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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, 1997
OR
( ) Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from : to
Commission file number: 1-8133
XEROX CREDIT CORPORATION
(Exact name of Registrant as specified in its charter)
Delaware 06-1024525
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
100 First Stamford Place, Stamford, Connecticut 06904
(Address of principal executive offices) (Zip Code)
(203) 325-6600
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class Name of Each Exchange on Which Registered
10% Notes due 1999 New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes: X No:
Indicate 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 27, 1998
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 28 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," "intends" 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 two to five years.
The Company purchases from Xerox all receivables due from commercial
customers and the Federal Government. 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.
In 1990 the Company discontinued its real estate development and
related real estate financing businesses and its third party financing and
leasing businesses. See Note 2 to the Consolidated Financial Statements for
further information regarding the Company's discontinued operations.
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 13,500
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 8,000 square feet of
office space. In Xerox United States Customer Operations 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):
1993 - $59; 1994 - $88; 1995 - $149; 1996 - $97; and 1997 - $41.
ITEM 6. Selected Financial Data
Not Required.
ITEM 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
RESULTS OF OPERATIONS
Continuing Operations
Contracts receivable income represents income earned under an agreement
with Xerox pursuant to which the Company purchases long-term accounts
receivable associated with Xerox' sold equipment. These receivables arise
primarily from Xerox equipment being sold under installment sales and sales-
type leases. In 1997, the Company purchased receivables from Xerox totaling
$2,185 million compared to $1,896 million in 1996. The increase in
receivables purchases was due to increased equipment sales and higher
financing penetration rates in the United States. Earned income from
contracts receivable increased in 1997 to $351 million from $340 million in
1996. The increase was primarily due to a larger average portfolio of
contracts receivable in 1997 than in 1996 partially offset by a lower average
interest rate. Earned income decreased in 1996 to $340 million from $352
million in 1995. The decrease was primarily due to a smaller average
portfolio of contracts receivable in 1996 and a reduction on the interest
rate spread on purchased contracts. The smaller portfolio in 1996 was a
result of relatively lower equipment sales by Xerox in the second half of
1995.
(3)
Interest expense was $217 million in 1997 compared to $204 million in
1996. The 1997 increase was principally attributable to higher debt balances
related to a larger average portfolio of contracts receivable in 1997, offset
partially by the reduced asset levels of discontinued operations. Assigned
discontinued operations debt is included in consolidated debt of the Company
and is expected to be paid off with proceeds from the liquidation of the
remaining asset portfolio of discontinued operations. The $204 million of
interest expense in 1996 was a decrease from the 1995 interest expense of
$219 million. This decrease was principally attributable to the smaller
average portfolio of contracts receivable in 1996, the reduction of assets of
discontinued operations in 1996 and the replacement of $150 million of
10.125% debt with lower rate debt in April 1996.
Since substantially all of the Company's contracts receivable earn
fixed rates of interest, the Company "match funds" the contracts by swapping
variable-rate commercial paper and medium term notes into fixed rates of
interest 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 $11 million in 1997 compared
to $13 million and $14 million in 1996 and 1995, respectively. These expenses
are incurred primarily to administer the contracts receivable purchased from
Xerox. The decrease was primarily attributable to improvements in systems
processing and other productivity measures that occurred during the year.
The effective income tax rate was 40.7 percent in 1997 and 1996 and
40.3 percent for 1995.
The Company contracts with Xerox to provide billing and collection
services for all of the receivables that it purchases from Xerox. Certain of
Xerox' information systems and products will require remediation or
replacement over the next two years in order to render these systems Year
2000 compliant. The Year 2000 problem is the result of computer programs
written with two digits, rather than four, to define the applicable year.
Xerox believes that the remediation or replacement of its information systems
and products will occur in a timely fashion so that the Year 2000 problem
will not result in significant operating problems with its information
systems and products. However, if such remediation or replacements are not
completed by Xerox in a timely manner, the Year 2000 problem could
potentially have a material adverse impact on the Company's operations.
