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 discontinued its real-estate development and related real- estate financing businesses in the first quarter of 1990. In the fourth quarter of 1990, the Company discontinued 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 a global company serving the worldwide Document Processing markets. 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. These products and systems are marketed in over 130 countries by a direct sales force and a network of agents, dealers, distributors and value-added resellers, as well as through U.S. retail marketing channels. The financing of Xerox equipment is generally carried out by the Company in the United States and internationally by several foreign financing subsidiaries.
(2)
ITEM 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 comprise approximately 25,000 square feet of office space. In addition, the Company leases approximately 1,200 square feet of office space at various domestic and international locations, the majority of which are used by the Company's discontinued operations. These facilities are deemed adequate by management.
ITEM 3.
ITEM 3. Legal Proceedings
None.
ITEM 4.
ITEM 4. Submission of Matters to a Vote of Security Holders
Not Required.
PART II
ITEM 5.
ITEM 5. Market for the Registrant's Common Equity and Related Stockholder Matters
This item is inapplicable to Registrant, which is a wholly-owned subsidiary of Xerox.
ITEM 6.
ITEM 6. Selected Financial Data
Not Required.
(3)
ITEM 7.
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 from Xerox equipment being sold under installment sales and sales-type leases. In 1994, the Company purchased receivables from Xerox totaling $1,916 million compared to $1,848 million in 1993. Earned income from contracts receivable decreased in 1994 to $362 million from $376 million in 1993. The 1994 decrease is due to lower interest earned on Xerox' contracts receivable which reflects the fact that a significant number of those contracts were activated in 1993 and 1992 when market interest rates were at a ten year low. Earned income from contracts receivable decreased in 1993 to $376 million from $389 million in 1992. The decrease in earned income was the result of lower purchases of contracts receivable in 1993 compared to 1992, due to weak United States sales early in 1993 because of the reorganization of the Xerox United States Customer Operations sales force, as well as lower interest income earned on Xerox contracts receivable resulting from declining interest rates.
Interest expense was $202 million in 1994 compared to $209 million in 1993, a decrease of $7 million. The 1994 decrease resulted from lower overall interest rates partially offset by increased borrowings required to fund the Company's additional investment in contracts receivable. The $209 million of interest expense in 1993 was a decrease of $3 million from the 1992 interest expense of $212 million. The 1993 decrease reflected lower interest rates partially offset by increased borrowings required to fund the Company's additional investment in contracts receivable. The Company intends to continue to match its contracts receivable and indebtedness to maintain the relationship between interest income and interest expense.
Operating and administrative expenses were $13 million for 1994, the same amount as in 1993. Operating and administrative expenses decreased to $13 million in 1993 compared to $19 million in 1992. This decrease was due primarily to operating efficiencies associated with the administration of contracts receivable purchased from Xerox.
The effective income tax rate for 1994 was 40.8 percent as compared with 40.9 percent for 1993 and 39.9 percent for 1992, respectively. The increase in the effective tax rates in 1993 compared to 1992 was due primarily to the 1993 increase in the corporate federal income tax rates from 34 percent to 35 percent retroactive to January 1, 1993.
(4)
Discontinued Operations
Since their discontinuance in 1990, the Company has made substantial progress in disengaging from the real-estate and third-party financing businesses. During the three years ended December 31, 1994, the Company received net cash proceeds of $841 million from the sale of discontinued business units and assets, from several asset securitizations and from run-off collection activities. The amounts received were consistent with the Company's estimates in the disposal plan and were primarily used to reduce the Company's short-term indebtedness. At December 31, 1994, the Company remains contingently liable for approximately $50 million under recourse provisions associated with the securitization transactions.
Since a portion of the remaining assets ($62 million) represents passive lease receivables, many with long-duration contractual maturities and unique tax attributes, the Company expects that the wind-down of the portfolio will be significantly slower in 1995 and future years, compared with prior years. The Company believes that the liquidation of the remaining assets will not result in a net loss.
