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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, 1998
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 26, 1999
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 27 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" 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 13,000 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):
1994 - $88; 1995 - $149; 1996 - $97; 1997 - $41; and 1998 - None.
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' sold equipment. These receivables arise
primarily from Xerox equipment being sold under installment sales and sales-
type leases, including any residual income related to such leases. In 1998,
the Company purchased receivables from Xerox totaling $2,745 million compared
to $2,138 and $1,896 million in 1997 and 1996, respectively. The increase in
receivables purchases was due to increased equipment sales in the United
States. Earned income from contracts receivable increased in 1998 to $388
million from $351 million in 1997 and $340 million in 1996. The increase was
primarily due to a larger average portfolio of contracts receivable in 1998
than in prior years, reflecting accelerated growth of Xerox' equipment sales
in the United States and slightly longer average contract terms, which are
partially offset by a lower average interest rate.
Interest expense was $240 million in 1998 compared to $217 million in
1997 and $204 million in 1996. The increases were primarily due to larger
average portfolios of contracts receivable, partially offset by a decrease in
the cost of debt and debt reduction from the proceeds of discontinued
operations' portfolio runoff and asset sales.
Since substantially all of the Company's contracts receivable earn fixed
rates of interest, the Company "match funds" the contracts by swapping
(3)
variable-rate commercial paper and medium-term notes into fixed-rate interest
obligations 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 1998 and 1997
compared to $13 million in 1996. These expenses include billing, collection
and other administrative costs related to the administration of the contracts
receivable purchased from Xerox. The decrease was attributable to
improvements in 1997 in Xerox' systems processing and in other Xerox
productivity measures that were passed through to the Company.
The effective income tax rate was 40.2 percent in 1998 and 40.7 percent
in 1997 and 1996.
The Year 2000 problem is the result of computer programs written in two
digits, rather than four, to define the applicable year. As a result, many
information systems are unable to properly recognize and process date-
sensitive information beyond December 31, 1999. The Company has no Information
Technology or Non-Information Technology systems of its own which might
require remediation. The Company contracts with Xerox to provide billing and
collection services for all of the receivables that it purchases from Xerox.
In addition, the Company's business significantly depends on the continuing
ability of Xerox to sell and lease products to customers. As with all major
companies, certain of Xerox' information systems and products require
remediation in order to render the systems Year 2000 compliant. For detailed
information regarding Xerox' Year 2000 readiness, reference should be made to
the Form 10-K of Xerox for the fiscal year ended December 31, 1998 as filed
with the Securities and Exchange Commission. The Company has no independent
readiness or contingency plans and does not intend to create any. If Xerox'
remediation plans are not completed in a timely manner, the Year 2000 problem
could potentially have a material adverse impact on the Company's operations.
Possible worst case consequences could include: an interruption in our ability
to bill and apply collections on the contracts receivable owned by the
Company; an interruption in our ability to meet our cash requirements; and a
significant reduction in the amount of contracts receivable purchased from
Xerox causing a reduction in the Company's income.
In June 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 requires companies to
recognize all derivatives as assets or liabilities measured at their fair
value. Gains or losses resulting from changes in the values of those
derivatives would be accounted for depending on the use of the derivative and
whether it qualifies for hedge accounting. Certain of the Company's interest
rate swap contracts hedge cash flow exposures. The accounting for such cash
flow hedges under SFAS No. 133 will require the Company to record adjustments
to other comprehensive income, including an adjustment at transition. The
Company does not expect the implementation of this Statement to have a
material effect on its results of operations or financial condition, although
shareholder's equity may experience increased volatility. This Statement is
effective for fiscal years beginning after June 15, 1999. The Company will
adopt this accounting standard beginning January 1, 2000.
(4)
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 $78 million in 1998
compared with $69 million in 1997 and $46 million in 1996. The 1998 increase
versus 1997 was primarily due to an increase in net income. The 1997 increase
versus 1996 was primarily the result of changes in the timing of payments of
accounts payable and accrued liabilities.
Net cash used in investing activities was $882 million in 1998 compared
to $333 million used in 1997. The increase was the result of more contracts
receivable purchased in 1998 than in 1997. The net proceeds from contracts
grew at a slower rate than the growth in purchases of contracts primarily due
to an increase in the length of the average contract originated in 1998 versus
the prior year. Net collections related to discontinued assets were lower as
the asset base continued to decline due to sales and contractual maturities.
