Consolidated Statements of Income
Year ended December 31 (in millions, except per-share data) 1994 1993 1992
================================================
-------------------
Document Processing
-------------------
Revenues
Sales $ 7,853 $ 7,211 $ 7,292
Service and rentals 6,229 5,954 5,948
Finance income 1,006 1,064 1,058
------------------------------------------------
Total Revenues 15,088 14,229 14,298
------------------------------------------------
Costs and Expenses
Cost of sales 4,653 4,098 3,898
Cost of service and rentals 3,016 2,986 3,080
Equipment financing interest 502 537 547
Research and development expenses 895 883 922
Selling, administrative and general expenses 4,394 4,477 4,664
Special charges, net - 1,373 -
Other, net 114 155 64
------------------------------------------------
Total Costs and Expenses 13,574 14,509 13,175
------------------------------------------------
Income (Loss) before Income Taxes, Equity Income and
Minorities' Interests 1,514 (280) 1,123
Income Taxes (Benefits) 595 (78) 493
Equity in Net Income of Unconsolidated Affiliates 88 87 81
Minorities' Interests in Earnings of Subsidiaries 213 78 149
------------------------------------------------
Income (Loss) from Document Processing 794 (193) 562
------------------------------------------------
---------
Insurance
---------
Revenues
Insurance premiums earned 2,312 2,408 2,326
Investment and other income 437 401 552
------------------------------------------------
Total Revenues 2,749 2,809 2,878
------------------------------------------------
Costs and Expenses
Insurance losses and loss expenses 1,769 1,836 2,725
Insurance acquisition costs and other insurance operating expenses 777 785 957
Interest expense 212 215 218
Administrative and general expenses 47 95 106
Goodwill write-down - - 400
------------------------------------------------
Total Costs and Expenses 2,805 2,931 4,406
------------------------------------------------
Realized Capital Gains 12 88 516
------------------------------------------------
Income (Loss) before Income Taxes (44) (34) (1,012)
Income Taxes (Benefits) (44) (38) (233)
------------------------------------------------
Income (Loss) from Insurance - 4 (779)
------------------------------------------------
-------------
Total Company
-------------
Income (Loss) from Continuing Operations 794 (189) (217)
Discontinued Operations - 63 (39)
Cumulative Effect of Changes in Accounting Principles - - (764)
------------------------------------------------
Net Income (Loss) $ 794 $ (126) $(1,020)
================================================
---------------------------------
Primary Earnings (Loss) per Share
---------------------------------
Continuing Operations $ 6.73 $ (2.46) $ (2.91)
Discontinued Operations - .62 (.41)
Cumulative Effect of Changes in Accounting Principles - - (7.97)
------------------------------------------------
Primary Earnings per Share $ 6.73 $ (1.84) $(11.29)
================================================
---------------------------------------
Fully Diluted Earnings (Loss) per Share
---------------------------------------
Continuing Operations $ 6.44 $ (2.46) $ (2.91)
Discontinued Operations - .62 (.41)
Cumulative Effect of Changes in Accounting Principles - - (7.97)
------------------------------------------------
Fully Diluted Earnings per Share $ 6.44 $ (1.84) $(11.29)
================================================
The accompanying notes are an integral part of the consolidated financial
statements.
28
Financial Review:
Document Processing and Total Company
SUMMARY OF TOTAL COMPANY RESULTS
In view of the Company's 1993 decision to concentrate its resources on its
core Document Processing business and disengage from the Insurance and Other
Financial Services (IOFS) businesses, management believes the most meaningful
and appropriate portrayal of the Company's operating results and financial
position is to report the Document Processing and Insurance businesses on a
tiered basis within the Company's consolidated financial statements. During
1993, the Other Financial Services businesses qualified as discontinued
operations and are accounted for accordingly.
Document Processing revenues increased 6 percent to $15.1 billion in 1994,
following a slight decline in revenues to $14.2 billion in 1993 from $14.3
billion in 1992. Insurance revenues declined 2 percent to $2.7 billion in
1994, following a decline of 2 percent to $2.8 billion in 1993 from $2.9
billion in 1992.
Document Processing income in 1994 increased 37 percent to $794 million,
compared with $580 million in 1993 before special items. On the same basis,
income increased 3 percent in 1993 from $562 million in 1992. The 1993
special items were charges of $813 million after taxes to provide for the
costs of restructuring the Document Processing business and lawsuit
settlements, and $40 million in one-time tax benefits. After special items,
Document Processing reported a $193 million loss in 1993.
Insurance income was zero in 1994, compared with income of $4 million in
1993, and a loss of $779 million in 1992. In 1992, in connection with the
restructuring of the Company's property and casualty insurance unit, Talegen
Holdings, Inc., the Company recognized after-tax charges of $981 million,
which were partially offset by associated realized capital gains of $293
million after taxes.
The Company's discontinued operations had zero income in 1994 compared with
income of $63 million in 1993, and a loss of $39 million in 1992. The 1993
results included a $62 million after-tax gain on the sale of Van Kampen
Merritt (VKM). The 1992 results included $90 million of adjustments,
primarily for the partial write-down of goodwill.
In 1992, the Company recognized a charge of $764 million associated with the
cumulative effect of the adoption of two accounting standards related to
postretirement medical benefits and income taxes.
The Company's net income in 1994 of $794 million compared with a net loss of
$126 million in 1993 after special items, and a net loss of $1,020 million in
1992 after special charges and the cumulative effect of the adoption of the
two accounting standards. On a comparable basis, the Company had net income
of $6.73 per primary share in 1994 compared with a net loss of $1.84 per
share in 1993 and a net loss of $11.29 per share in 1992. Fully diluted
earnings per share were $6.44 in 1994 compared with a net loss of $1.84 per
share in 1993 and a net loss of $11.29 per share in 1992.
Pictured here was a bar chart depicting Document Processing Earnings per
Share of $6.73 for 1994, $5.07 for 1993 before special items and $5.15 for
1992.
Although the presentation of separate Document Processing and Insurance
Earnings Per Share is not in accordance with generally accepted accounting
principles, the Company believes that, for analytical purposes, the separate
reporting of Earnings Per Share represents the contributions of the Company's
two businesses to the consolidated results of operations.
29
Primary earnings per share for Document Processing increased 33 percent to
$6.73 in 1994 from $5.07 in 1993 before special items, which was a 2 percent
decrease from $5.15 in 1992. Fully diluted earnings per share for Document
Processing increased 33 percent to $6.44 in 1994 from $4.86 in 1993 before
special items, which was a 1 percent decrease from $4.93 in 1992. 1993
Document Processing earnings per share reflect the impact of the additional
8.1 million shares issued in connection with the Company's equity offering in
June 1993.
Primary and fully diluted earnings per share for Insurance were zero in 1994
compared with income of $.04 in 1993 and a loss of $8.06 in 1992.
DOCUMENT PROCESSING
UNDERLYING GROWTH
To understand the trends in the business, the Company believes that it is
helpful to adjust revenue and expense growth (except for ratios) to exclude
the impact of the translation of foreign currencies into U.S. dollars and
special one-time items that distort the trends. This adjusted growth is
referred to as "underlying growth." The items that have been excluded from
the discussion of underlying growth are the 1993 charges from the Document
Processing restructuring program and the lawsuit settlements, and one-time
tax benefits.