In January 1995, Xerox signed a definitive agreement for the sale of Xerox Financial Services Life Insurance Company(XFSLIC), a subsidiary of the Company's parent, Xerox Financial Service, Inc. The Company's $74 million investment in XFSLIC, representing a 26% interest, is reported as a component of net assets of discontinued operations on the consolidated balance sheet. Closing of the sale is expected in the first half of 1995. The Company anticipates that the ultimate disposition of this investment will not result in a net loss.
Additional information regarding discontinued operations is included in Note 2 to the Consolidated Financial Statements.
(5)
Capital Resources and Liquidity
The Company's principal sources of funds are cash from the collection of Xerox contracts receivable and borrowings.
At December 31, 1994, the Company and Xerox have joint access to three revolving credit agreements totaling $5 billion with various banks, which expire from 1995 to 1999. The interest on amounts borrowed under these facilities is at rates based, at the borrower's option, on spreads above certain reference rates such as LIBOR and Federal funds rates.
Net cash provided by operating activities was $20 million in 1994 compared with $48 million of cash used in 1993. The 1994 decrease in cash used by operating activities is mainly attributable to the comparatively smaller reduction in the deferred income taxes payable balance offset by greater reduction in accounts payable and accrued liabilities due to timing of payments. Net cash used in operating activities was $48 million in 1993 compared with $23 million in 1992. The 1993 increase in cash used by operating activities was mainly attributable to the reduction in accounts payable and accrued liabilities due to timing of payments.
Net cash provided by investing activities was $47 million in 1994 compared to $21 million provided in 1993. The increase in cash provided by investing activities was the result of higher net collections from the Company's investment in contracts receivable in 1994,which was partially offset by lower net collections from discontinued operations. Net cash provided by investing activities was $21 million in 1993 compared to $58 million of cash used in investing activities in 1992. The increase in cash provided by investing activities was the result of higher net collections from the Company's investment in contracts receivable in 1993, which was partially offset by lower net collections from discontinued operations.
Net cash used in financing activities was $68 million in 1994 compared to $26 million provided in 1993. The increase in cash used was the result of less net borrowing and payment of higher dividends in 1994. Net cash provided by financing activities was $26 million in 1993 compared to $79 million in 1992. The decrease in cash provided was the result of increased principal payments on the Company's long-term debt.
(6)
The Company believes that cash provided by continuing operations, cash available under its commercial paper program supported by its credit facilities, and its readily available access to the capital markets are more than sufficient for its funding needs. During 1995, new borrowing associated with the financing of customer purchases of Xerox equipment will continue. The timing, principal amount and form of new short- and long-term financing will be determined based upon the Company's need for financing and prevailing debt market conditions.
The Company intends to continue to match fund interest income from its contracts receivable with interest obligations on its indebtedness. To lock-in interest spreads on new business and reduce interest cost, the Company has entered into a number of 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 based payments in return. The Company has also entered into swap agreements that convert both fixed-and non-commercial paper based variable-rate interest payments into payments that are indexed to commercial paper rates.
During 1994, the Company entered into interest rate swap agreements, which effectively converted $430 million of variable-rate debt into fixed-rate debt. These agreements mature at various dates through 1997 and resulted in a weighted average fixed-rate of 6.71 percent at December 31,1994. The Company also entered into interest rate swap agreements during 1994 which effectively converted $275 million of variable-rate debt into variable-rate debt that is indexed to the commercial paper rates. These agreements mature at various dates through 1997.
As of December 31, 1994, the Company's overall debt-to-equity ratio was 6.5 to 1. The Company declared aggregate dividends of $88 million, $59 million and $60 million during 1994, 1993 and 1992, respectively. The Company currently intends 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. (7)
ITEM 8.
ITEM 8. Financial Statements and Supplementary Data
The financial statements of the Company and its consolidated subsidiaries and the notes thereto, the financial statement schedules, and the report thereon of KPMG Peat Marwick LLP, independent auditors, are set forth on pages 10 through 28 hereof.
