Results of Operations and Financial Condition
Summary of Total Company Results
Document Processing revenues of $19.2 billion in 1999 were flat on a pre-
currency basis with 1998. Excluding Brazil, where revenues declined very
substantially due to the currency devaluation and subsequent economic weakness,
pre-currency revenues grew 4 percent driven by 5 percent growth in equipment
sales and 3 percent growth in recurring revenues. Revenues increased 8 percent
on a pre-currency basis to $19.4 billion in 1998 and 7 percent on a pre-currency
basis to $18.1 billion in 1997.
The following table summarizes net income and diluted earnings per share
(EPS):
- -----------------------------------------------------------------
(In millions, except per-share data) 1999 1998 1997
- -----------------------------------------------------------------
Document Processing before
restructuring charge $1,424 $ 1,692 $1,452
Restructuring Charge - (1,107) -
- -----------------------------------------------------------------
Continuing operations 1,424 585 1,452
Discontinued operations - (190) -
- -----------------------------------------------------------------
Net income $1,424 $ 395 $1,452
EPS
Document Processing before
restructuring charge $ 1.96 $ 2.33 $ 2.02
Restructuring charge - (1.53) -
- -----------------------------------------------------------------
Continuing operations $ 1.96 $ 0.80 $ 2.02
Discontinued operations - (0.28) -
- -----------------------------------------------------------------
Diluted EPS $ 1.96 $ 0.52 $ 2.02
- -----------------------------------------------------------------
Excluding the 1998 restructuring charge, income from continuing operations
decreased 16 percent in 1999 and increased 17 percent in 1998.
Excluding the 1998 restructuring charge, diluted earnings per share from
continuing operations decreased 16 percent in 1999 and increased 16 percent in
1998.
Since 1995, the results of our Insurance operations have been accounted for
as discontinued operations. Discontinued operations results for 1997 through
1999 were charged to previously established reserves and did not affect
reported net income. For 1998, results include a $190 million after-tax charge
in connection with the final disposition of the insurance businesses.
[The following data was represented by a chart]
Diluted EPS from Continuing Operations
1999 1998 1997
- ------ ----- -----
$1.96 $2.33* $2.02
* Before 1998 Restructuring
Document Processing
Pre-Currency Growth
To understand the trends in the business, we believe that it is helpful to
adjust revenue and expense growth (except for ratios) to exclude the impact of
changes in the translation of foreign currencies into U.S. dollars. We refer to
this adjusted growth as "pre-currency growth." Latin American currencies are
shown at actual exchange rates for both pre-currency and post-currency
reporting, since these countries generally have volatile currency and
inflationary environments, and our operations in these countries have
historically implemented pricing actions to recover the impact of inflation and
devaluation.
A substantial portion of our consolidated revenues is derived from operations
outside of the United States where the U.S. dollar is not the functional
currency. When compared with the average of the major European currencies on a
28
revenue-weighted basis, the U.S. dollar was approximately 4 percent stronger in
1999, 1 percent stronger in 1998 and 8 percent stronger in 1997. As a result,
foreign currency translation unfavorably impacted revenue growth by
approximately 1 percentage point in 1999, 1 percentage point in 1998 and 3
percentage points in 1997.
In the early part of 1999, the Brazilian real devalued substantially against
the U.S.dollar. For the full year, the average real exchange rate declined 36
per cent to 1.80 in 1999 from 1.16 in 1998. The unfavorable impact of our
Brazilian operation on our total revenue growth was approximately 4 percentage
points in 1999. This included the impact of the currency devaluation and the
subsequent weak economic environment.
We do not hedge the translation effect of revenues denominated in currencies
where the local currency is the functional currency.
Revenues by Product Category
For the major product categories, the pre-currency revenue growth rates were:
- -------------------------------------------------------------------
Pre-Currency Growth 1999 1998 1997
- -------------------------------------------------------------------
Excluding
Brazil Total
- -------------------------------------------------------------------
Total Revenues 4% -% 8% 7%
- -------------------------------------------------------------------
Digital Products 22 18 36 25
Light-lens copiers (18) (21) (11) (2)
Paper and other
products 2 1 1 3
- -------------------------------------------------------------------
The digital product portfolio includes production publishing, production
printing, color copying and printing, our expanding family of black-and-white
Document Centre digital multi-function products and network laser printers sold
through indirect channels. Excluding Brazil, digital product revenues grew 22
percent in 1999, driven by outstanding revenue growth from our expanding
Document Centre family of products, excellent laser printer revenue growth,
strong color copying and printing growth, good production publishing growth and
relatively flat production printing revenue.
Our expanding family of black-and-white Document Centre digital multifunction
products now includes models at speeds ranging from 20 to 65 pages per minute,
all available with optional network connectivity. During 1999, the proportion
of devices installed with network capability was over 50 percent. As result,
almost 40 percent of the total installed population of Document Centre products
have network capability. We believe that enabling network connectivity and
training our customers to optimize the power of the product will lead ultimately
to the page volume incrementality we expect. Document Centre revenues were $2.6
billion in 1999, $1.7 billion in 1998 and $0.4 billion in 1997.
Revenues from the DocuTech family of production publishing products grew 5
percent to $2.3 billion in 1999 and 15 percent in 1998. Growth slowed in 1999,
reflecting the currency devaluation and subsequent economic weakness in Brazil,
preparations for the January 2000 final phase of the realignment of the sales
organization to an industry focus, and customer Y2K mitigation efforts and
network lockdowns during the latter part of the year.
In 1999, color product revenues grew 8 percent. Excluding Brazil, revenues from
color products grew 14 percent in 1999. Office color revenues grew modestly as
unit volume increases were more than offset by pricing pressure and a continued
shift to lower speed, lower
[The following data was represented by a chart]
Color Copying & Printing Revenue
(constant currency, in billions)
1999 1998 1997
---- ---- ----
$2.0 $1.8 $1.5
29
priced models including our recently introduced DocuColor 12 and Document Centre
ColorSeries 50, the first color-enabled digital multifunction product. While
indirect channels color laser and inkjet placements grew significantly, inkjet
revenue growth was moderated by equipment price declines. Production color unit
and equipment sales growth was excellent, reflecting the success of the
DocuColor 100 Digital Color Press, the fastest, most productive digital color
device now on the market.
Production printing revenues declined modestly in 1999, reflecting
significant declines in Brazil due to the currency weakness and subsequent weak
economic environment. Customer Y2K mitigation efforts and network lockdowns in
the latter part of the year also impacted results. Total production printing
revenues were $2.1 billion in 1999, $2.2 billion in 1998 and $2.2 billion in
1997.
Revenue growth from our DocuPrint N Series of monochrome network laser
printers and expanding line of monochrome digital copiers sold through indirect
sales channels was excellent, including digital copiers from 6 to 16 pages per
minute and laser printers at speeds of 8 to 40 pages per minute.
The light-lens copier revenue decline reflects customer transition to our new
digital black-and-white products and increasing price pressures. We believe that
the trend over the past few years will continue and that digital product
revenues will represent an increasing share of total revenues.
Fluctuations in paper and other products revenue growth were principally due
to swings in paper prices a nd OEM sales.
The proportion of our revenues for the major product categories was:
- -------------------------------------------------------------
1999 1998 1997
- -------------------------------------------------------------
Digital products 53% 45% 35%
Light-lens copiers 30 38 47
Paper and other products 17 17 18
- -------------------------------------------------------------
The combination of excellent digital product revenue growth on a larger
proportion of our revenues partially offset by declines on an ever-smaller
percentage of light-lens revenues has resulted in 1999 digital revenues
representing more than half of the Company's revenues for the first time.
Revenues by Geography
Geographically, the pre-currency revenue growth rates were:
- -------------------------------------------------------------
Pre-Currency Growth 1999 1998 1997
- -------------------------------------------------------------
Total Revenues -% 8% 7%
- -------------------------------------------------------------
United States 3 10 7
Europe 4 9 7
Other Areas (11) 1 8
Memo: Fuji Xerox 1 (3) 3
- -------------------------------------------------------------
Revenues in the United States were 54 percent of total revenues in 1999
compared with 52 percent of revenues in 1998 and 51 percent in 1997. European
revenues represented 28 percent of total revenues in 1999, compared with 27
percent in 1998 and 1997. Other Areas, which includes operations in Latin
America, Canada, China, Russia, India, the Middle East and Africa, contributed
18 percent of total revenues in 1999 compared with 21 percent in 1998 and 22
percent in 1997.
U.S. revenue growth in 1999 and 1998 was driven primarily by digital products
and document outsourcing. 1999 U.S. revenue growth was significantly affected by
the ongoing disruptive impacts of the customer administration reorganization,
preparations for the January 2000 final phase of the realignment of the sales
organization to an industry approach and increased competition. In addition,
customer Y2K mitigation efforts and network lockdowns significantly impacted
production publishing and printing equipment sales in the latter part of the
year.
1999 and 1998 revenue growth in Europe was driven primarily by digital
products and document outsourcing. Competitive and pricing pressures were
evident in 1999, particularly in large bid and tender transactions. Customer Y2K
mitigation efforts in Europe were less pronounced than in the U.S. 1999 revenues
in Other Areas include a 40 percent decline in Brazil due to the very
significant currency devaluation and subsequent economic weakness. Revenues in
Brazil were $1.0 billion in 1999, $1.6 billion in 1998 and $1.8 billion in 1997.
Brazil represented 5 percent
30
of Xerox revenues in 1999, 8 percent in 1998 and 10 percent in 1997.
Excluding Brazil, revenue in Other Areas grew 8 percent in 1999, reflecting
excellent growth in Mexico and Central America and modest growth in Canada. In
1998, revenues in Brazil declined 7 percent due to the difficult economic
environment, and although our operations in Russia are relatively small, with
revenue of less than $100 million, revenues declined very significantly due to
the weak economy in that country. Growth in Canada and Mexico was strong in
1998. 1997 revenue growth reflects good growth in Brazil and China, modest
growth in Canada and excellent growth in Mexico.
Fuji Xerox Co., Ltd. (Fuji Xerox), an unconsolidated entity jointly owned by
Xerox Limited and Fuji Photo Film Co., Ltd., develops, manufactures and
distributes document processing products in Japan and the Pacific Rim.
Approximately 90 percent of Fuji Xerox revenues are generated in Japan, with
Australia, New Zealand, Singapore, Malaysia, Korea, Thailand and the Philippines
representing the remaining 10 percent. Fuji Xerox conducts business in other
Pacific Rim countries through joint ventures and distributors. Xerox' exposure
to economic turmoil in Asia is mitigated by our joint ownership of Fuji Xerox.
Fuji Xerox revenues grew 1 percent in 1999, reflecting flat revenues in Japan
and modest growth in Fuji Xerox' other Asia Pacific territories as economic
conditions in the region improved. Revenues declined by 3 percent in 1998,
reflecting a modest decline in Japan and a double-digit decline in the Asia
Pacific countries due to difficult economic conditions. Conversely, modest
revenue growth in 1997 reflected good growth in the Asia Pacific countries and
only modest growth in Japan due to difficult economic conditions.
[The following data was represented by a pie chart]
Worldwide Revenues
(billions)
US $10.4
Europe $ 5.3
Other $ 3.5
Total $19.2
Fuji Xerox $ 7.8
Revenues by Stream
The pre-currency growth rates by type of revenue were:
- ----------------------------------------------------------------
Pre-Currency Growth 1999 1998 1997
- ----------------------------------------------------------------
Excluding
Brazil Total
- ----------------------------------------------------------------
Equipment Sales 5% (2)% 12% 14%
Recurring Revenues 3 1 5 3
- ----------------------------------------------------------------
Total Revenues 4 - 8 7
- ----------------------------------------------------------------
Memo: Document
Outsourcing* 28% 26% 38% 58%
- ----------------------------------------------------------------
* Includes equipment accounted for as equipment sales.
Equipment Sales: Equipment Sales declined 2 percent in 1999, impacted very
significantly by the currency devaluation and weak economic environment in
Brazil. Excluding Brazil, Equipment Sales growth slowed to 5 percent, reflecting
the unfavorable impacts of the U.S. customer administration reorganization and
sales organization realignment in Europe and the U.S., increased competition,
and the impact of customer Y2K mitigation and network lockdowns on production
publishing and production printing equipment sales in the U.S. in the latter
part of the year. Equipment Sales in 1998 grew 12 percent despite declines in
Brazil and Russia due to their weak economies. Excluding Brazil and Russia,
Equipment Sales grew 17 percent. We have introduced a continuing stream of
state-of-the-art digital products since 1997. Approximately half of 1999
Equipment Sales were attributable to products introduced since 1997, including
our expanding family of Document Centre digital multifunction products, the
DocuColor 12, 30, 70 and 100, the Document Centre ColorSeries 50, the
31
DocuTech 6180 Production Publisher, and the network monochrome laser printers
and digital copiers sold through indirect channels. Digital product equipment
sales grew 16 percent in 1999, 46 percent in 1998 and 40 percent in 1997, and
represented 71 percent of 1999 Equipment Sales, 62 percent in 1998 and 47
percent in 1997.
Recurring Revenues: Recurring Revenues include revenues from service, Document
Outsourcing, rentals, supplies, paper and income from customer financing.
Recurring Revenues represented 63 percent of total revenues in 1999, 62 percent
in 1998 and 63 percent in 1997. These revenues are primarily a function of our
installed population of equipment, usage levels, pricing and interest rates.
Slowing overall recurring revenue growth reflects lower equipment sales growth.
1999 recurring revenue growth was strong in production publishing and color,
reflecting primarily the favorable impacts of earlier equipment sales growth.
Lower overall service revenues reflect lower equipment sales and lower page
volume growth, as pages diverted from light-lens copiers to printers have not
yet been fully offset by page volume increases on network-connected Document
Centre multi-function products. During 1999, the Company securitized $1,495
million of finance receivables. This resulted in a net increase in finance
income of approximately $17 million in 1999, which includes the unfavorable flow
through impacts. The unfavorable flow through of these securitizations will
continue to impact finance income in 2000 and 2001. Proceeds from the
securitizations were used to repay debt, which has resulted in lower equipment
financing interest expense.
Document Outsourcing: Document Outsourcing revenues are split between Equipment
Sales and Document Outsourcing. Where document out-sourcing contracts include
revenues accounted for as equipment sales, this revenue is included in Equipment
Sales on the income statement. All other document outsourcing revenues,
including service, equipment rental, supplies, paper and labor are included in
Document Outsourcing.
This has the effect of diverting some revenues from supplies, paper, service and
rental. The excellent overall Document Outsourcing growth reflects the trend of
customers focusing on their core businesses and outsourcing their document
processing requirements to Xerox. Slowing total document outsourcing growth in
1999 was due primarily to reduced fourth quarter production publishing and
printing equipment sales associated with U.S. customer Y2K mitigation efforts
and network lockdowns. At the end of 1999, the estimated future minimum value of
document outsourcing revenue under contract is over $8 billion, representing an
approximate 25 percent increase from 1998.
[The following data was represented by a chart]
Document Outsourcing Revenues
(billions)
1999 1998 1997
---- ---- ----
$3.4 $2.7 $2.0
Cost and Expenses
The trend in key ratios was as follows:
- --------------------------------------------------------------
1999 1998 1997
- --------------------------------------------------------------
Gross Margin 44.0% 46.3% 46.9%
SAG % Revenue 26.8 27.3 28.7
- --------------------------------------------------------------
The 2.3 percentage point 1999 gross margin decline was due primarily to
higher revenue growth in the lower margin document outsourcing and channels
businesses and the significant
32
revenue decline in the higher margin Brazilian operation together with a lower
gross margin in Brazil compared with the prior year. In addition, the gross
margin was adversely impacted by unfavorable product mix, unfavorable currency
and a decline in service gross margins as service revenue declines have not been
accompanied by corresponding cost reductions. Substantial competitive price
pressures were offset by manufacturing and other productivity improvements. The
modest 1998 gross margin decline was due to the increasing proportion of lower
margin channel product sales, the growing Document Outsourcing business, and
continued competitive price pressure partially offset by manufacturing and
service productivity. Including the inventory charges resulting from the
restructuring, the 1998 gross margin was 45.8 percent.
[The following data was represented by a chart]
Manufacturing Productivity
(percentage decline in per unit equipment manufacturing cost)
1999 1998 1997
---- ---- ----
12.0% 10.4% 8.6%
[The following data was represented by a chart]
SAG as a Percentage Of Revenue
1999 1998 1997
---- ---- ----
26.8% 27.3% 28.7%
The improved ratio of selling, administrative and general expenses (SAG) to
revenue in 1999 reflected significant declines in general and administrative
expenses due to restructuring, expense controls, substantially lower management
and employee bonuses and profit sharing, and the beneficial currency translation
impact, including the devaluation of the Brazilian currency partially offset by
the unfavorable impact of U.S. customer administration issues. The improvement
in 1998 reflected declines in general and administrative expenses due to
continuing productivity initiatives, restructuring and expense control,
partially offset by increased sales coverage and advertising investments. SAG,
on a pre-currency basis, declined 2 percent in 1999 and increased 3 percent in
1998 and 5 percent in 1997.