When compared with the major European currencies, the U.S. dollar was
approximately 2 percent stronger in 1994 and 11 percent stronger in 1993. As
a result, foreign currency translation had an unfavorable impact of 1
percentage point on revenues in 1994 and 4 percentage points on revenues in
1993.
The Company does not hedge foreign-currency denominated revenues.
REVENUES
The estimated components of underlying growth were as follows:
Underlying Growth
--------------------------
1994 1993 1992
---------------------------------------------------------------
Total Revenues 7% 3% 5%
===============================================================
Equipment Sales 10 1 6
Non-equipment revenues 5 5 6
Supplies 10 11 12
Paper 6 (4) (3)
Service 4 6 6
Rentals (1) (6) (6)
Facilities Management/Other 20 5 10
Finance Income (4) 4 11
===============================================================
The changes in the growth rates of total revenues are principally driven by
changes in the growth rates of equipment sales.
The improved growth in equipment sales in 1994 reflected good growth in
black-and-white copiers, excellent growth in the DocuTech family of digital
publishers and a near doubling of color copier and printer equipment sales.
OEM printer sales also had strong growth. The 1993 reduction in the growth
rate was principally the result of several weak economic environments,
particularly in Western Europe.
Pictured here was a graphic depicting Equipment Sales Growth of 10% in 1994,
1% in 1993 and 6% in 1992.
30
Non-equipment revenues from supplies, paper, service, rentals, facilities
management and other revenues, and income from customer financing, which
represented 65 percent of total revenues in 1994, are less volatile than
equipment sales revenues, and therefore provide significant stability to
overall revenues. Growth in these revenues is primarily a function of the
growth in the Company's installed population of equipment, usage and pricing.
Pictured here was George Roth, Treasury, Xerox Corporation.
. Supplies sales: The strong growth over the last several years is
principally due to cartridge sales for personal and convenience copiers and
to new OEM customers.
. Paper sales: The improvement in the growth rate in 1994 is primarily due
to higher prices after several years of declining wholesale prices. The
Company's strategy is to charge a spread over mill wholesale prices.
. Service revenues: The decline in growth in 1994 reflected the weak
equipment sales growth in 1993.
. Rental revenues: After a number of years of decline, reflecting a
customer preference for outright purchase of equipment, the rate of decline
was arrested by an increasing, but still relatively small, trend toward
cost-per-copy rental plans. During the 1994 fourth quarter, rental revenues
grew modestly for the first time in several years.
. Facilities management, copy centers and other revenues: The growth in
1994 and 1993 reflected the trend of customers focusing on their core
businesses and outsourcing their document processing requirements to Xerox.
. Finance income: The decline in 1994 reflects lower interest rates on
financing contracts and a stabilization in the percent of customers who
finance purchases through the Company at approximately 80 percent of
equipment sales in the U.S. and 70 percent in Western Europe. Over time, the
growth rate of finance income is expected to reflect the growth rate of
equipment sales and trends in interest rates. The Company's strategy is to
charge a spread over its cost of borrowing.
Geographically, the underlying revenue growth rates were estimated as
follows:
Underlying Growth
--------------------------
1994 1993 1992
---------------------------------------------------------------
Total Revenues 7% 3% 5%
===============================================================
United States 7 4 6
Rank Xerox 7 2 6
Other Areas 7 4 5
===============================================================
United States revenues were 52 percent of total revenues. Revenues of Rank
Xerox Limited and related companies (Rank Xerox), which manufactures and
markets Xerox products in eastern hemisphere countries, were 31 percent of
total revenues. Revenues of Other Areas, which includes operations
principally in Latin America and Canada, were 17 percent of total revenues.
The improved revenue growth in all areas in 1994 reflected good growth in
black-and-white copiers, excellent growth in the DocuTech family of digital
publishers and a near doubling of color copier and printer revenues,
attributable, in part, to improved sales productivity and economic
environments. The decline in U.S. revenue growth in 1993 was primarily due to
the disruptions early in the year from the realignment of the U.S. sales
force. The decline in Rank Xerox revenue growth in 1993 was primarily the
result of the weak economic environment in Western Europe.
For the major product categories, the underlying revenue growth rates were
estimated as follows:
Underlying Growth
-------------------------
1994 1993 1992
--------------------------------------------------------------
Total Revenues 7% 3% 5%
==============================================================
Digital Products 20 18 32
Black & White Copiers 4 - 1
Paper and Other Products 3 (5) (5)
==============================================================
Revenues from digital products, comprised of digital publishing, electronic
printing, and color copying and printing, represented 22 percent of total
document processing revenues in 1994,
31
19 percent in 1993 and 17 percent in 1992. Total revenues from the DocuTech
family of digital publishing products reflected excellent growth to $1 billion
in 1994, revenues from color products almost doubled to $400 million, and
revenues from black-and-white electronic printers had good growth in both 1994
and 1993.
The improved growth in revenues from black-and-white copiers in 1994 results
from customer acceptance of the Company's broad product line, excellent
growth in facilities management, strong growth in the emerging markets in
Latin America, Africa, Eastern Europe and the former Soviet Union, and
stronger economic environments in Europe and Brazil. Revenues from
black-and-white copying represented 63 percent of total document processing
revenues in 1994, 65 percent in 1993 and 66 percent in 1992.
The 1994 growth in revenues from paper and other products, which represented
15 percent of total revenues in 1994, and the declines in 1993 and 1992 are
principally due to paper pricing.
PRODUCTIVITY INITIATIVES
In December 1993, the Company announced a restructuring program with the
objectives of continuing to significantly reduce the cost base and to improve
productivity. The Company expects to reduce its worldwide work force by more
than 10,000 employees and to close or consolidate a number of facilities by
early 1996. The Company estimated that this program would result in pre-tax
cost reductions of approximately $350 million in 1994, approximately $700
million in 1995 and higher amounts thereafter. The Company stated, however,
that it expected a portion of these savings to be reinvested to reengineer
business processes, to support expansion in emerging markets, and to mitigate
anticipated continued pressure on gross margins.
Employment declined by 9,400 from year-end 1993 to 87,600 employees at the
end of 1994; 7,600 of the reductions were due to restructuring program
initiatives, 500 were due to net attrition and 1,300 employees were
transferred to Electronic Data Systems Corp. (EDS).
In June 1994, the Company awarded a 10-year, $3.2 billion contract to EDS to
operate its worldwide computer and telecommunications network, including data
center operations, telecommunications systems, desktop systems support, and
business applications support. Information management strategy and
architecture, and the development of systems for reengineered business
processes were not outsourced.
Also in June 1994, the Company signed a labor agreement that enables
productivity and competitive advantages, provides a seven-year job guarantee
and provides cost-of-living wage protection at the Company's primary
manufacturing operation in Webster, New York. Other provisions of the
agreement include: new starting and entry-level wage rates, modifications of
benefit programs, greater latitude in hiring temporary workers, flexibility
in promotions and transfers, and studies to reduce cost in low value-added
positions. The Company believes that the contract will enable significant
progress towards achieving benchmark unit manufacturing costs.