The other financial statements and schedules required herein are filed as "Financial Statement Schedules" pursuant to Item 14 of this report on Form 10-K.
ITEM 9.
ITEM 9. Disagreements on Accounting and Financial Disclosure
Not Applicable.
ITEM 10.
ITEM 10. Directors and Executive Officers of the Registrant
Not Required.
ITEM 11.
ITEM 11. Executive Compensation
Not Required.
ITEM 12.
ITEM 12. Security Ownership of Certain Beneficial Owners and Management
Not Required.
ITEM 13.
ITEM 13. Certain Relationships and Related Transactions
Not Required. PART IV
ITEM 14.
ITEM 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a) (1) and (2) The financial statements and the financial statement schedules and the report of independent auditors thereon filed herewith are listed or otherwise included in the attachment hereto.
(3) The exhibits filed herewith are set forth on 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.
(8)
SIGNATURE
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_______________________________
(NAME AND TITLE) Donald R. Altieri, Vice President, Treasurer and Chief Financial Officer
March 30, 1995
Pursuant to the requirements 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.
Signature Title
Principal Executive Officer:
Stuart B. Ross ______________________________ Chairman, President and Chief Executive Officer and Director
Principal Financial Officer:
Donald R. Altieri ______________________________ Vice President, Treasurer and Chief Financial Officer and Director
Principal Accounting Officer:
Tanvir Hyder, _____________________________ Controller
Directors:
David R. McLellan* Director Eunice M. Filter* Director
*By_____________________ Donald R. Altieri Attorney-in-Fact
(DATE) March 30, 1995 (9)
SIGNATURE 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 financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements and 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, 1994 and 1993, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1994, 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.
As discussed in Note 1 to the consolidated financial statements, the Company changed its method of accounting for income taxes and its method of accounting for postretirement benefits other than pensions in 1992.
KPMG PEAT MARWICK LLP
Stamford, Connecticut January 19, 1995 (10)
XEROX CREDIT CORPORATION INDEX TO FINANCIAL STATEMENTS AND SCHEDULES
Financial Statements:
Consolidated statements of income for each of the years in the three-year period ended December 31, 1994
Consolidated balance sheets at December 31, 1994 and 1993
Consolidated statements of shareholder's equity for each of the years in the three-year period ended December 31, 1994
Consolidated statements of cash flows for each of the years in the three-year period ended December 31, 1994
Notes to consolidated financial statements
Schedules:
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.
(11)
XEROX CREDIT CORPORATION CONSOLIDATED STATEMENTS OF INCOME Years Ended December 31, 1994, 1993 and 1992 (In Millions)
1994 1993 1992 Earned Income: Contracts receivable $ 362 $ 376 $ 389
Expenses: Interest 202 209 212 Operating and administrative 13 13 19
Total expenses 215 222 231
Income before income taxes 147 154 158
Provision for income taxes 60 63 63
Net income $ 87 $ 91 $ 95
See notes to consolidated financial statements.
(12)
XEROX CREDIT CORPORATION CONSOLIDATED BALANCE SHEETS December 31, 1994 and 1993 (In Millions)
ASSETS 1994 1993
Cash and cash equivalents $ - $ 1
Investments: Contracts receivable 4,203 4,148 Notes receivable - Xerox and affiliates 59 58 Unearned income (434) (437) Allowance for losses (129) (153) Total investments 3,699 3,616
Net assets of discontinued operations 289 431 Other assets 2 2
Total assets $3,990 $4,050
LIABILITIES, DEFERRED INCOME TAXES AND SHAREHOLDER'S EQUITY
Liabilities: Notes payable within one year: Commercial paper $1,657 $1,653 Current portion of notes payable after one year 403 554 Notes payable after one year 1,246 1,079 Notes payable after one year-Xerox and affiliates 75 75 Due to Xerox Corporation, net 39 54 Accounts payable and accrued liabilities 56 91 Total liabilities 3,476 3,506
Deferred income taxes 9 38
Shareholder's Equity: Common stock, no par value, 2,000 shares authorized, issued, and outstanding 23 23 Additional paid-in capital 145 145 Retained earnings 336 337 Cumulative translation adjustment 1 1
Total shareholder's equity 505 506
Total liabilities, deferred income taxes and shareholder's equity $3,990 $4,050
See notes to consolidated financial statements.