Research and development (R&D) expense declined 6 percent in 1999 and 2
percent in 1998 and increased 3 percent in 1997. The 1999 reduction is largely
due to substantially lower management and employee bonuses and profit sharing
and lower overhead. The modest reduction in 1998 reflected a reprioritization of
our spending to focus on areas intended to produce significant growth, such as
digital, color and solutions. We continue to invest in technological development
to maintain our position in the rapidly changing document processing market with
an added focus on increasing the effectiveness and value of our R&D investment.
Xerox R&D is strategically coordinated with Fuji Xerox, which invested $555
million in R&D in 1999 for a combined total of $1.5 billion. We expect R&D
spending in 2000 will be higher than 1999.
33
Worldwide employment increased by 1,900 in 1999 to 94,600 primarily as a
result of hiring 2,000 employees to support our fast-growing Document
Outsourcing business, 2,000 associated with our acquisition of majority
ownership in India, 600 associated with acquisition of the Omnifax business and
the net hiring of 2,000 employees for the centralized European customer care and
shared services operations in Ireland, direct sales and R&D skills enhancement.
These increases were partially offset by 4,700 employees leaving the Company
under the worldwide restructuring program.
Other expenses, net, were $297 million in 1999, $242 million in 1998 and $98
million in 1997. The increase of $55 million for 1999 primarily reflected
increased non-financing interest expense and goodwill amortization associated
with our $45 million 1999 acquisition of Omnifax, our $62 million 1999
acquisition of majority ownership in India and our May 1998 acquisition of
XLConnect Solutions; higher non-financing interest expense related to an
increase in working capital; and increased environmental expense provisions
following an updated review of our environmental liabilities. These increases
were partially offset by lower Year 2000 remediation spending and net gains from
several small asset sales. The increase of $144 million for 1998 reflected
increased non-financing interest expense and goodwill amortization associated
with our June 1997 acquisition of The Rank Group's remaining interest in Xerox
Limited and our May 1998 acquisition of XLConnect Solutions; non-financing
interest expense related to an increase in working capital; and increased Year
2000 remediation spending, partially offset by reduced currency losses from
balance sheet translation.
Income Taxes and Equity in Net Income of Unconsolidated Affiliates
Income before income taxes and the 1998 restructuring charge was $2,036 million
in 1999, $2,407 million in 1998 and $2,141 million in 1997.
The effective tax rates were 31.0 percent in 1999, 31.6 percent in 1998
before the restructuring charge, and 34.0 percent in 1997. The 1999 and 1998
rate benefited from increases in foreign tax credits and refunds of foreign
taxes, as well as shifts in the mix of our worldwide profits.
Equity in Net Income of Unconsolidated Affiliates is principally Xerox
Limited's share of Fuji Xerox income. Total equity in income declined to $68
million in 1999, reflecting difficult economic conditions in Japan and other
Asia Pacific countries and reductions in income from several smaller investments
partially offset by favorable currency translation due to the strengthening of
the yen compared with the U.S. dollar. The 1998 decline in total equity income
to $74 million was due principally to our share, $18 million, of a restructuring
charge recorded by Fuji Xerox; a reduction in Fuji Xerox income, reflecting
difficult economic conditions in Japan and other Asia Pacific countries; adverse
currency translation due to the weakening of the Japanese yen compared with the
U.S. dollar for most of the year; and reductions in income from several smaller
investments. The Xerox Limited 50 percent share of Fuji Xerox income was $55
million in 1999, $72 million (before our $18 million share of a restructuring
charge recorded by Fuji Xerox) in 1998 and $119 million in 1997.
1998 Restructuring Charge
In April 1998, we announced a worldwide restructuring program intended to
enhance our competitive position and lower our overall cost structure. In
connection with this program, in the second quarter of 1998 we recorded a pre-
tax provision of $1,644 million ($1,107 million after taxes and including our
$18 million share of a restructuring charge recorded by Fuji Xerox). The program
includes the elimination of approximately 9,000 jobs, net, worldwide, the
closing and consolidation of facilities, and the write-down of certain assets.
34
The following table summarizes the status of the restructuring reserve:
- --------------------------------------------------------------
Charges Dec. 31
Total Against 1999
Reserve Reserve Balance
- --------------------------------------------------------------
Severance and related
costs $1,017 $ 717 $300
Asset impairment 316 316 -
Lease cancellation and
other costs 198 104 94
Inventory charges 113 113 -
- --------------------------------------------------------------
Total $1,644 $ 1,250 $394
- --------------------------------------------------------------
As of December 31, 1999, approximately 10,000 employees have left the Company
under the 1998 restructuring program. Pre-tax savings from the implementation
through the end of 1999 are approximately $0.6 billion annually, resulting
primarily in lower selling, administrative and general expenses. The majority of
the annual savings to date have been reinvested to implement process and systems
changes in order to enable the restructuring, and to sustain ongoing efforts to
broaden and strengthen marketing programs and distribution channels to enhance
revenue growth. When the 1998 restructuring program initiatives are fully
implemented, the ongoing pre-tax savings before reinvestments will be
approximately $1.0 billion annually.
The restructuring reserve is reviewed quarterly and there have been no
material changes to the program since its announcement in April 1998. The
remaining reserve will be primarily utilized during 2000 for certain European
initiatives that extended beyond 1999 due to local regulatory issues as they
relate to the workforce.
2000 Restructuring Charge
Management is currently performing a comprehensive review to identify additional
operational productivity and cost-saving opportunities above those previously
taken in connection with the 1998 restructuring program. We anticipate that a
substantial restructuring charge, although less than the 1998 restructuring
charge, will be recorded most likely in the first quarter of 2000. The ultimate
restructuring charge is expected to include employee termination expenses and
closure costs related to the initiatives identified as part of the comprehensive
review.
Share Repurchase
In April 1998, we announced that we were reactivating our $1 billion stock
repurchase program, which was suspended in April 1997 when we acquired the
remaining financial interest in Xerox Limited. Although we did not repurchase
any shares during 1999, since inception of the program we have repurchased 20.6
million shares for $594 million. We have no current plans to activate the
program in 2000.
Year 2000
The Year 2000 (Y2K) problem is the result of computer programs written in two
digits, rather than four, to define the applicable year. As a result, many
information systems and related interfaces are unable to properly recognize and
process date-sensitive information beyond December 31, 1999. As with all major
companies, certain of our information systems, products and other technology
interfaces required remediation or replacement in order to render these items
Year 2000 compliant. As of December 31, 1999, remediation and replacement work
on all required mission critical and non-mission critical information systems,
technology interfaces, facilities and products was completed as planned. As a
result of these efforts, we did not experience any Y2K-related business
disruptions.
During 1999, 1998 and 1997, we spent $47 million, $92 million and $28
million, respectively, on Y2K remediation efforts, exclusive of software and
systems that were being upgraded or replaced in the normal course of business.
35
Acquisition of the Color Printing and Imaging Division of Tektronix
In January 2000, we acquired the Color Printing and Imaging Division of
Tektronix (CPID) for $925 million in cash including $75 million paid by Fuji
Xerox for the Asia Pacific operations of CPID. CPID manufactures and sells color
printers, ink and related products, and supplies. This transaction will result
in goodwill and other identifiable intangible assets of approximately $575
million, which will be amortized over their useful lives, predominantly 20
years. In addition, we will also recognize a charge in the first quarter of 2000
for acquired in-process research and development of approximately $25 million
associated with this acquisition.
New Accounting Standards
In 1998, the Financial Accounting Standards Board (FASB) 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. We will adopt SFAS No. 133, as amended, beginning January
1, 2001. We do not expect this Statement to have a material impact on our
consolidated financial statements.
Capital Resources and Liquidity
We manage the capital structure of our non-financing operations separately from
that of our captive finance companies, which employ a more highly leveraged
capital structure typical of captive finance companies.
At year-end 1999, total debt, including ESOP and Discontinued Operations
debt, was $106 million less than at year-end 1998. During 1998, total debt
increased by $2,204 million from $12,903 million to $15,107 million.
====================================================================
(In millions) 1999 1998 1997
====================================================================
Total debt* as of January 1 $15,107 $12,903 $12,448
====================================================================
Non-Financing Businesses:
Document Processing
operations cash
generation (353) (99) (1,026)
Brazil dollar debt reallocation 505 - -
Purchase of The Rank
Group's remaining
interests in Xerox Limited - - 1,534
Acquisitions, net of cash and
debt acquired 160 380 -
Mandatorily redeemable
preferred securities - - (637)
ESOP (71) (64) (60)
Discontinued businesses (114) (381) (541)
- --------------------------------------------------------------------
Subtotal Non-Financing 127 (164) (730)
Financing Businesses (847) 1,764 760
Shareholder dividends 586 531 475
All other changes 28 73 (50)
- --------------------------------------------------------------------
Total debt* as of December 31 $15,001 $15,107 $12,903
====================================================================
* Includes discontinued operations.
For analytical purposes, total equity includes common equity, ESOP preferred
stock, mandatorily redeemable preferred securities and minorities' interests.
Total equity increased by $39 million in 1999, decreased $148 million in 1998
and increased by $523 million in 1997.
The following is a three-year summary of the changes in total equity:
==============================================================
(In millions) 1999 1998 1997
==============================================================
Total equity as of January 1 $6,306 $6,454 $5,931
Income from continuing
operations, before
restructuring charge 1,424 1,692 1,452
Restructuring charge - (1,107) -
Loss from Discontinued
operations - (190) -
Mandatorily redeemable
preferred securities - - 637
Shareholder dividends (586) (531) (475)
Purchase of treasury stock - (172) (116)
Exercise of stock options 97 112 99
Change in minorities' interests 3 (3) (716)
Translation adjustments (1,003) (56) (463)
All other, net 104 107 105
- --------------------------------------------------------------
Total equity as of December 31 $6,345 $6,306 $6,454
==============================================================
36
Debt related to non-financing operations grew by $741 million and $440
million in 1999 and 1998, respectively. The non-financing debt-to-capital ratio
increased to 47.3 percent compared with 43.8 percent and 38.9 percent as of
year-end 1998 and 1997, respectively. The 1999 growth reflects a 7.4 point
increase related to the significant devaluation of the Brazilian real,
partially offset by net cash from operations and income net of shareholder
dividends. The $1,107 million after-tax restructuring charge taken in 1998 was a
primary factor underlying the 4.9 point increase in 1998.
The following table summarizes the results of capital and coverage
calculations commonly used to measure the Company's financial strength:
================================================================
(In millions) 1999 1998 1997
================================================================
Non-Financing:
Debt* $ 4,155 $ 3,414 $ 2,974
Equity* 4,630 4,385 4,662
- ----------------------------------------------------------------
Total Capital $ 8,785 $ 7,799 $ 7,636
================================================================
Debt-to-Capital 47.3% 43.8% 38.9%
Ratio of earnings to interest
expense, before 1998
restructuring charge** 5.9x 7.1x 7.1x
Ratio of earnings to interest
expense, after 1998
restructuring charge** 5.9x 2.0x 7.1x
Ratio of earnings to fixed
charges, before 1998
restructuring charge** 4.4x 5.0x 4.8x
Ratio of earnings to fixed
charges, after 1998
restructuring charge** 4.4x 1.7x 4.8x
================================================================
Financing:
Debt $11,165 $12,012 $10,248
Equity 1,396 1,602 1,473
- ----------------------------------------------------------------
Total Capital $12,561 $13,614 $11,721
================================================================
Debt-to-Equity 8.0x 7.5x 7.0x
Ratio of Earnings to
Interest Expense 1.9x 1.8x 1.7x
================================================================
* Includes $319 million (one-half) share of mandatorily redeemable preferred
securities.
**Includes one-half share of redeemable preferred securities dividends of $27
million in 1999 and 1998, and $24 million in 1997.
Non-Financing Operations
The following table summarizes 1999, 1998 and 1997 document processing non-
financing operations cash generation and usage:
================================================================
(In millions) 1999 1998 1997
================================================================
Document Processing
Non-Financing:
Income $1,114 $1,381* $1,217
Depreciation and
amortization** 935 821 739
- ----------------------------------------------------------------
Cash from Operations $2,049 $2,202 $1,956
- ----------------------------------------------------------------
Additions to land, building
and equipment (594) (566) (520)
Increase in on-lease
equipment (401) (473) (347)
Decrease/(increase) in
inventories 68 (558) (170)
Increase in accounts
receivable (94) (540) (188)
All other changes, net (238) 366 295
- ----------------------------------------------------------------
Net Cash Generation, Before
Restructuring Charges $ 790 $ 431 $1,026
- ----------------------------------------------------------------
Cash charges against 1998
restructuring reserve (437) (332) -
- ----------------------------------------------------------------
Net Cash Generation $ 353 $ 99 $1,026
================================================================
* Before restructuring charge.
** Includes rental equipment depreciation of $463, $411 and $311 in 1999, 1998
and 1997, respectively.
[The following data was represented by a chart]
Non-Financing Cash Flows (millions)
1999 $ 353
1998 $ 99
1997 $1,026
37
Cash from operations was $2,049 million in 1999 versus $2,202 million in 1998
as lower net income was only partially offset by higher non-cash depreciation
and amortization expenses. Investment in land, buildings and equipment grew by
$28 million and $46 million in 1999 and 1998, respectively, reflecting
investments in Ireland, where we are consolidating European customer support
centers and investing in manufacturing - partially offset by overall spending
constraints. Inventories, other than on-lease equipment, were reduced by $68
million in 1999, a $626 million improvement versus 1998, driven by a major focus
on inventory management as well as lower requirements for analog products. The
improvement was partially offset by inventory build associated with fourth
quarter revenue shortfalls and Y2K inventory contingencies. Inventory growth of
$558 million in 1998 was up from $170 million in 1997, reflecting accelerated
digital product sales growth. Receivables grew by $94 million in 1999 versus
$540 million and $188 million of growth in 1998 and 1997, respectively. Although
days sales outstanding improved in the fourth quarter, progress in receivables
was less than expected in 1999 due primarily to continued disruptions related to
the consolidation of U.S. customer administrative centers. We believe that days
sales outstanding will continue to improve during 2000.
Financing Businesses
Customer financing-related debt declined by $847 million in 1999 and increased
by $1,764 million in 1998. This change reflects the securitization in 1999 of
$1,495 million of financing contracts, and an allocation of $505 million of debt
to non-financing operations based on our 8:1 debt to equity guideline. This
allocation was necessary because of the impact on our Brazilian finance
receivables of the significant devaluation in the Brazilian real. The increase
in 1998 largely reflects improved equipment sales growth and currency
translation effects. Customer financing debt grew by $760 million in 1997 also
due to equipment sales growth, partially offset by currency translation.
Debt related to discontinued third-party financing and real estate
activities was fully paid down in 1999. Related amounts, included in financing
business debt in 1998 and 1997, totaled $86 million and $117 million,
respectively.
Funding Plans for 2000
Decisions related to term funding of our non-financing businesses, including
any term funding to replace the $850 million commercial paper borrowing in
January related to our purchase of the Color Printing and Imaging Division of
Tektronix, Inc., will remain based on the interest rate environment and capital
market conditions, and our desire to maintain ample liquidity and capital
strength.
Customer financing-related debt is expected to increase in year 2000 in line
with equipment sales growth and securitized asset run-off. Decisions regarding
the size and timing of funding for our financing businesses will be made based
on match funding needs, refinancing requirements and capital market conditions.
We believe our short-term credit facilities provide an ample source of funds
to finance our day-to-day operations, and we have readily available access to
the global capital markets to satisfy medium- and long-term financing needs. Our
$7 billion global revolving credit agreement with a group of banks expires in
2002. This facility is unused and available to provide backup to Xerox, Xerox
Credit Corporation (XCC) and Xerox Capital (Europe) plc (XCE) commercial paper
borrowings. Commercial paper balances supported by the global credit agreement
totaled $954 million at December 31, 1999. Xerox or XCC may access the facility
up to its $7 billion limit. XCE has access subject to a $4 billion limit. At
December 31, 1999, Xerox and XCE had combined U.S. shelf capacity of $2.1
billion and XCC had U.S. shelf capacity of $2 billion. In addition, a $4 billion
Euro market debt facility is available to Xerox, XCC and XCE, of which $2
billion remained unused at December 31, 1999.
38
Risk Management
Xerox is typical of multinational corporations because it is exposed to market
risk from changes in foreign currency exchange rates and interest rates that
could affect our results of operations and financial condition.
We have entered into certain financial instruments to manage interest rate
and foreign currency exposures. These instruments are held solely for hedging
purposes and include interest rate swap agreements, forward exchange contracts
and foreign currency swap agreements. We do not enter into derivative instrument
transactions for trading purposes and employ longstanding policies prescribing
that derivative instruments are to be used only to achieve a set of very limited
objectives.
Currency derivatives are primarily arranged in conjunction with underlying
transactions that give rise to foreign currency-denominated payables and
receivables - for example, an option to buy foreign currency to settle the
importation of goods from foreign suppliers, or a forward exchange contract to
fix the dollar value of a foreign currency-denominated loan.