To date, the activities associated with the productivity initiatives are on
track towards achieving the Company's objectives.
Pictured here was Dave Edwards, Xerox Graphic Systems.
32
COSTS AND EXPENSES
The gross margins by revenue stream were as follows:
Gross Margins
--------------------------
1994 1993 1992
---------------------------------------------------------------
Total 45.8% 46.4% 47.4%
===============================================================
Sales 40.7 43.2 46.5
Service and Rentals 51.6 49.9 48.2
Finance Income 50.1 49.5 48.3
===============================================================
The declines in sales gross margins were principally due to adverse currency,
competitive equipment pricing, unfavorable product and channel mix, and
inventory adjustments in 1994, partially offset by improved productivity. The
improvements in service and rentals gross margins were principally due to
improved productivity and price increases, partially offset by economic cost
increases and adverse currency. The improvements in finance income gross
margins were principally due to country mix.
Research and development (R&D) expense increased 1 percent in 1994 after a
decline of 3 percent in 1993. The Company expects to increase its investment
in technological development in 1995 and over the longer term to maintain its
premier position in the rapidly changing document processing market. The
Company's R&D is strategically coordinated with Fuji Xerox. The R&D
investment by Fuji Xerox was approximately $500 million in 1994, bringing the
total to almost $1.4 billion.
Selling, administrative and general expenses (SAG) declined 1 percent in
1994 on an underlying basis and were essentially unchanged in 1993 from 1992.
SAG as a percent of revenues was 29.1 percent in 1994 compared with 31.5 percent
in 1993 and 32.6 percent in 1992. The improvement in the ratios is primarily due
to improved productivity.
Pictured here was a graphic depicting Selling, Administrative and General
Expenses (percent of revenues) of 29.1% in 1994, 31.5% in 1993 and 32.6% in
1992.
Other expenses, net, were $114 million in 1994, $155 million in 1993, and
$64 million in 1992. The largest component of other expenses is aggregate
foreign currency exchange gains and losses. The Company's South American
operations in general, and Brazil in particular, are subject to hyper-inflation,
government-imposed price controls and currency devaluation. The aggregate
foreign currency losses which amounted to $136 million in 1994, $174 million in
1993 and $67 million in 1992, were substantially all in Brazil where the rate of
inflation and devaluation, after increasing in 1993 and the first half of 1994,
declined in the second half of 1994 following implementation by the Brazilian
government on July 1, 1994 of a new economic plan. It should be noted, however,
that the reduced aggregate exchange loss in 1994 was more than offset by lower
prices and other adverse impacts related to the new economic plan. Nevertheless,
South American operations continued to have good profit growth in 1994.
33
INCOME TAXES, EQUITY IN NET INCOME OF UNCONSOLIDATED AFFILIATES, AND
MINORITIES' INTERESTS IN EARNINGS OF SUBSIDIARIES BEFORE SPECIAL ITEMS
Income before special items and income taxes was $1,514 million in 1994
compared with $1,093 million in 1993 and $1,123 million in 1992.
The effective tax rate was 39 percent in 1994 compared with 37 percent in
1993 and 44 percent in 1992. The changes in tax rates are primarily due to
the mix of operations and ESOP dividends, and, in 1993, due to favorable
revaluations of deferred tax provisions resulting from changes in statutory
income tax rates.
Equity in Net Income of Unconsolidated Affiliates was essentially unchanged at
$88 million in 1994 after increasing 7 percent in 1993 from 1992. The equity in
the income of Fuji Xerox, the principal unconsolidated affiliate, was also
essentially unchanged in 1994, with improved results from operations offset by a
provision for an early retirement program. The 1993 increase was primarily due
to the strengthening of the Japanese yen against the U.S. dollar.
Minorities' Interests in Earnings of Subsidiaries was $213 million in 1994
compared with $152 million, before the effect of special items, in 1993 and $149
million in 1992. The 1994 increase was due to excellent growth in Rank Xerox
income, reflecting strong revenue growth as well as benefits from productivity.
The 1993 increase was primarily due to productivity improvements partially
offset by currency. The restructuring provision reduced 1993 Minorities'
Interests in the Earnings of Subsidiaries by $74 million.
Pictured here was Jane Moyer, Xerox Business Services.
INCOME
In 1994, Document Processing income of $794 million grew 37 percent before 1993
special items. 1993 income of $580 million, before special charges and one-time
tax benefits of $40 million, grew 3 percent from $562 million in 1992.
GEOGRAPHIC INCOME
The following table shows 1992 through 1994 Document Processing income,
excluding the special items, by geographic area (in millions):
Income after Minorities' Interests
and before Special Items
------------------------------------
1994 1993 1992
----------------------------------------------------------------------
United States $329 $248 $301
Rank Xerox 215 100 74
Other Areas 250 232 187
----------------------------------------------------------------------
Total $794 $580 $562
======================================================================
In addition to adjusting the 1993 income by geographic area for 1993 special
items, 1994 income has been adjusted to exclude certain intercompany transfers
for comparability purposes.
The improvement in 1994 income in the U.S. and Rank Xerox was primarily due to
strong equipment sales growth and improved productivity. The decline in the
United States income in 1993 was driven primarily by lower gross margins
principally due to competitive pricing, adverse currency and a shift in mix
toward the low end/lower margin products partially offset by improved
productivity. The increase in the Company's 1993 share of Rank Xerox income was
principally attributable to aggressive productivity actions partially offset by
currency. Other Areas income continued to have good growth in spite of a decline
in income in Mexico because of the weak 1994 economic environment.
34
RETURN ON ASSETS
Improving Return on Assets (ROA) is a key priority throughout all levels of
the Document Processing organization. ROA is used as a surrogate for return
on equity since asset and asset-related return targets can be more clearly
assigned to operating managers. The Company's 1994 ROA was 16.1 percent
compared with 12.6 percent in 1993 excluding special items, and 13.6 percent
in 1992.
The Company's internal measurement for ROA is defined as Document Processing
before-tax profits plus equity in the net income of unconsolidated affiliates
divided by average ROA assets. These assets are Document Processing assets
less investments in affiliates and Xerox equipment financing debt.
Pictured here was a bar chart depicting Document Processing Return on Assets
of 16.1% in 1994, 12.6% in 1993 before special items and 13.6% in 1992.
QUARTERLY ANALYTICAL EARNINGS PER SHARE
The presentation of separate Document Processing and Insurance earnings per
share (EPS) amounts is not in accordance with generally accepted accounting
principles.
The Company believes, however, that for analytical purposes, these EPS
amounts represent the contributions of the Company's two businesses to the
consolidated results of operations and that the Document Processing results
are an appropriate basis for comparison with future financial results from
Document Processing.
The following schedule summarizes the 1994 Document Processing revenues,
income and EPS computations on a quarterly basis.