(13)
XEROX CREDIT CORPORATION CONSOLIDATED STATEMENTS OF SHAREHOLDER'S EQUITY Years Ended December 31, 1994, 1993 and 1992 (In Millions)
Additional Cumulative Common Paid-In Retained Translation Stock Capital Earnings Adjustment Total
Balance at December 31, 1991 $ 23 $ 145 $ 295 $ 1 $ 464
Net Income 95 95
Dividends* (85) (85)
Balance at December 31, 1992 23 145 305 1 474
Net Income 91 91
Dividends (59) (59)
Balance at December 31, 1993 23 145 337 1 506
Net Income 87 87
Dividends (88) (88)
Balance at December 31, 1994 $ 23 $ 145 $ 336 $ 1 $ 505
* Includes a non-cash dividend of $25 million.
See notes to consolidated financial statements.
(14)
XEROX CREDIT CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS Years Ended December 31, 1994, 1993 and 1992 (In Millions)
1994 1993 1992 Cash Flows from Operating Activities Net income $ 87 $ 91 $ 95 Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Amortization of discount on long-term debt - - 2 (Decrease) in deferred income taxes (29) (136) (149) (Decrease)increase in operating assets and liabilities, net (38) (3) 29
Net cash provided by (used in) operating activities 20 (48) (23)
Cash Flows from Investing Activities Purchases of investments (1,916) (1,848) (1,964) Proceeds from investments 1,834 1,637 1,426 Net collections from discontinued operations 129 232 480
Net cash provided by (used in) investing activities 47 21 (58)
Cash Flows from Financing Activities Increase in short-term debt, net 4 305 382 Proceeds from long-term debt 567 475 406 Principal payments of long-term debt (551) (695) (649) Dividends (88) (59) (60)
Net cash (used in) provided by financing activities (68) 26 79
Decrease in cash and cash equivalents (1) (1) (2)
Cash and cash equivalents, beginning of year 1 2 4
Cash and cash equivalents, end of year $ - $ 1 $ 2
See notes to consolidated financial statements.
(15)
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.
(16)
XEROX CREDIT CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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 contemplates that delinquent receivables will be charged off before the aging of such delinquent receivables reaches 180 days.
New Accounting Pronouncements
Effective January 1, 1992, the Company adopted Statement of Financial Accounting Standard (SFAS) No. 109- "Accounting for Income Taxes." The effect of adopting SFAS No. 109 had no impact on shareholder's equity and income from continuing operations in 1992. A tax benefit of $87 million was recorded to discontinued operations and represented the cumulative tax benefits associated with the discontinued real-estate operations that were not previously recorded.
Also, effective January 1, 1992, the Company adopted SFAS No. 106- "Employees' Accounting for Postretirement Benefits other than Pensions," which changes the method of recording other postretirement benefit costs from a cash basis to the accrual basis. The cumulative effect of adopting SFAS No. 106 on the Company was immaterial.
Commencing in 1994, SFAS No. 112- "Employers' Accounting for Postemployment Benefits" requires accrual accounting for employee benefits that are paid after the termination of active employment but prior to retirement. SFAS No.112 did not have an impact on operating results of the Company as the applicable benefits are either routinely accrued or are types of benefits not currently offered by the Company.
Effective December 31, 1994, the Company adopted SFAS No. 119- "Disclosure about Derivative Financial Instruments and Fair Value of Financial Instruments". The typical transactions with off-balance sheet risk which the Company enters into are interest rate swap agreements. See Note 4 on Page 21 for disclosure relating to these derivative financial instruments.