Discontinued Operations
Since their discontinuance in 1990, the Company has made substantial
progress in disengaging from the third party financing and real estate
businesses. Through December 31, 1997, the Company received net cash
proceeds of $2,570 million from the sale of discontinued business units,
asset securitizations, asset sales, and run-off collection activities. The
amounts received have been consistent with the Company's estimates in its
disposal plan and were primarily used to reduce the Company's short-term
indebtedness.
During 1997, the Company reduced its net assets of discontinued
operations by $94 million, primarily through contractual maturities and cash
sales, compared to a reduction of $31 million in 1996. Collections in 1998
are expected to be less than the Company received in 1997.
(4)
Since a significant portion of the remaining $58 million portfolio
represents passive lease receivables with long-duration contractual
maturities and unique tax attributes, the Company expects that the wind-down
of the portfolio will continue to be a gradual process. The Company believes
that the liquidation of the remaining assets will not result in a net loss.
Additional information regarding discontinued operations is included in
Note 2 to the Consolidated Financial Statements.
CAPITAL RESOURCES AND LIQUIDITY
The Company's principal sources of funds are cash from the collection
of Xerox contracts receivable and borrowings.
Net cash provided by operating activities was $210 million in 1997
compared with $123 million in 1996 and $17 million in 1995. The 1997 increase
was primarily due to a change in the timing of intercompany settlements.
Net cash used in investing activities was $333 million in 1997 compared
to $122 million used in 1996. The increase was the result of more contracts
receivable purchased in 1997 than in 1996, particularly in the fourth
quarter, partially offset by the reduction of discontinued operations assets.
The increase in receivables was due to increased financing penetration rates
by the Xerox United States Customer Operations sales force and sales
resulting from new product types. The decrease in discontinued operations
was primarily through cash sales and contractual maturities. Net cash used
in 1996 was $122 compared to the $210 million provided in 1995. The change
was principally the result of significantly more contracts receivable
purchased in 1996 than in 1995 as a result of significant increases in Xerox
equipment sales due to changes in sales coverage and marketing support, and
customer acceptance of new products.
Net cash provided by financing activities was $123 million in 1997
compared to $1 million used in 1996. Cash provided by financing has grown
due to higher debt levels associated with investments in contracts receivable
purchased from Xerox during 1997 and higher debt levels and lower dividend
payments as a result of the year end 1996 change in the Company's leverage
guideline from 6.5 to 1 to 7.0 to 1. Net cash used in financing activities
was $1 million in 1996 compared to $227 million in 1995. The decrease was
associated with the increased purchases of contracts receivable in 1996 over
1995.
Cash dividends paid during the three years ended December 31 were as
follows (in millions): 1997 - $41; 1996 - $97; and 1995 - $75. In addition,
there was a non-cash dividend in 1995 of $74 million.
At December 31, 1997, the Company had registered domestic shelf
capacity of $2 billion, of which $1,875 million remained unused. In
addition, a $2 billion Euro-debt facility is available to Xerox, Xerox
Capital (Europe) plc, Xerox Overseas Holdings PLC, and the Company of which
$1,193 million remained unused at December 31, 1997.
At December 31, 1997, the Company and Xerox have joint access to a $7
billion revolving credit agreement with various banks which expires in 2002.
Up to $4 billion of this revolver is also accessible by Xerox Capital
(Europe) plc or Xerox Overseas Holdings PLC. Any amounts borrowed under this
facility would be at rates based, at the borrower's option, on spreads above
certain LIBOR reference rates.
(5)
The Company believes that cash provided by continuing operations,
funding available through its commercial paper program supported by its
credit facility, and its readily available access to the capital markets are
more than sufficient to enable the Company to meet its liquidity needs. New
borrowing associated with the financing of customer purchases of Xerox
equipment will continue in 1998 and decisions regarding the size and timing
of any new term debt financing will be made based on cash flows, match
funding needs, refinancing requirements and capital market conditions.
