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: June 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 July 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 14 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.
XEROX CREDIT CORPORATION
Form 10-Q
June 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 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)
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
XEROX CREDIT CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
(In Millions)
Three Months Ended Six Months Ended
June 30, June 30,
2000 1999 2000 1999
Earned income:
Contracts and notes receivable $ 108 $ 103 $ 211 $ 207
Gain on securitization - 28 - 28
Total earned income 108 131 211 235
Expenses:
Interest 70 61 137 127
Operating and administrative 3 3 6 6
Total expenses 73 64 143 133
Income before income taxes 35 67 68 102
Provision for income taxes 14 26 27 40
Net income $ 21 $ 41 $ 41 $ 62
See accompanying notes.
XEROX CREDIT CORPORATION
CONSOLIDATED BALANCE SHEETS
(In Millions)
ASSETS
June 30, December 31,
2000 1999
(UNAUDITED)
Cash and cash equivalents $ - $ -
Investments:
Contracts receivable 5,976 5,653
Notes receivable - Xerox and affiliates 25 56
Unearned income (687) (647)
Allowance for losses (131) (138)
Total investments 5,183 4,924
Other assets 29 16
Total assets $ 5,212 $ 4,940
LIABILITIES AND SHAREHOLDER'S EQUITY
Liabilities:
Notes payable within one year:
Commercial paper $ 1,048 $ 160
Current portion of notes payable after one year 712 2,025
Notes Payable - Xerox and affiliates - 717
Notes payable after one year 2,753 1,330
Due to Xerox Corporation, net 74 97
Accounts payable and accrued liabilities 24 52
Deferred income taxes 30 29
Total liabilities 4,641 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 329 288
Total shareholder's equity 571 530
Total liabilities and shareholder's equity $ 5,212 $ 4,940
See accompanying notes.
XEROX CREDIT CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(In Millions)
Six Months Ended
June 30,
2000 1999
Cash Flows from Operating Activities
Net income $ 41 $ 62
Adjustments to reconcile net income to net cash
provided by operating activities:
Net gain on securitization of contracts receivable - (17)
Net change in operating assets and liabilities (15) 3
Net cash provided by operating activities 26 48
Cash Flows from Investing Activities
Purchases of investments (1,200) (1,340)
Proceeds from investments 887 1,012
Proceeds from asset securitization - 750
Net cash (used in)/provided by investing activities (313) 422
Cash Flows from Financing Activities
Change in commercial paper, net 888 (890)
Change in notes with Xerox and affiliates,net (711) (295)
Proceeds from long-term debt 1,525 1,240
Principal payments on long-term debt (1,415) (525)
Net cash provided by/(used in) financing activities 287 (470)
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 six months of 2000, the Company redeemed $1,415 million
of fixed and variable-rate notes on their final maturity dates.
(3) During the first six 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.
(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.
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'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 $108 million and $131 million for the second
quarter of 2000 and 1999, respectively and $211 million and $235 million for
the first six months of 2000 and 1999, respectively. The decrease includes the
effect of a $28 million gain from the securitization of $750 million of
contracts receivable in June of 1999 and a smaller average portfolio size in
the first six months of 2000 caused by the flow through effects of the 1999
second and third quarter securitization activity. These impacts were partially
offset by somewhat higher interest rates during the first six months of 2000
as compared to the first six months of 1999.
Interest expense was $70 million and $61 million for the second quarter
of 2000 and 1999, respectively, and $137 million and $127 million for the
first six months of 2000 and 1999, respectively. The increase is due to higher
interest rates and the increase in the Company's debt-to-equity ratio,
partially offset by a smaller average portfolio of contracts receivable
resulting from the flow-through effects of the 1999 securitization activity.
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 both the second
quarter of 2000 and 1999, respectively, and $6 million for both the first six
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 six months of 2000 and 1999
was 39.7 percent and 39.2 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
securitization.
Net cash provided by operating activities was $26 million in the first
six months of 2000 compared to $48 million during the same period in 1999. The
decrease was primarily due to the timing of interest payments. During the
first six months of 2000, accrued interest decreased as commercial paper
balances, which have a shorter interest payment cycle, were increased from an
abnormally low Y2K contingency level at year end 1999. During the fourth
quarter of 1999, accrued interest grew primarily due to increased use of
medium-term funding in place of short-term commercial paper borrowings.
Net cash used in investing activities was $313 million in the first six
months of 2000 compared to $422 million provided by investing activities
during the same period in 1999. The 1999 period includes the receipt of $750
million related to the securitization of contract receivables in the second
quarter. Net cash used in investing activities was $328 million in the first
six months of 1999, excluding the second quarter securitization. The change in
the same period from 1999 to 2000 reflects both the effects of lower Xerox
equipment sales growth in 2000 and lower first half 2000 collections resulting
from 1999 securitization activity.
The changes in operating and investing cash flows resulted in net cash
provided from financing activities of $287 million during the first six months
of 2000, versus $470 million used in financing activities during the same
period in 1999. During the first six months of 2000, commercial paper balances
were increased from an abnormally low Y2K contingency level at year-end 1999.
At June 30, 2000, the Company had registered domestic shelf capacity of
$2,000 million. In addition, a $4 billion Euro-debt facility was available to
the Company, Xerox and Xerox Capital (Europe) plc ("Xerox Capital"), of which
$900 million was unused at June 30, 2000. In July 2000, the Euro-debt facility
was increased to $6.5 billion, providing an additional $2.5 billion in
borrowing capacity.
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 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.
Xerox's and the Company's present credit ratings, which reflect the
following events, enable ready access to the credit markets.
* On July 26, 2000, Moody's placed the long-term ratings of Xerox under review
for possible downgrade.
* On July 27, 2000, Standard & Poor's lowered its senior debt and commercial
paper ratings for Xerox and the Company from A to A-, and from A-1 to A-2,
respectively and maintained its negative CreditWatch on the Company's
senior debt.
These actions will result in higher borrowing costs for the Company as debt is
refinanced. There is no assurance that these credit ratings will be maintained
and/or that the Company will continue to have ready access to the credit
markets in the future.
The Company believes that cash provided by operations, funding available
through its commercial paper program supported by its committed credit
facility, and its available access to the global capital markets are more than
sufficient to enable the Company to meet its financing needs. New borrowing
associated with the financing of customer purchases of Xerox equipment will
continue in 2000 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 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 six months of 2000, the Company entered into interest
rate swap agreements that effectively converted $1,210 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 7.12 percent.
The Company also entered into interest rate swap and interest rate cross-
currency agreements during the first six 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 June 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 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.
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 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
August 10, 2000 BY: /S/ Richard Ragazzo
Richard Ragazzo
Vice President, Treasurer and
Chief Financial Officer
