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FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(Mark One)
( X ) Annual Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the fiscal year ended: December 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 by check mark if disclosure of delinquent filers pursuant to Item 405
of regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K. Not Applicable
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 February 29, 2000
Common Stock 2,000
THE REGISTRANT MEETS THE CONDITIONS SET FORTH IN GENERAL INSTRUCTIONS J(1)(a)
AND (b) OF FORM 10-K AND IS THEREFORE FILING THIS FORM WITH THE REDUCED
DISCLOSURE FORMAT.
THIS DOCUMENT CONSISTS OF 31 PAGES
(1)
To the extent that this Form 10-K 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 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.
PART I
ITEM 1. Business
Xerox Credit Corporation, a Delaware corporation (together with its
subsidiaries herein called the "Company" unless the context otherwise
requires), was organized on June 23, 1980. All of the Company's outstanding
capital stock is owned by Xerox Financial Services, Inc. ("XFSI"), a holding
company, which is wholly-owned by Xerox Corporation (Xerox Corporation
together with its subsidiaries are herein called "Xerox" unless the context
otherwise requires).
The Company is engaged in financing long-term accounts receivable
arising out of equipment sales by Xerox to its Document Processing customers
throughout the United States. Contract terms on these accounts receivable
range primarily from three to five years.
The Company purchases from Xerox all receivables due from commercial
customers, the Federal Government and non-tax exempt State & Local Government
agencies. New contracts are purchased monthly. The Company pays Xerox an
administration fee for providing billing and collection services. The
purchase price of the contract is calculated as the present value of the
future cash flows. The interest rates utilized to discount the cash flows are
determined by certain referenced interest rates plus a prescribed spread. The
interest rate utilized for the cost calculation is adjusted monthly as each
new set of contracts is purchased.
Xerox is The Document Company and a leader in the global document
market, providing document solutions that enhance business productivity.
Xerox' Document Processing activities encompass developing, manufacturing,
marketing, servicing and financing a complete range of document processing
products and services designed to make offices around the world more
productive. Xerox document processing products are principally sold directly
to customers by Xerox' worldwide sales force of approximately 15,200 employees
and through a network of independent agents, dealers, retail chains, value-
added resellers and systems integrators. In addition, Xerox has arrangements
with U.S. retail marketing channels to market low-end products not generally
suited for distribution through the Xerox direct sales force. The financing
of Xerox equipment is generally carried out by the Company in the United
States and internationally by foreign financing subsidiaries and divisions in
most countries where Xerox operates.
(2)
ITEM 2. Properties
The Company does not directly own any facilities in order to carry on
its principal business. Its principal executive offices in Stamford,
Connecticut are leased facilities of approximately 500 square feet of office
space. In Xerox North American Solutions Group located in Rochester, New
York, the Company uses less than 1,000 square feet of the total office space.
These facilities are deemed adequate by management.
ITEM 3. Legal Proceedings
None.
ITEM 4. Submission of Matters to a Vote of Security Holders
Not Required.
PART II
ITEM 5. Market for the Registrant's Common Equity and Related Stockholder
Matters
Because the Company is a wholly-owned subsidiary, there is no market for
its common shares. Dividends declared during the five years ended December 31
were as follows (in millions):
1995 - $149; 1996 - $97; 1997 - $41; 1998 - None; and 1999 - $170.
ITEM 6. Selected Financial Data
Not Required.
ITEM 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
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' sales of 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. In 1999,
the Company purchased receivables from Xerox totaling $2,911 million compared
to $2,745 and $2,138 million in 1998 and 1997, respectively. The increase in
receivables purchases for both years was due to increased equipment sales in
the United States. The 1999 increase of 6% was significantly below the 1998
increase of 28% as U.S. revenue growth was significantly affected by the
ongoing disruptive impacts of Xerox' customer administration reorganization,
preparations for the January, 2000 final phase of the realignment of the sales
organization to an industry approach, customer Y2K mitigation efforts and
network lockdowns and increased competition. Earned income from contracts
receivable increased in 1999 to $435 million from $388 million in 1998 and
$351 million in 1997. The 1999 increase was primarily due to gains from the
sale of $1,150 million of contracts receivable totaling $39 million and a
larger average portfolio of contracts receivable, partially offset by the
reduction in earned income of approximately $33 million stemming from the
flow-through impact of the 1999 receivable sales and lower interest rates. The
1998 increase was primarily due to a larger average portfolio of contracts
receivable, reflecting accelerated growth of Xerox' equipment sales in the
United States partially offset by lower average interest rates.