The Company is exposed to market risk from changes in interest rates
that could affect results of operations and financial condition. To assist
in managing its interest rate exposure the Company routinely enters into
certain financial instruments, primarily interest rate swap agreements. The
Company intends to continue to match fund its contracts receivable. In
general, the Company's objective is to hedge its variable-rate debt by paying
fixed rates under the swap agreements while receiving variable rate payments
in return. Additionally, in order to manage its outstanding commercial
paper, the Company opportunistically issues variable- and fixed-rate medium
term notes which are swapped to attractive LIBOR-based rates. The Company
does not enter into derivative instrument transactions for trading purposes,
and, employs long-standing policies prescribing that derivative instruments
are only to be used to achieve a set of very limited objectives.
During 1997, the Company entered into interest rate swap agreements
which effectively converted $1,487 million of variable-rate debt into fixed-
rate debt. These agreements mature at various dates through 2002 and
resulted in a weighted average fixed-rate of interest of 6.25 percent. The
Company also entered into interest rate swap agreements during 1997 which
effectively converted $749 million of fixed- and adjustable-rate debt into
variable-rate debt indexed to LIBOR rates. These agreements mature in 1998,
2000, 2002, 2007 and 2012. The agreements which mature in 2007 and 2012 are
cancelable by the respective counterparties on interest payment dates
beginning in 1999 and 2001. Cancellation dates within the swap agreements
conform to exercise dates of call options embedded in the Company's fixed-
and adjustable-rate debt. These arrangements were entered into to ensure
that, when taking into account the Company's debt portfolio described in
Footnote 5 to the Consolidated Financial Statements, the Company is
adequately match funded.
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, 1997, the
fair value of the Company's term debt and interest swaps would increase or
decrease, by approximately $28 million and $33 million, respectively.
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 December 31, 1997, the Company's overall debt-to-equity ratio was
7.0 to 1. The Company's practice is to maintain a debt-to-equity ratio of
approximately 7.0 to 1. Prior to December 31, 1996, the Company's practice
was to maintain a debt-to-equity ratio of approximately 6.5 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.
(6)
ITEM 8. Financial Statements and Supplementary Data
The financial statements of the Company and its consolidated
subsidiaries and the notes thereto, the financial statement schedule, and the
report thereon of KPMG Peat Marwick LLP, independent auditors, are set forth
on pages 9 through 23 hereof.
The financial statement schedule required herein is filed as "Financial
Statement Schedules" pursuant to Item 14 of this report on Form 10-K.
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 Item 8 financial
statement schedule and the report of independent auditors thereon
filed herewith are set forth in the Index to Financial Statements
and Schedule included herein.
(3) The exhibits filed herewith are set forth in the Exhibit
Index included herein.
(b) No Current Reports on Form 8-K were 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/ George R. Roth___________
(NAME AND TITLE) George R. Roth, Vice President,
Treasurer and Chief Financial Officer
March 23, 1998
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 23, 1998
Signature Title
Principal Executive Officer:
Eunice M. Filter __/s/ Eunice M. Filter___________
President, Chief Executive Officer
and Director
Principal Financial Officer:
George R. Roth __/s/ George R. Roth_____________
Vice President, Treasurer and
Chief Financial Officer
Principal Accounting Officer:
Daniel S. Marchibroda __/s/ Daniel S. Marchibroda______
Controller
Directors:
__/s/ Donald R. Altieri_________
Donald R. Altieri, Director
__/s/ David R. McLellan_________
David R. McLellan, Director
__/s/ Barry D. Romeril__________
Barry D. Romeril, Director
__/s/ Stuart B. Ross____________
Stuart B. Ross, 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, 1997
Consolidated balance sheets at December 31, 1997 and 1996
Consolidated statements of shareholder's equity for each of the years in the
three-year period ended December 31, 1997
Consolidated statements of cash flows for each of the years in the three-year
period ended December 31, 1997
Notes to consolidated financial statements
Schedule:
II Valuation and qualifying accounts
All other 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. In
connection with our audits of the consolidated financial statements, we also
have audited the financial statement schedule as listed in the accompanying
index. These consolidated financial statements and the financial statement
schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements and the financial statement schedule 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, 1997 and 1996, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 1997, in conformity with generally
accepted accounting principles. Also in our opinion, the related financial
statement schedule, when considered in relation to the basic consolidated
financial statements taken as a whole, presents fairly, in all material
respects, the information set forth therein.