As of December 31, 1999 and 1998, our primary foreign currency market
exposures include the Japanese yen, Euro, Brazilian real, British pound sterling
and Canadian dollar.
In order to manage the risk of foreign currency exchange rate fluctuations,
we hedge a significant portion of all cross-border cash transactions denominated
in a currency other than the functional currency applicable to each of our legal
entities. From time to time, when cost-effective, foreign currency debt and
currency derivatives are used to hedge international equity investments.
Consistent with the nature of the economic hedge of such foreign currency
exchange contracts, associated unrealized gains or losses would be offset by
corresponding decreases or increases in the value of the underlying asset or
liability being hedged.
Assuming a 10 percent appreciation or depreciation in foreign currency
exchange rates as of December 31, 1999, the potential change in fair value of
our net foreign currency portfolio would approximate $22million. The amount
permanently invested in foreign subsidiaries and affiliates, primarily Xerox
Limited, Fuji Xerox and Xerox do Brasil, and translated into dollars using the
year-end exchange rate, was $6.5 billion at December 31, 1999, net of foreign
currency-denominated liabilities designated as a hedge of our net investment.
Assuming a 10 percent appreciation or depreciation of the U.S. dollar against
all currencies from the quoted foreign currency exchange rates at December 31,
1999, the unrealized loss or gain would approximate $650million.
With regard to interest rate hedging, virtually all customer financing assets
earn fixed rates of interest. Therefore, within industrialized economies, we
"lock in" an interest rate spread by arranging fixed-rate liabilities with
similar maturities as the underlying assets and fund the assets with liabilities
in the same currency. We refer to the effect of these conservative practices as
"match funding" customer financing assets. This practice effectively eliminates
the risk of a major decline in interest margins during a period of rising
interest rates. Conversely, this practice effectively eliminates the opportunity
to materially increase margins when interest rates are declining.
Pay fixed-rate and receive variable-rate swaps are typically used in place of
more expensive fixed-rate debt. Additionally, pay variable-rate and receive
fixed-rate swaps are used from time to time to transform longer term fixed-rate
debt into variable-rate obligations. The transactions performed within each of
these categories enable more cost-effective management of interest rate
exposures. The potential risk attendant to this strategy is the non-performance
of the swap counterparty. We address this risk by arranging swaps with a diverse
group of strong-credit counterparties, regularly monitoring their credit ratings
and determining the replacement cost, if any, of existing transactions.
39
On an overall worldwide basis, and including the impact of our hedging
activities, weighted average interest rates for 1999, 1998 and 1997 approximated
5.6 percent, 6.1 percent and 6.2 percent, respectively.
Many of the financial instruments we use are sensitive to changes in interest
rates. Hypothetically, interest rate changes result in gains or losses related
to the market value of our term debt and interest rate swaps due to differences
between current market interest rates and the stated interest rates within the
instrument. Applying an assumed 10 percent reduction or increase in the yield
curves at December 31, 1999, the fair value of our term debt and interest swaps
would increase or decrease by approximately $69 million.
Our currency and interest rate hedging are typically unaffected by changes in
market conditions as forward contracts, options and swaps are normally held to
maturity consistent with our objective to lock in currency rates and interest
rate spreads on the underlying transactions.
Liquidity
Our primary sources of liquidity are cash generated from operations and
borrowings. The consolidated statements of cash flows detailing changes in our
cash balances are on page 44.
Operating activities resulted in a net cash inflow of $1,224 million in 1999
compared with outflow of $1,165 in 1998. This year-over-year improvement largely
results from the 1999 finance receivables securitizations, containment of the
trend toward higher days sales outstanding, improved inventory turns and higher
non-cash charges. Higher restructuring payments and infrastructure investment
had a modest offsetting effect on cash flow from operations. The unusually high
level of operations cash usage experienced in 1998 was largely attributable to
strong growth in our customer financing businesses and lower inventory and
receivables turnover, which more than offset higher income and non-cash charges.
1999 investing activities resulted in net cash usage of $627 million, or $240
million less than in 1998 due to our 1998 purchase of XLConnect. Net cash
outflows from investing activities reached $1,251 million in 1997 largely due to
an initial $812 million payment to The Rank Group under our agreement to
purchase The Rank Group's remaining interests in Xerox Limited.
Financing activities used $569 million of cash in 1999, and generated $1,887
million and $184 million in 1998 and 1997, respectively. These significant year-
to-year financing movements primarily result from operations cash flow changes
and, in 1997, include $637 million of proceeds from the issuance of mandatorily
redeemable preferred securities.
Year-end cash balances were $126 million in 1999, $79 million in 1998 and $75
million in 1997, consistent with our objective to minimize investments that do
not provide added value to our shareholders.
Discontinued Operations -Insurance and Other
The net investment in our discontinued businesses, which includes Insurance and
Other Discontinued Businesses, totaled $702 million at December 31, 1999
compared with $759 million at December 31, 1998. The decrease in 1999 was
primarily caused by the sale of seven of our remaining eight financing leases,
the sale of other Real Estate investments and other run-off activity that were
partially offset by the funding of reinsurance coverage for the former Talegen
Holdings, Inc. (Talegen) companies to Ridge Reinsurance Limited (Ridge Re) and
interest for the period on the assigned debt. A discussion of the discontinued
businesses follows.
40
Net Investment in Insurance
In 1995, we recorded a $1,546 million after-tax charge in connection with the
disengagement activities for our five then remaining Talegen insurance companies
and three related service companies. In the first quarter of 1998, an additional
after-tax charge of $190 million was recorded. For a complete description of the
status of insurance, see Note 10 to the Consolidated Financial Statements.
The net investment in Insurance at December 31, 1999, totaled $621 million
compared with a balance of $513 million and $1,076 million at December 31, 1998
and 1997, respectively. The increase in 1999 is primarily due to contractual
payments to Ridge Re for annual premium installments and associated finance
charges, a settlement payment related to the sale of one of the former Talegen
units and interest on the assigned insurance debt, partially offset by dividends
received from Ridge Re. The decrease in 1998 versus 1997 primarily reflects the
sales of the remaining insurance and service companies and the reserve increase
recorded in the first quarter of 1998, somewhat offset by contractual payments
to Ridge Re for annual premium installments and associated finance charges and
interest on the assigned insurance debt.
Net Investment in Other Discontinued Business
The net investment in our Other Discontinued Businesses at December 31, 1999,
which includes Other Financial Services and Third-Party Financing and Real
Estate, totaled $131 million compared with $382 million and $423 million at
December 31, 1998 and 1997, respectively. The reduction primarily relates to
sales of financing leases and an office building and other real estate,
partially offset by interest on the assigned debt and other expenses. Debt
associated with these assets totaled $50 million at December 31, 1999 compared
with $136 million and $167 million at December 31, 1998 and 1997, respectively.
Forward-Looking Cautionary Statements
This Annual Report contains forward-looking statements and information relating
to Xerox that are based on our beliefs, as well as assumptions made by and
information currently available to us. The words "anticipate," "believe,"
"estimate," "expect," "intend," "will" and similar expressions, as they relate
to us, are intended to identify forward-looking statements. Actual results could
differ materially from those projected in such forward-looking statements.
Information concerning certain factors that could cause actual results to differ
materially is included in the company's 1999 10-K filed with the SEC in March
2000. We do not intend to update these forward-looking statements.
41
Consolidated Statements of Income
=============================================================================================================================
Year ended December 31 (in millions, except per-share data) 1999 1998 1997
=============================================================================================================================
Revenues
Sales $10,346 $10,696 $ 9,881
Service and rentals 7,856 7,678 7,257
Finance income 1,026 1,073 1,006
- -----------------------------------------------------------------------------------------------------------------------------
Total Revenues 19,228 19,447 18,144
- -----------------------------------------------------------------------------------------------------------------------------
Costs and Expenses
Cost of sales 5,744 5,662 5,330
Cost of service and rentals 4,481 4,205 3,778
Inventory charges - 113 -
Equipment financing interest 547 570 520
Research and development expenses 979 1,040 1,065
Selling, administrative and general expenses 5,144 5,321 5,212
Restructuring charge and asset impairments - 1,531 -
Other, net 297 242 98
- -----------------------------------------------------------------------------------------------------------------------------
Total Costs and Expenses 17,192 18,684 16,003
- -----------------------------------------------------------------------------------------------------------------------------
Income before Income Taxes, Equity Income and Minorities` Interests 2,036 763 2,141
Income taxes 631 207 728
Equity in net income of unconsolidated affiliates 68 74 127
Minorities' interests in earnings of subsidiaries 49 45 88
- -----------------------------------------------------------------------------------------------------------------------------
Income from Continuing Operations 1,424 585 1,452
Discontinued operations - (190) -
- -----------------------------------------------------------------------------------------------------------------------------
Net Income $ 1,424 $ 395 $ 1,452
=============================================================================================================================
Basic Earnings (Loss) per Share
Continuing operations $ 2.09 $ 0.82 $ 2.16
Discontinued operations - (0.29) -
- -----------------------------------------------------------------------------------------------------------------------------
Basic Earnings per Share $ 2.09 $ 0.53 $ 2.16
=============================================================================================================================
Diluted Earnings (Loss) per Share
Continuing operations $ 1.96 $ 0.80 $ 2.02
Discontinued operations - (0.28) -
- -----------------------------------------------------------------------------------------------------------------------------
Diluted Earnings per Share $ 1.96 $ 0.52 $ 2.02
=============================================================================================================================
The accompanying notes on pages 46 to 65 are an integral part of the
consolidated financial statements.
42
Consolidated Balance Sheets
=================================================================================================================
December 31 (in millions) 1999 1998
=================================================================================================================
Assets
Cash $ 126 $ 79
Accounts receivable, net 2,622 2,671
Finance receivables, net 5,115 5,220
Inventories 2,961 3,269
Deferred taxes and other current assets 1,161 1,236
- -----------------------------------------------------------------------------------------------------------------
Total Current Assets 11,985 12,475
Finance receivables due after one year, net 8,203 9,093
Land, buildings and equipment, net 2,456 2,366
Investments in affiliates, at equity 1,615 1,456
Goodwill, net 1,724 1,731
Other assets 1,701 1,233
Investment in discontinued operations 1,130 1,670
- -----------------------------------------------------------------------------------------------------------------
Total Assets $ 28,814 $ 30,024
=================================================================================================================
Liabilities and Equity
Short-term debt and current portion of long-term debt $ 3,957 $ 4,104
Accounts payable 1,016 948
Accrued compensation and benefits costs 630 722
Unearned income 186 210
Other current liabilities 2,161 2,523
- -----------------------------------------------------------------------------------------------------------------
Total Current Liabilities 7,950 8,507
Long-term debt 10,994 10,867
Postretirement medical benefits 1,133 1,092
Deferred taxes and other liabilities 2,263 2,711
Discontinued operations liabilities - policyholders' deposits and other 428 911
Deferred ESOP benefits (299) (370)
Minorities' interests in equity of subsidiaries 127 124
Company-obligated, mandatorily redeemable preferred securities of subsidiary
trust holding solely subordinated debentures of the Company 638 638
Preferred stock 669 687
Common shareholders' equity 4,911 4,857
- -----------------------------------------------------------------------------------------------------------------
Total Liabilities and Equity $ 28,814 $ 30,024
=================================================================================================================
Shares of common stock issued and outstanding at December 31, 1999 were (in
thousands) 665,156. Shares of common stock issued and out- standing at December
31, 1998 were (in thousands) 657,196 and 656,787, respectively.
The accompanying notes on pages 46 to 65 are an integral part of the
consolidated financial statements.
43
Consolidated Statements of Cash Flows
================================================================================================================================
Year ended December 31 (in millions) 1999 1998 1997
================================================================================================================================
Cash Flows from Operating Activities
Income from continuing operations $ 1,424 $ 585 $ 1,452
Adjustments required to reconcile income to cash flows from
operating activities:
Depreciation and amortization 935 821 739
Provision for doubtful accounts 359 301 265
Restructuring charge and other charges - 1,644 -
Provision for postretirement medical benefits, net of payments 41 33 29
Cash charges against 1998 restructuring reserve (437) (332) -
Minorities' interests in earnings of subsidiaries 49 45 88
Undistributed equity in income of affiliated companies (68) (27) (84 )
Decrease (increase) in inventories 68 (558) (170 )
Increase in on-lease equipment (401) (473) (347 )
Increase in finance receivables (1,788) (2,169) (1,629 )
Proceeds from securitization of finance receivables 1,495 - -
Increase in accounts receivable (94) (540) (188 )
(Decrease) increase in accounts payable and accrued
compensation and benefit costs (94) 127 250
Net change in current and deferred income taxes 277 (192) 361
Change in other current and non-current liabilities (78) 67 83
Other, net (464) (497) (377 )
--------------------------------------------------------------------------------------------------------------------------------
Total 1,224 (1,165) 472
--------------------------------------------------------------------------------------------------------------------------------
Cash Flows from Investing Activities
Cost of additions to land, buildings and equipment (594) (566) (520)
Proceeds from sales of land, buildings and equipment 99 74 36
Acquisitions, net of cash acquired (107) (380) (812)
Other, net (25) 5 45
--------------------------------------------------------------------------------------------------------------------------------
Total (627) (867) (1,25 1)
--------------------------------------------------------------------------------------------------------------------------------
Cash Flows from Financing Activities
Net change in debt (97) 2,468 5
Dividends on common and preferred stock (586) (531) (475)
Proceeds from sale of common stock 144 126 140
Repurchase of preferred and common stock - (172) (116)
Dividends to minority shareholders (30) (4) (7)
Proceeds from issuance of mandatorily redeemable preferred securities - - 637
--------------------------------------------------------------------------------------------------------------------------------
Total (569) 1,887 184
--------------------------------------------------------------------------------------------------------------------------------
Effect of exchange rate changes on cash (9) (29) (18)
--------------------------------------------------------------------------------------------------------------------------------
Cash provided (used) by continuing operations 19 (174) (613)
Cash provided by discontinued operations 28 178 584
--------------------------------------------------------------------------------------------------------------------------------
Increase (decrease) in cash 47 4 (29)
Cash at beginning of year 79 75 104
--------------------------------------------------------------------------------------------------------------------------------
Cash at end of year $ 126 $ 79 $ 75
================================================================================================================================
The accompanying notes on pages 46 to 65 are an integral part of the
consolidated financial statements.
44
Consolidated Statements of Shareholders' Equity
==================================================================================================================================
Accumulated
Common Common Additional Other Treasury Treasury
Stock Stock Paid-In Retained Comprehen- Stock Stock
(In millions, except share data in thousands) Shares Amount Capital Earnings sive Income/1/ Shares Amount Total
==================================================================================================================================
Balance at December 31, 1996 651,804 $655 $1,025 $3,090 $ (242) (4,442) $ (161) $ 4,367
- ----------------------------------------------------------------------------------------------------------------------------------
Net income 1,452 1,452
Net income during stub period 8 8
Translation adjustments (463) (463)
-------
Comprehensive income 997
Purchase of treasury stock (3,975) (116) (116)
Stock option and incentive plans 360 (17) (129) 7,296 245 99
Xerox Canada exchangeable stock 116 126
Convertible securities 202 9 995 32 41
Cash dividends declared
Common stock ($0.64 per share) (418) (418)
Preferred stock (57) (57)
Tax benefits on ESOP dividends 14 14
Premiums from sale of put options 13 13
Tax benefits on stock options 45 45
- ----------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1997 652,482 $655 $1,075 $3,960 $ (705) - $ - $ 4,985
- ----------------------------------------------------------------------------------------------------------------------------------
Net income 395 395
Net loss during stub period (6) (6)
Translation adjustments (56) (56)
-------
Comprehensive income 333
Purchase of treasury stock (3,683) (172) (172)
Stock option and incentive plans 3,899 4 69 (116) 2,364 111 68
Xerox Canada exchangeable stock 350 12
Convertible securities 465 1 28 898 42 71
Cash dividends declared
Common stock ($0.72 per share) (475) (475)
Preferred stock (56) (56)
Tax benefits on ESOP dividends 10 10
Premiums from sale of put options 5 5
Tax benefits on stock options 88 88
- ----------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1998 657,196 $660 $1,265 $3,712 $ (761) (409) $ (19) $ 4,857
- ----------------------------------------------------------------------------------------------------------------------------------
Net income 1,424 1,424
Translation adjustments (1,003) (1,003)
Minimum pension liability (32) (32)
-------
Comprehensive income 389
Stock option and incentive plans 5,331 6 136 (57) 270 12 97
Xerox Canada exchangeable stock 1,362
Convertible securities 1,267 1 63 139 7 71
Cash dividends declared
Common stock ($0.80 per share) (532) (532)
Preferred stock (54) (54)
Tax benefits on ESOP dividends 8 8
Settlement of put options (5) (5)
Tax benefits on stock options 80 80
- ----------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1999 665,156 $667 $1,539 $4,501 $(1,796) - $ - $ 4,911
==================================================================================================================================
/1/ Accumulated Other Comprehensive Income is composed of cumulative translation
of $(1,764) and minimum pension liability of $(32). The accompanying notes
on pages 46 to 65 are an integral part of the financial statements.