First Second Third Fourth Full
(In millions, except per-share data, unaudited) Quarter Quarter Quarter Quarter Year
--------------------------------------------------------------------------------------------------------------------------------
Revenues $3,271 $3,584 $3,636 $4,597 $15,088
Income $ 131 $ 167 $ 185 $ 311 $ 794
Primary Earnings Per Share
Preferred dividends net of tax benefit $ (15) $ (26) $ (12) $ (11) $ (64)
Income available for common shareholders 116 141 173 300 730
Adjusted average shares outstanding 107.9 108.6 108.8 108.9 108.4
Primary Earnings Per Share $ 1.07 $ 1.30 $ 1.60 $ 2.76 $ 6.73
Fully Diluted Earnings Per Share
Preferred dividends net of tax benefit $ (7) $ (16) $(3) $ (1) $ (27)
Income available for common shareholders 124 151 182 310 767
Adjusted average shares outstanding 118.6 119.3 119.5 119.5 119.1
Fully Diluted Earnings Per Share $ 1.04 $ 1.27 $ 1.53 $ 2.60 $ 6.44
================================================================================================================================
35
SPECIAL ITEMS
In the fourth quarter of 1993, the Company provided $813 million after income
taxes and minorities' interests in earnings of subsidiaries for the costs of
a restructuring program and lawsuit settlements.
The Company reached agreement to settle a 1992 antitrust class action lawsuit
involving selling spare parts for high-volume copiers and printers to
independent service organizations, and a lawsuit involving the termination of
a contract to purchase laptop computers. Under the antitrust settlement, the
Company has provided $225 million of discount certificates to members of the
plaintiff class for use as partial payment on future purchases of Xerox
products, and has agreed to sell service parts to independent service
organizations in the U.S., similar to the existing policy in Europe.
Pictured here was Noel Jackson, Production Systems Division, Rank Xerox.
This change in policy is not expected to have any material ongoing impact on
future service revenues because of the Xerox total satisfaction guarantee and
the sophisticated service support that the Company provides to ensure high
levels of customer satisfaction. The discount certificates are available for
use over a three-year period which commenced in September 1994 and may be
applied against the payment of future purchases by the Company's customers.
The settlement will have no impact on future revenues or income. Through 1994,
$42 million of discount certificates were applied against purchases.
In 1993, the Company benefited from a total of $40 million of favorable
revaluations of deferred tax provisions due to changes in the U.S. and
Brazilian statutory income tax rates.
ADDITIONAL FINANCIAL INTEREST IN RANK XEROX
On February 28, 1995, Xerox paid The Rank Organisation Plc (RO) (Pounds)620
million, or approximately $970 million, for a 40 percent interest in RO's
financial interest in Rank Xerox. The transaction increased the Xerox
financial interest in Rank Xerox to about 80 percent from 67 percent. The
transaction was funded with commercial paper. The Company may retire a
portion of the commercial paper with proceeds from the announced sales of
Constitution Re Corporation (Constitution Re) and Xerox Financial Services
Life Insurance Company (Xerox Life) and/or fund out a portion with longer-
term debt. The transaction resulted in goodwill of approximately $570 million
and a decline in minorities' interests in equity of subsidiaries of
approximately $400 million.
The Company estimates that the transaction will increase its earnings per
share, will have a neutral to slightly positive cash flow impact in 1995, and
will have a positive impact on earnings per share and cash flow going
forward. Minorities' interests in earnings of subsidiaries will decline by
approximately 40 percent. The resultant increase in interest expense will
depend on the method of funding. The goodwill will be amortized over 40
years, resulting in an annual impact of $14 million, before and after taxes.
36
RANK XEROX AND LATIN AMERICAN FISCAL-YEAR CHANGE IN 1995
Effective January 1, 1995, the Company changed Rank Xerox and Latin American
operations to calendar-year financial reporting. The 1994 fiscal year ended
on October 31 for Rank Xerox and on November 30 for Latin American
operations. The results of these non-U.S. operations that occur between the
1994 and 1995 fiscal years (the stub period) will be accounted for as a
direct charge or credit to equity.
MEXICAN ECONOMIC ENVIRONMENT
Because of the change in fiscal years, the impact of the December devaluation
of the Mexican currency and related economic dislocations, net of the benefit
of a currency hedge, will be reported in the stub period.
It is too early to determine the impact of the Mexican economic problems on
Xerox operations, revenues and income in 1995. The Company's 1994 Mexican
revenues were approximately 2 percent of total revenues.
BRAZILIAN TAX RATE
In January, the Brazilian Congress approved an increase in the statutory tax
rate. The impact of this rate increase, if the enactment is for more than one
year, on Xerox of Brazil will be a one-time charge to deferred tax expense of
approximately $30 million in the 1995 first quarter.
Pictured here were Val Tanigawa, Louise Pardyjak, Dennis Coyne and Chris
Debski, Personal Document Products; and the 5305 Personal Copier, introduced
in 1994.
CAPITAL RESOURCES AND LIQUIDITY
CAPITAL
Total equity increased to $6,030 million at December 31, 1994, compared with
$5,882 million in 1993 and $5,832 million in 1992. The $148 million increase
in 1994 was primarily due to strong earnings of $794 million, an increase of
$177 million in Minorities' Interests, favorable currency of $145 million,
and $92 million from the exercise of employee stock options, partially offset
by unrealized insurance investment portfolio losses of $439 million, $395
million of shareholder dividends and preferred stock redemptions of $245
million. In 1993, the impact of the Company's net loss of $126 million (after
special items of $813 million) and $389 million of shareholder dividends was
more than offset by $580 million of proceeds generated by the issuance of 8.1
million common shares and $58 million of new equity associated with the
exercise of employee stock options.
Total debt, excluding debt of the Company's ESOP, which is guaranteed by
Xerox, increased to $10,343 million at December 31, 1994, from $9,443 million
in 1993 and $9,957 million in 1992. ESOP debt in 1994, 1993 and 1992 was $596
million, $641 million and $681 million, respectively.
On a consolidated basis, the debt-to-capital ratio at December 31, 1994 was
67 percent, including the debt associated with the Company's ESOP, and 63
percent excluding ESOP debt. Both these ratios were up 1 percentage point
from 1993 due to the growth in debt associated with the Company's financing
of equipment sales, and were unchanged from 1992.
37
Consolidated Balance Sheets
December 31 (in millions) 1994 1993
=====================================
Assets
------
Document Processing
Cash $ 35 $ 68
Accounts Receivable, net 1,811 1,613
Finance Receivables, net 3,910 3,358
Inventories 2,294 2,162
Deferred Taxes and Other Current Assets 1,199 1,167
-------------------------------------
Total Current Assets 9,249 8,368
Finance Receivables Due after One Year, net 6,038 5,594
Land, Buildings and Equipment, net 2,108 2,219
Investments in Affiliates, at Equity 1,278 1,094
Other Assets 701 883
-------------------------------------
Total Document Processing Assets 19,374 18,158
-------------------------------------
Insurance
Cash 21 18
Investments Available-for-Sale 8,384 8,344
Reinsurance Recoverable 3,116 3,835
Premiums and Other Receivables 1,276 1,443
Goodwill 284 291
Deferred Taxes and Other Assets 1,438 1,487
-------------------------------------
Total Insurance Assets 14,519 15,418
-------------------------------------
Investment in Discontinued Operations 4,692 5,174
-------------------------------------
Total Assets $38,585 $38,750
=====================================
Liabilities and Equity
Document Processing
Short-Term Debt and Current Portion of Long-Term Debt $ 3,159 $ 2,698
Accounts Payable 562 541
Accrued Compensation and Benefit Costs 709 511
Unearned Income 298 335
Other Current Liabilities 2,110 1,926
-------------------------------------
Total Current Liabilities 6,838 6,011
Long-Term Debt 5,494 5,157
Liability for Postretirement Medical Benefits 1,006 997
Deferred Taxes and Other Liabilities 2,210 2,608
-------------------------------------
Total Document Processing Liabilities 15,548 14,773
-------------------------------------
Insurance
Unpaid Losses and Loss Expenses 8,862 9,684
Unearned Income 1,066 1,077
Notes Payable 425 -
Other Liabilities 954 990
-------------------------------------
Total Insurance Operating Liabilities 11,307 11,751
-------------------------------------
Discontinued Operations Liabilities - Policyholders' Deposits and Other 4,194 4,585
Other Long-Term Debt and Obligations 2,102 2,400
Deferred ESOP Benefits (596) (641)
Minorities' Interests in Equity of Subsidiaries 1,021 844
Preferred Stock 832 1,066
Common Shareholders' Equity 4,177 3,972
-------------------------------------
Total Liabilities and Equity $38,585 $38,750
=====================================
Shares of common stock issued and outstanding at December 31, 1994 and 1993
(in thousands) were 105,993 and 104,122, respectively.
