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, 2000
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 October 31, 2000
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 15 PAGES
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," "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. The Registrant does not intend to update
these forward-looking statements.
Liquidity - the Registrant's liquidity is dependant upon the liquidity of its
parent, Xerox Corporation. Xerox Corporation's liquidity is currently
provided through its own cash generation from operations, various financing
strategies including securitizations and utilization of its $7 billion
Revolving Credit Agreement with a large group of banks which is available
through October, 2002. Xerox Corporation has embarked upon a process of
selling certain assets with the objective of generating proceeds for the
purpose of retiring outstanding debt. Thus, Xerox Corporation's liquidity is
dependent upon its ability to successfully generate positive cash flow from
operations, continuation of securitizations and other financing alternatives,
and completion of asset sales.
XEROX CREDIT CORPORATION
Form 10-Q
September 30, 2000
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 11
Part II - Other Information
Item 1. Legal Proceedings 12
Item 6. Exhibits and Reports on Form 8-K 12
Signature 13
Exhibits
Computation of Ratio of Earnings to Fixed Charges (Xerox
Credit Corporation) 14
Computation of Ratio of Earnings to Fixed Charges (Xerox
Corporation) 15
Xerox Corporation's $7 Billion Revolving Credit Agreement
Dated October 22, 1997 (filed in electronic form only)
Financial Data Schedule (filed in electronic form only)
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,
2000 1999 2000 1999
Earned income:
Contracts and notes receivable $ 113 $ 98 $ 324 $ 305
Gain on securitization - 11 - 39
Total earned income 113 109 324 344
Expenses:
Interest 74 59 211 186
Operating and administrative 3 3 9 9
Total expenses 77 62 220 195
Income before income taxes 36 47 104 149
Provision for income taxes 14 18 41 58
Net income $ 22 $ 29 $ 63 $ 91
See accompanying notes.
XEROX CREDIT CORPORATION
CONSOLIDATED BALANCE SHEETS
(In Millions)
ASSETS
September 30, December 31,
2000 1999
(UNAUDITED)
Cash and cash equivalents $ - $ -
Investments:
Contracts receivable 6,080 5,653
Notes receivable - Xerox and affiliates 30 56
Unearned income (698) (647)
Allowance for losses (119) (138)
Total investments 5,293 4,924
Other assets 29 16
Total assets $ 5,322 $ 4,940
LIABILITIES AND SHAREHOLDER'S EQUITY
Liabilities:
Notes payable within one year:
Commercial paper $ 890 $ 160
Current portion of notes payable after one year 511 2,025
Current portion secured borrowing 143 -
Notes Payable - Xerox and affiliates - 717
Notes payable after one year 2,753 1,330
Secured borrowing due after one year 268 -
Due to Xerox Corporation, net 73 97
Accounts payable and accrued liabilities 61 52
Deferred income taxes 30 29
Total liabilities 4,729 4,410
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 351 288
Total shareholder's equity 593 530
Total liabilities and shareholder's equity $ 5,322 $ 4,940
See accompanying notes.
XEROX CREDIT CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(In Millions)
Nine Months Ended
September 30,
2000 1999
Cash Flows from Operating Activities
Net income $ 63 $ 91
Adjustments to reconcile net income to net cash
provided by operating activities:
Net gain on securitization of contracts receivable - (24)
Net change in operating assets and liabilities 29 6
Net cash provided by operating activities 92 73
Cash Flows from Investing Activities
Purchases of investments (1,764) (2,032)
Proceeds from investments 1,343 1,438
Proceeds from asset securitization - 1,150
Net cash (used in)/provided by investing activities (421) 556
Cash Flows from Financing Activities
Change in commercial paper, net 730 (447)
Change in notes with Xerox and affiliates,net (721) (548)
Proceeds from long-term debt 1,525 1,240
Proceeds from secured borrowings 411 -
Principal payments on long-term debt (1,616) (774)
Dividends - (100)
Net cash provided by/(used in) financing activities 329 (629)
Increase in cash and cash equivalents - -
Cash and cash equivalents, beginning of period - -
Cash and cash equivalents, end of period $ - $ -
See accompanying notes.