45
Notes to Consolidated Financial Statements
(Dollars in millions, except per-share data and unless otherwise indicated)
1 Summary of Significant Accounting Policies
Basis of Consolidation. The consolidated financial statements include the
accounts of Xerox Corporation and all majority owned subsidiaries (the Company).
All significant intercompany accounts and transactions have been eliminated.
References herein to "we" or "our" refer to Xerox and consolidated subsidiaries
unless the context specifically requires otherwise.
Xerox Limited, Xerox Holding (Nederland) BV, Xerox Investments (Bermuda)
Limited, Xerox Holdings (Bermuda) Limited and their respective subsidiaries are
referred to as Xerox Limited.
Investments in which we have a 20 to 50 percent ownership interest are
generally accounted for on the equity method.
Upon the sale of stock by a subsidiary, we recognize a gain or loss equal
to our proportionate share of the increase or decrease in the subsidiary's
equity.
Fuji Xerox Co. Ltd. (Fuji Xerox), changed its reporting period from a
fiscal year ending October 20, 1996 to a fiscal year ending December 20. The
results of operations during the period between the end of the 1996 fiscal year
and the beginning of the new fiscal year (the stub period) amounted to a gain of
$8. Fuji Xerox again changed its reporting period from a fiscal year ending
December 20, 1997 to a fiscal year ending December 31. The results of operations
during this stub period amounted to a loss of $6. The stub period results were
recorded directly in retained earnings to avoid reporting more than 12 months'
results of operations in one year.
Earnings per Share. Basic earnings per share are based on net income less
preferred stock dividend requirements divided by the average common shares
outstanding during the period. Diluted earnings per share assume exercise of
in-the-money stock options outstanding and full conversion of convertible debt
and convertible preferred stock into common stock at the beginning of the year
or date of issuance, unless they are antidilutive.
Use of Estimates. The preparation of financial statements in accordance with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
the disclosure of contingent assets and liabilities at the date of the financial
statements, and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Goodwill. Goodwill represents the cost of acquired businesses in excess of the
net assets purchased and is amortized on a straight-line basis, over periods
ranging from 15 to 40 years. Goodwill is reported net of accumulated
amortization, and the recoverability of the carrying value is evaluated on a
periodic basis by assessing current and future levels of income and cash flows
as well as other factors. Accumulated amortization at December 31, 1999 and 1998
was $176 and $119, respectively.
Accounting Changes. In June 1998, the Financial Accounting Standards Board
(FASB) 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. We will adopt SFAS No.
133, as amended, beginning January 1, 2001. We do not expect this Statement to
have a material impact on our consolidated financial statements.
Revenue Recognition. Revenues from the sale of equipment under installment
contracts and from sales-type leases are recognized at the time of sale or at
the inception of the lease, respectively. Associated finance income is earned on
an accrual basis under an effective annual yield method. Revenues from equipment
under other leases are accounted for by the operating lease method and are
recognized over the lease term. Service revenues are derived primarily from
maintenance contracts on our equipment sold to customers and are recognized over
the term of the contracts. Sales of equipment subject to the Company's operating
leases to third-party lease finance companies are recorded as sales at the time
the equipment is accepted by the third party.
46
Provisions for Losses on Uncollectible Receivables.
The provisions for losses on uncollectible trade and finance receivables are
determined principally on the basis of past collection experience.
Inventories. Inventories are carried at the lower of average cost or market.
Buildings and Equipment. Our fixed assets are depreciated over their estimated
useful lives. Depreciation is computed using principally the straight-line
method. Significant improvements are capitalized; maintenance and repairs are
expensed. See Note 7 on page 49.
Classification of Commercial Paper and Bank Notes Payable. It is our policy to
classify as long-term debt that portion of commercial paper and notes payable
that is intended to match fund finance receivables due after one year to the
extent that we have the ability under our revolving credit agreement to
refinance such commercial paper and notes payable on a long-term basis. See Note
11 on page 54.
Foreign Currency Translation. The functional currency for most foreign
operations is the local currency. Net assets are translated at current rates of
exchange, and income and expense items are translated at the average exchange
rate for the year. The resulting translation adjustments are recorded in
Accumulated Other Comprehensive Income. The U.S. dollar is used as the
functional currency for certain subsidiaries that conduct their business in U.S.
dollars or operate in hyperinflationary economies. A combination of current and
historical exchange rates is used in remeasuring the local currency transactions
of these subsidiaries, and the resulting exchange adjustments are included in
income. Aggregate foreign currency losses were $1, $29 and $85 in 1999, 1998 and
1997, respectively, and are included in Other, net in the consolidated
statements of income.
Stock-Based Compensation. The Company follows the intrinsic value-based method
of accounting for its stock-based compensation.
Reclassifications. Prior years' financial statements have been restated to
reflect certain reclassifications to conform with the 1999 presentation. The
impact of these changes is not material and did not affect net income.
2 Restructuring
In 1998, we announced a worldwide restructuring program intended to enhance our
competitive position and lower our overall cost structure. In connection with
this program, we recorded a pre-tax provision of $1,644 ($1,107 after taxes and
including our $18 share of a restructuring charge recorded by Fuji Xerox). The
program includes the elimination of approximately 9,000 jobs, net, worldwide,
the closing and consolidation of facilities, and the write-down of certain
assets. The charges associated with this restructuring program include $113 of
inventory charges recorded as cost of revenues and $316 of asset
impairments. Included in the asset impairment charge is facility fixed asset
write-downs of $156 and other asset write-downs of $160. For facility fixed
assets classified as assets to be disposed of, the impairment loss recognized is
based on fair value less cost to sell, with fair value based on third-party
valuations as well as our internal estimates of existing market prices for
similar assets. The effect of suspending depreciation on assets no longer in use
for 1999 and 1998 is not material. The remaining $160 of asset impairments
includes the write-down of certain technology assets and other items impacted by
the consolidation initiatives described below. Key initiatives of the
restructuring include:
1. Consolidating 56 European customer support centers into one facility and
implementing a shared services organization for back-office operations.
2. Streamlining manufacturing, logistics, distribution and service operations.
This will include centralizing U.S. parts depots and outsourcing storage
and distribution.
3. Overhauling our internal processes and associated resources, including
closing one of four geographically organized U.S. customer administrative
centers.
The reductions are occurring primarily in administrative functions, but
also impact service, research and manufacturing.
47
The following table summarizes the status of the restructuring reserve (in
millions):
===========================================================================
Charges
Total Against 12/31/99
Reserve Reserve/1/ Balance
===========================================================================
Severance and related costs $1,017 $ 717 $ 300
Asset impairment 316 316 -
Lease cancellation and
other costs 198 104 94
Inventory charges 113 113 -
===========================================================================
Total $1,644 $1,250 $394/2/
===========================================================================
/1/ Includes the impact of currency changes.
/2/ Of this amount, $273 is included in Other current liabilities.
As of December 31, 1999, approximately 10,000 employees have left the
Company under the restructuring program.
The restructuring reserve is reviewed quarterly and there have been no
material changes to the program since its announcement in April 1998. The
remaining reserve will be primarily utilized during 2000 for the completion of
certain European initiatives that extended beyond 1999 due to local regulatory
issues as they relate to the workforce.
3 Common Stock Split
On January 25, 1999, the Board of Directors approved a two-for-one split of
the Company's common stock. The effective date of the stock split was February
23 for shareholders of record as of February 4. Shareholders' equity has been
restated to give retroactive recognition to the stock split in prior periods by
reclassifying from additional paid-in capital to common stock the par value of
the additional shares arising from the split. In addition, all prior period
references in the financial statements to number of shares and per-share
amounts have been restated to reflect the stock split.
4 Acquisitions
In August 1999, we purchased the OmniFax division from Danka Business
Systems for $45 in cash. OmniFax is a supplier of business laser multifunction
fax systems. The acquisition resulted in goodwill of approximately $31
(including transaction costs), which is being amortized over 15 years. Also
during the third quarter, we paid $62 to increase our ownership in our joint
venture in India from approximately 40 percent to 68 percent. This transaction
resulted in additional goodwill of $48, which is being amortized over 40 years.
The operating results of these companies, which are immaterial, have been
included in our consolidated statement of income from the dates of acquisition.
In May 1998, we acquired XLConnect Solutions, Inc. (XLConnect), an
information technology services company, and its parent company, Intelligent
Electronics,Inc., for $413 in cash. The operating results of these companies,
which are not material, have been included in our consolidated statement of
income from the date of the acquisition. Based on the allocation of the purchase
price, the transaction resulted in goodwill of $395 (including transaction
costs), which is being amortized over 25 years.
In June 1997, we acquired the remaining 20 percent of Xerox Limited from
The Rank Group Plc (Rank) in a transaction valued at (pound)940 million, or
approximately $1.5 billion. As a result of this transaction, we now own 100
percent of Xerox Limited. The transaction was funded entirely by debt consisting
of (pound)500 million of third-party debt and (pound)440 million of notes
payable issued to Rank, which were paid in deferred installments, half paid on
June 29, 1998 and the other half paid on June 30, 1999. The purchase price
(including transaction costs) was allocated such that goodwill increased by
$737, minority interest in equity of subsidiaries was reduced by approximately
$720, with the balance of $70 applied to other assets and liabilities, primarily
investment in affiliates, at equity.
5 Finance Receivables, Net
Finance receivables result from installment sales and sales-type leases
arising from the marketing of our business equipment products. These receivables
generally mature over two to five years and are typically collateralized by a
security interest in the underlying assets. The components of finance
receivables, net at December 31, 1999, 1998 and 1997 follow:
====================================================================
1999 1998 1997
====================================================================
Gross receivables $14,666 $16,139 $14,094
Unearned income (1,677) (2,084) (1,909)
Unguaranteed residual
values 752 699 557
Allowance for doubtful
accounts (423) (441) (389)
- --------------------------------------------------------------------
Finance receivables, net 13,318 14,313 12,353
Less current portion 5,115 5,220 4,599
====================================================================
Amounts due after one
year, net $ 8,203 $ 9,093 $ 7,754
====================================================================
48
Contractual maturities of our gross finance receivables subsequent to
December 31, 1999 follow:
========================================================================
2000 2001 2002 2003 2004 Thereafter
========================================================================
$5,430 $3,938 $2,719 $1,640 $676 $263
========================================================================
Experience has shown that a portion of these finance receivables will be
prepaid prior to maturity. Accordingly, the preceding schedule of contractual
maturities should not be considered a forecast of future cash collections.
During 1999, the Company sold $1,495 of finance receivables. This resulted
in a net increase in finance income of approximately $17, which includes the
unfavorable flow through impacts.
Allowances for doubtful accounts on our accounts receivable balances at
December 31, 1999, 1998 and 1997 amounted to $137, $102 and $92, respectively.
6 Inventories
The components of inventories at December 31, 1999, 1998 and 1997 follow:
=======================================================================
1999 1998 1997
=======================================================================
Finished goods $1,800 $1,923 $1,549
Work in process 122 111 97
Raw materials 363 464 406
Equipment on operating
leases, net 676 771 740
- -----------------------------------------------------------------------
Inventories $2,961 $3,269 $2,792
=======================================================================
Equipment on operating leases consists of our business equipment products
that are rented to customers and are depreciated to estimated residual value.
Depreciable lives vary from two to four years. Our business equipment operating
lease terms vary, generally from 12 to 36 months.
Accumulated depreciation on equipment on operating leases at December 31,
1999, 1998 and 1997 amounted to $1,082, $1,260 and $1,198, respectively.
Scheduled minimum future rental revenues on operating leases with original terms
of one year or longer are:
=======================================================================
2000 2001 2002 Thereafter
=======================================================================
$308 $160 $68 $24
=======================================================================
Total contingent rentals, principally usage charges in excess of minimum
allowances relating to operating leases, for the years ended December 31, 1999,
1998 and 1997 amounted to $163, $161 and $186, respectively.
7 Land, Buildings and Equipment, Net
The components of land, buildings and equipment, net at December 31, 1999,
1998 and 1997 follow:
==========================================================================
Estimated
Useful
Lives
(Years) 1999 1998 1997
==========================================================================
Land $ 66 $ 80 $ 88
Buildings and building
equipment 25 to 50 1,087 973 1,012
Leasehold
improvements Lease term 434 425 403
Plant machinery 4 to 12 1,897 1,926 1,870
Office furniture and
equipment 3 to 15 1,339 1,299 1,285
Other 3 to 20 235 260 190
Construction in progress 328 283 310
- --------------------------------------------------------------------------
Subtotal 5,386 5,246 5,158
Less accumulated
depreciation 2,930 2,880 2,781
- --------------------------------------------------------------------------
Land, buildings and
equipment, net $2,456 $2,366 $2,377
==========================================================================
We lease certain land, buildings and equipment, substantially all of which
are accounted for as operating leases. Total rent expense under operating leases
for the years ended December 31, 1999, 1998 and 1997 amounted to $397, $436 and
$419, respectively. Future minimum operating lease commitments that have
remaining non-cancelable lease terms in excess of one year at December 31, 1999
follow:
==========================================================================
2000 2001 2002 2003 2004 Thereafter
==========================================================================
$275 $218 $157 $131 $113 $329
==========================================================================
In certain circumstances, we sublease space not currently required in
operations. Future minimum sublease income under leases with non-cancelable
terms in excess of one year amounted to $22 at December 31, 1999.
In 1994, we awarded a contract to Electronic Data Systems Corp. (EDS) to
operate our worldwide data processing and telecommunications network through the
year 2004. Subject to making a payment defined in the contract, effective July
1, 1999, Xerox obtained the right to terminate this agreement with six months`
notice to EDS. Minimum payments due EDS under the contract follow:
==========================================================================
2000 2001 2002 2003 2004
==========================================================================
$229 $217 $198 $183 $95
==========================================================================
49
8 Investments in Affiliates, at Equity
Investments in corporate joint ventures and other companies in which we
generally have a 20 to 50 percent ownership interest at December 31, 1999, 1998
and 1997 follow:
==========================================================================
1999 1998 1997
- --------------------------------------------------------------------------
Fuji Xerox $1,513 $1,354 $1,231
Other investments 102 102 101
- --------------------------------------------------------------------------
Investments in affiliates,
at equity $1,615 $1,456 $1,332
==========================================================================
Xerox Limited owns 50 percent of the outstanding stock of Fuji Xerox, a
corporate joint venture with Fuji Photo Film Co. Ltd. (Fuji Photo). Fuji Xerox
is headquartered in Tokyo and operates in Japan and other areas of the Pacific
Rim, Australia and New Zealand, except for China. Condensed financial data of
Fuji Xerox for its last three fiscal years follow:
==========================================================================
1999 1998 1997
==========================================================================
Summary of Operations
Revenues $7,751 $6,809 $7,415
Costs and expenses 7,440 6,506 6,882
- --------------------------------------------------------------------------
Income before income taxes 311 303 533
Income taxes 201 195 295
- --------------------------------------------------------------------------
Net income $ 110 $ 108 $ 238
==========================================================================
Balance Sheet Data
Assets
Current assets $3,521 $2,760 $2,461
Non-current assets 3,521 3,519 2,942
Total assets $7,042 $6,279 $5,403
==========================================================================
Liabilities and Shareholders'
Equity
Current liabilities $2,951 $2,628 $2,218
Long-term debt 169 101 286
Other non-current liabilities 1,079 1,028 679
Shareholders' equity 2,843 2,522 2,220
- --------------------------------------------------------------------------
Total liabilities and
shareholders' equity $7,042 $6,279 $5,403
==========================================================================
9 Segment Reporting
Our reportable segments are as follows: Core Business, Fuji Xerox, Paper
and Media, and Other.
The Core Business operating segment consists of the worldwide development,
manufacturing, marketing, financing and servicing of document processing
products and services. We have aggregated all Core Business operating units due
to commonality of economic characteristics, products and services, the
production process, class of customer and distribution process. This segment
also includes our corporate headquarters.
The Fuji Xerox operating segment is composed of our corporate joint
venture with Fuji Photo and is managed jointly.
The Paper and Media segment operates as a distributor of print media and
supplies to our customers. The mission of Paper and Media is to charge a spread
over mill wholesale prices to cover our costs and value added as a distributor
and is managed as a separate operating segment.
The Other operating segment is composed primarily of our Channels business
and Xerox Technology Enterprises companies. Channels distributes products
primarily through retail channels and value-added resellers. Xerox Technology
Enterprises comprises our investments in emerging companies with important
document processing hardware and software technologies in various stages of
development. Total assets for this segment also includes our investment in
discontinued operations.
The accounting policies of the operating segments are the same as those
described in the summary of significant accounting policies.
