestic shelf capacity of
$1,240 million. In addition, a $2 billion Euro-debt facility is available to
the Company, Xerox and Xerox Capital (Europe) plc ("Xerox Capital"), of which
$993 million was unused at September 30, 1998.
The Company and Xerox have joint access to a $7 billion revolving credit
agreement with various banks, which expires in 2002. Up to $4 billion of this
revolver is also accessible by Xerox Capital. Any amounts borrowed under this
facility would be at rates based, at the borrower's option, on spreads above
certain LIBOR reference rates.
The Company believes that cash provided by continuing operations, funding
available through its commercial paper program supported by its committed
credit facility, and its readily available access to the capital markets are
more than sufficient to enable the Company to meet its liquidity needs. New
borrowing associated with the financing of customer purchases of Xerox
equipment is expected to continue during the remainder of 1998 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 is exposed to market risk from changes in interest rates that
could affect results of operations and financial condition. To assist in
managing its interest rate exposure and match funding its principal assets,
the Company routinely uses certain financial instruments, primarily 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
LIBOR-based rates. The Company does not enter into derivative instrument
transactions for trading purposes and employs long-standing policies
prescribing that derivative instruments are only to be used to achieve a set
of very limited match funding and liquidity objectives.
During the first nine months of 1998, the Company entered into interest rate
swap agreements that effectively convert $1,276 million of variable-rate debt
into fixed-rate debt. These agreements mature at various dates through 2003
and result in a weighted average interest rate of 5.72 percent. The Company
also entered into interest rate swap agreements during the first nine months
of 1998 that effectively convert $335 million of fixed and adjustable-rate
debt into variable-rate debt indexed to LIBOR rates. Of these, $225 million
mature in 2000 and $110 million mature on various dates beginning in 2008 and
ending in 2018. Each of the swaps that are scheduled to mature beyond 2000 is
cancelable by the counterparty on interest payment dates beginning in 2000.
Cancellation dates within the swap agreements conform to exercise dates of
call options embedded in the Company's fixed and adjustable-rate debt.
(10)
<PAGE>
The Company's interest rate hedging is typically unaffected by changes in
market conditions as variable- to fixed- rate swaps are normally held to
maturity consistent with the Company's objective to lock in interest rate
spreads on the underlying transactions.
As of September 30, 1998, the debt-to-equity ratio approximated 7.0 to 1.
Under the terms of the Amended and Restated Operating Agreement, Xerox has the
option, but no obligation, to transfer additional funds to the Company in
order to maintain such ratio at a specific level. No such transfers were made
during the periods covered by this report.
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
(11)
<PAGE>
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
November 10, 1998 BY: /s/ George R. Roth
George R. Roth
Vice President, Treasurer and
Chief Financial Officer
(12)
<PAGE>
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,
1998 1997 1997 1996 1995 1994 1993
Income before income taxes $ 101 $ 93 $ 123 $ 123 $ 119 $ 147 $ 154
Fixed Charges:
Interest expense (2)
Xerox debt 14 3 3 5 6 5 4
Other debt 164 159 214 199 213 197 205
Total fixed charges 178 162 217 204 219 202 209
Earnings available for
fixed charges $ 279 $ 255 $ 340 $ 327 $ 338 $ 349 $ 363
Ratio of earnings to
fixed charges (1) 1.56 1.57 1.57 1.60 1.54 1.73 1.74
(1) The ratio of earnings to fixed charges has been computed by dividing
total earnings available for fixed charges by total fixed charges.
(2) Debt has been assigned to discontinued operations based on the net assets
of the discontinued operations and the debt-to-equity ratios in accordance
with the Company's guideline. Beginning in 1995, the amount of interest
expense that would have been allocated to discontinued operations was
insignificant and therefore is now being reported within continuing operations
and included in the fixed charges. Discontinued operations consist of the
Company's third party financing and real estate businesses.
(13)
<PAGE>
Exhibit 12(b)
XEROX CORPORATION
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
(In Millions)
Nine Months Ended
September 30, Year Ended December 31,
1998* 1997 1997 1996 1995 1994 1993**
Fixed charges:
Interest expense $ 553 $ 450 $ 617 $ 592 $ 603 $ 520 $ 540
Rental expense 104 92 140 140 142 170 180
Total fixed charges before
capitalized interest and
preferred stock dividends
of subsidiaries 657 542 757 732 745 690 720
Preferred stock dividends
of subsidiaries 41 37 50 - - - -
Capitalized interest - - - - - 2 5
Total fixed charges $ 698 $ 579 $ 807 $ 732 $ 745 $ 692 $ 725
Earnings available for
fixed charges:
Earnings *** $ (60)$1,480 $2,268 $2,067 $1,980 $1,602 $ (193)
Less undistributed income
in minority owned companies (49) (101) (84) (84) (90) (54) (51)
Add fixed charges before
capitalized interest and
preferred stock dividends
of subsidiaries 657 542 757 732 745 690 720
Total earnings available
for fixed charges $ 548 $1,921 $2,941 $2,715 $2,635 $2,238 $ 476
Ratio of earnings to
fixed charges (1)(2) 0.79 3.32 3.64 3.71 3.54 3.23 0.66
(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 and preferred stock dividends of subsidiaries,
by total fixed charges. Fixed charges consist of interest, including
capitalized interest and preferred stock dividends of subsidiaries, 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. Discontinued operations consist of Xerox' Insurance,
Other Financial Services, and Third Party Financing and Real Estate
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.
* Earnings for the nine months of 1998 were inadequate to cover fixed
charges. The coverage deficiency was $150 million. Excluding the
restructuring charge, the ratio of earnings to fixed charges would be 3.14.
** 1993 earnings were inadequate to cover fixed charges. The coverage
deficiency was $249 million.
*** Sum of "Income (Loss) before Income Taxes (Benefits), Equity Income and
Minorities' Interests" and "Equity in Net Income of Unconsolidated
Affiliates."
(14)
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM XEROX
CREDIT CORPORATION'S SEPTEMBER 30, 1998 FINANCIAL STATEMENTS AND IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> SEP-30-1998
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 4,757
<ALLOWANCES> 122
<INVENTORY> 0
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<TOTAL-ASSETS> 4,677
<CURRENT-LIABILITIES> 2,835
<BONDS> 4,026
<COMMON> 23
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<OTHER-SE> 545
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<INTEREST-EXPENSE> 178
<INCOME-PRETAX> 101
<INCOME-TAX> 41
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