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, 1999 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.
(2) During the first nine months of 2000, the Company redeemed $1,616 million
of fixed and variable-rate notes on their final maturity dates.
(3) During the first nine months of 2000, the Company sold a total of $1,525
million of term debt consisting of $260 million of 3 year fixed-rate Medium
Term Notes, 130 billion Yen ($1,215 million) of 5 and 7 year notes and $50
million of 2 year adjustable-rate notes. Interest payments on these notes have
been swapped to LIBOR-based rates. Additionally, in September 2000, the
Company arranged a borrowing of $411 million which is secured by Finance
Receivables as described in Note 5 of the "Notes to Consolidated Financial
Statements" of this Quarterly Report on Form 10-Q.
(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 formerly 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) In September 2000, the Company transferred $457 million of finance
receivables to a wholly-owned qualifying bankruptcy-remote special purpose
entity for cash proceeds of $411 million. The difference of $46 million
between the amount transferred and the proceeds represents the Company's
retained interest in these finance receivables. The Company and the financial
institutions which provided the funding for the special purpose entity's
payment for the transfer of the receivables, through the purchase of
participating interests, intend the transfer to be a "true sale at law" and
have received an opinion to that effect from the Company's outside legal
counsel. However, the agreement includes a repurchase option and therefore
the proceeds of $411 million received from the financial institutions were
accounted for as a secured borrowing in accordance with the provisions of SFAS
No. 125 "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities". The balance of the receivables transferred
was $457 million at September 30, 2000 and continues to be included in Finance
receivables, net in the Consolidated Balance Sheet.
Item 2. Management's Discussion and Analysis of Results of Operations and
Financial Condition
RESULTS OF OPERATIONS
The sole business of the Company is to purchase long-term accounts receivable
arising from installment sales and sales-type leases originated by the
domestic marketing operations of Xerox Corporation (Xerox). Substantially all
commercial and federal government transactions originated by Xerox are sold to
the Company. Long-term receivables arising from transactions with state and
local government customers are retained by Xerox.
Contracts receivable income represents income earned under an agreement with
Xerox pursuant to which the Company purchases long-term accounts receivable
associated with Xerox's 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.
Total earned income was $113 million and $109 million for the third quarter of
2000 and 1999, respectively and $324 million and $344 million for the first
nine months of 2000 and 1999, respectively. Income from the first nine months
of 1999 includes $39 million of gains associated with securitization of $1,150
million of contracts receivable in the first nine months at 1999. Excluding
these gains, the increase from 1999 to 2000 is due to a slightly higher
average portfolio size in the first nine months of 2000 as compared to the
first nine months of 1999 and higher interest rates in year 2000.
Interest expense was $74 million and $59 million for the third quarter of 2000
and 1999, respectively, and $211 million and $186 million for the first nine
months of 2000 and 1999, respectively. The increase is due to a slightly
higher portfolio, higher market interest rates, widening credit spreads and
the increase in the Company's debt-to-equity ratio.
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.
Considering our current situation, there is no assurance we will be able to
continue to execute interest rate and foreign currency swap transactions with
counterparties.
Operating and administrative expenses were $3 million for both the third
quarter of 2000 and 1999, respectively, and $9 million for both the first nine
months of 2000 and 1999, respectively. These expenses are incurred to
administer the contracts receivable purchased from Xerox.
The effective income tax rate for the first nine months of 2000 and 1999 was
39.4 percent and 38.9 percent, respectively.
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 will be accounted for based upon 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. The Company will
adopt SFAS No. 133, as amended, beginning January 1, 2001.
CAPITAL RESOURCES AND LIQUIDITY
The Company's principal sources of funds are cash from the collection of Xerox
contracts receivable, borrowings and cost-efficient use of asset
securitizations.