50
==============================================================================================================================
Document Processing Segments
==============================================================================================================================
Core Paper and
Business Fuji Xerox Media Other Total
- ------------------------------------------------------------------------------------------------------------------------------
1999
Information about profit or loss
Revenues from external customers $15,224 - $ 1,148 $1,830 $18,202
Finance income 1,016 - - 10 1,026
Intercompany revenues (206) - - 206 -
-----------------------------------------------------------
Total segment revenues 16,034 - 1,148 2,046 19,228
Depreciation and amortization 930 - - 5 935
Interest expense 803 - - - 803
Segment profit (loss) 2,014 - 62 (40) 2,036
Earnings of non-consolidated affiliates 13 $ 55 - - 68
Information about assets
Investments in non-consolidated affiliates 102 1,513 - - 1,615
Total assets 25,319 1,513 86 1,896 28,814
Capital expenditures 580 - - 14 594
==============================================================================================================================
1998
Information about profit or loss
Revenues from external customers $15,553 - $1,162 $1,659 $18,374
Finance income 1,064 - - 9 1,073
Intercompany revenues (326) - - 326 -
-----------------------------------------------------------
Total segment revenues 16,291 - 1,162 1,994 19,447
Depreciation and amortization 803 - - 18 821
Interest expense 749 - - - 749
Segment profit (loss) before restructuring 2,424 - 58 (75) 2,407
Segment profit (loss) after restructuring 916 - 58 (211) 763
Earnings of non-consolidated affiliates/1/ 19 $ 72 - 1 92
Information about assets
Investments in non-consolidated affiliates 81 1,354 - 21 1,456
Total assets 26,238 1,354 84 2,348 30,024
Capital expenditures 539 - - 27 566
==============================================================================================================================
1997
Information about profit or loss
Revenues from external customers $14,937 - $1,117 $1,084 $17,138
Finance income 1,006 - - - 1,006
Intercompany revenues (118) - - 118 -
-----------------------------------------------------------
Total segment revenues 15,825 - 1,117 1,202 18,144
Depreciation and amortization 732 - - 7 739
Interest expense 617 - - - 617
Segment profit (loss) 2,180 - 44 (83) 2,141
Earnings of non-consolidated affiliates 6 $ 119 - 2 127
Information about assets
Investments in non-consolidated affiliates 91 1,231 - 10 1,332
Total assets 22,913 1,231 91 3,497
Capital expenditures 510 - - 10 520
==============================================================================================================================
/1/ Excludes our $18 share of a restructuring charge recorded by Fuji Xerox.
Products and services and geographic area data for our continuing operations
follow:
==============================================================================================================================
Revenues
==============================================================================================================================
1999 1998 1997
- ------------------------------------------------------------------------------------------------------------------------------
Information about products and services
Digital $10,198 $ 8,644 $ 6,347
Light-lens 5,785 7,351 8,304
Paper and Other 3,245 3,452 3,493
- ------------------------------------------------------------------------------------------------------------------------------
Total $19,228 $19,447 $18,144
==============================================================================================================================
51
===========================================================================================================================
Revenues Long-Lived Assets
===========================================================================================================================
1999 1998 1997 1999 1998 1997
- ---------------------------------------------------------------------------------------------------------------------------
Information about Geographic Areas
United States $10,417 $10,122 $ 9,187 $2,250 $2,090 $2,020
Europe 5,345 5,155 4,794 616 503 456
Other Areas 3,466 4,170 4,163 751 804 801
- ---------------------------------------------------------------------------------------------------------------------------
Total $19,228 $19,447 $18,144 $3,617 $3,397 $3,277
===========================================================================================================================
10 Discontinued Operations
In January 1993, we announced our intent to sell or otherwise disengage from our
Insurance and Other Financial Services (IOFS) businesses. Since that time, we
have sold all of our Talegen Holdings, Inc. (Talegen) insurance businesses and
have disposed of a number of other financial services businesses through sale
and run-off collection activities. At December 31, 1999, our sole remaining
insurance operation is the Ridge Reinsurance Limited (Ridge Re) reinsurance
business. Our other discontinued businesses, consisting of OakRe Life Insurance
Company (OakRe) and Third-Party Financing and Real Estate, are primarily in
asset and liability run-off. A discussion of the status of IOFS follows.
Insurance. In the fourth quarter of 1995, we recorded a $1,546 after-tax charge
in connection with the disengagement activities for our five then remaining
Talegen insurance companies and three related service companies. In the first
quarter of 1998, an additional after-tax charge of $190 was recorded.
In 1997 and 1998, all of the Talegen insurance companies and service
companies were sold for an aggregate $1,793 in cash, the assumption or repayment
of $269 of debt, less approximately $145 in transaction-related costs. As part
of the consideration for one of the companies, The Resolution Group, Inc. (TRG),
which closed in 1997, we received a $462 performance-based instrument. We will
participate in the future cash flows of TRG via the performance-based
instrument. The recovery of this instrument is dependent upon the sufficiency of
TRG's available cash flows. Based on current forecasts at December 31, 1999, we
expect to realize $462 for this instrument. However, the ultimate realization
may be more or less than this amount.
The net proceeds of the above sales transactions, after transaction-related
costs, were used primarily to retire debt.
At December 31, 1999, the insurance business consists of Ridge Re and
headquarters costs associated with the insurance activities of Xerox Financial
Services, Inc. (XFSI), a wholly owned subsidiary.
XFSI continues to provide aggregate excess of loss reinsurance coverage
(the Reinsurance Agreements) to one of the former Talegen units and TRG through
Ridge Re, a wholly owned subsidiary of XFSI. The coverage limits for these two
remaining Reinsurance Agreements total $578, which is net of 15 percent
coinsurance and exclusive of $234 in coverage that was reinsured under a
retrocession arrangement during 1998. Through December 31, 1999, Ridge Re had
recognized the discounted value of approximately $366 of this available coverage
and it is possible that some additional reserves could ultimately be needed
within the coverage limit. During 1999, Ridge Re entered into agreements with
other insurers to eliminate its obligations for reinsurance coverage related to
two of the former Talegen units. The coverage limit under the policies totaled
$170. In connection with the agreements, Ridge Re paid the insurers $105.
XFSI has guaranteed that Ridge Re will meet all of its financial
obligations under the two remaining Reinsurance Agreements. Related premium
payments to Ridge Re are made by XFSI and guaranteed by us. As of December 31,
1999, there were three remaining annual installments of $38, plus finance
charges. We have also guaranteed that Ridge Re will meet its financial
obligations on $578 of the Reinsurance Agreements and we have provided a $400
partial guaranty of Ridge Re's $600 letter of credit facility. This facility is
required to provide security with respect to aggregate excess of loss
reinsurance obligations under the two remaining Reinsurance Agreements.
XFSI may also be required, under certain circumstances, to purchase, over
time, additional redeemable preferred shares of Ridge Re, up to a maximum of
$301.
52
Other Discontinued Businesses. In 1995, we completed the sale of Xerox Financial
Services Life Insurance Company and related companies (Xerox Life). In
connection with the transaction, OakRe, a wholly owned XFSI subsidiary, assumed
responsibility, via coinsurance agreements, for the Single Premium Deferred
Annuity (SPDA) policies issued by Xerox Life. As a result of these coinsurance
agreements, at December 31, 1999 and 1998, the consolidated balance sheets
include approximately $400 and $800, respectively, of invested assets and the
related reinsurance liabilities associated with these SPDA policies. Most of
these liabilities are expected to be satisfied during the year 2000 as the
policies are either terminated by the policyholder or renewed and transferred to
the buyer. In support of OakRe's coinsurance obligations, XFSI established a
$500 letter of credit and line of credit, expiring in July 2000, with a group of
banks. These facilities are unused and available at December 31, 1999. Upon a
drawing under the letter of credit, XFSI has the option to cover the drawing
using the credit line.
We have made substantial progress in disengaging from the Third-Party
Financing and Real Estate businesses that were discontinued in 1990. During the
three years ended December 31, 1999, we received net cash proceeds of $460 ($260
in 1999, $48 in 1998 and $152 in 1997) from the sale of individual assets and
from run-off and collection activities. These proceeds were used primarily to
retire debt. The remaining assets at December 31, 1999 primarily represent real
estate held for sale in Virginia and one asset-based financing lease, with a
long-duration contractual maturity and unique tax attributes.
Total Discontinued Operations. The consolidated financial statements present the
Insurance and Other Discontinued Businesses as discontinued operations. Debt was
assigned to discontinued operations based on historical levels assigned to the
businesses when they were continuing operations, adjusted for subsequent
paydowns. Interest expense thereon is primarily determined based on our annual
average domestic borrowing costs. Assigned interest expense for the discontinued
businesses for the years ended December 31, 1999, 1998 and 1997 was $50, $143
and $201, respectively.
Summarized information of discontinued operations for the three years ended
December 31, 1999 follows:
=======================================================================
1999 1998 1997
=======================================================================
Balance Sheet Data
Assets
Insurance
Investment, net $ 621 $ 513 $ 1,076
- -----------------------------------------------------------------------
Other Discontinued
Businesses
OakRe investments 408 805 1,537
All other assets, net 101 352 412
- -----------------------------------------------------------------------
Investments, net 509 1,157 1,949
Investment in discontinued
operations $ 1,130 $ 1,670 $ 3,025
- -----------------------------------------------------------------------
Liabilities
OakRe policyholders'
deposits $ 378 $ 775 $ 1,526
Assigned debt 50 136 167
- -----------------------------------------------------------------------
Discontinued operations
liabilities $ 428 $ 911 $ 1,693
- -----------------------------------------------------------------------
Net investment in
discontinued operations $ 702 $ 759 $ 1,332
=======================================================================
Based on current estimates, we believe that the proceeds received from
disposition or run-off and collection activities from the remaining net
discontinued assets will be consistent with our net carrying value of these
businesses.
53
11 Debt
Short-Term Debt. Short-term borrowings data at December 31, 1999 and 1998
follow:
=============================================================================
Weighted
Average Interest
Rates
at
12/31/99 1999 1998
=============================================================================
Notes payable - $ - $ 536
Foreign commercial
paper - - 384
- -----------------------------------------------------------------------------
Total short-term debt - - 920
Current maturities of
long-term debt 3,957 3,184
- -----------------------------------------------------------------------------
Total $3,957 $4,104
=============================================================================
Notes payable generally represent foreign currency denominated borrowings
of non-U.S. subsidiaries.
Long-Term Debt. A summary of long-term debt by final maturity date at
December 31, 1999 and 1998 follows:
=============================================================================
Weighted
Average Interest
Rates
at
12/31/99 1999 1998
=============================================================================
U.S. Operations
Xerox Corporation
(parent company)
Guaranteed ESOP
notes due 1999-2003 7.60% $ 299 $ 370
Notes due 1999 - - 1,108
Notes due 2000 6.24 2,041 600
Notes due 2001 6.67 721 675
Notes due 2002 7.90 230 230
Notes due 2003 5.60 1,398 1,360
Notes due 2004 4.95 502 200
Notes due 2016 7.20 250 250
Convertible notes due 2018 3.63 601 575
Notes due 2038 5.96 25 25
Other debt due 1999-2018 6.91 120 137
- -----------------------------------------------------------------------------
Subtotal 6,187 5,530
- -----------------------------------------------------------------------------
Xerox Credit Corporation
Notes due 1999 - - 1,175
Notes due 2000 5.47 2,026 536
Notes due 2001 6.21 401 51
Notes due 2002 2.20/1/ 668 -
Notes due 2003 6.10 200 -
Floating rate notes due 2048 5.19 60 60
- -----------------------------------------------------------------------------
Subtotal 3,355 1,822
- -----------------------------------------------------------------------------
Total U.S. operations $9,542 $7,352
=============================================================================
/1/ Weighted average interest rate includes Japanese yen bonds of $488 issued
by Xerox Credit Corporation in 1999 with an interest rate of 0.80%.
=============================================================================
Weighted
Average Interest
Rates at
12/31/99 1999 1998
=============================================================================
International Operations
Various obligations,
payable in:
Canadian dollars due
1999-2007 11.46% $ 88 $ 99
Dutch guilders due
1999-2001 4.67 9 37
French francs due
1999-2004 4.60 133 7
Pounds sterling due
1999-2003 8.75 202 207
Italian lire due 1999 - - 140
Euros due 2000-2004 6.41 195 -
U.S. dollars due
1999-2008 6.02 2,995 1,013
Other currencies due
1999-2000 6.93 7 212
Capital lease obligations 5.93 3 1
- -----------------------------------------------------------------------------
Total international
operations 3,632 1,716
=============================================================================
Other borrowings
deemed long-term 1,827 5,119
- -----------------------------------------------------------------------------
Subtotal 15,001 14,187
Less current maturities 3,957 3,184
- -----------------------------------------------------------------------------
Total long-term debt $11,044 $11,003
=============================================================================
Consolidated Long-Term Debt Maturities.
Payments due on long-term debt for the next five years and thereafter follow:
=============================================================================
2000 2001 2002 2003 2004 Thereafter
=============================================================================
$3,957 $1,316 $3,230 $2,918 $530 $1,223
=============================================================================
These payments do not include amounts relating to domestic commercial paper
and foreign bank notes payable, which have been classified as long-term debt
under the caption "Other borrowings deemed long-term." These borrowings are
classified as long-term because we have the intent to refinance them on a long-
term basis and the ability to do so under our revolving credit agreement.
Certain of our debt agreements allow us to redeem outstanding debt prior to
scheduled maturity. Outstanding debt issues with these call features are
classified 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 prevailing economic and business conditions and the relative
costs of new borrowing.
54
Convertible Debt. In April 1998, we issued convertible subordinated debentures
for net proceeds of $575. The amount due upon maturity in April 2018 is $1,012,
resulting in an effective interest rate of 3.625 percent per annum, including
1.003 percent payable in cash semiannually beginning in October 1998. These
debentures are convertible at any time at the option of the holder into 7.808
shares of our stock per $1,000 principal amount at maturity of debentures.
Lines of Credit. We have a $7 billion revolving credit agreement with a group of
banks, which matures in 2002. This revolver is also accessible by the following
wholly owned subsidiaries: Xerox Credit Corporation (up to a $7 billion limit)
and Xerox Capital (Europe) plc (up to a $4 billion limit) with our guarantee.
Any amounts borrowed under this facility would be at rates based, at the
borrower's option, on spreads above certain reference rates such as LIBOR. This
agreement is unused and is available to back commercial paper borrowings of our
domestic operations, Xerox Capital (Europe) plc and Xerox Overseas Holdings
Ltd., which amounted to $1.0 billion at December 31, 1999. In addition, our
foreign subsidiaries had unused committed long-term lines of credit used to back
short-term indebtedness that aggregate $0.2 billion in various currencies at
prevailing interest rates.
Match Funding of Finance Receivables and Indebtedness. We employ a match funding
policy for customer financing assets and related liabilities. Under this policy,
which is more fully discussed in the accompanying Financial Review on page 39,
the interest and currency characteristics of the indebtedness are, in most
cases, matched to the interest and currency characteristics of the finance
receivables. At December 31, 1999, these operations had approximately $13.3
billion of net finance receivables, which will service approximately $11.2
billion of assigned short- and long-term debt.
Guarantees. At December 31, 1999, we have guaranteed the borrowings of our ESOP
and $1,279 of indebtedness of our foreign subsidiaries.
Interest. Interest paid by us on our short- and long-term debt, including
amounts relating to debt assigned to discontinued operations, amounted to $787,
$859 and $812 for the years ended December 31, 1999, 1998 and 1997,
respectively.
Total Short- and Long-Term Debt. Our total indebtedness, at December 31, 1999
and 1998, is reflected in the consolidated balance sheet captions as follows:
============================================================================
1999 1998
============================================================================
Short-term debt and current portion
of long-term debt $ 3,957 $ 4,104
Long-term debt 10,994 10,867
Discontinued operations liabilities -
policyholders' deposits and other 50 136
- ----------------------------------------------------------------------------
Total debt $ 15,001 $ 15,107
============================================================================
A summary of changes in consolidated indebtedness for the three years ended
December 31, 1999 follows:
============================================================================
1999 1998 1997
============================================================================
Increase (decrease) in
short-term debt, net $(4,140) $ 553 $ (276)
Proceeds from long-term
debt 5,446 3,464 1,807
Principal payments on
long-term debt (1,489) (1,580) (1,632)
- ----------------------------------------------------------------------------
Subtotal (183) 2,437 (101)
Less change in debt of
discontinued operations (86) (31) (106)
- ----------------------------------------------------------------------------
Total change in debt of
continuing operations $ (97)/1/ $ 2,468 $ 5
============================================================================
/1/ Excludes debt of $51 assumed with the increased ownership in our India
joint venture and accretion of $26 on convertible debt.
12 Financial Instruments
Derivative Financial Instruments.
Certain financial instruments with off-balance-sheet risk have been entered
into by us to manage our interest rate and foreign currency exposures. These
instruments are held solely for hedging purposes and include interest rate swap
agreements, forward exchange contracts and foreign currency swap agreements. We
do not enter into derivative instrument transactions for trading or other
speculative purposes.
We typically enter into simple, unleveraged derivative transactions which,
by their nature, have low credit and market risk. Our policies on the use of
derivative instruments prescribe an investment-grade counterparty credit floor
and at least quarterly monitoring of market risk on a counterparty-by-
counterparty basis. We utilize numerous counterparties to ensure that there are
no significant concentrations of credit risk with any individual counterparty or
groups of counterparties. Based upon our ongoing evaluation of the replacement
cost of our derivative transactions and counterparty creditworthiness, we
consider the risk of
55
credit default significantly affecting our financial position or results of
operations to be remote.