Interest expense was $243 million in 1999 compared to $240 million in
1998 and $217 million in 1997. The increases were primarily due to larger
average portfolios of contracts receivable and an increase in the Company's
debt-to-equity ratio, partially offset by a decrease in the cost of debt and
debt reduction from the proceeds of receivable sales.
(3)
The Company's 1999 sales of $1,150 million of contracts receivable
represented approximately 20% of its investment portfolio. As a result of
these transactions, future earned income and interest expense will be
correspondingly reduced.
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 realize higher 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 $12 million in 1999 compared
to $11 million in 1998 and 1997. These expenses include billing, collection
and other administrative costs related to the administration of the contracts
receivable purchased from Xerox. The increase over 1998 is due to a larger
average portfolio of contracts receivable.
The effective income tax rate was 38.9 percent in 1999, 40.2 percent in
1998 and 40.7 in 1997. The decline is due to a decrease in the Company's
blended state income tax rate.
The Year 2000 (Y2K) 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. 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, products, and other technology interfaces required
remediation or replacement in order to render the systems Year 2000 compliant.
As of December 31, 1999, remediation and replacement work on all required
mission critical and non-mission critical information systems, technology
interfaces, facilities and products was completed by Xerox as planned. As a
result of these efforts, the Company did not experience any Y2K related
business disruptions.
In 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
shareholder's equity may experience increased volatility. The Company will
adopt SFAS No. 133, as amended, beginning January 1, 2001.
(4)
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 $107 million in 1999
compared with $81 million in 1998 and $69 million in 1997. The year-to-year
increase in 1999 was due to net income growth and higher accrued interest
reflecting increased use of medium-term funding in place of short-term
commercial paper borrowing. The 1998 increase versus 1997 was primarily due
to higher net income.
Net cash provided by investing activities was $129 million in 1999,
including the $1,150 million of securitization proceeds. Net cash used by
investing activities was $882 million in 1998 reflecting the effects of Xerox
equipment sales growth and slower growth in collections due to an increase in
the average length of contracts originated in 1998. Net cash used by
investing activities was $333 million in 1997. In both 1999 and 1998 cash
collections were negatively impacted by the continued disruptions related to
the consolidation of Xerox' U.S. customer administrative centers.
Net cash used for financing activities was $236 million in 1999 compared
to $801 million provided in 1998. The change was primarily due to the proceeds
from the sale of receivables being used to reduce outstanding debt. Also
during 1999 the Company increased term borrowings outstanding by $1,533
million and reduced the commercial paper balance by $1,350 million. This
shift was made in anticipation of potential disruption to the commercial paper
market due to Y2K. Net cash provided by financing activities was $801 million
in 1998 compared to $264 million in 1997. The 1998 increase was largely a
result of higher amounts of notes payable to Xerox and affiliates to support
the growth in contracts purchased which more than offset lower cash provided
by commercial paper borrowings. Also contributing to the increase was the
absence of dividend payments to Xerox in 1998 given the Company's need to
retain equity capital to support its accelerated growth.
At December 31, 1999, the Company had registered domestic shelf capacity
of $2 billion. In addition, a $4 billion Euro-debt facility is available to
the Company, Xerox and Xerox Capital (Europe) plc ("Xerox Capital"), of which
$1,960 million remained unused at December 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 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 operations, funding available
through its commercial paper programs 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 2000 and decisions regarding the size and timing of
new term debt financing and any asset securitization activity will be made
based on cash flows, match funding needs, refinancing requirements and capital
market conditions.
Xerox' and the Company's present credit ratings permit ready access to
the credit markets. There is no assurance that these credit ratings can be
maintained and/or that the Company will continue to have ready access to the
credit markets. In December 1999, Moody's Investors Service, Inc. announced
that the long and short term credit ratings of Xerox and its financially
supported subsidiaries are under review for possible downgrade, Standard &
Poor's announced a negative outlook for Xerox' and the Company's ratings and
Fitch IBCA, Inc. placed Xerox' and its subsidiaries' debt ratings on
"RatingAlert-Negative". A downgrade or lowering in such ratings could result
in higher borrowing costs for the Company in future periods.
(5)
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 1999, the Company entered into interest rate swap agreements that
effectively converted $1,824 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 5.96 percent. The Company also entered into
interest rate swap agreements during 1999 that effectively converted $1,718
million of new fixed-rate debt into variable-rate debt indexed to LIBOR rates.