--------------------------------------------------------------------------------
The accompanying notes are an integral part of the consolidated financial
statements.
38
The Company manages the capital structure of its non-financing operations
separately from that of its more highly leveraged activities. The following
table summarizes the debt, equity, and total capital for the Company's
non-financing and financing activities for the three-year period ended
December 31, 1994.
(Dollars in millions) 1994 1993 1992
---------------------------------------------------------------------------------
Non-Financing:
Debt* $2,055 $1,805 $2,522
Equity 4,730 4,679 4,682
---------------------------------------------------------------------------------
Total Capital $6,785 $6,484 $7,204
=================================================================================
Debt-to-Capital Ratio 30.3% 27.8% 35.0%
=================================================================================
Financing:
Xerox Equipment
Financing Debt $8,057 $7,214 $6,812
Third-Party Financing Debt 231 424 623
---------------------------------------------------------------------------------
Total Debt 8,288 7,638 7,435
Equity 1,300 1,203 1,150
---------------------------------------------------------------------------------
Total Capital $9,588 $8,841 $8,585
=================================================================================
Debt-to-Equity Ratio 6.4x 6.4x 6.5x
=================================================================================
*Primarily related to investments in disengaged IOFS businesses. Excludes ESOP
debt of $596 million, $641 million, and $681 million for 1994, 1993 and 1992,
respectively.
The Company's 1994 debt-to-total-capital ratio for its non-financing
operations (excluding ESOP debt) was 30.3 percent, up from 27.8 percent in
1993 as strong Document Processing funds generation was offset by the impact
of Talegen business unit borrowings, unrealized insurance investment
portfolio losses and the redemption of preferred stock. The 1993 ratio
declined from 35.0 percent in 1992 due to strong Document Processing funds
generation and the proceeds from the common stock offering, partially offset
by the reduction in equity associated with the restructuring and lawsuit
settlement provisions.
With respect to its financing activities, the Company match funds by
arranging fixed-rate liabilities with similar maturities as the underlying
customer financing assets. The Company's target debt-to-equity ratio for the
financing activities is 6.5 to 1. In 1994, this ratio was 6.4 to 1 compared
with 6.4 to 1 in 1993 and 6.5 to 1 in 1992.
The following table summarizes funds generation and usage for the three-year
period ended December 31, 1994 and the related impacts on cash and debt
balances. These data exclude restricted cash flows of the insurance
businesses.
Funds Generation (Use)
------------------------------------
(In millions) 1994 1993 1992
-------------------------------------------------------------------------------
Non-Financing:
Document Processing $ 989 $ 496 $ 354
Yen/$ Financing repayment (116) - -
IOFS-related/other (605) 15 (180)
-------------------------------------------------------------------------------
Non-Financing 268 511 174
-------------------------------------------------------------------------------
Financing:
Xerox Equipment Financing (844) (409) (1,128)
Third-Party Financing 193 199 392
-------------------------------------------------------------------------------
Financing (651) (210) (736)
-------------------------------------------------------------------------------
Operations generation (use) (383) 301 (562)
Shareholder dividends (395) (389) (374)
Equity issuance (redemption) and
changes in cash (122) 602 121
-------------------------------------------------------------------------------
Debt (increase) decrease $(900) $ 514 $ (815)
===============================================================================
Pictured here were Ping Mei and Jason Wu, Palo Alto Research Center.
39
Consolidated Statements of Cash Flows
Year ended December 31 (in millions) 1994 1993 1992
===========================================
Cash at Beginning of Year
-------------------------
Document Processing $ 68 $ 2 $ 10
Insurance 18 41 35
-------------------------------------------
Total 86 43 45
-------------------------------------------
Document Processing
-------------------
Cash Flows from Operating Activities 477 526 (353)
-------------------------------------------
Cash Flows from Investing Activities
Cost of additions to land, buildings and equipment (389) (470) (582)
Proceeds from sales of land, buildings and equipment 220 41 43
Net change in payables to Insurance (124) 19 395
Net transactions with Insurance 215 164 (411)
Net transactions with Discontinued Operations 66 (206) 263
-------------------------------------------
Total (12) (452) (292)
-------------------------------------------
Cash Flows from Financing Activities
Net change in debt 375 (151) 1,014
Yen financing repayment (116) - -
Dividends on common and preferred stock (395) (389) (373)
Proceeds from sale of common stock 90 665 113
Redemption of preferred stock (245) (6) (6)
Dividends to minority shareholders (97) (105) (121)
Proceeds received from (returned to) minority shareholders (32) 12 31
-------------------------------------------
Total (420) 26 658
-------------------------------------------
Effect of Exchange Rate Changes on Cash (78) (34) (21)
-------------------------------------------
Net Cash Flows from Document Processing (33) 66 (8)
-------------------------------------------
Insurance
---------
Cash Flows from Operating Activities (53) (167) (595)
-------------------------------------------
Cash Flows from Investing Activities
Purchase of portfolio investments (2,053) (5,143) (14,481)
Proceeds from sales and maturities of portfolio investments 879 6,077 14,592
Decrease (increase) in short-term investments 707 (1,212) 181
-------------------------------------------
Subtotal (467) (278) 292
Other, net 126 (181) (201)
Net transactions with Discontinued Operations 12 401 (31)
-------------------------------------------
Total (329) (58) 60
-------------------------------------------
Cash Flows from Financing Activities
Net change in debt 600 366 130
Net transactions with Document Processing (215) (164) 411
-------------------------------------------
Total 385 202 541
-------------------------------------------
Net Cash Flows from Insurance 3 (23) 6
-------------------------------------------
Discontinued Operations
-----------------------
Income (Loss) from Discontinued Operations - 63 (39)
Collections and changes in assets, net 469 418 236
Net change in debt (193) (584) (378)
Net change in operating liabilities (198) 211 413
Settlement of tax benefits with Document Processing - 87 -
Net transactions with Document Processing (66) 206 (263)
Net transactions with Insurance (12) (401) 31
-------------------------------------------
Net Cash Flows from Discontinued Operations - - -
-------------------------------------------
Cash at End of Year
-------------------
Document Processing 35 68 2
Insurance 21 18 41
-------------------------------------------
Total $ 56 $ 86 $ 43
===========================================
The Supplemental Cash Flows Information and accompanying notes are an integral
part of the consolidated financial statements.