(17)
XEROX CREDIT CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(2) Discontinued Operations
The Company has made substantial progress in disengaging from the real-estate and third-party financing businesses that were discontinued in 1990. During the three years ended December 31, 1994, the Company received aggregate net cash proceeds of $841 million ($129 million in 1994, $232 million in 1993 and $480 million in 1992) from the sale of individual assets, from several asset securitizations and from run-off collection activities. The amounts received were consistent with the Company's estimates in the disposal plan and were used primarily to repay short-term indebtedness. At December 31, 1994, the Company remains contingently liable for $50 million under recourse provisions associated with the securitization transactions.
During 1992, incremental tax benefits of $122 million were realized by the Company related to the write-off of its real estate businesses in 1990. Rather than recording these tax benefits in net income, the Company increased before-tax reserves related to the discontinued businesses. Management believed this prudent in view of weak market conditions and continuing uncertainties in the domestic real-estate and credit markets.
Approximately $62 million (21 percent) of the remaining assets represent passive lease receivables, many with long-duration contractual maturities and unique tax attributes. Accordingly, the Company expects that the wind-down of the portfolio will be slower during 1995 and in future years, compared with prior years. The Company believes that the liquidation of the remaining assets will not result in a net loss.
Short-and long-term debt represents debt included in the Company's consolidated balance sheets that has been assigned to the discontinued businesses in accordance with historical methodologies. Interest expense assigned to discontinued businesses for 1994 and 1993 was $10 million and $14 million, respectively. Proceeds from disposition of these businesses, along with their results of operations during the phase-out period, are expected to be used to repay such consolidated indebtedness.
(18)
XEROX CREDIT CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Summarized information of discontinued operations for the three years ended December 31, 1994 follows: (In millions)
1994 1993 1992
Summary of Operations
Loss before income taxes $ - $ - $ (122) Income tax benefit - - 122 *
Net income (loss) from discontinued operations $ - $ - $ -
Balance Sheet Data
Gross finance receivables $ 109 $ 202 $ 515 Unearned income (31) (53) (87) Other assets 211** 282** 222
Investment in discontinued operations, net $ 289 $ 431 $ 650
Assigned short- and long-term debt $ 154 $ 244 $ 400
* Includes $87 million resulting from the cumulative effect of adopting statement of Financial Accounting Standards No. 109- "Accounting for Income Taxes," effective January 1, 1992.
** Includes a $74 million investment in Xerox Financial Services Life Insurance Company, a subsidiary of the Company's parent, Xerox Financial Services, Inc.
Contractual maturities of the gross finance receivables at December 31, 1994 follow (in millions): 1995-$20; 1996-$9; 1997-$16; 1998-$2; 1999; $1; 2000 and thereafter-$61.
(19)
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 $1,916 million in 1994, $1,848 million in 1993, and $1,964 million in 1992. The Company was charged $11 million in 1994 and 1993, and $10 million in 1992 by Xerox for administrative costs associated with the contracts receivable purchased from Xerox.
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 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, 1994 are as follows (in millions): 1995-$1,702; 1996-$1,206; 1997-$785; 1998-$368; 1999-$133; 2000 and thereafter- $9. 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 $59 million notes receivable balance from Xerox and affiliates are receivables from related parties payable on demand at various interest rates. $50 million of these amounts is a floating rate note from XFSI.
(20)
XEROX CREDIT CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(4) Lines of Credit and Interest Rate Swaps
At December 31, 1994, the Company and Xerox had joint access to three revolving credit agreements totaling $5.0 billion with various banks, which expire from 1995 to 1999. These agreements are unused and are available to back the issuance of commercial paper. At December 31, 1994, the Company had a total of $1.7 billion of commercial paper outstanding. The average interest rate paid on commercial paper issued in 1994 was 4.4 percent.
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. 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 amounts of interest rate swaps outstanding at December 31, 1994 and 1993 are as follows: (Dollars in millions) 1994 1993
Pay fixed/receive variable $1,555 $2,050 Pay variable/receive variable 425 375 Pay variable/receive fixed 0 0
$1,980 $2,425
Average interest payment rates 5.54% 5.39%
At December 31, 1994 and 1993, the Company's swap agreements had an aggregate net fair value of $45 million and $(35) million, respectively, based on quotes from banks. These values represents the estimated net amounts the Company would have received and paid had the agreements been terminated as of December 31, 1994 and 1993, respectively. The Company has no present plans to terminate any of these agreements prior to their scheduled maturities.