In addition the Company entered into an interest rate swap agreement that
effectively converted $390 million of new prime-rate debt into LIBOR-rate
debt. These agreements mature in 2000, 2002, 2003 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.
Many of the financial instruments the Company uses are sensitive to
changes in interest rates. Hypothetically, interest rate changes result in
gains or losses related to the market value of the Company's term debt and
interest rate swaps due to differences between current market interest rates
and the stated interest rates within the instrument. Applying an assumed 10
percent reduction or increase in the yield curves at December 31, 1999, the
fair value of the Company's term debt and interest swaps would increase or
decrease by approximately $34 million.
The Company's interest rate hedging is unaffected by changes in market
conditions because swaps are normally held to maturity in order to lock in
interest rate spreads on the underlying transactions.
As of December 31, 1999, the Company's overall 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 periods covered by this report. It is the
Company's intention to maintain the debt-to-equity ratio at no greater than 8
to 1.
Pursuant to a Support Agreement between the Company and Xerox, Xerox has
agreed to retain ownership of 100 percent of the voting capital stock of the
Company and to make periodic payments to the extent necessary to ensure that
the Company's annual pre-tax earnings available for fixed charges equal at
least 1.25 times the Company's fixed charges. No such payments were made
during the periods covered by this report.
(6)
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
The information set forth in the ninth through twelfth paragraphs under the
caption "Capital Resources and Liquidity" in Item 7 above is hereby
incorporated by reference in answer to this Item.
ITEM 8. Financial Statements and Supplementary Data
The financial statements of the Company and its consolidated
subsidiaries and the notes thereto and the report thereon of KPMG LLP,
independent auditors, are set forth on pages 9 through 22 hereof.
ITEM 9. Disagreements on Accounting and Financial Disclosure
Not Applicable.
PART III
ITEM 10. Directors and Executive Officers of the Registrant
Not Required.
ITEM 11. Executive Compensation
Not Required.
ITEM 12. Security Ownership of Certain Beneficial Owners and Management
Not Required.
ITEM 13. Certain Relationships and Related Transactions
Not Required.
PART IV
ITEM 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a) (1) and (2) The financial statements and the report of independent
auditors thereon filed herewith are set forth in the Index to
Financial Statements included herein.
(3) The exhibits filed herewith are set forth in the Exhibit Index
included herein.
(b) A Current Report on Form 8-K dated December 10, 1999 reporting
Item 5 "Other Events" was filed during the last quarter of the
period covered by this Report.
(7)
Pursuant to the requirements of Section 13 or 15 (d) 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 /s/ Richard Ragazzo________________
(NAME AND TITLE) Richard Ragazzo, Vice President,
Treasurer and Chief Financial Officer
March 27, 2000
Pursuant to the requirement of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the date indicated.
March 27, 2000
Principal Executive Officer:
Eunice M. Filter /s/ Eunice M. Filter______________
President, Chief Executive Officer
and Director
Principal Financial Officer:
Richard Ragazzo /s/ Richard Ragazzo________________
Vice President, Treasurer and
Chief Financial Officer
Principal Accounting Officer:
Gary R. Kabureck /s/ Gary R. Kabureck_________
Controller
Directors:
/s/ Donald R. Altieri______
Donald R. Altieri, Director
/s/ Barry D. Romeril_______
Barry D. Romeril, Director
(8)
XEROX CREDIT CORPORATION
INDEX TO FINANCIAL STATEMENTS AND SCHEDULE
Financial Statements:
Report of Independent Auditors
Consolidated statements of income for each of the years in the three-year
period ended December 31, 1999
Consolidated balance sheets at December 31, 1999 and 1998
Consolidated statements of shareholder's equity for each of the years in the
three-year period ended December 31, 1999
Consolidated statements of cash flows for each of the years in the three-year
period ended December 31, 1999
Notes to consolidated financial statements
Schedules:
All schedules are omitted as they are not applicable or the information
required is included in the consolidated financial statements or notes
thereto.
(9)
Report of Independent Auditors
The Board of Directors
Xerox Credit Corporation:
We have audited the consolidated financial statements of Xerox Credit
Corporation and subsidiaries as listed in the accompanying index. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the consolidated financial
statements are free of material misstatement. An audit includes examining, on
a test basis, evidence supporting the amounts and disclosures in the
consolidated financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation. We believe
that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Xerox
Credit Corporation and subsidiaries at December 31, 1999 and 1998, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 1999, in conformity with generally
accepted accounting principles.