Net cash used was $333 million in 1997 versus $122 million 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 increased net
collections from discontinued operations assets. The increase in receivables
purchased was due to increased financing penetration rates by the Xerox United
States Customer Operations sales force and sales resulting from new products.
The net collections from discontinued operations were from cash sales and
contractual maturities.
Net cash provided by financing activities was $804 million in 1998
compared to $264 million in 1997 and $76 million in 1996. The 1998 increase is
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. The 1997 increase was
primarily due to higher debt levels associated with increased investments in
contracts receivable purchased from Xerox, particularly during the fourth
quarter of 1997.
At December 31, 1998, the Company had registered domestic shelf capacity
of $1,240 million. In addition, a $2 billion Euro-debt facility is available
to the Company, Xerox and Xerox Capital (Europe) plc ("Xerox Capital"), of
which $993 million remained unused at December 31, 1998.
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. Any amounts borrowed under this
facility would be at rates based, at the borrower's option, on spreads above
certain LIBOR reference rates.
The Company believes that cash provided by continuing operations,
funding available through its commercial paper program supported by its credit
facility, and its readily available access to the capital markets are more
than sufficient to enable the Company to meet its liquidity needs. New
borrowing associated with the financing of customer purchases of Xerox
equipment will continue in 1999 and decisions regarding the size and timing of
any new term debt financing will be made based on cash flows - including
refinancing requirements, match funding needs and capital market conditions.
(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 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 1998, the Company entered into interest rate swap agreements that
effectively converted $1,811 million of variable-rate debt into fixed-rate
debt. These agreements mature at various dates through 2003 and result in a
weighted average fixed-rate of interest of 5.50 percent. The Company also
entered into interest rate swap agreements during 1998 that effectively
converted $335 million of fixed- and adjustable-rate debt into variable-rate
debt indexed to LIBOR rates. Of these, $225 million mature in 2000 and $110
million mature on various dates beginning in 2008 and ending in 2018. Each of
the swaps scheduled to mature beyond 2000 is cancelable by the counterparty
on interest payment dates beginning in 2000. Cancellation dates within the
swap agreements conform to exercise dates of call options embedded in the
Company's 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, 1998, the
fair value of the Company's term debt and interest swaps would increase or
decrease by approximately $24 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, 1998, the Company's overall debt-to-equity ratio was
7.4 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.
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 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 LLP, independent auditors, are set forth on pages 9
through 22 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, 1999
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, 1999
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/ 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, 1998
Consolidated balance sheets at December 31, 1998 and 1997
Consolidated statements of shareholder's equity for each of the years in the
three-year period ended December 31, 1998
Consolidated statements of cash flows for each of the years in the three-year
period ended December 31, 1998
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, 1998 and 1997, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 1998, 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 LLP
Stamford, Connecticut
January 25, 1999
(10)
XEROX CREDIT CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
Years Ended December 31, 1998, 1997 and 1996
(In Millions)
1998 1997 1996
Earned Income:
Contracts receivable $ 388 $ 351 $ 340
Expenses:
Interest 240 217 204
Operating and administrative 11 11 13
Total expenses 251 228 217
Income before income taxes 137 123 123
Provision for income taxes 55 50 50
Net income $ 82 $ 73 $ 73
The accompanying notes are an integral part of the consolidated financial
statements.
(11)
XEROX CREDIT CORPORATION
CONSOLIDATED BALANCE SHEETS
December 31, 1998 and 1997
(In Millions)
ASSETS
1998 1997
Cash and cash equivalents $ - $ -
Investments:
Contracts receivable 5,789 4,796
Notes receivable - Xerox and affiliates 56 56
Unearned income (700) (623)
Allowance for losses (136) (131)
Total investments 5,009 4,098
Net assets of discontinued operations 29 58
Other assets 1 2
Total assets $ 5,039 $ 4,158
LIABILITIES AND SHAREHOLDER'S EQUITY
Liabilities:
Notes payable within one year:
Commercial paper $ 1,510 $ 1,428
Current portion of notes payable after one year 1,175 795
Notes payable - Xerox and affiliates 1,047 161
Notes payable after one year 647 1,191
Due to Xerox Corporation, net 22 21
Accounts payable and accrued liabilities 34 34
Deferred income taxes 14 20
Total liabilities 4,449 3,650
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 348 266
Total shareholder's equity 590 508
Total liabilities and shareholder's equity $ 5,039 $ 4,158
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, 1998, 1997 and 1996
(In Millions)
Additional
Common Paid-In Retained
Stock Capital Earnings Total
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
Net Income 82 82
Balance at December 31, 1998 $ 23 $ 219 $ 348 $ 590
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, 1998, 1997 and 1996
(In Millions)
1998 1997 1996
Cash Flows from Operating Activities
Net income $ 82 $ 73 $ 73
Adjustments to reconcile net income to net cash
provided by operating activities:
Net change in operating assets and liabilities (4) (4) (27)
Net cash provided by operating activities 78 69 46
Cash Flows from Investing Activities
Purchases of investments (2,745) (2,138) (1,896)
Proceeds from investments 1,834 1,711 1,743
Net collections from discontinued operations 29 94 31
Net cash used in investing activities (882) (333) (122)
Cash Flows from Financing Activities
Change in commercial paper, net 82 302 251
Change in notes payable-Xerox and affiliates, net 886 141 77
Proceeds from long-term debt 635 751 700
Principal payments of long-term debt (799) (889) (855)
Dividends - (41) (97)
Net cash provided by (used in) financing activities 804 264 76
Increase(decrease) 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.