(21)
XEROX CREDIT CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(5) Notes Payable After One Year
A summary of notes payable at December 31, 1994 and 1993 follows:
(In Millions) 1994 1993
9.50% Notes due 1994 $ - $ 100 9.76% Notes due 1994 - 14 4.119% Notes due 1994 - 50 Floating Rate Notes due 1994 (a) - 275 5.375% Notes due 1995 150 150 Floating Rate Notes due 1995 (a) 100 100 8.75% Notes due 1995 150 150 6.25% Notes due 1996 200 200 Medium Term Notes due 1996 (e) 100 - Floating Rate Notes due 1996 (a) 220 50 4.80% Notes due 1997 50 50 Medium Term Notes due 1997 (e) 147 - Floating Rate Notes due 1997 (a) 150 - 8.00% Notes due 1999 (b) - 100 10.00% Notes due 1999 150 150 10.125% Notes due 1999 (c) 150 150 Floating Rate Notes due 2048 (d) 61 61 Other Notes due 1995 - 1997 21 34
Subtotal $ 1,649 $ 1,634
Less unamortized discount - (1) Less current portion of notes payable after one year (403) (554)
Total Notes Payable After one Year $ 1,246 $ 1,079
(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) The Company exercised its option to redeem these notes on March 1, 1994.
(c) The notes are redeemable on or after April 15, 1996, at the option of the Company, at their principal amount plus accrued interest.
(22)
XEROX CREDIT CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(d) The notes mature August 15, 2048 and are repayable at the option of the noteholders beginning August 15, 1993 and annually thereafter. 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 6.03 percent.
(e) The 1996 and 1997 medium term notes carry average interest rates of 5.24% and 5.99%, respectively.
Principal payments on notes payable for the next five years are: $403 million in 1995; $684 million in 1996; $351 million in 1997; $0 million in 1998; $150 million in 1999; and $61 million thereafter.
Certain of the Company's debt agreements allow it to redeem outstanding debt, usually at par, prior to scheduled maturity. Outstanding debt issues with these call features are classified on the balance sheet and in the preceding five-year maturity table 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 then in existence.
Interest payments on notes payable for 1994, 1993 and 1992 were $137 million, $148 million, and $166 million, respectively. Interest payments on commercial paper for 1994, 1993 and 1992 were $66 million, $48 million and $40 million, respectively. The weighted-average commercial paper interest rates for 1994, 1993 and 1992 were 4.4 percent, 3.3 percent and 3.9 percent, respectively.
At December 31, 1994 and 1993, carrying values of notes payable were $1,649 million and $1,634 million, respectively, substantially all of which are subject to the requirements of SFAS No. 107- "Disclosures about Fair Values of Financial Instruments." The fair values of the Company's notes payable at December 31, 1994 and 1993 were $1,640 million and $1,698 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 received or paid if it had retired all notes payable at December 31, 1994 or 1993, 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.
(23)
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 $86 million, $136 million, and $15 million in 1994, 1993 and 1992, respectively. The Company paid $10 million in 1994, and $1 million in both 1993 and 1992, to taxing authorities for Company operations not included in Xerox' consolidated tax returns.
(24)
XEROX CREDIT CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The components of income from continuing operations before taxes and the provision for income taxes are as follows: (In Millions) 1994 1993 1992
Income from continuing operations before income taxes: $ 147 $ 154 $ 158
Federal income taxes Current $ 47 $ 50 $ 52 Deferred - (1) (3)
State income taxes Current 13 14 15 Deferred - - (1)
Total provision for income taxes $ 60 $ 63 $ 63
Deferred income taxes for 1993 and 1992 result from differences between financial and tax reporting in the timing of the recognition of income on securitized assets.