/s/ KPMG LLP
KPMG LLP
Stamford, Connecticut
January 25, 2000
(10)
XEROX CREDIT CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
Years Ended December 31, 1999, 1998 and 1997
(In Millions)
1999 1998 1997
Earned Income:
Contracts receivable $ 435 $ 388 $ 351
Expenses:
Interest 243 240 217
Operating and administrative 12 11 11
Total expenses 255 251 228
Income before income taxes 180 137 123
Provision for income taxes 70 55 50
Net income $ 110 $ 82 $ 73
The accompanying notes are an integral part of the consolidated financial
statements.
(11)
XEROX CREDIT CORPORATION
CONSOLIDATED BALANCE SHEETS
December 31, 1999 and 1998
(In Millions)
ASSETS
1999 1998
Cash and cash equivalents $ - $ -
Investments:
Contracts receivable 5,653 5,789
Notes receivable - Xerox and affiliates 56 56
Unearned income (647) (700)
Allowance for losses (138) (136)
Total investments 4,924 5,009
Other assets 16 30
Total assets $ 4,940 $ 5,039
LIABILITIES AND SHAREHOLDER'S EQUITY
Liabilities:
Notes payable within one year:
Commercial paper $ 160 $ 1,510
Current portion of notes payable after one year 2,025 1,175
Notes payable - Xerox and affiliates 717 1,035
Notes payable after one year 1,330 647
Due to Xerox Corporation, net 97 34
Accounts payable and accrued liabilities 52 34
Deferred income taxes 29 14
Total liabilities 4,410 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 288 348
Total shareholder's equity 530 590
Total liabilities and shareholder's equity $ 4,940 $ 5,039
The accompanying notes are an integral part of the consolidated financial
statements.
(12)
XEROX CREDIT CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDER'S EQUITY
Years Ended December 31, 1999, 1998 and 1997
(In Millions)
Additional
Common Paid-In Retained
Stock Capital Earnings Total
Balance at December 31, 1996 $ 23 $ 219 $ 234 $ 476
Net Income - - 73 73
Dividends - - (41) (41)
Balance at December 31, 1997 23 219 266 508
Net Income - - 82 82
Dividends - - - -
Balance at December 31, 1998 23 219 348 590
Net Income - - 110 110
Dividends - - (170) (170)
Balance at December 31, 1999 $ 23 $ 219 $ 288 $ 530
The accompanying notes are an integral part of the consolidated financial
statements.
(13)
XEROX CREDIT CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, 1999, 1998 and 1997
(In Millions)
1999 1998 1997
Cash Flows from Operating Activities
Net income $ 110 $ 82 $ 73
Adjustments to reconcile net income to net cash
provided by operating activities:
Net gain on sales of contracts receivable (24) - -
Net change in operating assets and liabilities 21 (1) (4)
Net cash provided by operating activities 107 81 69
Cash Flows from Investing Activities
Purchases of investments (2,911) (2,745) (2,138)
Proceeds from investments 1,890 1,863 1,805
Proceeds from sales of contract receivables 1,150 - -
Net cash provided by (used in) investing activities 129 (882) (333)
Cash Flows from Financing Activities
Change in commercial paper, net (1,350) 82 302
Change in notes payable-Xerox and affiliates, net (249) 883 141
Proceeds from long-term debt 2,608 635 751
Principal payments of long-term debt (1,075) (799) (889)
Dividends (170) - (41)
Net cash provided by (used in) financing activities (236) 801 264
Change in cash and cash equivalents - - -
Cash and cash equivalents, beginning of year - - -
Cash and cash equivalents, end of year $ - $ - $ -
The accompanying notes are an integral part of the consolidated financial
statements.
(14)
XEROX CREDIT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) Summary of Significant Accounting Policies
Basis of Presentation
The consolidated financial statements include the accounts of Xerox
Credit Corporation (the Company) and its subsidiaries. The Company is a
wholly-owned subsidiary of Xerox Financial Services, Inc. (XFSI), which is in
turn wholly-owned by Xerox Corporation (Xerox). All significant transactions
between the Company and its subsidiaries have been eliminated.
Recognition of Earned Income
The Company utilizes the interest method for the recognition of earned
income associated with contracts receivable. Under this method, the
difference between the amount of gross contract receivable and the cost of the
contract is recorded as unearned income. The unearned income is amortized to
income over the term of the transaction under an effective yield method.
Cash and Cash Equivalents
All highly liquid investments of the Company, with a maturity of three
months or less at date of purchase, are considered to be cash equivalents.
Sale of Contract Receivables
The Company periodically sells contract receivables through special
purpose subsidiaries, retains the servicing rights and certain other
beneficial interests, and receives a servicing fee which is recognized as
collected over the remaining term of the related sold contract receivables.