Net cash provided by operating activities was $92 million in the first nine
months of 2000 compared to $73 million during the same period in 1999. Lower
net income was offset by higher interest and tax accruals due to the timing of
payments.
Net cash used in investing activities was $421 million in the first nine
months of 2000 compared to $556 million provided by investing activities
during the same period in 1999. The 1999 period includes the receipt of $1,150
million related to the securitization of contract receivables in the second
and third quarters. Net cash used in investing activities was $594 million in
the first nine months of 1999, excluding securitizations. The change from
1999 to 2000 reflects both the effects of lower Xerox equipment sales growth
in 2000 partially offset by lower 2000 collections resulting from 1999
securitization activity.
The changes in operating and investing cash flows resulted in net cash
provided from financing activities of $329 million during the first nine
months of 2000, versus $629 million used in financing activities during the
same period in 1999. During the first nine months of 2000, commercial paper
balances were increased from an abnormally low Y2K contingency level at year-
end 1999. In addition, 2000 includes the proceeds received from the secured
borrowing associated with the transfer of finance receivables as described in
Note 5 of the "Notes to Consolidated Financial Statements" of this Quarterly
Report on Form 10-Q.
At September 30, 2000, the Company had registered domestic shelf capacity of
$2,000 million. In addition, a $6.5 billion Euro-debt facility was available
to the Company, Xerox and Xerox Capital (Europe) plc ("Xerox Capital"), of
which $3,431 million was unused at September 30, 2000. In July 2000, the Euro-
debt facility was increased to $6.5 billion from $4.0 billion.
Since the beginning of October 2000, Xerox Corporation and the Company have
experienced a significant reduction in our ability to access capital markets
and uncommitted bank lines of credit. Decisions related to funding of our
businesses will remain based on the interest rate environment and capital
market conditions as well as our ability to access these markets. Currently,
these markets and uncommitted bank lines are largely unavailable to both
companies.
As a result, as of October 31, 2000 Xerox Corporation and its supported
subsidiaries had drawn down $5.3 billion under our $7 billion Revolving Credit
Agreement dated as of October 27, 1997 with a group of banks (the
"Agreement"). These funds were used primarily to pay down commercial paper,
medium term notes and similar obligations. Xerox Corporation and the Company
are in compliance with the covenants, terms and conditions in the Agreement,
which matures on October 22, 2002, and expects that the remaining balance of
the commitments under the Agreement will be fully available to support the
business operations of Xerox Corporation and the Company going forward.
Included in the $5.3 billion draw down is $0.8 billion related to the Company.
We anticipate that we will require approximately $0.4 billion during the
balance of the year to refinance commercial paper and maturing medium term
notes. Xerox Corporation and subsidiaries, including the Company, will
require approximately $1.1 billion during the balance of the year to refinance
commercial paper, maturing medium term notes and maturing bank obligations.
Xerox Corporation and the Company do not have any other material short-term
obligations during the balance of the year to be financed through the
Agreement unless the Company's debt ratings are further downgraded as
discussed below.
Xerox Corporation is implementing several global initiatives to reduce costs
and improve operations and sell certain non-core assets that should positively
affect its capital resources and liquidity position when completed. These
include the implementation of a non-core asset divestiture program, which is
expected to generate between $2 billion and $4 billion when completed. In
addition, Xerox has initiated discussions to change its current method of
financing customer purchases of Xerox equipment and to evaluate the sale of
all or a portion of the existing finance receivables portfolio, the proceeds
of which would be used primarily to reduce debt. We expect that the runoff
and/or sale of the Company's finance receivable portfolio is more than
adequate to pay down the Company's outstanding debt.
Xerox Corporation has also initiated a worldwide cost reduction program, which
should result in annualized expense savings of $1 billion when completed.
These initiatives are expected to be completed during 2001.
