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, 1999
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
7.20% Notes due 2012 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, 1999
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 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," "intend", "will" and similar expressions, as they relate to
Registrant or Registrant's management, are intended to identify forward-
looking statements. Such statements reflect the current views of 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, expected or intended. Registrant does not intend to update these
forward-looking statements.
(2)
XEROX CREDIT CORPORATION
Form 10-Q
March 31, 1999
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
Results of Operations 8
Capital Resources and Liquidity 9
Item 3. Quantitative and Qualitative Disclosures About
Market Risk 10
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)
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
XEROX CREDIT CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
(In Millions)
Three Months Ended
March 31,
1999 1998
Earned income:
Contracts receivable $ 104 $ 94
Expenses:
Interest 66 59
Operating and administrative 3 3
Total expenses 69 62
Income before income taxes 35 32
Provision for income taxes 14 13
Net income $ 21 $ 19
See accompanying notes.
(4)
XEROX CREDIT CORPORATION
CONSOLIDATED BALANCE SHEETS
(In Millions)
ASSETS
March 31, December 31,
1999 1998
(UNAUDITED)
Cash and cash equivalents $ - $ -
Investments:
Contracts receivable 5,882 5,789
Notes receivable - Xerox and affiliates 56 56
Unearned income (699) (700)
Allowance for losses (134) (136)
Total investments 5,105 5,009
Other assets 21 30
Total assets $ 5,126 $ 5,039
LIABILITIES AND SHAREHOLDER'S EQUITY
Liabilities:
Notes payable within one year:
Commercial paper $ 1,321 $ 1,510
Current portion of notes payable after one year 2,000 1,175
Notes Payable - Xerox and affiliates 499 1,035
Notes payable after one year 597 647
Due to Xerox Corporation, net 40 34
Accounts payable and accrued liabilities 44 34
Deferred income taxes 14 14
Total liabilities 4,515 4,449
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 369 348
Total shareholder's equity 611 590
Total liabilities and shareholder's equity $ 5,126 $ 5,039
See accompanying notes.
(5)
XEROX CREDIT CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(In Millions)
Three Months Ended
March 31,
1999 1998
Cash Flows from Operating Activities
Net income $ 21 $ 19
Adjustments to reconcile net income to net cash
provided by operating activities:
Net change in operating assets and liabilities 16 24
Net cash provided by operating activities 37 43
Cash Flows from Investing Activities
Purchases of investments (589) (656)
Proceeds from investments 502 473
Net cash used in investing activities (87) (183)
Cash Flows from Financing Activities
Change in commercial paper, net (189) 134
Change in notes with Xerox and affiliates,net (536) (94)
Proceeds from long-term debt 850 100
Principal payments on long-term debt (75) -
Net cash provided by financing activities 50 140
Increase in cash and cash equivalents - -
Cash and cash equivalents, beginning of period - -
Cash and cash equivalents, end of period $ - $ -
See accompanying notes.
(6)
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, 1998 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 1999, the Company redeemed $75 million of
fixed-rate notes prior to their final maturity dates.
(3) During the first three months of 1999, the Company sold a total of $850
million of fixed-rate notes that mature at various dates in 2000 and 2014. The
notes maturing in 2014 are callable beginning in 2001. The interest rates on
these notes have been swapped to LIBOR-based rates.
(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.
(7)
XEROX CREDIT CORPORATION
Item 2. Management's Discussion and Analysis of Results of Operations and
Financial Condition
RESULTS OF 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, including any residual income related to such leases.
Earned income from contracts and notes receivable was $104 million and
$94 million for the first three months of 1999 and 1998, respectively. The
increase was primarily due to a larger average portfolio of contracts
receivable and higher residual income offset slightly by lower interest rates.
Interest expense increased to $66 million in the first quarter of 1999
from $59 million in the same period in 1998. The increase is due to a larger
average portfolio of contracts receivable and a slight increase in the
Company's debt to equity ratio partially offset by lower interest rates.
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 (including fixed-rate
medium term notes that had been swapped to variable rates) 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 1999 and 1998. These expenses are incurred to administer the
contracts receivable purchased from Xerox.
The effective income tax rate for the first three months of 1999 and 1998
was 40.0 percent and 40.6 percent, respectively. The decline is due to a
decrease in the Company's blended state income tax rate.
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 significantly depends on the continuing
ability of Xerox to sell and lease products to customers. As with all major
companies, certain of Xerox' information systems and products require
remediation in order to render the systems Year 2000 compliant. For detailed
information regarding Xerox' Year 2000 readiness, reference should be made to
the Form 10-Q of Xerox for the fiscal quarter ended March 31, 1999 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 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 contracts receivable owned by the
Company; an interruption in our ability to meet our cash requirements; and a
(8)
significant reduction in the amount of contracts 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. Certain of 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 may experience increased volatility. This Statement is
effective for fiscal years beginning after June 15, 1999. The Company will
adopt this accounting standard beginning January 1, 2000.