KPMG PEAT MARWICK LLP
Stamford, Connecticut
January 23, 1998
(10)
XEROX CREDIT CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
Years Ended December 31, 1997, 1996 and 1995
(In Millions)
1997 1996 1995
Earned Income:
Contracts receivable $ 351 $ 340 $ 352
Expenses:
Interest 217 204 219
Operating and administrative 11 13 14
Total expenses 228 217 233
Income before income taxes 123 123 119
Provision for income taxes 50 50 48
Net income $ 73 $ 73 $ 71
The accompanying notes are an integral part of the consolidated financial
statements.
(11)
XEROX CREDIT CORPORATION
CONSOLIDATED BALANCE SHEETS
December 31, 1997 and 1996
(In Millions)
ASSETS
1997 1996
Cash and cash equivalents $ - $ -
Investments:
Contracts receivable 4,796 4,272
Notes receivable - Xerox and affiliates 56 130
Unearned income (623) (534)
Allowance for losses (131) (123)
Total investments 4,098 3,745
Net assets of discontinued operations 58 152
Deferred income taxes and other assets 2 2
Total assets $ 4,158 $ 3,899
LIABILITIES AND SHAREHOLDER'S EQUITY
Liabilities:
Notes payable within one year:
Commercial paper $ 1,428 $ 1,126
Current portion of notes payable after one year 795 886
Notes payable - Xerox and affiliates 161 20
Notes payable after one year 1,191 1,238
Notes payable after one year - Xerox and affiliates - 75
Due to Xerox Corporation, net 21 16
Accounts payable and accrued liabilities 34 31
Deferred income taxes 20 31
Total liabilities 3,650 3,423
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 266 234
Total shareholder's equity 508 476
Total liabilities and shareholder's equity $ 4,158 $ 3,899
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, 1997, 1996 and 1995
(In Millions)
Additional Cumulative
Common Paid-In Retained Translation
Stock Capital Earnings Adjustment Total
Balance at December 31, 1994 $ 23 $ 145 $ 336 $ 1 $ 505
Net Income 71 71
Dividends* (149) (149)
Capital Contribution 74 74
Other (1) (1)
Balance at December 31, 1995 $ 23 $ 219 $ 258 $ - $ 500
Net Income 73 73
Dividends (97) (97)
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
* Includes a non-cash dividend of $74 million.
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, 1997, 1996 and 1995
(In Millions)
1997 1996 1995
Cash Flows from Operating Activities
Net income $ 73 $ 73 $ 71
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Net change in operating assets and liabilities 137 50 (54)
Net cash provided by operating activities 210 123 17
Cash Flows from Investing Activities
Purchases of investments (2,185) (1,896) (1,539)
Proceeds from investments 1,758 1,743 1,717
Net collections from discontinued operations 94 31 32
Net cash (used in) provided by investing activities (333) (122) 210
Cash Flows from Financing Activities
Change in commercial paper, net 302 251 (782)
Proceeds from long-term debt 751 700 1,033
Principal payments of long-term debt (889) (855) (403)
Dividends (41) (97) (75)
Net cash provided by (used in) financing activities 123 (1) (227)
Increase(decrease) in cash and cash equivalents - - -
Cash and cash equivalents, beginning of year - - -
Cash and cash equivalents, end of year $ - $ - $ -
Supplemental disclosure of non-cash activities:
The Company dividended its $74 million investment in Xerox Financial
Services Life Insurance Company to its parent company in 1995. The parent
company then made a capital contribution of $74 million by issuing a $74
million interest bearing note to the Company.
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.
Allowance for Losses
In connection with the contracts receivable purchased from Xerox, the
Company retains an allowance for losses at the time of purchase which is
intended to protect against future losses. Should any additional allowances
be required, Xerox is required to provide such funding. The resultant effect
is to relieve the Company of any exposure with regard to write-offs
associated with the contracts receivable purchased from Xerox.
Xerox computes the allowance for potential 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 reserve calculation, Xerox reimburses the
Company for the excess charge-offs.