40
Consolidated Statements of Cash Flows
Supplemental Cash Flows Information
A reconciliation of income (loss) to cash flows from operating activities for
the last three years follows:
Year ended December 31 (in millions) 1994 1993 1992
========================================
Document Processing
-------------------
Income (Loss) from Document Processing $ 794 $ (193) $ 562
Adjustments required to reconcile income (loss) to cash flows
from operating activities:
Depreciation and amortization 649 629 672
Provision for special charges - 1,373 -
Provisions for doubtful accounts 252 250 267
Provision for postretirement medical benefits 54 70 61
Charges against 1993 restructuring reserve (423) - -
Minorities' interests in earnings of subsidiaries 213 78 149
Undistributed equity in income of affiliated companies (54) (51) (52)
Increase in inventory (472) (228) (524)
Increase in finance receivables (937) (993) (1,389)
(Increase) decrease in accounts receivable (266) 134 (34)
Increase (decrease) in accounts payable and accrued
compensation and benefit costs 205 (65) (14)
Net change in current and deferred income taxes 258 (359) 41
Settlement of Discontinued Operations tax benefits - (87) -
Other, net 204 (32) (92)
----------------------------------------
Cash Flows from Operating Activities $ 477 $ 526 $ (353)
========================================
Insurance
---------
Income (Loss) from Insurance $ - $ 4 $ (779)
Adjustments required to reconcile income (loss) to cash flows
from operating activities:
Depreciation and amortization 32 26 55
Provisions for doubtful accounts 12 7 19
Talegen reserve strengthening actions - - 880
Goodwill write-down - - 400
Realized capital gains (12) (88) (516)
Decrease in receivables 730 457 163
Increase in accounts payable and accrued
compensation and benefit costs 69 126 114
Increase (decrease) in unearned income (11) 4 (37)
Decrease in unpaid losses and loss expenses (809) (955) (498)
Other, net (64) 252 (396)
----------------------------------------
Cash Flows from Operating Activities $ (53) $ (167) $ (595)
========================================
See accompanying Consolidated Statements of Cash Flows.
41
NON-FINANCING OPERATIONS
The following table summarizes 1994 and 1993 Document Processing non-financing
operations funds generation and usage, after investments in the business.
Funds Generation (Use)
----------------------
(In millions) 1994 1993
------------------------------------------------------------
Document Processing
Non-Financing:
Income $ 565 $ 379
Depreciation and Amortization 649 629
Restructuring Payments (423) -
Capital Expenditures (389) (470)
Assets Sold 220 41
Working Capital/Other 367 (83)
------------------------------------------------------------
$ 989 $ 496
============================================================
The improvement in year-over-year 1994 funds generation was largely due to
higher income, increased sales of fixed assets primarily related to the
information management outsourcing and lower working capital and other
requirements, partially offset by restructuring payments.
IOFS-related/other funds usage of $605 million in 1994 compares with funds
generation of $15 million in 1993 and was mainly due to Talegen business unit
borrowings totaling $425 million to retire intercompany debt and fund
investment activity. The decrease in IOFS-related/other usage in 1993, versus
the prior year, was mainly due to cash proceeds from the 1993 sales of VKM
and Furman Selz Holding Corporation, partially offset by the requirements to
restructure Talegen and to initiate scheduled funding for Ridge Reinsurance
Limited.
Pictured here were Abdul Terry, Office Document Products; Tomoko Lane,
Planning and Spare Parts; Negin Naghib, Middle East and Africa; Richard
Sullivan, Nordic Entity; all from Rank Xerox.
FINANCING ACTIVITIES
Incremental debt required to fund the growth of Xerox equipment financing in
1994 was $843 million, an increase of $441 million from 1993, due to
accelerated growth in equipment sales revenues and the effects of translating
foreign currencies into U.S. dollars. Xerox equipment financing debt growth
of $402 million in 1993 was $709 million lower than in 1992 due to less rapid
sales growth and the effects of currency translation.
Debt related to discontinued third-party financing activities declined by
$193 million in 1994, reflecting asset sales and portfolio run-off. This
decrease was in line with 1993 experience and less than the reduction in 1992
due to the declining asset base and the long-duration contractual maturities
and unique tax attributes of most of the remaining assets.
The total increase in debt required to fund the growth of financing
activities in 1994, therefore, was $650 million compared with increases of
$203 million in 1993 and $719 million in 1992.
42
FUNDING PLANS FOR 1995
Non-financing debt levels will be significantly affected by the Company's
recently completed acquisition of 40 percent of The Rank Organisation Plc's
financial interest in Rank Xerox for (Pounds)620 million, or approximately
$970 million. The transaction was funded with commercial paper. The Company
may retire a portion of the commercial paper with proceeds from the announced
sales of Constitution Re and Xerox Life and/or fund out a portion with
longer-term debt. Any further disposition of the Talegen business units could
also significantly impact 1995 funding levels since proceeds from the sales will
be used to pay down debt.
In 1995, debt levels associated with the financing of customer purchases of
Xerox equipment are planned to increase in line with sales activity. Ongoing
run-off and opportunistic sales of third-party financing assets are not
expected to significantly impact the Company's overall financing debt level.
Management believes that the Company has adequate short-term credit
facilities available to fund its day-to-day operations and has readily
available access to the capital markets to meet any longer-term financing
requirements. To provide added funding flexibility during 1994, the Company
increased the revolving credit agreements of its domestic operations from $3
billion to $5 billion. In addition, Rank Xerox had $2 billion of revolving
credit facilities. At December 31, 1994, the Company and XCC had domestic
shelf capacity of $940 million and $980 million, respectively. In 1995, the
Company intends to establish a $1 billion Euro-debt facility that will be
available to both Xerox and XCC. Depending upon the status of Talegen
disengagement, term debt financing may be required in 1995 to refinance
maturing and callable securities and to enable the matched funding of the
Xerox equipment financing activities.
Pictured here was Peter Boden, Jr., U.S. Customer Operations.
43
LIQUIDITY
The Company's primary sources of liquidity are funds generated from
operations and borrowings.
Document Processing operations used net cash of $33 million in 1994, compared
with $66 million generated in 1993 and $8 million usage in 1992. The
significant changes in the components of Document Processing cash flows
follow:
. Non-financing operations generated $989 million in 1994, $496 million in
1993 and $354 million in 1992, as shown on Page 39. Xerox equipment financing
activities used $844 million in 1994, $409 million in 1993 and $1,128 million
in 1992.
. During 1994, a 1984 yen-denominated financing was repaid for $116 million.
. During 1993, $580 million of net proceeds was received from the sale of
8.1 million shares of common stock via a public offering.
. During 1994, the Company redeemed shares of its preferred stock for $245
million, including an $11 million call premium.