A reconciliation of the effective tax rate from the U.S. Federal statutory tax rate follows: 1994 1993 1992
U.S. Federal statutory rate 35.0% 35.0% 34.0% State income taxes, net of Federal income tax benefit 5.8 5.9 5.9
Effective tax rate 40.8% 40.9% 39.9%
(25)
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, 1994 follows:
(In millions) 1994 1993 Tax effect of future tax deductions: Discontinued real-estate tax benefit $ 31 $ 42
Tax effect on future taxable income: Discontinued leverage leases and other (39) (79) Continuing operations- asset securitizations (1) (1)
Total deferred taxes, net $ (9) $ (38)
The 1994 reduction in deferred income taxes payable is the result of sales of certain discontinued operations assets. The Company believes that 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.
(26)
XEROX CREDIT CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(8) Quarterly Results of Operations (Unaudited)
A summary of interim financial information follows:
(In Millions) First Second Third Fourth Quarter Quarter Quarter Quarter Total
Earned income $ 93 $ 89 $ 91 $ 89 $ 362
Interest expense 52 50 52 48 202
Operating and administrative expenses 4 3 2 4 13
Income taxes 15 15 15 15 60
71 68 69 67 275
Net income $ 22 $ 21 $ 22 $ 22 $ 87
Earned income $ 102 $ 93 $ 87 $ 94 $ 376
Interest expense 56 53 52 48 209
Operating and administrative expenses 4 2 4 3 13
Income taxes 17 15 13 18 63
77 70 69 69 285
Net income $ 25 $ 23 $ 18 $ 25 $ 91
(27)
SCHEDULE II XEROX CREDIT CORPORATION Valuation and Qualifying Accounts Years Ended December 31, 1994, 1993 and 1992 (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)
Allowance for losses- continuing operations $ 153 $ - $ 19 $ 43 $ 129
Allowance for losses- continuing operations $ 139 $ - $ 63 $ 49 $ 153
Allowance for losses- continuing operations $ 108 $ - $ 75 $ 44 $ 139
(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.
(28)
XEROX CREDIT CORPORATION Form 10-K For the Year Ended December 31, 1994
Index of Exhibits
Document
(3) (a) Certificate 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 July 15, 1991.
Incorporated by reference to Exhibit 3(b) to Registrants Quarterly Report on Form 10-Q for the quarter ended June 30, 1991.
(4) (a) Indenture dated as of February 1, 1987 between Registrant and Continental Illinois National Bank and Trust Company 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. 33-12160.
(b) 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.
(29)
XEROX CREDIT CORPORATION Form 10-K For the Year Ended December 31, 1994
Index of Exhibits
Document
(c) 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.
(d) Indenture dated as of August 1, 1991, as supplemented by the First Supplemental Indenture dated as of December 31, 1991, between the Registrant and Bank of Montreal Trust Company relating to unlimited amounts of debt securities which may be issued from time to time by Registrant when and as authorized by the 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. 33-39838.
(e) Indenture dated as of October 1, 1991 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 the Registrant's Board of Directors or the Executive Committee of the Board of Directors, as supplemented by the First Supplemental Indenture dated as of May 1, 1992.
Incorporated by reference to Exhibit 4(a)(1) and 4(a)(2) to Registration Statement No. 33-43470.
(f) Indenture dated as of May 1, 1994, between Registrant and 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.
(30)
XEROX CREDIT CORPORATION Form 10-K For the Year Ended December 31, 1994 Index of Exhibits
Document
(g) 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 Corporation ("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 32 of this Report on Form 10-K.
(b) Computation of Xerox' Ratio of Earnings to Fixed Charges.
See Page 33 of this Report on Form 10-K.
(23) Consent of KPMG Peat Marwick LLP.
See Page 35 of this Report on Form 10-K.
(24) Power of Attorney.
See Page 36 of this Report on Form 10-K.
(27) Financial Data Schedule
See Page 37 of this Report on Form 10-K.
(31)