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 $37 million in the first
three months of 1999 compared to $43 million provided by operating activities
during the same period in 1998. The change was primarily due to the timing of
intercompany settlements relating to state taxes.
Net cash used in investing activities was $87 million in the first three
months of 1999 compared to $183 million in the first three months of 1998.
The decrease was primarily caused by lower purchases of investments as a
result of changes in the timing of transfer of contracts from Xerox to the
Company.
Net cash provided by financing activities was $50 million during the
first three months of 1999 compared to $140 million provided by financing
activities during the same period in 1998. While the Company's term borrowing
in the first three months of 1999 increased by $750 million versus the same
period in 1998, the proceeds were largely used to repay short-term
intercompany advances and to reduce commercial paper balances.
At March 31, 1999, the Company had registered domestic shelf capacity of
$390 million, which was fully utilized through the Company's issuance of $390
million of variable-rate notes on April 6, 1999. The Company filed a new $2.5
billion Shelf Registration Statement ("SRS") with the Securities and Exchange
Commission ("SEC") on April 9, 1999. The SEC has not yet declared the SRS
effective. A $2 billion Euro-debt facility is available to the Company, Xerox,
Xerox Capital (Europe) plc, and Xerox Overseas Holdings Limited, of which $646
million was unused at March 31, 1999.
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.
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 1999 and decisions regarding the size and timing of
(9)
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 1999, the Company entered into interest
rate swap agreements that effectively converted $482 million of variable-rate
debt into fixed-rate debt. These agreements mature at various dates through
2004 and resulted in a weighted average interest rate of 5.27 percent. The
Company also entered into interest rate swap agreements during the first
quarter of 1999 that effectively converted $850 million of fixed-rate debt
into variable-rate debt indexed to LIBOR rates. These agreements mature in
2000 and 2014. The agreements that mature in 2014 are cancelable by the
respective counterparties on interest payment dates beginning in 2001.
Cancellation dates within the swap agreements conform to exercise dates of
call options embedded in the Company's fixed-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, 1999, the debt-to-equity ratio was 7.2 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 period covered by this report. It is the Company's intention to maintain
the debt-to-equity ratio at no greater than 8 to 1.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The information set forth in the eighth, ninth and tenth paragraphs under the
caption "Capital Resources and Liquidity" in Item 2 above is hereby
incorporated by reference in answer to this Item.
(10)
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)
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
May 14, 1999 BY: /S/ George R. Roth
George R. Roth
Vice President, Treasurer and
Chief Financial Officer
(12)
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,
1999 1998 1998 1997 1996 1995 1994
Income before income taxes $ 35 $ 32 $ 137 $ 123 $ 123 $ 119 $ 147
Fixed Charges:
Interest expense (2)
Xerox debt 8 2 23 3 5 6 5
Other debt 58 57 217 214 199 213 197
Total fixed charges 66 59 240 217 204 219 202
Earnings available for
fixed charges $ 101 $ 91 $ 377 $ 340 $ 327 $ 338 $ 349
Ratio of earnings to
fixed charges (1) 1.53 1.54 1.57 1.57 1.60 1.54 1.73
(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)
Exhibit 12(b)
XEROX CORPORATION
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
(In Millions)
Three months ended Year ended
March 31, December 31,
1999 1998 1998* 1997 1996 1995 1994
Fixed charges:
Interest expense $ 206 $ 177 $ 748 $ 617 $ 592 $ 603 $ 520
Rental expense 35 28 145 140 140 142 170
Total fixed charges
before capitalized
interest and preferred
stock dividends of
subsidiaries 241 205 893 757 732 745 690
Preferred stock dividends
of subsidiaries 14 14 55 50 - - -
Capitalized interest - - - - - - 2
Total fixed charges $ 255 $ 219 $ 948 $ 807 $ 732 $ 745 $ 692
Earnings available for
fixed charges:
Earnings** $ 504 $ 459 $ 837 $2,268 $2,067 $1,980 $1,602
Less undistributed
income in minority
owned companies (10) (9) (27) (84) (84) (90) (54)
Add fixed charges before
capitalized interest
and preferred stock
dividends of
subsidiaries 241 205 893 757 732 745 690
Total earnings
available for
fixed charges $ 735 $ 655 $1,703 $2,941 $2,715 $2,635 $2,238
Ratio of earnings to
fixed charges (1)(2) 2.88 2.99 1.80 3.64 3.71 3.54 3.23
(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, 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 the Company's Insurance, Other
Financial Services, and Third Party Financing and Real Estate businesses.
(2) The Company's ratio of earnings to fixed charges includes the effect of
the Company's 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.
* Excluding the effects of the charges recorded in connection with the 1998
restructuring plan, the ratio of earnings to fixed charges would be 3.55.
** Sum of "Income before Income Taxes, Equity Income and Minorities'
Interests" and "Equity in Net Income of Unconsolidated Affiliates."
(14)
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THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM XEROX
CREDIT CORPORATION'S MARCH 31, 1999 FINANCIAL STATEMENTS AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
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