Gains or losses from the sale of contract receivables are recognized in the
period in which the sale occurs. In determining the gain or loss on each
qualifying sale of contract receivables, the investment in the sold receivable
pool is allocated between the portion sold and the portion retained based on
their relative fair values at the date of sale. The retained interest
includes interest only (IO) strips, subordinated receivable interests, and
allowance for credit losses. These financial instruments are recorded at
market value.
Allowance for Losses
Xerox computes the allowance for losses on all contracts based upon
historical experience and current trends. When the Company purchases the
contracts from Xerox, the portion of Xerox' allowance allocable to the
purchased contracts is deducted from the purchase price and recorded as
Allowance for Losses by the Company. If more contracts are charged off than
were forecast in the initial allowance for loss calculation, Xerox reimburses
the Company for the excess charge-offs. The resultant effect is to relieve the
Company of any exposure with regard to write-offs associated with the
contracts receivable purchased from Xerox, and therefore, no bad debt expense
is included in the Company's Consolidated Statements of Income.
Charge-Off of Delinquent Receivables
The Company's policy with respect to the charge-off of delinquent
receivables is that receivables are charged-off as soon as it becomes apparent
that the collection of the receivables through normal means is unlikely.
(15)
XEROX CREDIT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Fair Value of Financial Instruments
The fair value of cash and cash equivalents and commercial paper
approximate carrying amounts due to the short maturities of these instruments.
The fair value of investments, interest rate swaps, and notes payable are
discussed in Notes 3, 4, and 5, respectively.
Accounting Changes
In 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 the date of
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 shareholder's equity may experience increased volatility. The Company
will adopt SFAS No. 133, as amended, beginning January 1, 2001.
Reclassifications
Certain prior year balances have been reclassified to conform to the
current year presentation.
(2) Allowance for Losses
The analysis of the Allowance for Losses for the three-year period
ending December 31, 1999 is as follows ($ in millions):
Additions
Balance Charged Retained Balance
at to at at
Beginning Costs Time End
of and of of
Period Expenses Purchase Deductions Period
(A)
1999
Allowance for losses $ 136 $ - $ 81 $ 79 $ 138
1998
Allowance for losses $ 131 $ - $ 52 $ 47 $ 136
1997
Allowance for losses $ 123 $ - $ 60 $ 52 $ 131
(A) Amounts written-off, net of recoveries.
(16)
XEROX CREDIT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(3) Investments
Contracts receivable represent purchases of long-term trade accounts
receivable from Xerox. These receivables arise from Xerox equipment being
sold under installment sales and sales-type leases. Contract terms on these
receivables range primarily from three to five years and are generally
collateralized by a security interest in the underlying assets. The Company
purchased receivables from Xerox totaling $2,911 million in 1999, $2,745
million in 1998, and $2,138 million in 1997. The Company was charged $10
million in 1999 and $9 million in 1998 and 1997 by Xerox for administrative
costs associated with the contracts receivable purchased.
The Company is not required to determine the fair value of these
receivables, however management believes that as of December 31, 1999 any
revaluation of the contracts receivable would result in a fair value in excess
of the carrying value of these receivables.
The scheduled maturities of customer financing contracts receivable at
December 31, 1999 are as follows (in millions):
2000 $2,084
2001 1,399
2002 1,091
2003 713
2004 344
Thereafter 22
Total $5,653
Experience has shown that a portion of these contracts receivable will be
prepaid prior to maturity. Accordingly, the preceding schedule of contractual
maturities should not be considered a forecast of future cash collections.
Included in the $56 million notes receivable balance from Xerox and
affiliates are interest bearing demand receivables from related parties.
During 1999, the Company received proceeds of $1,150 million from the
sale of contracts receivable. The net pre-tax benefit related to these sales
was approximately $27 million and is included in the consolidated statement of
income as follows ($ in millions):
Gain on initial sale transactions included in Earned Income $39
Flow through impact of lower interest income in Earned Income (33)
Flow through impact of lower interest expense in Interest 21
Net pre-tax benefit $27
Recourse amounts associated with the aforementioned sale are expected to be
minimal and adequate reserves are in place to cover potential losses.