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. The policy, enforced by Xerox on behalf of the Company,
contemplates that delinquent receivables will be charged off before the aging
of such delinquent receivables reaches 180 days.
Fair Value of Financial Instruments
Under SFAS No. 107 - "Disclosures about Fair Value of Financial
Instruments," the Company is required to disclose the 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.
(15)
XEROX CREDIT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Reclassifications
Certain prior year balances have been reclassified to conform with the
current year presentation.
(2) Discontinued Operations
In 1990 the Company discontinued its third party financing and real
estate businesses. A significant portion of the remaining $58 million
portfolio represents passive lease receivables with long-duration contractual
maturities and unique tax attributes. Accordingly, the Company expects that
the wind-down of the portfolio will continue to be a gradual process. The
Company believes that the liquidation of the remaining assets will not result
in a net loss.
Through December 31, 1997, the Company received net cash proceeds of
$2,570 million from the sale of discontinued business units, asset
securitizations, asset sales, and run-off collection activities. Of the
$2,570 million, $94 million, $31 million and $32 million were received in
1997, 1996 and 1995, respectively. The amounts received have been consistent
with the Company's estimates in the disposal plan and were primarily used to
reduce the Company's short-term indebtedness. Collections in 1998 are
expected to be less than the Company received in 1997.
The Company has consistently assigned debt, which is included in the
notes payable lines of the Company's Balance Sheets, to discontinued
operations based on the net assets of discontinued operations and debt to
equity ratios in accordance with Company policy. This assigned debt is
expected to be paid with the liquidation of the remaining asset portfolio of
the discontinued operations.
Summarized balance sheet information of discontinued operations for the
years ended December 31, 1997 and 1996 follows:
(In Millions)
1997 1996
Gross finance receivables $ 47 $ 65
Unearned income (21) (23)
Other assets 32 110
Investment in discontinued operations, net $ 58 $ 152
Assigned short- and long-term debt $ 15 $ 84
Contractual maturities of the gross finance receivables at December 31, 1997
follow (in millions):
1998 $ 2
1999 2
2000 6
2001 -
2002 -
2003 and thereafter 37
Total $ 47
(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 two to five years and are generally
collateralized by a security interest in the underlying assets. The Company
purchased receivables from Xerox totaling $2,185 million in 1997, $1,896
million in 1996, and $1,539 million in 1995. The Company was charged $9
million in 1997, $11 million in 1996 and $10 million in 1995 by Xerox for
administrative costs associated with the contracts receivable purchased.
Under SFAS No. 107 - "Disclosures about Fair Values of Financial
Instruments," the Company is not required to determine the fair value of
these receivables. Management believes that as of December 31, 1997 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 contracts receivable at December 31, 1997
are as follows (in millions):
1998 $1,829
1999 1,315
2000 908
2001 513
2002 208
Thereafter 23
Total $4,796
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 receivables from related parties payable on demand at various
floating interest rates.
(17)
XEROX CREDIT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(4) Notes Payable
A summary of notes payable at December 31, 1997 and 1996 follows:
(In Millions)
1997 1996
Medium Term Notes due 1997 $ - $ 347
Floating Rate Notes due 1997 - 530
Medium Term Notes due 1998 (b,c,f) 475 100
Floating Rate Notes due 1998 (a) 320 320
10.00% Notes due 1999 150 150
6.50% Euro Medium Term Notes due 1999 150 150
Medium Term Notes due 2000 (b,c) - 100
Floating Rate Notes due 2000 (a) 53 53
5.40% Euro Medium Term Notes due 2000 148 -
Medium Term Notes due 2001 (b) 126 100
2.875% Medium Term Notes due 2002 (d) 250 -
Medium Term Notes due 2007 (b,e) 25 -
Medium Term Notes due 2011 (f) - 200
Medium Term Notes due 2012 (b) 225 -
Floating Rate Notes due 2048 (g) 60 61
Other Notes due 1997 and 2000 4 13
Subtotal $1,986 $2,124
Less current maturities (795) (886)
Total Notes Payable after one year $1,191 $1,238
(a) The notes carry interest rates which are based primarily on spreads
above certain reference rates such as U.S. Treasury Bill, LIBOR and
Federal Funds Rates.