We employ the use of hedges to reduce the risks that rapidly changing
market conditions may have on the underlying transactions. Typically, our
currency and interest rate hedging activities are not affected by changes in
market conditions, as forward contracts and swaps are arranged and normally held
to maturity in order to lock in currency rates and interest rate spreads related
to underlying transactions.
None of our hedging activities involves exchange-traded instruments.
Interest Rate Swaps. We enter into interest rate swap agreements to manage
interest rate exposure. An interest rate swap is an agreement to exchange
interest rate payment streams based on a notional principal amount. We follow
settlement accounting principles for interest rate swaps whereby the net
interest rate differentials to be paid or received are recorded currently as
adjustments to interest expense.
Virtually all customer financing assets earn fixed rates of interest.
Accordingly, through the use of interest rate swaps in conjunction with the
contractual maturity terms of outstanding debt, we "lock in" an interest spread
by arranging fixed-rate interest obligations with maturities similar to the
underlying assets. Additionally, in industrialized countries customer financing
assets are funded with liabilities denominated in the same currency. We refer to
the effects of these conservative practices as "match funding" our customer
financing assets. This practice effectively eliminates the risk of a major
decline in interest margins resulting from adverse changes in the interest rate
environment. Conversely, this practice does effectively eliminate the
opportunity to materially increase margins when interest rates are declining.
More specifically, pay fixed/receive variable interest rate swaps are often
used in place of more expensive fixed-rate debt for the purpose of match funding
fixed-rate customer contracts.
Pay variable/receive variable interest rate swaps ("basis swaps") are used
to transform variable rate, medium-term debt into commercial paper or local
currency LIBOR rate obligations. Pay variable/receive fixed interest rate swaps
are used to transform term fixed-rate debt into variable rate obligations.
During 1999, 7 such agreements were cancelled in connection with the early
retirement of 7 issues of medium-term notes. The transactions performed within
each of these three categories enable the cost-effective management of interest
rate exposures. During 1999, the average notional amount of an interest rate
swap agreement was $31.
For the three years ended December 31, 1999, no pay fixed/receive variable
interest rate swap agreements were terminated prior to maturity.
The total notional amounts of these transactions at December 31, 1999 and
1998, based on contract maturity, follow:
==============================================================================
1999 1998
==============================================================================
Commercial paper/bank borrowings $ 5,352 $ 2,242
Medium-term debt 10,493 6,629
Long-term debt 4,238 5,128
- ------------------------------------------------------------------------------
Total $20,083 $13,999
==============================================================================
The aggregate notional amounts of interest rate swaps by maturity date and
type at December 31, 1999 and 1998 follow:
===========================================================================================================
2001- 2004-
1999 2000 2003 2018 Total
===========================================================================================================
1999
Pay fixed/receive variable $ - $2,699 $ 6,380 $2,903 $11,982
Pay variable/receive variable - 443 550 - 993
Pay variable/receive fixed - 2,210 3,563 1,335 7,108
- -----------------------------------------------------------------------------------------------------------
Total $ - $5,352 $10,493 $4,238 $20,083
- -----------------------------------------------------------------------------------------------------------
Memo:
Interest rate paid - 5.94% 4.95% 5.92% 5.42%
Interest rate received - 5.48% 5.27% 5.82% 5.44%
===========================================================================================================
1998
Pay fixed/receive variable $1,792 $1,788 $ 5,489 $ 479 $ 9,548
Pay variable/receive variable - 53 550 - 603
Pay variable/receive fixed 450 587 1,901 910 3,848
- -----------------------------------------------------------------------------------------------------------
Total $2,242 $2,428 $ 7,940 $1,389 $13,999
- -----------------------------------------------------------------------------------------------------------
Memo:
Interest rate paid 6.36% 6.08% 4.89% 5.51% 5.39%
Interest rate received 5.10% 5.25% 5.01% 6.54% 5.22%
===========================================================================================================
56
Forward Exchange Contracts. We utilize forward exchange contracts to hedge
against the potentially adverse impacts of foreign currency fluctuations on
foreign currency-denominated receivables and payables; firm foreign currency
commitments; and investments in foreign operations. Firm foreign currency
commitments generally represent committed purchase orders for foreign-sourced
inventory. These contracts generally mature in six months or less. At December
31, 1999 and 1998, we had outstanding forward exchange contracts of $3,838 and
$2,817, respectively. Of the outstanding contracts at December 31, 1999, the
largest single currency represented was the Euro. Contracts denominated in
Euros, U.S. dollars, British pounds sterling, Brazilian reais, French francs and
Japanese yen accounted for over 85 percent of our forward exchange contracts. On
contracts that hedge foreign currency-denominated receivables and payables,
gains or losses are reported currently in income, and premiums or discounts are
amortized to income and included in Other, net in the consolidated statements of
income. Gains or losses, as well as premiums or discounts, on contracts that
hedge firm commitments are deferred and subsequently recognized as part of the
underlying transaction. At December 31, 1999, we had a net deferred gain of $13.
Gains or losses on contracts that hedge an investment in a foreign operation are
reported currently in the balance sheet as a component of cumulative translation
adjustments. The premium or discount on contracts that hedge an investment in a
foreign operation are amortized to income and included in Other, net in the
consolidated statements of income. During 1999, the average notional amount of a
forward exchange contract amounted to $16.
Foreign Currency Swap Agreements. We enter into cross-currency interest rate
swap agreements, whereby we issue foreign currency-denominated debt and swap the
proceeds with a counterparty. In return, we receive and effectively denominate
the debt in local currencies. Currency swaps are utilized as hedges of the
underlying foreign currency borrowings, and exchange gains or losses are
recognized currently in Other, net in the consolidated statements of income. At
December 31, 1999 and 1998, we had outstanding cross-currency interest rate swap
agreements with aggregate notional amounts of $3,968 and $3,143, respectively.
Of the outstanding agreements at December 31, 1999, the largest single currency
represented was the British pound sterling. Contracts denominated in British
pounds sterling, U.S. dollars, Japanese yen and French francs accounted for over
75 percent of our currency interest rate swap agreements.
Fair Value of Financial Instruments. The estimated fair values of our financial
instruments at December 31, 1999 and 1998 follow:
==========================================================================
1999 1998
==========================================================================
Carrying Fair Carrying Fair
Amount Value Amount Value
- --------------------------------------------------------------------------
Cash $ 126 $ 126 $ 79 $ 79
Accounts
receivable, net 2,622 2,622 2,671 2,671
Short-term debt - - 920 920
Long-term debt 15,001 14,839 14,187 14,524
Interest rate and
currency swap
agreements - (40) - 47
Forward exchange
contracts - 131 - 51
==========================================================================
The fair value amounts for Cash, Accounts receivable, net and Short-term
debt approximate carrying amounts due to the short maturities of these
instruments.
The fair value of Long-term debt was estimated based on quoted market
prices for these or similar issues or on the current rates offered to us for
debt of the same remaining maturities. The difference between the fair value and
the carrying value represents the theoretical net premium or discount we would
pay or receive to retire all debt at such date. We have no plans to retire
significant portions of our long-term debt prior to scheduled maturity. We are
not required to determine the fair value of our finance receivables, the match
funding of which is the source of much of our interest rate swap activity.
The fair values for interest rate and cross-currency swap agreements and
forward exchange contracts were calculated by us based on market conditions at
year-end and supplemented with quotes from brokers. They represent amounts we
would receive (pay) to terminate/replace these contracts. We have no present
plans to terminate/replace significant portions of these contracts.
57
13 Employee Benefit Plans
We sponsor numerous pension and other postretirement benefit plans in our
U.S. and international operations.
=====================================================================================================================
Pension Benefits Other Benefits
=====================================================================================================================
1999 1998 1999 1998
- ---------------------------------------------------------------------------------------------------------------------
Change in Benefit Obligation
Benefit obligation, January 1 $8,040 $7,399 $ 1,095 $ 997
Service cost 191 172 27 26
Interest cost 1,009 916 77 72
Plan participants' contributions 14 13 - -
Actuarial (gain)/loss (79) 157 (78) 40
Currency exchange rate changes (139) 31 2 (3)
Curtailments (3) (9) - 20
Settlements 2 - - -
Special termination benefits 11 99 2 2
Benefits paid (628) (738) (65) (59)
- ---------------------------------------------------------------------------------------------------------------------
Benefit obligation, December 31 8,418 8,040 1,060 1,095
=====================================================================================================================
Change in Plan Assets
Fair value of plan assets, January 1 7,958 7,708 - -
Actual return on plan assets 1,422 872 - -
Employer contribution 96 80 65 59
Plan participants' contributions 14 13 - -
Currency exchange rate changes (91) 23 - -
Benefits paid (628) (738) (65) (59)
- ---------------------------------------------------------------------------------------------------------------------
Fair value of plan assets, December 31 8,771 7,958 - -
=====================================================================================================================
Funded status (including under-funded and non-funded plans) 353 (82) (1,060) (1,095)
Unamortized transition assets (36) (61) - -
Unrecognized prior service cost 21 28 (4) (4)
Unrecognized net actuarial (gain) loss (381) 121 (69) 7
- ---------------------------------------------------------------------------------------------------------------------
Net amount recognized $ (43) $ 6 $(1,133) $(1,092)
=====================================================================================================================
Amounts recognized in the consolidated balance sheets consist of:
Prepaid benefit cost $ 377 $ 349 $ - $ -
Accrued benefit liability (456) (343) (1,133) (1,092)
Intangible asset 4 - - -
Accumulated other comprehensive income 32 - - -
- ---------------------------------------------------------------------------------------------------------------------
Net amount recognized $ (43) $ 6 $(1,133) $(1,092)
=====================================================================================================================
Under-funded or non-funded plans
Aggregate benefit obligation $ 497 $ 345 $ 1,060 $ 1,095
Aggregate fair value of plan assets $ 174 $ 35 $ - $ -
=====================================================================================================================
Weighted average assumptions as of December 31
Discount rate 7.4% 7.0% 8.0% 7.0%
Expected return on plan assets 8.9 9.2
Rate of compensation increase 4.2 4.2
=====================================================================================================================
=====================================================================================================================
Pension Benefits Other Benefits
=====================================================================================================================
1999 1998 1997 1999 1998 1997
- ---------------------------------------------------------------------------------------------------------------------
Components of Net Periodic Benefit Cost
Defined benefit plans
Service cost $ 191 $ 172 $ 167 $ 27 $ 26 $ 25
Interest cost 1,009 916 948 77 72 66
Expected return on plan assets (1,090) (1,010) (1,014) - - -
Recognized net actuarial (gain)/loss 11 10 16 1 - (4)
Amortization of prior service cost 8 6 8 - - -
Recognized net transition asset (18) (19) (20) 2 - -
Recognized curtailment/settlement gain (9) (60) (31) - - -
- ---------------------------------------------------------------------------------------------------------------------
Net periodic benefit cost 102 15 74 107 98 87
Defined contribution plans 28 32 23 - - -
- ---------------------------------------------------------------------------------------------------------------------
Total $ 130 $ 47 $ 97 $ 107 $ 98 $ 87
=====================================================================================================================
58
Assumed health care cost trend rates have a significant effect on the
amounts reported for the health care plans. For measurement purposes, a 7.5
percent annual rate of increase in the per capita cost of covered health care
benefits was assumed for 1999. The rate was assumed to decrease to 5.25 percent
in 2002 and thereafter.
A one-percentage-point change in assumed health care cost trend rates would
have the following effects:
===============================================================================
One- One-
percentage- percentage-
point point
increase decrease
===============================================================================
Effect on total service and interest
cost components $ 5 $ (4)
Effect on postretirement benefit
obligation $62 $(53)
===============================================================================
Employee Stock Ownership Plan (ESOP) Benefits. In 1989, we established an ESOP
and sold to it 10 million shares of Series B Convertible Preferred Stock
(Convertible Preferred) of the Company for a purchase price of $785. Each ESOP
share is convertible into six common shares of the Company. The Convertible
Preferred has a $1 par value and a guaranteed minimum value of $78.25 per share
and accrues annual dividends of $6.25 per share. The ESOP borrowed the purchase
price from a group of lenders. The ESOP debt is included in our consolidated
balance sheets because we guarantee the ESOP borrowings. A corresponding amount
classified as Deferred ESOP benefits represents our commitment to future
compensation expense related to the ESOP benefits.
The ESOP will repay its borrowings from dividends on the Convertible
Preferred and from our contributions. The ESOP's debt service is structured such
that our annual contributions (in excess of dividends) essentially correspond to
a specified level percentage of participant compensation. As the borrowings are
repaid, the Convertible Preferred is allocated to ESOP participants and Deferred
ESOP benefits are reduced by principal payments on the borrowings. Most of our
domestic employees are eligible to participate in the ESOP.
Information relating to the ESOP for the three years ended December 31, 1999
follows:
================================================================================
1999 1998 1997
================================================================================
Interest on ESOP Borrowings $28 $33 $38
- --------------------------------------------------------------------------------
Dividends declared on
Convertible Preferred
Stock $54 $56 $57
- --------------------------------------------------------------------------------
Cash contribution to the
ESOP $44 $41 $39
- --------------------------------------------------------------------------------
Compensation expense $46 $44 $40
================================================================================
We recognize ESOP costs based on the amount committed to be contributed to the
ESOP plus related trustee, finance and other charges.
14 Income Taxes
The parent company and its domestic subsidiaries file consolidated U.S.
income tax returns. Generally, pursuant to tax allocation arrangements, domestic
subsidiaries record their tax provisions and make payments to the parent company
for taxes due or receive payments from the parent company for tax benefits
utilized.
Income before income taxes from continuing operations for the three years
ended December 31, 1999 consists of the following:
================================================================================
1999 1998 1997
================================================================================
Domestic income $1,243 $625 $1,082
Foreign income 793 138 1,059
- --------------------------------------------------------------------------------
Income before income taxes $2,036 $763 $2,141
================================================================================
Provisions for income taxes from continuing operations for the three years ended
December 31, 1999 consist of the following:
================================================================================
1999 1998 1997
================================================================================
Federal income taxes
Current $168 $ 265 $253
Deferred 189 (149) 67
Foreign income taxes
Current 124 178 168
Deferred 68 (143) 158
State income taxes
Current 52 70 69
Deferred 30 (14) 13
- --------------------------------------------------------------------------------
Income taxes $631 $ 207 $728
================================================================================
59
A reconciliation of the U.S. federal statutory income tax rate to the effective
income tax rate for continuing operations for the three years ended December 31,
1999 follows:
==============================================================================
1999 1998 1997
==============================================================================
U.S. federal statutory
income tax rate 35.0% 35.0% 35.0%
Foreign earnings and
dividends taxed at
different rates (6.8) (7.3) (3.2)
Goodwill amortization .7 .7 .3
Tax-exempt income (1.0) (2.3) (.8)
State taxes 2.6 4.7 2.5
Other .5 (3.7) .2
- ------------------------------------------------------------------------------
Effective income tax rate 31.0% 27.1% 34.0%
==============================================================================
The 1999 effective tax rate of 31.0 percent is 0.6 percentage points lower
than 1998, after excluding the 1998 worldwide restructuring program from the
1998 effective tax rate.
The 1998 effective tax rate of 27.1 percent is 6.9 percentage points lower
than 1997. Excluding the 1998 worldwide restructuring program, the 1998
effective tax rate is 31.6 percent, which is 2.4 percentage points lower than
1997. This lower 1998 rate is primarily attributable to an increase in foreign
tax credits, refund of foreign taxes and mix of profits from our worldwide
operations.
On a consolidated basis, including the effects of discontinued operations,
we paid a total of $238, $217 and $241 in income taxes to federal, foreign and
state income-taxing authorities in 1999, 1998 and 1997, respectively.
Total income tax expense (benefit) for the three years ended December 31,
1999 was allocated as follows:
===============================================================================
1999 1998 1997
===============================================================================
Income taxes on income
from continuing
operations $ 631 $ 207 $ 728
Tax benefit included in
minorities' interests/1/ (20) (20) (19)
Discontinued operations (26) (54) (166)
Common shareholders'
equity/2/ (106) (140) (57)
- -------------------------------------------------------------------------------
Total $ 479 $ (7) $ 486
===============================================================================
/1/ Benefit relates to preferred securities as more fully described in Note 16
on page 63.
/2/ For dividends paid on shares held by the ESOP, cumulative translation
adjustments and tax benefit on nonqualified stock options.
Deferred income taxes have not been provided on the undistributed earnings
of foreign subsidiaries and other foreign investments carried at equity. The
amount of such earnings included in consolidated retained earnings at December
31, 1999 was approximately $4.9 billion. These earnings have been substantially
reinvested, and we do not plan to initiate any action that would precipitate the
payment of income taxes thereon. It is not practicable to estimate the amount of
additional tax that might be payable on the foreign earnings.