Insurance operations generated $3 million of cash in 1994 compared with net
cash usage of $23 million in 1993 and net cash generation of $6 million in
1992. The significant changes in cash flows follow:
. A net decrease in receivables of $730 million in 1994 compared with
decreases of $457 million in 1993 and $163 million in 1992 reflects a decline
in reinsurance recoverables due to collections on balances established in
prior periods and less dependence on reinsurance in recent years. The
reduction also reflects a premium decline caused primarily by a continued
focus on profitability versus maintaining market share, particularly in the
non-standard automobile, casualty and workers' compensation lines.
. A net decrease in unpaid losses and loss expense of $809 million in 1994
compared with decreases of $955 million in 1993 and $498 million in 1992
reflects continued operational trends where claims payments are in excess of
new reserves established.
. A net increase in aggregate investments of $467 million in 1994 compared
with an increase of $278 million in 1993 and a decrease of $292 million in
1992 reflects investment activities supported by cash flow from operations
and debt proceeds.
. A net increase in Talegen debt of $425 million in 1994, the proceeds of
which were used to retire intercompany debt and fund investment activity.
Discontinued operations net cash flows were zero during 1994, 1993 and 1992,
as cash generated by collection and sales activities and tax benefits was
used to reduce assigned debt.
Pictured here were Andrius Buldygerovas and Marysia Mycielska, Eastern Export
Operations.
44
HEDGING INSTRUMENTS
Certain financial instruments have been entered into by the Company to manage
its interest rate and foreign currency exposures. These instruments are held
solely for hedging purposes and include interest rate swap agreements and
forward foreign-exchange agreements. The Company has long-standing policies
prescribing that derivative instruments are only to be used to achieve a set
of very limited objectives: to lock in the value of cross-border cash flows
and to reduce the impact of currency and interest rate volatility on costs,
assets and liabilities. The Company does not enter into derivative instrument
transactions for trading purposes.
Currency derivatives are only 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 suppliers, or, a forward foreign-exchange contract
to fix the rate at which a dividend will be paid by a foreign subsidiary.
The Company does not hedge foreign-currency-denominated revenues of its
foreign subsidiaries since these do not represent cross-border cash flows.
With regard to interest rate hedging, virtually all customer financing assets
earn fixed rates of interest and, therefore, the Company "locks in" an
interest rate spread by arranging fixed-rate liabilities with similar
maturities as the underlying assets. Additionally, customer financing assets
in one currency are consistently funded with liabilities in the same
currency. The Company refers to the effect of these conservative practices as
"match funding" its customer financing assets.
Pictured here was Liz Blythers, Office Document Systems; and the Xerox 4510
Desktop laser printer with bi-directional communications software.
More specifically, pay fixed-rate and receive variable-rate swaps are
typically used in place of more expensive fixed-rate debt for the purpose of
match funding fixed-rate, customer contracts. Pay variable-rate and receive
variable-rate swaps are used to transform variable-rate medium-term debt into
commercial paper or local currency LIBOR obligations. Additionally, pay
variable-rate and receive fixed-rate swaps are used infrequently to transform
longer-term fixed-rate debt into commercial paper-based rate obligations. The
transactions performed within each of these three categories enable the
Company to manage its interest rate exposures. The potential risk attendant
to this strategy is the performance of the swap counterparty. The Company
addresses this risk by arranging swaps exclusively with a diverse group of
strong-credit counterparties, regularly monitoring their credit ratings, and
determining the replacement cost, if any, of existing transactions.
On an overall worldwide basis, weighted average interest rates for 1994, 1993
and 1992 approximated 7.2 percent, 8.3 percent and 9.2 percent, respectively,
which include the impact of the Company's hedging activities.
The Company's currency and interest rate hedging are typically not affected
by changes in market conditions as forward contracts, options and swaps are
normally held to maturity in order to lock in currency rates and interest
rate spreads on the underlying transactions.
45
Financial Review:
Insurance and Other Financial Services (IOFS)
In January 1993, the Company announced its decision to concentrate on the core
Document Processing business and disengage from the financial services
businesses. Consistent with this objective, the Van Kampen Merritt Companies,
Inc. (VKM), an investment advisory organization, and Furman Selz Holding
Corporation (Furman Selz), an institutional brokerage, investment banking and
management firm, were sold in 1993. In 1994, Shields Asset Management, Inc.
(Shields), a Furman Selz subsidiary, and Regent Investor Services Incorporated
(Regent), a subsidiary of Shields, were sold. Contracts were also signed to sell
Constitution Re Corporation (CRC) to EXOR America Inc. in 1994 and Xerox
Financial Services Life Insurance Company (Xerox Life) to a subsidiary of
General American Life Insurance Company in 1995. Both sales will close after
regulatory approvals. The Company will continue to implement its strategy for
divesting the remaining insurance businesses in an orderly and disciplined way.
The ongoing operations of Xerox Credit Corporation and the international
financing companies that finance customer purchases of Xerox equipment remain
unaffected by the Company's decision to disengage from financial services.
STATUS OF INSURANCE
The Insurance segment includes Talegen Holdings, Inc. (Talegen), a holding
company of seven property and casualty insurance operating groups and three
insurance related service companies, Ridge Reinsurance Limited (Ridge Re) and
that portion of the Xerox Financial Services, Inc. (XFSI) headquarters costs and
interest expense associated with the continuing business activities. In 1993,
Talegen established and capitalized seven insurance operating groups, each of
which includes one or more legal insurance entities (the "Insurance Companies").
Each of the Insurance Companies maintains its own investment portfolio, loss
reserves and capital. This recapitalization and legal restructuring was approved
by the insurance departments of all states in which Talegen's Insurance
Companies are domiciled. The objective of the Talegen restructuring was to
strengthen the insurance operating groups and facilitate the realization of
shareholder value.
The seven insurance operating groups and their areas of specialization are:
. Constitution Reinsurance - treaty and facultative reinsurance
. Coregis - professional liability, public entity and other property and
casualty programs
. Crum & Forster Insurance - commercial property and casualty insurance
through a select network of independent agents
. Industrial Indemnity - workers compensation coverage and services
. The Resolution Group - reinsurance collection services and management of
run-off businesses
. Viking - non-standard personal automobile insurance
. Westchester Specialty Group - umbrella, excess casualty and specialty
property business
In connection with the 1993 restructuring and the regulatory approvals, XFSI
agreed to provide various forms of capital support to ensure that statutory
capital requirements of the newly established legal entities were met. The
capital contributions consisted of $235 million in cash, which was used to
purchase portfolio investments, and $100 million of XFSI promissory notes
(guaranteed by the Company). In connection with actions taken to strengthen
the Talegen balance sheet at the end of 1992, XFSI also provided support in
the form of $200 million in notes guaranteed by the Company.
XFSI also agreed that support would be provided in the form of aggregate
excess of loss reinsurance protection issued by Ridge Re, XFSI's wholly-owned
Bermuda reinsurance company established in 1992. XFSI is obligated to pay annual
premium installments of $49 million in the aggregate, plus finance charges,
payable for up to ten years, for coverage
46
totaling $1,245 million, which is net of 15 percent coinsurance. A total of
eight years annual premium installments remain to be paid as of December 31,
1994. The Company has guaranteed the payment by XFSI of all such premiums.
In addition to XFSI's original contribution of $25 million to the
capitalization of Ridge Re, XFSI may be required, under certain
circumstances, to purchase over time additional redeemable preferred shares
up to a maximum of $301 million.