(b) Medium Term Notes due in 1998, 2000 and 2001+ have weighted
average interest rates of 8.54%, 6.78% and 7.17%, respectively.
(c) $100 million of Medium Term Notes due 2000 are expected to be called in
1998.
(d) $250 million of cash exchangeable equity-linked notes are exchangeable
at a premium if Xerox stock price is at or higher than $101.06.
(e) $25 million of Medium Term Notes due 2007 are first callable in 1999.
(f) $200 million of Medium Term Notes due 2011 are expected to be called in
1998.
(g) 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
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 commercial paper rating is "AA" or the equivalent as
reported in Federal Reserve Statistical Release H.15 (519), which at
year-end was 5.65 percent.
(18)
XEROX CREDIT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Principal payments on notes payable for the next five years are (in
millions):
1998 $ 795
1999 300
2000 201
2001 126
2002 and Thereafter 564
Total $ 1,986
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 1997, 1996 and 1995 were $132
million, $146 million, and $142 million, respectively. Interest payments on
commercial paper for 1997, 1996 and 1995 were $79 million, $68 million and
$79 million, respectively. The weighted-average commercial paper interest
rates for 1997, 1996 and 1995 were 5.6 percent, 5.5 percent and 5.9 percent,
respectively.
At December 31, 1997 and 1996, carrying values of notes payable were
$1,986 million and $2,124 million, respectively. The fair values of the
Company's notes payable at December 31, 1997 and 1996 were $1,995 million and
$2,140 million, respectively, based on quoted market prices for the notes or
other issues with similar features and maturity dates. The difference
between the fair value and the carrying value represents the theoretical net
amounts the Company would have paid or received if it had retired all notes
payable at December 31, 1997 or 1996, respectively. 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, 1997, 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 and Xerox
Overseas Holdings PLC up to a limit of $4 billion. This agreement is unused
and is available to back the issuance of commercial paper. At December 31,
1997, the Company had a total of $1,428 million of commercial paper
outstanding. The average interest rate on commercial paper outstanding at
December 31, 1997 was 5.85 percent.
(19)
XEROX CREDIT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (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 commercial
paper-rate payments in return. These swap agreements effectively convert an
amount (equal to the notional amount) of underlying variable-rate commercial
paper 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 typically major commercial
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 that 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, 1997 and 1996 are as follows:
(In Millions)
1997 1996
Pay fixed/receive variable $3,107 $2,666
Pay variable/receive variable 173 828
Pay variable/receive fixed 1,499 800
$4,779 $4,294
Average interest payment rates 6.01% 5.99%
These arrangements were entered into to ensure that, when taking into account
the Company's debt portfolio described in Footnote 5, the Company was
adequately match funded.
At December 31, 1997 and 1996, the Company's swap agreements had
aggregate net fair values of $(30) million and $(8) million, respectively.
These values represent the estimated net amounts the Company would have paid
if the agreements had been terminated as of December 31, 1997 and 1996,
respectively. The fair values for interest rate swap agreements were
calculated by the Company based on market conditions at the respective year-
ends and supplemented with quotes from banks. The Company has no present
plans to terminate any of these agreements prior to their scheduled
maturities.
The maturities of the Company's swaps outstanding as of December 31,
1997 are: 1998 - $1,055 million, 1999 - $200 million, 2000 - $570 million,
2001 - $967, 2002 and thereafter - $1,987 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 $54
million, $69 million, and $48 million in 1997, 1996 and 1995, respectively.