The tax effects of temporary differences that give rise to significant
portions of the deferred taxes at December 31, 1999 and 1998 follow:
===============================================================================
1999 1998
===============================================================================
Tax effect of future tax deductions
Depreciation $ 385 $ 443
Postretirement medical benefits 436 419
Restructuring reserves 160 329
Other operating reserves 198 277
Deferred intercompany profit 90 76
Allowance for doubtful accounts 104 93
Deferred compensation 159 165
Tax credit carryforwards 98 104
Research and development 641 564
Other 145 116
- -------------------------------------------------------------------------------
Total $ 2,416 $ 2,586
===============================================================================
Tax effect of future taxable income
Installment sales and leases $(1,041) $(1,407)
Leveraged leases (29) (23)
Deferred income (848) (630)
Other (298) (264)
- -------------------------------------------------------------------------------
Total $(2,216) $(2,324)
===============================================================================
The above amounts are classified as current or long-term in the consolidated
balance sheets in accordance with the asset or liability to which they relate.
Current deferred tax assets at December 31, 1999 and 1998 amounted to $478 and
$551, respectively.
We have concluded 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.
At December 31, 1999, we have tax credit carry-forwards for federal income
tax purposes of $98 available to offset future federal income taxes
indefinitely. We also have net operating loss carry-forwards for income tax
purposes of $94 that are available to offset future taxable income through 2006
and $291 available to offset future taxable income indefinitely.
60
15 Litigation
On March 10, 1994, a lawsuit was filed in the United States District Court
for the District of Kansas by two independent service organizations (ISOs) in
Kansas City and St. Louis and their parent company. Subsequently, a single
corporate entity, CSU, L.L.C. (CSU), was substituted for the three affiliated
companies. CSU claimed damages predominately resulting from the Company's
alleged refusal to sell parts for high-volume copiers and printers to CSU prior
to 1994. The Company's policies and practices with respect to the sale of parts
to ISOs were at issue in an antitrust class action in Texas, which was settled
by the Company during 1994. Claims for individual lost profits of ISOs who were
not named parties, such as CSU, were not included in that class action. The
Company asserted counter-claims against CSU alleging patent and copyright
infringement relating to the copying of diagnostic software and service manuals.
On April 8, 1997, the District Court granted partial summary judgment in favor
of the Company on CSU's antitrust claims, ruling that the Company's unilateral
refusal to sell or license its patented parts cannot give rise to antitrust
liability. On January 8, 1999, the Court dismissed with prejudice all of CSU's
antitrust claims. The District Court also granted summary judgment in favor of
the Company on its patent infringement claim, leaving open with respect to
patent infringement only the issues of willfulness and the amount of damages,
and granted partial summary judgment in favor of the Company with respect to
some of its claims of copyright infringement. A judgment in the amount of $1 was
entered in favor of the Company and against CSU on the copyright infringement
counterclaim. On February 16, 2000, the United States Court of Appeals for the
Federal Circuit affirmed the judgment of the District Court dismissing CSU's
antitrust claims.
On April 11, 1996, an action was commenced by Accuscan Corp. (Accuscan), in
the United States District Court for the Southern District of New York, against
the Company seeking unspecified damages for infringement of a patent of Accuscan
which expired in 1993. The suit, as amended, was directed to facsimile and
certain other products containing scanning functions and sought damages for
sales between 1990 and 1993. On April 1, 1998, the jury entered a verdict in
favor of Accuscan for $40. However, on September 14, 1998, the Court granted the
Company's motion for a new trial on damages. The trial ended on October 25, 1999
with a jury verdict of $10. The Company is also seeking to appeal the issue of
liability and believes that the liability verdict should be set aside. We filed
a motion to have the judge dismiss or modify the verdict.
A consolidated lawsuit is currently pending in the United States District
Court for the Western District of Texas. It is a consolidation of two previously
separate lawsuits, one of which had been filed in the United States District
Court for the District of New Jersey and had been transferred to Texas, and the
other which was commenced in Texas. Plaintiffs in both cases claimed that the
withdrawal of Crum & Forster Holdings, Inc. (a former subsidiary of ours) (C&F)
from the Xerox Corporation Employee Stock Ownership Plan (ESOP) constituted a
wrongful termination under the Employee Retirement Income Security Act (ERISA).
Both cases were also brought as purported class actions. The complaints in the
two cases asserted different legal theories for recovery. In one case damages of
$250 were alleged and in the other case damages were unspecified.
On December 14, 1999, the Court granted plaintiffs' motion to amend their
complaint. The amended complaint alleges violations of ERISA only and seeks
unspecified damages, injunctive relief, costs and attorneys' fees. Under the
amended complaint, plaintiffs purport to bring this action on behalf of
themselves and a class of approximately 10,000 persons who were C&F participants
in the ESOP on January 1, 1993. The plaintiffs have filed a new motion for class
certification based upon the allegations in the amended complaint, which is
currently pending. Plaintiffs' previous motion to certify a class action was
denied by the Court. Xerox denies liability and intends to vigorously defend
this action.
On June 24, 1999, Xerox Corporation was served with a summons and complaint
filed in the Superior Court of the State of California for the County of Los
Angeles. The complaint was filed on behalf of 681 individual plaintiffs claiming
damages as a result of Xerox' alleged disposal and/or release of hazardous
substances into the soil, air and groundwater. On July 22, 1999, a complaint was
filed in the same Court, which has not yet been served on Xerox, in a separate
action on behalf of an additional 80 plaintiffs with the same claims for damages
as the earlier action. Plaintiffs in both cases further allege that they have
been exposed to such hazardous substances by inhalation, ingestion and dermal
contact, including but not limited to hazardous substances contained within the
municipal drinking water supplied by the City of Pomona and the Southern
California Water Company. Plaintiffs' claims against Xerox include personal
injury,
61
wrongful death, property damage, negligence, trespass, nuisance, fraudulent
concealment, absolute liability for ultra-hazardous activities, civil
conspiracy, battery and violation of the California Unfair Trade Practices Act.
Damages are unspecified.
We deny any liability for the plaintiffs' alleged damages and intend to
vigorously defend these actions. The Court has issued a stay in this case until
March 2, 2000.
On December 9, 1999, a complaint was filed in the United States District
Court for the District of Connecticut in an action entitled Giarraputo, et al.
vs. Xerox Corporation, Barry Romeril, Paul Allaire and Richard Thoman which
purports to be a class action on behalf of the named plaintiff and all other
purchasers of Common Stock of the Company between January 25, 1999 and October
7, 1999, (Class Period). On December 13, 1999, an amended complaint was filed
adding an additional named plaintiff, extending the Class Period through
December 10, 1999, and expanding the class to include individuals who purchased
call options or sold put options. The amended complaint alleges that pursuant to
the Securities Exchange Act of 1934, as amended, each of the defendants is
liable as a participant in a fraudulent scheme and course of business that
operated as a fraud or deceit on purchasers of the Company's Common Stock during
the Class Period by disseminating materially false and misleading statements
and/or concealing material facts. The amended complaint further alleges that the
alleged scheme: (i) deceived the investing public regarding the economic
capabilities, sales proficiencies, growth, operations and intrinsic value of the
Company's Common Stock; (ii) allowed several corporate insiders, such as the
named individual defendants, to sell shares of privately held Common Stock of
the Company while in possession of materially adverse, non-public information;
and (iii) caused the individual plaintiffs and the other members of the
purported class to purchase Common Stock of the Company at inflated prices. The
amended complaint seeks unspecified compensatory damages in favor of the
plaintiffs and the other members of the purported class against all defendants,
jointly and severally, for all damages sustained as a result of defendants'
alleged wrongdoing, including interest thereon, together with reasonable costs
and expenses incurred in the action, including counsel fees and expert fees.
Several additional class action complaints alleging the same or substantially
similar claims have been filed in the same Court.
The named individual defendants and we deny any wrongdoing and intend to
vigorously defend these actions, which we expect to be consolidated.
16 Preferred Securities
As of December 31, 1999, we have four series of outstanding preferred
securities. In total we are authorized to issue 22 million shares of cumulative
preferred stock, $1 par value.
Convertible Preferred Stock. As more fully described in Note 13 on page 59, we
sold, for $785, 10 million shares of our Series B Convertible Preferred Stock
(ESOP shares) in 1989 in connection with the establishment of our ESOP. As
employees with vested ESOP shares leave the Company, these shares are redeemed
by us. We have the option to settle such redemptions with either shares of
common stock or cash. Outstanding preferred stock related to our ESOP at
December 31, 1999 and 1998 follows (shares in thousands):
================================================================================
1999 1998
================================================================================
Shares Amount Shares Amount
- --------------------------------------------------------------------------------
Convertible
Preferred Stock 8,551 $669 8,785 $687
================================================================================
Preferred Stock Purchase Rights. We have a shareholder rights plan designed to
deter coercive or unfair takeover tactics and to prevent a person or persons
from gaining control of us without offering a fair price to all shareholders.
Under the terms of the plan, one-half of one preferred stock purchase right
(Right) accompanies each share of outstanding common stock (giving effect to the
two-for-one stock split in February 1999). Each full Right entitles the holder
to purchase from us one three-hundredth of a new series of preferred stock at an
exercise price of $250.
Within the time limits and under the circumstances specified in the plan, the
Rights entitle the holder to acquire either our common stock, the surviving
company in a business combination, or the purchaser of our assets, having a
value of two times the exercise price.
62
The Rights may be redeemed prior to becoming exercisable by action of the Board
of Directors at a redemption price of $.01 per Right. The Rights expire in April
2007.
The Rights are non-voting and, until they become exercisable, have no
dilutive effect on the earnings per share or book value per share of our common
stock.
Deferred Preferred Stock. In 1996, a subsidiary of ours issued 2 million
deferred preferred shares for Canadian (Cdn.) $50 million. The U.S. dollar value
was $37 and is included in Minorities' interests in equity of subsidiaries in
the consolidated balance sheets. These shares are mandatorily redeemable on
February 28, 2006 for Cdn. $90 million. The difference between the redemption
amount and the proceeds from the issue is being amortized, through the
redemption date, to Minorities' interests in earnings of subsidiaries in the
consolidated statements of income. We have guaranteed the redemption value.
Company-obligated, mandatorily redeemable preferred securities of subsidiary
trust holding solely subordinated debentures of the Company. In January 1997, a
trust sponsored and wholly owned by the Company issued $650 aggregate
liquidation amount preferred securities (the "Original Preferred Securities") to
investors and 20,103 shares of common securities to the Company, the proceeds of
which were invested by the trust in $670 aggregate principal amount of the
Company's newly issued 8 percent Junior Subordinated Debentures due 2027 (the
"Original Debentures"). In June 1997, pursuant to a registration statement filed
by the Company and the trust with the Securities and Exchange Commission,
Original Preferred Securities with an aggregate liquidation preference amount of
$644 and Original Debentures with a principal amount of $644 were exchanged for
a like amount of preferred securities (together with the Original Preferred
Securities, the "Preferred Securities") and 8 percent Junior Subordinated
Debentures due 2027 (together with the Original Debentures, the "Debentures")
which were registered under the Securities Act of 1933. The Debentures represent
all of the assets of the trust. The proceeds from the issuance of the Original
Debentures were used by the Company for general corporate purposes. The
Debentures and related income statement effects are eliminated in the Company's
consolidated financial statements.
The Preferred Securities accrue and pay cash distributions semiannually at a
rate of 8 percent per annum of the stated liquidation amount of $1,000 per
Preferred Security. The Company has guaranteed (the "Guarantee"), on a
subordinated basis, distributions and other payments due on the Preferred
Securities. The Guarantee and the Company's obligations under the Debentures and
in the indenture pursuant to which the Debentures were issued and the Company's
obligations under the Amended and Restated Declaration of Trust governing the
trust, taken together, provide a full and unconditional guarantee of amounts due
on the Preferred Securities.
The Preferred Securities are mandatorily redeemable upon the maturity of
the Debentures on February 1, 2027, or earlier to the extent of any redemption
by the Company of any Debentures. The redemption price in either such case will
be $1,000 per share plus accrued and unpaid distributions to the date fixed for
redemption.
17 Common Stock
We have 1.05 billion authorized shares of common stock, $1 par value. At
December 31, 1999 and 1998, 84.3 and 45.3 million shares, respectively, were
reserved for issuance under our incentive compensation plans. In addition, at
December 31, 1999,13.2 million common shares were reserved for the conversion of
$654 of convertible debt, and 51.3 million common shares were reserved for
conversion of ESOP-related Convertible Preferred Stock.
Treasury Stock. The Board of Directors has authorized us to repurchase up to $1
billion of our common stock. The stock will be repurchased from time to time on
the open market depending on market and other conditions. No shares were
repurchased during 1999. During 1998, we repurchased 3.7 million shares for
$172. Since inception of the program we have repurchased 20.6 million shares for
$594. Common shares issued for stock option exercises, conversion of convertible
securities and other exchanges were partially satisfied by reissuances of
treasury shares.
63
Put Options. In connection with the share repurchase program, during 1999, 1998
and 1997, we sold 0.8 million, 1.0 million and 8.0 million put options,
respectively, that entitle the holder to sell one share of our common stock to
us at a specified price. These put options are exercisable only at maturity and
can be settled in cash at our option. The put options had original maturities
ranging from six months to two years.
In 1999, put options on 1.0 million shares of common stock were exercised and
settled for a net cash payment of $5.
At December 31, 1999, 0.8 million put options remain outstanding with a strike
price of $40.56 per share.
Stock Option and Long-Term Incentive Plans. We have a long-term incentive plan
whereby eligible employees may be granted nonqualified stock options and
performance unit rights. Subject to vesting and other requirements, performance
unit rights are typically paid in our common stock, beginning with the 1998
awards, and are typically paid in cash for units awarded prior to 1998. Prior to
1999, the value of each performance unit was typically based upon the level of
return on assets during the year in which granted. Beginning with the 1999
awards, the value of each performance unit is based on the growth in earnings
per share during the year in which granted. Performance units ratably vest in
the three years after the year awarded.
Beginning in 1999, certain incentive compensation plans were modified to
provide for the issuance of stock options as part of the total payments due
under the plans.
Stock options and rights are settled with newly issued or treasury shares
of our common stock. Stock options granted prior to December 31, 1995 normally
vest in two years and expire five years from the date of grant. Stock options
granted subsequent to December 31, 1995 generally vest in three years and expire
between eight and ten years from the date of grant. The exercise price of the
options is equal to the market value of our common stock on the effective date
of grant.
At December 31, 1999 and 1998, 36.2 million and 6.4 million shares,
respectively, were available for grant of options or rights. The following
table provides information relating to the status of, and changes in, options
granted:
==========================================================================================================================
Employee Stock Options 1999 1998 1997
==========================================================================================================================
Average Average Average
Stock Option Stock Option Stock Option
(Options in thousands) Options Price Options Price Options Price
- --------------------------------------------------------------------------------------------------------------------------
Outstanding at January 1 30,344 $33 27,134 $26 22,206 $19
Granted 19,059 51 8,980 47 12,201 34
Cancelled (870) 47 (199) 37 (300) 24
Exercised (5,145) 23 (5,571) 20 (6,973) 17
- ---------------------------------------------------------------------------------------------------------------------------
Outstanding at December 31 43,388 42 30,344 33 27,134 26
- ---------------------------------------------------------------------------------------------------------------------------
Exercisable at end of year 13,467 9,622 8,850
==========================================================================================================================
Options outstanding and exercisable at December 31, 1999 are as follows:
==========================================================================================================================
Thousands except per-share data Options Outstanding Options Exercisable
==========================================================================================================================
Weighted
Range of Average Remaining Weighted Average Number Weighted Average
Exercise Prices Number Outstanding Contractual Life Exercise Price Exercisable Exercise Price
- ---------------------------------------------------------------------------------------------------------------------------
$13.18 to $19.63 2,058 1.55 $18.16 2,058 $18.16
20.11 to 28.91 7,737 6.84 23.99 3,954 22.07
30.97 to 44.16 15,358 5.37 37.10 6,396 35.82
46.88 to 60.95 18,235 7.10 56.02 1,059 48.60
- ---------------------------------------------------------------------------------------------------------------------------
$13.18 to $60.95 43,388 6.18 $41.81 13,467 $30.09
===========================================================================================================================
64
We do not recognize compensation expense relating to employee stock options
because the exercise price of the option equals the fair value of the stock on
the effective date of grant. If we had deter mined the compensation based on the
value as determined by the modified Black-Scholes option pricing model, in
accordance with SFAS No. 123, the pro forma net income and earnings per share
would be as follows:
===========================================================
1999 1998 1997
===========================================================
Net income - as reported $1,424 $ 395 $1,452
Net income - pro forma 1,323 350 1,429
Basic EPS - as reported 2.09 0.53 2.16
Basic EPS - pro forma 1.94 0.46 2.12
Diluted EPS - as reported 1.96 0.52 2.02
Diluted EPS - pro forma 1.82 0.45 1.99
===========================================================
The effects of applying SFAS No. 123 in this pro forma disclosure are not
necessarily indicative of future amounts.