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)
Accounting Changes
In June 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 requires companies to
recognize all derivatives as assets or liabilities measured at their fair
value. Gains or losses resulting from changes in the values of those
derivatives would be accounted for depending on the use of the derivative and
whether it qualifies for hedge accounting. Certain of the Company's interest
rate swap contracts hedge cash flow exposures. The accounting for such cash
flow hedges under SFAS No. 133 will require the Company to record adjustments
to other comprehensive income, including an adjustment at transition. The
Company does not expect the implementation of this Statement to have a
material effect on its results of operations or financial condition, although
shareholder's equity may experience increased volatility. This Statement is
effective for fiscal years beginning after June 15, 1999. The Company will
adopt this accounting standard beginning January 1, 2000.
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. The remaining $29 million portfolio represents passive
lease receivables with long-duration contractual maturities and unique tax
attributes as well as other third party financing investments. Accordingly,
the Company expects that the wind-down of the portfolio will remain a gradual
process. The Company believes that the liquidation of the remaining assets
will not result in a net loss.
(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 $2,745 million in 1998, $2,138
million in 1997, and $1,896 million in 1996. The Company was charged $9
million in 1998 and 1997 and $11 million in 1996 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, 1998 any revaluation
of the contracts receivable would result in a fair value in excess of the
carrying value of these receivables.
(16)
XEROX CREDIT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The scheduled maturities of customer financing contracts receivable at
December 31, 1998 are as follows (in millions):
1999 $2,100
2000 1,563
2001 1,141
2002 669
2003 287
Thereafter 29
Total $5,789
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.
(4) Notes Payable
A summary of notes payable at December 31, 1998 and 1997 follows:
(In Millions)
1998 1997
Medium Term Notes due 1998 $ - $ 475
Floating Rate Notes due 1998 - 320
Floating Rate Notes due 1999 (a) 300 -
10.00% Notes due 1999 150 150
6.50% Euro Medium Term Notes due 1999 150 150
Floating Rate Notes due 2000 (a) 53 53
Medium Term Notes due 2000 (b) 225 -
5.40% Euro Medium Term Notes due 2000 148 148
Medium Term Notes due 2001 (b,c) 126 126
2.875% Medium Term Notes due 2002 (d) 250 250
Medium Term Notes due 2007 (b,e) 25 25
Medium Term Notes due 2008 (b) 25 -
Medium Term Notes due 2012 (b,f) 225 225
Medium Term Notes due 2013 (b) 60 -
Medium Term Notes due 2018 (b) 25 -
Floating Rate Notes due 2048 (g) 60 60
Other Notes due 1997 and 2000 - 4
Subtotal $1,822 $1,986
Less current maturities (1,175) (795)
Total Notes Payable after one year $ 647 $1,191
(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 2007+ have weighted
average interest rates of 5.83%, 6.04% and 6.98%, respectively.
(c) $100 million of Medium Term Notes due 2001 are expected to be called in
1999.
(17)
XEROX CREDIT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(d) $250 million of cash exchangeable equity-linked notes are exchangeable
at a premium if Xerox' stock price is at or higher than $50.53. However,
the Company has entered into a swap to limit the principal payment at
maturity to $250 million. These notes are expected to be called in 1999.
(e) $25 million of Medium Term Notes due 2007 are expected to be called in
1999.
(f) $200 million of Medium Term Notes due 2012 are expected to be called in
1999.
