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: March 31, 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 April 30, 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)
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)
PART 1. FINANCIAL INFORMATION
Item 1. Financial Statements
XEROX CREDIT CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
(In Millions)
Three Months
Ended
March 31,
1998 1997
Earned income:
Contracts receivable $ 94 $ 88
Expenses:
Interest 59 53
Operating and administrative 3 _3
Total expenses 62 56
Income before income taxes 32 32
Provision for income taxes 13 13
Net income $ 19 $ 19
See accompanying notes.
(3)
XEROX CREDIT CORPORATION
CONSOLIDATED BALANCE SHEETS
(In Millions)
ASSETS
March 31, December
31,
1998 1997
(UNAUDITED)
Cash and cash equivalents $ - $ -
Investments:
Contracts receivable 5,001 4,796
Notes receivable - Xerox and affiliates 56 56
Unearned income (656)
(623)
Allowance for losses _(116)
(131)
Total investments 4,285 4,098
Net assets of discontinued operations 54 58
Deferred income taxes and other assets 1 2
Total assets $ 4,340 $ 4,158
LIABILITIES AND SHAREHOLDER'S EQUITY
Liabilities:
Notes payable within one year:
Commercial paper $ 1,562 $ 1,428
Current portion of notes payable after one year 870 795
Notes Payable - Xerox and affiliates 66 161
Notes payable after one year 1,216 1,191
Due to Xerox Corporation, net 34 21
Accounts payable and accrued liabilities 44 34
Deferred income taxes ___21 ___20
Total liabilities 3,813 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 285 266
Total shareholder's equity 527 508
Total liabilities and shareholder's equity $ 4,340 $ 4,158
See accompanying notes.
(4)
XEROX CREDIT CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(In Millions)
Three Months
Ended
March 31,
1998 1997
Cash Flows from Operating Activities
Net income $ 19 $ 19
Adjustments to reconcile net income to net cash
(used in) provided by operating activities:
Net change in operating assets and liabilities (70) 12
Net cash (used in) provided by operating activities (51) 31
Cash Flows from Investing Activities
Purchases of investments (656) (513)
Proceeds from investments 469 423
Net collections from discontinued operations _ 4 _ 27
Net cash used in investing activities _(183) _ (63)
Cash Flows from Financing Activities
Change in commercial paper, net 134 213
Proceeds from long-term debt 100 100
Principal payments on long-term debt - (265)
Dividends _ - (16)
Net cash provided by financing activities _ 234 _ 32
Increase in cash and cash equivalents - -
Cash and cash equivalents, beginning of period - -
Cash and cash equivalents, end of period $ - $ -
See accompanying notes.
(5)
XEROX CREDIT CORPORATION
Notes to Consolidated Financial Statements
(UNAUDITED)
(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 three months of 1998, the Company did not redeem any
term debt.
(3) During the first three months of 1998, the Company sold at various
dates
a total of $100 million of fixed- and adjustable-rate notes which
mature
at various dates in 2008, 2013 and 2018 and are first callable in
2000.
The interest rates on all of these notes have been swapped into 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) 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.
(6)
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 being sold under installment sales and sales-
type leases.
Earned income from contracts and notes receivable was $94 million and
$88 million for the first three months of 1998 and 1997, respectively. The
increase was primarily due to a larger average portfolio of contracts
receivable in 1998 than in 1997. This increase was partially offset by a $1
million decrease in income earned on intercompany receivables.
Interest expense increased to $59 million in the first quarter of 1998
from $53 million in the same period in 1997. The increase is due to a
larger average portfolio of contracts receivable which was slightly offset
by a lower average interest rate and lower discontinued operations net
assets (see page 7).
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 $3 million for the first
quarter of 1998 and 1997. These expenses are incurred to administer the
contracts receivable purchased from Xerox.
The effective income tax rate for the first three months of 1998 and
1997 was 40.6 percent.
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 March 31, 1998, the Company has received net cash
proceeds of $2,574 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.
(7)
During the first quarter of 1998, the Company reduced its net assets of
discontinued operations by $4 million, primarily through contractual
maturities and cash sales.
A significant portion of the remaining $54 million portfolio represents
passive lease receivables with long-duration contractual maturities and
unique tax attributes. 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 used in operating activities was $51 million in the first
three months of 1998 compared to $31 million provided by operating
activities during the same period in 1997. The change was primarily due to
decreased intercompany balances in the first quarter of 1998.
Net cash used in investing activities was $183 million in the first
three months of 1998 compared to $63 million in the first three months of
1997. The increase was the result of more contracts receivable purchased in
1998 than in 1997 offset partially by higher collections due to growth in
the contracts receivable base. Lower cash collections resulting from the
sale of discontinued assets and the fact that some of the discontinued
assets reached their contractual maturities also contributed to the increase
in 1998.