As reflected in the pro forma amounts in the table at left, the fair value
of each option granted in 1999, 1998 and 1997 was $15.83, $13.31 and $9.03,
respectively. The fair value of each option granted was estimated on the date of
grant using the following weighted average assumptions:
============================================================
1999 1998 1997
============================================================
Risk-free interest rate 5.1% 5.2% 6.1%
Expected life in years 6.2 5.3 5.0
Expected volatility 28.0% 24.9% 23.5%
Expected dividend yield 1.8% 1.4% 1.9%
============================================================
18 Earnings per Share
A reconciliation of the numerators and denominators of the basic and
diluted EPS calculation follows:
=========================================================================================================================
1999 1998 1997
=========================================================================================================================
Income Shares Per Income Shares Per Income Shares Per
(Numer- (Denom- Share (Numer- (Denom- Share (Numer- (Denom- Share
(Shares in thousands) ator) inator) Amount ator) inator) Amount ator) inator) Amount
- --------------------------------------------------------------------------------------------------------------------------
Basic EPS
Income from continuing
operations $1,424 $585 $1,452
Accrued dividends on
preferred stock (38) (46) (44)
- ---------------------------------------------------------------------------------------------------------------------------
Basic EPS $1,386 663,493 $2.09 $539 658,956 $0.82 $1,408 653,371 $2.16
- ---------------------------------------------------------------------------------------------------------------------------
Diluted EPS
Stock options and other
incentives 8,727 9,811 7,929
ESOP Adjustment,
net of tax 43 51,989 44 54,686
Convertible debt,
net of tax 17 13,191 3 5,287 3 5,287
- --------------------------------------------------------------------------------------------------------------------------
Diluted EPS $1,446 737,400 $1.96 $542 674,054 $0.80 $1,455 721,273 $2.02
==========================================================================================================================
Note: Recalculation of per-share amounts may be off by $0.01 in certain
instances due to rounding.
19 Subsequent Events
In January 2000, we and Fuji Xerox acquired the Color Printing and Imaging
Division of Tektronix, Inc. (CPID). The aggregate consideration paid of $925 in
cash, which includes $75 paid directly by Fuji Xerox, is subject to certain
post-closing adjustments. CPID manufactures and sells color printers, ink and
related products, and supplies. The acquisition was accounted for using the
purchase method and will result in goodwill and other identifiable intangible
assets of approximately $575 (unaudited), which will be amortized over their
useful lives, predominantly 20 years. In addition, we will also recognize a
charge in the first quarter of 2000 for accrued in-process research and
development of approximately $25 (unaudited). We have engaged an independent
appraiser to value the intangible assets, including amounts allocable to accrued
in-process research and development. Accordingly, the amounts included herein
are based on preliminary estimates and will be revised to reflect the final
appraisal.
65
Quarterly Results of Operations
(Unaudited)
==================================================================================================================
First Second Third Fourth Full
In millions, except per-share data Quarter Quarter Quarter Quarter Year
==================================================================================================================
1999
Revenues $ 4,300 $ 4,862 $4,628 $5,438 $19,228
Costs and Expenses 3,806 4,229 4,123 5,034 17,192
- ------------------------------------------------------------------------------------------------------------------
Income before Income Taxes, Equity Income and
Minorities' Interests 494 633 505 404 2,036
Income Taxes 153 196 157 125 631
Equity in Net Income of Unconsolidated Affiliates 10 24 5 29 68
Minorities' Interests in Earnings of Subsidiaries 8 13 14 14 49
- ------------------------------------------------------------------------------------------------------------------
Income from Continuing Operations 343 448 339 294 1,424
Discontinued Operations - - - - -
- ------------------------------------------------------------------------------------------------------------------
Net Income $ 343 $ 448 $ 339 $ 294 $ 1,424
==================================================================================================================
Basic Earnings per Share
Continuing Operations $ 0.50 $ 0.66 $ 0.50 $ 0.43 $ 2.09
Discontinued Operations - - - - -
- ------------------------------------------------------------------------------------------------------------------
Basic Earnings per Share $ 0.50 $ 0.66 $ 0.50 $ 0.43 $ 2.09
==================================================================================================================
Diluted Earnings per Share/1/
Continuing Operations $ 0.48 $ 0.62 $ 0.47 $ 0.41 $ 1.96
Discontinued Operations - - - - -
- ------------------------------------------------------------------------------------------------------------------
Diluted Earnings per Share/1/ $ 0.48 $ 0.62 $ 0.47 $ 0.41 $ 1.96
==================================================================================================================
1998
Revenues $ 4,304 $ 4,742 $4,607 $5,794 $19,447
Costs and Expenses 3,859 5,841 4,067 4,917 18,684
- ------------------------------------------------------------------------------------------------------------------
Income (Loss) before Income Taxes (Benefits),
Equity Income and Minorities' Interests 445 (1,099) 540 877 763
Income Taxes (Benefits) 147 (385) 173 272 207
Equity in Net Income of Unconsolidated Affiliates 14 12 28 20 74
Minorities' Interests in Earnings of Subsidiaries 11 10 14 10 45
- ------------------------------------------------------------------------------------------------------------------
Income (Loss) from Continuing Operations 301 (712) 381 615 585
Discontinued Operations (190) - - - (190)
- ------------------------------------------------------------------------------------------------------------------
Net Income (Loss)/2/ $ 111 $ (712) $ 381 $ 615 $ 395
==================================================================================================================
Basic Earnings (Loss) per Share
Continuing Operations $ 0.44 $ (1.10) $ 0.56 $ 0.92 $ 0.82
Discontinued Operations (0.29) - - - (0.29)
- ------------------------------------------------------------------------------------------------------------------
Basic Earnings per Share $ 0.15 $ (1.10) $ 0.56 $ 0.92 $ 0.53
==================================================================================================================
Diluted Earnings (Loss) per Share/1/
Continuing Operations $ 0.42 $ (1.10) $ 0.53 $ 0.84 $ 0.80
Discontinued Operations (0.26) - - - (0.28)
- ------------------------------------------------------------------------------------------------------------------
Diluted Earnings per Share/1/ $ 0.16 $ (1.10) $ 0.53 $ 0.84 $ 0.52
==================================================================================================================
/1/ Quarterly diluted earnings per share differ from the full-year amounts
because securities that are antidilutive in certain quarters are not
antidilutive on a full-year basis.
/2/ 1998 second quarter includes a restructuring charge of $1,644 ($1,107 after
taxes and including our $18 share of a restructuring charge recorded by
Fuji Xerox).
66
Reports of Management and Independent Auditors
Report of Management
Xerox Corporation management is responsible for the integrity and objectivity of
the financial data presented in this annual report. The consolidated financial
statements were prepared in conformity with generally accepted accounting
principles and include amounts based on management's best estimates and
judgments.
The Company maintains an internal control structure designed to provide
reasonable assurance that assets are safeguarded against loss or unauthorized
use and that financial records are adequate and can be relied upon to produce
financial statements in accordance with generally accepted accounting
principles. This structure includes the hiring and training of qualified people,
written accounting and control policies and procedures, clearly drawn lines of
accountability and delegations of authority. In a business ethics policy that is
communicated annually to all employees, the Company has established its intent
to adhere to the highest standards of ethical conduct in all of its business
activities.
The Company monitors its internal control structure with direct management
reviews and a comprehensive program of internal audits. In addition, KPMG LLP,
independent auditors, have audited the consolidated financial statements and
have reviewed the internal control structure to the extent they considered
necessary to support their report, which follows.
The Audit Committee of the Board of Directors, which is composed solely of
outside directors, meets regularly with the independent auditors, the internal
auditors and representatives of management to review audits, financial reporting
and internal control matters, as well as the nature and extent of the audit
effort. The Audit Committee also recommends the engagement of independent
auditors, subject to shareholder approval. The independent auditors and internal
auditors have free access to the Audit Committee.
/s/ G. Richard Thoman /s/ Barry D. Romeril
G. Richard Thoman Barry D. Romeril
President and Chief Executive Officer Vice Chairman and Chief Financial Officer
Report of Independent Auditors
To the Board of Directors and Shareholders of Xerox Corporation:
We have audited the consolidated balance sheets of Xerox Corporation and
consolidated subsidiaries as of December 31, 1999 and 1998, and the related
consolidated statements of income, cash flows and shareholders' equity for each
of the years in the three-year period ended December 31, 1999. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
consolidated financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements appearing on pages 42
through 65 present fairly, in all material respects, the financial position of
Xerox Corporation and consolidated subsidiaries as of December 31, 1999 and
1998, and the results of their operations and their cash flows for each of the
years in the three-year period ended December 31, 1999, in conformity with
generally accepted accounting principles.
/s/ KPMG LLP
KPMG LLP
Stamford, Connecticut
January 25, 2000
67
Eleven Years in Review
==============================================================================================================================
(Dollars in millions, except per-share data) 1999 1998 1997 1996
==============================================================================================================================
Per-Share Data
Earnings (loss) from continuing operations
Basic $ 2.09 $ 0.82 $ 2.16 $ 1.78
Diluted 1.96 0.80 2.02 1.66
Dividends declared 0.80 0.72 0.64 0.58
==============================================================================================================================
Operations
Revenues $ 19,228 $ 19,447 $ 18,144 $ 17,378
Research and development expenses 979 1,040 1,065 1,044
Income (loss) from continuing operations 1,424 585 1,452 1,206
Net income (loss) 1,424 395 1,452 1,206
==============================================================================================================================
Financial Position
Accounts and finance receivables, net $ 15,940 $ 16,984 $ 14,498 $ 13,394
Inventories 2,961 3,269 2,792 2,676
Land, buildings and equipment, net 2,456 2,366 2,377 2,256
Investment in discontinued operations 1,130 1,670 3,025 4,398
Total assets 28,814 30,024 27,732 26,818
Consolidated capitalization
Short-term debt 3,957 4,104 3,707 3,536
Long-term debt 11,044 11,003 8,946 8,697
- ------------------------------------------------------------------------------------------------------------------------------
Total debt 15,001 15,107 12,653 12,233
Deferred ESOP benefits (299) (370) (434) (494)
Minorities' interests in equity of subsidiaries 127 124 127 843
Company-obligated, mandatorily redeemable
preferred securities of subsidiary trust
holding solely subordinated debentures
of the Company 638 638 637 -
Preferred stock 669 687 705 721
Common shareholders' equity 4,911 4,857 4,985 4,367
Total capitalization 21,047 21,043 18,673 17,670
==============================================================================================================================
Selected Data and Ratios
Common shareholders of record at year-end 55,297 52,048 54,689 55,908
Book value per common share/1/ $ 7.35 $ 7.35 $ 7.59 $ 6.71
Year-end common stock market price $ 22.69 $ 59.00 $ 36.94 $ 26.31
Employees at year-end 94,600 92,700 91,500 86,700
Working capital $ 4,035 $ 3,968 $ 3,074 $ 2,948
Current ratio 1.5 1.5 1.4 1.4
Additions to land, buildings and equipment $ 594 $ 566 $ 520 $ 510
Depreciation on land, buildings and equipment $ 416 $ 362 $ 400 $ 372
==============================================================================================================================
* Data that conform with the 1999 basis of presentation were not available.
/1/ Book value per common share is computed by dividing common shareholders'
equity by outstanding common shares plus common shares reserved for the
conversion of the Xerox Canada Inc. Exchangeable Class B Stock.
68
==============================================================================================================================
1995 1994 1993 1992 1991 1990 1989
==============================================================================================================================
$ 1.73 $ 1.14 $ (0.42) $ 0.87 $ 0.63 $ 0.91 $ 0.74
1.61 1.07 (0.42) 0.77 0.62 0.87 0.73
0.50 0.50 0.50 0.50 0.50 0.50 0.50
==============================================================================================================================
16,588 $ 15,084 $ 14,229 $ 14,298 $ 13,438 $ 13,210 $ 12,095
949 895 883 922 890 848 809
1,174 794 (193) 562 436 599 488
(472) 794 (126) (1,020) 454 243 704
==============================================================================================================================
$ 12,389 $ 11,759 $ 10,565 $ 10,250 $ 8,952 $ 8,016 $ 7,272
2,656 2,294 2,162 2,257 2,091 2,148 2,413
2,105 2,108 2,219 2,150 1,950 1,851 1,781
4,810 7,904 8,841 8,652 9,164 9,695 *
26,008 27,278 26,999 25,792 24,342 24,116 *
==============================================================================================================================
3,274 3,159 2,698 2,533 2,038 1,828 1,482
8,148 7,355 7,386 8,105 7,825 8,726 9,247
- ------------------------------------------------------------------------------------------------------------------------------
11,422 10,514 10,084 10,638 9,863 10,554 10,729
(547) (596) (641) (681) (720) (756) (785)
755 1,021 844 885 818 832 715
- - - - - - -
763 832 1,066 1,072 1,078 1,081 1,081
3,878 4,177 3,972 3,875 5,140 5,051 5,035
16,271 15,948 15,325 15,789 16,179 16,762 16,775
==============================================================================================================================
54,262 56,414 65,820 68,877 71,213 74,994 78,876
$ 5.92 $ 6.48 $ 6.28 $ 6.70 $ 9.07 $ 8.96 $ 8.93
$ 22.84 $ 16.50 $ 14.69 $ 13.21 $ 11.42 $ 5.92 $ 9.54
85,900 87,600 97,000 99,300 100,900 99,000 99,000
$ 2,843 $ 2,411 $ 2,357 $ 2,578 $ 2,282 $ 2,537 *
1.4 1.4 1.4 1.5 1.5 1.6 *
$ 438 $ 389 $ 470 $ 582 $ 467 $ 405 $ 390
$ 376 $ 446 $ 437 $ 418 $ 397 $ 372 $ 370
==============================================================================================================================
69
How to Reach Us
Xerox Corporation Developing Markets
800 Long Ridge Road Operations
P.O. Box 1600 800 Long Ridge Road
Stamford, CT 06904 P.O. Box 1600
203 968-3000 Stamford, CT 06904
203 968-3000
Industry Solutions
Operations Xerox Europe
800 Long Ridge Road Riverview
P.O. Box 1600 Oxford Road
Stamford, CT 06904 Uxbridge
203 968-3000 Middlesex
United Kingdom
General Markets UB8 1HS
Operations 44 1895 251133
800 Long Ridge Road
P.O. Box 1600 Fuji Xerox Co., Ltd.
Stamford, CT 06904 2-17-22 Akasaka
203 968-3000 Minato-ku, Tokyo 107
Japan
813 3585-3211
Products and Services
www.xerox.com or by phone:
.800 ASK-XEROX (800 275-9376) for any product or service
.800 TEAM-XRX (800 832-6979) for any small office or home office product
.800 34-XEROX (800 349-3769) for networked products sold through resellers
Additional Information
The Xerox Foundation and Community Involvement Program: 203 968-3333
Xerox diversity programs and EEO-1 reports: 716 423-6157
Environmental, Health and Safety Progress Report: 800 828-6571
Questions from Students and Educators:
800 594-5015 or 716 423-4828
E-mail: Nancy.Dempsey@usa.xerox.com
Auditors
KPMG LLP
Certified Public Accountants
Stamford Square
3001 Summer Street
Stamford, CT 06905
203 356-9800
Consecutive Dividends Paid to Shareholders
At its February 7, 2000, meeting, the Company's Board of Directors declared the
regular quarterly dividend of $.20 per share on the common stock and the regular
quarterly dividend of $1.5625 per share on the preferred stock. Xerox has
declared dividends to its shareholders for 70 consecutive years and has paid
consecutive quarterly dividends since 1948. The Series B Convertible Preferred
stock was issued in July 1989 in connection with the formation of a Xerox
Employee Stock Ownership Plan.
Both common and preferred dividends are payable April 1 to shareholders of
record March 3.
Xerox Common Stock Prices and Dividends
==============================================================================
New York Stock Exchange composite prices
==============================================================================
First Second Third Fourth
1999 Quarter Quarter Quarter Quarter
==============================================================================
High $63.00 $63.69 $59.75 $42.81
Low 51.63 52.50 40.50 19.88
Dividends Paid $ 0.18 $ 0.20 $ 0.20 $ 0.20
==============================================================================
==============================================================================
First Second Third Fourth
1998 Quarter Quarter Quarter Quarter
==============================================================================
High $53.38 $57.50 $58.25 $60.81
Low 33.09 45.16 39.00 40.91
Dividends Paid $ 0.16 $ 0.18 $ 0.18 $ 0.18
==============================================================================
Stock Listed and Traded
Xerox common stock (XRX) is listed on the New York Stock Exchange and the
Chicago Stock Exchange. It is also traded on the Boston, Cincinnati, Pacific
Coast, Philadelphia, London and Switzerland exchanges.
Copyright(R) Xerox Corporation 2000. All rights reserved. Xerox(R), The Document
Company(R) and the stylized X(R) are trademarks of Xerox Corporation, as are
ColorSeries, ContentGuard, DataGlyph(R), DigiPath(R), DocuImage(R), Document
Centre(R), DocuPrint(R), DocuShare(R), DocuTech(R), FlowPort, PageCam,
PaperWare(R) and Phaser(R).
Adobe(R) and Postscript(R) are trademarks of Adobe Systems Inc. DocuColor(R) is
a trademark of Identix Inc., licensed to Xerox Corporation. Domino.doc and Lotus
Notes(R) are trademarks of Lotus Development Corp. Microsoft Exchange(R) is a
trademark of Microsoft Corp.
72