(17)
XEROX CREDIT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(4) Notes Payable
A summary of notes payable at December 31, 1999 and 1998 follows:
(In Millions)
1999 1998
Floating Rate Notes due 1999 $ - $ 300
10.00% Notes due 1999 - 150
6.50% Euro Medium Term Notes due 1999 - 150
Floating Rate Notes due 2000 (a) 643 53
Medium Term Notes due 2000 (b) 1,025 225
5.40% Euro Medium Term Notes due 2000 148 148
Floating Rate Notes due 2001 (a) 300 -
Medium Term Notes due 2001 (b) 26 126
6.00% Euro Medium Term Notes due 2002 180 -
0.80% Yen Denominated Medium Term Notes due 2001(c) 488 -
2.875% Medium Term Notes due 2002 (d) - 250
6.10% Euro Medium Term Notes due 2003 200 -
Medium Term Notes due 2007 - 25
Medium Term Notes due 2008 (b,e) 25 25
Medium Term Notes due 2012 (b,f) 125 225
Medium Term Notes due 2013 (b,g) 60 60
Medium Term Notes due 2014 (b) 50 -
Medium Term Notes due 2018 (b,h) 25 25
Floating Rate Notes due 2048 (i) 60 60
Subtotal $3,355 $1,822
Less current maturities (2,025) (1,175)
Total Notes Payable after one year $1,330 $ 647
(a) The notes carry interest rates which are based primarily on spreads
above or below certain reference rates such as U.S. LIBOR.
(b) Medium Term Notes due in 2000, 2001 and 2008 through 2018 have weighted
average interest rates of 5.33%, 3.25% and 6.70%, respectively.
(c) Represents synthetic US$ obligation as a result of a cross-currency
interest rate swap. This interest rate swap converts the notes to U.S.
LIBOR based funding.
(d) $250 million of cash exchangeable equity-linked notes were exchanged
at a premium based on Xerox' stock price. However, the Company had
entered into a swap to limit the principal payment at maturity to $250
million. These notes were called during 1999.
(e) $25 million of Medium Term Notes due 2008 are expected to be called in
2000.
(f) $100 million of Medium Term Notes due 2012 are expected to be called in
2000.
(g) $60 million of Medium Term Notes due 2013 are expected to be called in
2000.
(h) $25 million of Medium Term Notes due 2018 are expected to be called in
2000.
(i) The notes mature August 15, 2048 and are repayable annually each August
15th at the option of the noteholders. The outstanding notes are
classified as notes payable after one year since the Company has the
(18)
XEROX CREDIT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(4) Notes Payable (Continued)
ability to refinance them on a long-term basis, if required. The
interest rate is indexed to rates on commercial paper placed for
issuers whose bond rating is "AA" or the equivalent as
reported in Federal Reserve Statistical Release H.15 (519), which at
year-end was 5.13 percent.
Expected principal repayments on notes payable during the next five
years are (in millions):
2000 $ 2,025
2001 402
2002 668
2003 200
2004 and Thereafter 60
Total $ 3,355
Certain of the Company's debt agreements allow it to redeem outstanding debt,
usually at par, prior to scheduled maturity. Outstanding debt issues with
such call features are classified on the balance sheet and in the preceding
five-year maturity summary in accordance with management's current
expectations. The actual decision as to early redemption will be made at the
time the early redemption option becomes exercisable and will be based on
economic and business conditions at that time.
Interest payments on notes payable for 1999, 1998 and 1997 were $161
million, $152 million, and $132 million, respectively. Interest payments on
commercial paper for 1999, 1998 and 1997 were $62 million, $87 million and $79
million, respectively. The weighted-average commercial paper interest rates
for 1999, 1998 and 1997 were 5.1 percent, 5.5 percent and 5.6 percent,
respectively.
At December 31, 1999 and 1998, carrying values of notes payable totaled
$3,355 million and $1,822 million, respectively. The fair values of the
Company's notes payable at December 31, 1999 and 1998 were $3,316 million and
$1,886 million, respectively, based on quoted market prices for the Company's
notes or those of comparable issuers with similar features and maturity dates.
The difference between the fair value and the carrying value represents the
theoretical net discount or premium the Company would have received or paid if
it had retired all notes payable at December 31, 1999 or 1998, respectively.
Except as disclosed above, the Company has no plans to retire its notes
payable prior to their call or final maturity dates.
The original issue discount and other expenses associated with the debt
offerings are amortized over the term of the related issue.
(5) Lines of Credit and Interest Rate Swaps
At December 31, 1999, the Company and Xerox had joint access to a $7
billion revolving credit agreement with various banks, which expires in 2002.
The agreement is also accessible by Xerox Capital (Europe) plc (Xerox Capital)
and Xerox Overseas Holdings Limited up to a limit of $4 billion. This
agreement is unused and is available to back the issuance of commercial paper.