(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 4.90 percent.
Expected principal repayments on notes payable during the next five
years are (in millions):
1999 $ 1,175
2000 536
2001 51
2002 -
2003 and Thereafter 60
Total $ 1,822
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 1998, 1997 and 1996 were $152
million, $132 million, and $146 million, respectively. Interest payments on
commercial paper for 1998, 1997 and 1996 were $87 million, $79 million and $68
million, respectively. The weighted-average commercial paper interest rates
for 1998, 1997 and 1996 were 5.5 percent, 5.6 percent and 5.5 percent,
respectively.
At December 31, 1998 and 1997, carrying values of notes payable totaled
$1,822 million and $1,986 million, respectively. The fair values of the
Company's notes payable at December 31, 1998 and 1997 were $1,886 million and
$1,995 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 premium the Company would have paid if it had retired all
notes payable at December 31, 1998 or 1997, 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.
(18)
XEROX CREDIT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(5) Lines of Credit and Interest Rate Swaps
At December 31, 1998, 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") up to a limit of $4 billion. This agreement is unused and is
available to back the issuance of commercial paper. At December 31, 1998, the
Company had a total of $1,510 million of commercial paper outstanding. The
average interest rate on commercial paper outstanding at December 31, 1998 was
5.27 percent. In addition, a $2 billion Euro-debt facility is available to
the Company, Xerox and Xerox Capital, of which $993 million remained unused at
December 31, 1998.
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, 1998 and 1997 are as follows:
(In Millions)
1998 1997
Pay fixed/receive variable $3,709 $3,107
Pay variable/receive variable 53 173
Pay variable/receive fixed 1,259 1,499
$5,021 $4,779
Average interest payment rates 5.67% 6.01%
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.
(19)
XEROX CREDIT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
At December 31, 1998 and 1997, the Company's swap agreements had
aggregate net fair values of $31 million and $(30) million, respectively.
These values represent the estimated net amounts the Company would have
received/(paid) if all agreements had been terminated/replaced as of December
31, 1998 and 1997, 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,
1998 are: 1999 - $1,979 million, 2000 - $1,733 million, 2001 - $854 million,
2002 - $324, 2003 and thereafter - $131 million.
(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 $62
million, $54 million, and $69 million in 1998, 1997 and 1996, respectively.
The Company paid less than $1 million in each of 1998, 1997 and 1996 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)
1998 1997 1996
Income before income taxes: $ 137 $ 123 $ 123
Federal income taxes
Current $ 48 $ 43 $ 43
Deferred - - -
State income taxes
Current 7 7 7
Deferred - - -
Total provision for income taxes $ 55 $ 50 $ 50
A reconciliation of the effective tax rate from the U.S. Federal
statutory tax rate follows:
1998 1997 1996
U.S. Federal statutory rate 35.0% 35.0% 35.0%
State income taxes, net of Federal
income tax benefit 5.2 5.7 5.7
Effective tax rate 40.2% 40.7% 40.7%
(20)
XEROX CREDIT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The tax effects of temporary differences that give rise to significant
portions of deferred taxes at December 31, 1998 follows:
(In Millions)
1998 1997
Tax effect of future tax deductions:
Discontinued investment partnerships and
real estate and other $ 9 $ 3
Tax effect of future taxable income:
Discontinued leverage leases and other (23) (23)
Total deferred taxes, net $ (14) $ (20)
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.
(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
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
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
(21)
SCHEDULE II
XEROX CREDIT CORPORATION
Valuation and Qualifying Accounts
Year Ended December 31, 1998, 1997 and 1996
(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)
1998
Allowance for losses-
continuing operations $ 131 $ - $ 52 $ 47 $ 136
1997
Allowance for losses-
continuing operations $ 123 $ - $ 60 $ 52 $ 131
1996
Allowance for losses-
continuing operations $ 127 $ - $ 33 $ 37 $ 123
(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.
(22)
XEROX CREDIT CORPORATION
Form 10-K
For the Year Ended December 31, 1998
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, 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 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.
(c) 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.
(23)
XEROX CREDIT CORPORATION
Form 10-K
For the Year Ended December 31, 1998
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 25 of this Report on Form 10-K.
(b) Computation of Xerox' Ratio of Earnings to Fixed Charges.
See Page 26 of this Report on Form 10-K.
(23) Consent of KPMG LLP.
See Page 27 of this Report on Form 10-K.
(27) Financial Data Schedule (Electronic Form Only)
(24)