Xerox Corporation believes that its liquidity is presently sufficient to meet
its current and anticipated needs going forward, subject to timely
implementation and execution of the non-core asset sales and the global
operating initiatives discussed above. Should Xerox Corporation not be able
to successfully complete these initiatives or non-core asset sales on a timely
or satisfactory basis, it will be necessary for it to obtain additional
sources of funds through other improvements in operations or through bridge or
other financing from third parties.
In September 2000, the Company completed the securitization of certain finance
receivables as part of our overall funding strategy. Gross proceeds from the
securitization totaled $411 million. Since this transaction was accounted for
as a secured borrowing, the balance sheet continues to reflect the receivables
and related debt obligation. The earnings impact of this transaction was not
material.
The credit rating agencies that assign ratings to the Company's debt have
recently taken various actions including downgrading the Company's senior debt
and short-term debt. As of November 13, 2000, Moody's debt ratings were Baa2
and P-2, respectively, and the Company's long-term and short-term ratings were
being reviewed for possible downgrade; Fitch debt ratings were BBB- and F3,
respectively, and the ratings were on Ratings Watch Negative and Standard and
Poors debt ratings were BBB- and A-3, respectively, and the ratings outlook
was stable.
The recent lowering of the ratings of the Company's debt are expected to
result in higher borrowing costs and limited access to the capital markets for
the Company going forward. Should the Company be further downgraded by either
Moody's or Standard and Poors to non-investment grade status, the
counterparties to certain of the Company's derivative agreements may require
the Company to repurchase the obligations under such agreements from the
counterparties in the approximate aggregate amount of $75 million. In
addition, if both credit rating agencies downgrade the Company to non-
investment grade status, the Company may be required to repurchase an
additional approximate aggregate amount of $35 million. There is no assurance
that the Company's credit ratings will be maintained, the Company's credit
ratings will not be downgraded below investment grade, the various
counterparties to qualifying derivative agreements would not require the
obligations to be repurchased by the Company and/or that the Company will have
ready access to the credit markets in the future.
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 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. Considering our current situation, there is no assurance we will
be able to continue to execute interest rate and foreign currency swap
transactions with counterparties.
During the first nine months of 2000, the Company entered into interest rate
swap agreements that effectively converted $1,474 million of variable-rate
debt into fixed-rate debt. These agreements mature at various dates through
2005 and resulted in a weighted average interest rate of 7.10 percent. The
Company also entered into interest rate swap and interest rate cross-currency
agreements during the first nine months of 2000 that effectively converted
$1,525 million of fixed- and adjustable-rate debt into debt indexed to LIBOR
rates. These agreements mature at various dates through 2007.
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 September 30, 2000, the debt-to-equity ratio was 8.0 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 period covered by this report. It is the Company's intention to maintain
the debt-to-equity ratio at no greater than 8.0 to 1.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The information set forth under the caption "Capital Resources and Liquidity"
in Item 2 above is hereby incorporated by reference in answer to this Item.
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
Registrant's Annual Report on Form 10-K for
the Year ended December 31, 1999.
(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 4 (d) Revolving Credit Agreement dated
as of October 22, 1997 among Xerox
Corporation, Xerox Credit Corporation
and certain Overseas Borrowers, as Borrowers,
and Various Lenders and Morgan Guaranty Trust
Company of New York, The Chase Manhattan
Bank, Citibank, N.A. and The First National
Bank of Chicago, as Agents". (Electronic Form
Only)
Exhibit 4 (e) Instruments with respect to
long-term debt where the total amount of
securities authorized thereunder does not
exceed ten percent of the total assets of the
Registrant and its subsidiaries on a
consolidated basis have not been filed.
Registrant agrees to furnish the Commission a
copy of each such instrument upon request.
Exhibit 12 (a) Computation of the Company's Ratio of
Earnings to Fixed Charges.
(b) Computation of Xerox's Ratio of Earnings
to Fixed Charges.
Exhibit 27 Financial Data Schedule (Electronic Form Only)
(b) Reports on Form 8-K.
None
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 14, 2000 BY: /S/ Richard Ragazzo
Richard Ragazzo
Vice President, Treasurer and
Chief Financial Officer