Net cash provided by financing activities was $234 million during the
first three months of 1998 compared to $32 million provided by financing
activities during the same period in 1997. The increase resulted primarily
from the fact that no principal payments were required to be made with
respect to long-term debt and no dividends were paid in the first quarter of
1998 as compared to the first quarter of 1997.
At March 31, 1998, the Company had registered domestic shelf capacity
of $1,775 million. In addition, a $2 billion Euro-debt facility is
available to the Company, Xerox, Xerox Capital (Europe) plc, and Xerox
Overseas Holdings Limited, of which $1,193 million was unused at March 31,
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 (Europe) plc and Xerox
Overseas Holdings Limited. Any amounts borrowed under this facility would be
at rates based, at the borrower's option, on spreads above certain LIBOR
reference rates.
(8)
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 will continue in 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 enters into 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 objectives.
During the first three months of 1998, the Company entered into
interest rate swap agreements which effectively converted $432 million of
variable-rate debt into fixed-rate debt. These agreements mature at various
dates through 2003 and resulted in a weighted average interest rate of 5.71
percent. The Company also entered into interest rate swap agreements during
the first quarter of 1998 which effectively converted $100 million of fixed-
and adjustable-rate debt into variable-rate debt indexed to LIBOR rates.
These agreements mature in 2008, 2013 and 2018, and all are cancelable by
the respective counterparties 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.
The Company's interest rate hedging is typically unaffected by changes
in market conditions as swaps are normally held to maturity consistent with
the Company's objective to lock in interest rate spreads on the underlying
transactions.
As of March 31, 1998, the debt-to-equity ratio was 7.0 to 1, consistent
with the Company's guideline for this ratio.
(9)
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)
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______________________
George R. Roth, Vice President,
Treasurer and Chief Financial Officer
May 12, 1998
(11)
Exhibit
12(a)
XEROX CREDIT CORPORATION
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
(In Millions)
Three Months Ended
March 31, Year Ended December 31,
1998 1997 1997 1996 1995 1994
1993
Income before income taxes $ 32 $ 32 $ 123 $ 123 $ 119 $ 147 $
154
Fixed Charges:
Interest expense (2)
Xerox debt 2 2 3 5 6 5
4
Other debt 57 51 214 199 213 197
205
Total fixed charges 59 53 217 204 219 202
209
Earnings available for
fixed charges $ 91 $ 85 $ 340 $ 327 $ 338 $ 349 $
363
Ratio of earnings to
fixed charges (1) 1.54 1.60 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.
(12)
Exhibit 12(b)
XEROX CORPORATION
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
(In Millions)
Three Months ended
March 31, Year ended December 31,
1998 1997 1997 1996 1995 1994
1993*
Fixed charges:
Interest expense $ 156 $ 135 $ 617 $ 592 $ 603 $ 520 $ 540
Rental expense 28 34 140 140 142 170 180
Total fixed charges
before capitalized
interest and preferred
stock dividends of
subsidiaries 184 169 757 732 745 690 720
Preferred stock dividends
of subsidiaries 14 6 50
Capitalized interest - - - - - 2 5
Total fixed charges $ 198 $ 175 $ 807 $ 732 $ 745 $ 692 $ 725
Earnings available for fixed
charges:
Earnings ** $ 459 $ 450 $2,268 $2,067 $1,980 $1,602 $
(193)
Less undistributed
income in minority
owned companies (9) (23) (84) (84) (90) (54)
(51)
Add fixed charges before
capitalized interest
and preferred stock
dividends of
subsidiaries 184 169 __757 __732 __745 690 720
Total earnings available
for fixed charges $ 634 $ 596 $2,941 $2,715 $2,635 $2,238 $ 476
Ratio of earnings to
fixed charges (1)(2) 3.20 3.41 3.64 3.71 3.54 3.23 .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 businesses and Third Party Financing and Real Estate
businesses.
(13)
(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."
(14)
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM XEROX
CREDIT CORPORATION'S MARCH 31, 1998 FINANCIAL STATEMENTS AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
<MULTIPLIER> 1000000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> MAR-31-1998
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 4,401
<ALLOWANCES> 116
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 4,340
<CURRENT-LIABILITIES> 2,498
<BONDS> 3,714
<COMMON> 23
0
0
<OTHER-SE> 504
<TOTAL-LIABILITY-AND-EQUITY> 4,340
<SALES> 0
<TOTAL-REVENUES> 94
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 3
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 59
<INCOME-PRETAX> 32
<INCOME-TAX> 13
<INCOME-CONTINUING> 19
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 19
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