The Company paid less than $1 million in each of 1997 and 1996 to taxing
authorities for Company operations and received a net of $3 million in 1995
from 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)
1997 1996 1995
Income before income taxes: $ 123 $ 123 $ 119
Federal income taxes
Current $ 43 $ 43 $ 42
Deferred - - -
State income taxes
Current 7 7 6
Deferred - - -
Total provision for income taxes $ 50 $ 50 $ 48
A reconciliation of the effective tax rate from the U.S. Federal
statutory tax rate follows:
1997 1996 1995
U.S. Federal statutory rate 35.0% 35.0% 35.0%
State income taxes, net of Federal
income tax benefit 5.7 5.7 5.3
Effective tax rate 40.7% 40.7% 40.3%
The tax effects of temporary differences that give rise to significant
portions of deferred taxes at December 31, 1997 follows:
(In Millions)
1997 1996
Tax effect of future tax deductions:
Discontinued real estate tax benefit
and other $ 3 $ 3
Tax effect on future taxable income:
Discontinued leverage leases and other (23) (34)
Total deferred taxes, net $ (20) $ (31)
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
1997
Earned income $ 88 $ 90 $ 85 $ 88 $ 351
Interest expense 53 55 54 55 217
Operating and administrative
expenses 3 3 2 3 11
Income before income taxes 32 32 29 30 123
Income taxes 13 13 12 12 50
Net income $ 19 $ 19 $ 17 $ 18 $ 73
1996
Earned income $ 88 $ 85 $ 83 $ 84 $ 340
Interest expense 52 51 49 52 204
Operating and administrative
expenses 4 3 3 3 13
Income before income taxes 32 31 31 29 123
Income taxes 13 13 13 11 50
Net income $ 19 $ 18 $ 18 $ 18 $ 73
(22)
SCHEDULE II
XEROX CREDIT CORPORATION
Valuation and Qualifying Accounts
Years Ended December 31, 1997, 1996 and 1995
(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) (B)
1997
Allowance for losses-
continuing operations $ 123 $ - $ 60 $ 52 $ 131
1996
Allowance for losses-
continuing operations $ 127 $ - $ 33 $ 37 $ 123
1995
Allowance for losses-
continuing operations $ 129 $ - $ 49 $ 51 $ 127
(A) In connection with the contracts receivable purchased from Xerox,
the Company retains an allowance for losses at the time of purchase
which is intended to protect against future losses. Should any
additional allowances be required, Xerox is required under the
Operating Agreement to provide such funding. For the period
covered by this Schedule, no additional funding was required or
provided.
(B) Amounts written-off, net of recoveries.
(23)
XEROX CREDIT CORPORATION
Form 10-K
For the Year Ended December 31, 1997
Index of Exhibits
Document
(3) (a) Articles of Incorporation of Registrant filed with the
Secretary of State of Delaware on June 23, 1980.
Incorporated by reference to Exhibit 3(a) to Registration
Statement No. 2-71503.
(b) By-Laws of Registrant, as amended through September 1, 1992.
Incorporated by reference to Exhibit 3(b) to Registrant's
Quarterly Report on Form 10-Q for the quarter ended
March 31, 1997.
(4) (a) Indenture dated as of March 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,
as supplemented by the First Supplemental Indenture dated as of
July 1, 1988.
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 March 1, 1989 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 the
Executive Committee of the Board of Directors, as supplemented by
the First Supplemental Indenture dated as of October 1, 1989.
Incorporated by reference to Exhibit 4(a) to Registration
Statement No. 33-27525 and to Exhibit 4(a)(2) to Registration
Statement No. 33-31367.
(c) Indenture dated as of May 1, 1994, between Registrant and State
Street Bank and Trust Company (formerly The First
National Bank of Boston) 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. 33-53533 and to Exhibits 4 (a)(1)
and 4 (a)(2) to Registrant's Registration Statement No. 33-43470.
(d) 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.
(24)
XEROX CREDIT CORPORATION
Form 10-K
For the Year Ended December 31, 1997
Index of Exhibits (continued)
Document
(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 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
December 31, 1992 between Registrant and Xerox.
Incorporated by reference to Exhibit 10(a) of Registrant's Annual
Report on Form 10-K for the year ended December 31, 1992.
(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 26 of this Report on Form 10-K.
(b) Computation of Xerox' Ratio of Earnings to Fixed Charges.
See Page 27 of this Report on Form 10-K.
(23) Consent of KPMG Peat Marwick LLP.
See Page 28 of this Report on Form 10-K.
(27) Financial Data Schedule (Electronic Form Only)
(25)