At December 31, 1999, the Company had a total of $160 million of commercial
paper outstanding. The average interest rate on commercial paper outstanding
at December 31, 1999 was 5.93 percent. In addition, a $4 billion Euro-debt
facility is available to the Company, Xerox and Xerox Capital, of which $1,960
million remained unused at December 31, 1999.
(19)
XEROX CREDIT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(5) Lines of Credit and Interest Rate Swaps (Continued)
The Company routinely enters into interest rate swap agreements in the
management of interest rate exposure. An interest rate swap is an agreement
to exchange interest rate payment streams based on a notional principal
amount. In general, the Company's objective is to hedge its variable-rate
debt by paying fixed rates under the swap agreements and receiving variable-
rate payments in return. These swap agreements effectively convert a portion
(equal to the notional amount) of underlying variable-rate commercial paper
and Medium Term Notes into fixed-rate debt. The net interest rate
differentials that will be paid or received are recorded currently as
adjustments to interest expense. The counterparties to these swap agreements
are major commercial and investment banks.
The Company does not enter into swap transactions for trading or other
speculative purposes. The Company's policies on the use of such derivative
instruments prescribe an investment grade counterparty credit floor and at
least quarterly monitoring of market risk on a counterparty-by-counterparty
basis. We utilize numerous counterparties to ensure there are no significant
concentrations of credit risk with any individual counterparty or groups of
counterparties. Based upon its ongoing evaluation of the replacement cost of
its derivatives transactions, and counterparty creditworthiness, the Company
considers the risk of credit default significantly affecting its financial
position or results of operations to be remote. The Company's interest rate
hedging activities are largely unaffected by changes in market conditions as
swaps are typically held to maturity in order to lock in interest spreads on
underlying transactions.
The aggregate notional amounts of interest rate swaps outstanding at
December 31, 1999 and 1998 are as follows:
(In Millions)
1999 1998
Pay fixed/receive variable $4,206 $3,709
Pay variable/receive variable 443 53
Pay variable/receive fixed 2,352 1,259
$7,001 $5,021
Average interest payment rates 5.94% 5.67%
These arrangements were entered into to ensure that, when taking into
account the characteristics of its debt portfolio (described in Footnote 4)
the Company is adequately match funded.
At December 31, 1999 and 1998, the Company's swap agreements had
aggregate net fair values of $16 million and $31 million, respectively. These
values represent the estimated net amounts the Company would have received if
all agreements had been terminated/replaced as of December 31, 1999 and 1998,
respectively. The fair values for interest rate swap agreements were
calculated by the Company based on market conditions as of the respective
year-ends and supplemented with quotes from banks. The Company has no present
plans to terminate/replace a significant portion of these agreements prior to
their scheduled maturities.
The maturities of the Company's swaps outstanding as of December
31, 1999 are: 2000 - $3,276 million, 2001 - $1,344 million,
2002 - $1,406 million, 2003 - $593 million, 2004 and thereafter - $382 million.
(20)
XEROX CREDIT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(6) Income Taxes
Income taxes are provided at statutory rates based on income before
income taxes exclusive of the amortization of investment tax credits and
earnings not subject to Federal taxation. Substantially all of the Company's
operations are included in Xerox' consolidated income tax returns. In
connection with these consolidated returns, the Company paid Xerox $58
million, $62 million, and $54 million in 1999, 1998 and 1997, respectively.
The Company paid $2 million in 1999 and less than $1 million in each of 1998
and 1997 to taxing authorities for Company operations not included in Xerox'
consolidated tax returns.
The components of income before income taxes and the provision for
income taxes are as follows:
(In Millions)
1999 1998 1997
Income before income taxes: $ 180 $ 137 $ 123
Federal income taxes
Current $ 52 $ 48 $ 43
Deferred 11 - -
State income taxes
Current 6 7 7
Deferred 1 - -
Total provision for income taxes $ 70 $ 55 $ 50
A reconciliation of the effective tax rate from the U.S. Federal
statutory tax rate follows:
1999 1998 1997
U.S. Federal statutory rate 35.0% 35.0% 35.0%
State income taxes, net of Federal
income tax benefit 3.9 5.2 5.7
Effective tax rate 38.9% 40.2% 40.7%
The tax effects of temporary differences that give rise to significant
portions of deferred taxes at December 31, 1999 and 1998 follows:
(In Millions)
1999 1998
Tax effect of future tax deductions:
Real estate and other $ 6 $ 9
Tax effect of future taxable income:
Asset securitizations (12) -
Leveraged leases and other (23) (23)
Total deferred taxes, net $ (29) $ (14)
The Company believes it is more likely than not that the deferred tax
assets will be realized in the ordinary course of operations based on
scheduling of deferred tax liabilities and income from operating activities.
(21)
XEROX CREDIT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(7) Xerox Corporation Support Agreement
The terms of a Support Agreement with Xerox provide that the Company
will receive 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.
(8) Quarterly Results of Operations (Unaudited)
A summary of interim financial information follows:
(In Millions)
First Second Third Fourth
Quarter Quarter Quarter Quarter Total
1999
Earned income $ 104 $ 131 $ 109 $ 91 $ 435
Interest expense 66 61 59 57 243
Operating and administrative
expenses 3 3 3 3 12
Income before income taxes 35 67 47 31 180
Income taxes 14 26 18 12 70
Net income $ 21 $ 41 $ 29 $ 19 $ 110
1998
Earned income $ 94 $ 96 $ 97 $ 101 $ 388
Interest expense 59 58 61 62 240
Operating and administrative
expenses 3 2 3 3 11
Income before income taxes 32 36 33 36 137
Income taxes 13 15 13 14 55
Net income $ 19 $ 21 $ 20 $ 22 $ 82
(22)
XEROX CREDIT CORPORATION
Form 10-K
For the Year Ended December 31, 1999
Index of Exhibits
Document
(3) (a) Articles of Incorporation of Registrant filed with the Secretary
of State of Delaware on June 23, 1980, as amended by Certificates
of Amendment thereto filed with the Secretary of State of Delaware
on September 12, 1980 and September 19, 1988, as further amended
by Certificate of Change of Registered Agent filed with the
Secretary of State of Delaware on October 7, 1986.
(b) By-Laws of Registrant, as amended through September 1, 1992.
Incorporated by reference to Exhibit 3(b) to Registrant's
Quarterly Report on Form 10-Q for the quarter ended March 31,
1997.
(4) (a) Indenture dated as of March 1, 1988, as supplemented by the First
Supplemental Indenture dated as of July 1,1988, between Registrant
and The First National Bank of Chicago relating to unlimited
amounts of debt securities which may be issued from time to time
by Registrant when and as authorized by Registrant's Board of
Directors or the Executive Committee of the Board of Directors.
Incorporated by reference to Exhibit 4(a) to Registration
Statement No. 33-20640 and to Exhibit 4(a)(2) to Registrant's
Current Report on Form 8-K dated July 13, 1988.
(b) Indenture dated as of October 2, 1995 between Registrant and State
Street Bank and Trust Company relating to unlimited amounts of
debt securities which may be issued from time to time by
Registrant when and as authorized by Registrant's Board of
Directors.
Incorporated by reference to Exhibit 4(a) to Registrant's
Registration Statement Nos. 33-61481 and 333-29677.
(c) Indenture dated as of April 1, 1999 between Registrant and
Citibank, N.A. relating to unlimited amounts of debt securities
which may be issued from time to time by Registrant when and as
authorized by Registrant's Board of Directors or Executive
Committee of the Board of Directors.
Incorporated by reference to Exhibit 4(a) to Registrant's
Registration Statement No. 33-61481.
(23)
XEROX CREDIT CORPORATION
Form 10-K
For the Year Ended December 31, 1999
Index of Exhibits (continued)
Document
(d) 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 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.
(10) (a) Amended and Restated Operating Agreement originally made and
entered into as of November 1, 1980, amended and restated as of
June 30, 1998 between Registrant and Xerox.
Incorporated by reference to Exhibit 10(a) of Registrant's
Quarterly Report on Form 10-Q for the quarter ended June 30, 1998.
(b) Support Agreement dated as of November 1, 1980 between Registrant
and Xerox.
Incorporated by reference to Exhibit 10(b) to Registration
Statement No. 2-71503.
(c) Tax Allocation Agreement dated as of January 1, 1981 between
Registrant and Xerox.
Incorporated by reference to Exhibit 10(c) to Registration
Statement No. 2-71503.
(12) (a) Computation of Registrant's Ratio of Earnings to Fixed Charges.
See Page 29 of this Report on Form 10-K.
(b) Computation of Xerox' Ratio of Earnings to Fixed Charges.
See Page 30 of this Report on Form 10-K.
(23) Consent of KPMG LLP.
See Page 31 of this Report on Form 10-K.
(27) Financial Data Schedule (Electronic Form Only)
(24)