XFSI has guaranteed to the Talegen insurance companies that Ridge Re will
meet all of its financial obligations under all of the foregoing excess of
loss reinsurance issued to them.
In December 1994, a stock purchase agreement was signed with EXOR America
Inc. for its purchase of Constitution Re Corporation, a Talegen subsidiary,
for approximately $410 million subject to closing adjustments, which is
approximately the same as book value. The closing of the sale is subject to
customary closing conditions and regulatory approvals and is expected to
close during the first half of 1995.
At December 31, 1994, the Company's investment in Insurance amounted to
$3,645 million, which excludes the effect of unrealized losses on investment
securities. The ultimate exit from the insurance businesses and the recovery
of the investment could take several years. During the disengagement process,
the Company will continue to be exposed to all the business risks of its
insurance businesses. The Company anticipates that future income or losses
from its insurance businesses may vary widely as the disengagement strategy
is implemented, due to, among other reasons, the recognition of proceeds of
sales or other forms of disengagement and the results from operations of the
remaining insurance businesses. No assurances can be given as to the timing
of the disengagement process, the amount and timing of proceeds of sales or
other forms of disengagement from insurance units or the impact the remaining
insurance businesses will have on the Company's total results from operations
during the disengagement process.
OPERATING RESULTS
The results of IOFS are separated into the continuing Insurance segment and
discontinued operations, which include Other Financial Services (discontinued
in 1993) and third-party financing and real-estate development (discontinued
in 1990). The Insurance segment includes Talegen, Ridge Re and that portion
of XFSI interest expense and other costs associated with the continuing
business activities.
Income from the Insurance segment was break-even in 1994 compared with $4
million in 1993 and a $779 million loss in 1992 as summarized in the
following table.
Insurance Income Summary
--------------------------
(In millions) 1994 1993 1992
-------------------------------------------------------------
Talegen
Underwriting $(168) $(213) $(479)
Investment Income 421 380 525
Taxes/Other (75) (54) (36)
-------------------------------------------------------------
Operations Before Capital
Gains/Other 178 113 10
Capital Gains After Tax 8 57 48
One-Time Items - (21) (704)
Cessions to Ridge Re (35) - -
Interest/Other (151) (145) (133)
-------------------------------------------------------------
Total Insurance $ - $ 4 $(779)
=============================================================
In connection with the operational and legal restructuring of Talegen, the
Company recognized net pre-tax charges of $58 million and $836 million in
1993 and 1992, respectively. The 1992 charges included strengthening of loss
reserves and reinsurance recoverable provisions of $880 million, and $400
million related to the partial write-down of goodwill, offset by $444 million
in capital gains realized as Talegen repositioned its investment portfolio in
anticipation of restructuring. The 1993 charge was largely made up of
relocation, severance and leasehold expenses as a result of the
decentralization and downsizing of support functions to the
47
new stand alone units. The after-tax restructuring charges amounted to $38
million and $688 million in 1993 and 1992, respectively. These amounts are
included in the "one-time" items category on the preceding chart, which totals
$21 million in 1993 and $704 million in 1992. The balance relates to one-time
SFAS No. 109 impacts.
On an analytical basis, excluding the restructuring and tax-related impacts
for adoption of SFAS No.109 in 1993 and 1992, and after-tax realized capital
gains in the 1992-94 period, management estimates Talegen's operating income
grew 58 percent to $178 million in 1994, compared with $113 million in 1993
and $10 million in 1992.
Revenues from the insurance businesses were $2.7 billion in 1994, a decline
of 2 percent from 1993, which in turn had declined by 2 percent from 1992.
The lower revenues in 1994 reflect a 4 percent decrease in earned premiums,
partially offset by a 9 percent increase in investment and other income. The
1993 revenue decline reflects a lower level of investment income, as
described later, partially offset by a 4 percent growth in earned premiums.
Further details on premium levels are included in the individual Talegen
insurance operating group results.
Excluding the unusual charges in 1993 and 1992 noted previously, the overall
underwriting loss in 1994 for Talegen's seven insurance operating groups
improved by $45 million to $168 million, compared with $213 million in 1993
and $479 million in 1992. The overall decreases in 1994 and 1993 reflect
improvements in both losses and expenses as the insurance operating groups
continued to tighten their strategic focus on more profitable business
segments, maintain price disciplines and increase productivity. Underwriting
results for 1994 exclude $53 million of adverse development on loss and
reinsurance recoverable reserves ceded to Ridge Re for 1992 and prior
accident years (as discussed in the Ridge Re Related/Other section).
Net catastrophe losses were $27 million in 1994, $25 million in 1993 and $52
million in 1992. The 1994 catastrophe losses primarily reflect the California
earthquake and Northeast winter storms in the first quarter. In 1993,
catastrophe losses were largely attributable to the World Trade Center
bombing and East Coast storms in the first quarter. The 1992 catastrophe
losses primarily relate to Hurricanes Andrew and Iniki.
Excluding the unusual charges, underwriting results for each of Talegen's six
ongoing insurance operating groups are expressed on the next page in terms of
annual gross written premiums and combined ratios. Underwriting results for
The Resolution Group are not meaningful on this basis since that unit has
only run-off premiums and, therefore, are excluded.
48
(Dollars in millions) Gross Written Premiums Combined Ratio
------------------------------- -----------------------------
Year 1994 1993 1992 1994 1993 1992
---------------------------------------------------------------------------------------------------------------------------
Constitution Reinsurance $ 545 $ 532 $505 100.7 102.4 110.0
Coregis 371 373 379 103.7 105.2 106.2
Crum & Forster Insurance 1,022 1,021 972 106.9 109.8 120.0
Industrial Indemnity 370 492 486 105.2 112.4 118.8
Viking 152 170 212 97.3 100.2 102.6
Westchester Specialty Group 334 356 357 115.7 102.5 91.6
===========================================================================================================================
The combined ratio is a standard insurance industry measure of underwriting
results. It measures the relationship of losses and expenses to net earned
premiums. It does not include income from an insurer's investments. The combined
ratio is the sum of the three ratios: (i) the loss and loss adjustment expense
ratio, (ii) the underwriting expense ratio and (iii) the dividend ratio. The
loss and loss adjustment expense ratio reflects claims expenses, the
underwriting expense ratio reflects policy acquisition and administrative costs,
and the dividend ratio reflects dividends to policyholders. The objective of the
combined ratio is to match costs with revenues. A combined ratio under 100
percent indicates underwriting profits while a combined ratio exceeding 100
percent indicates underwriting losses.
The following are the key reasons for the year-over-year performance changes
for each of these insurance operating groups.
Constitution Reinsurance's combined ratio improved 1.7 points for the year
reflecting a continuing shift toward more profitable pro-rata business and
decreased emphasis on per risk business. This improvement was moderated by
higher catastrophe losses in 1994 than in the prior year. The combined ratio
in 1993 was 7.6 points lower than 1992 which included significant losses
related to Hurricanes Andrew and Iniki. Constitution's gross premium volume
in 1994 increased 3 percent due to continuing strong overall production and
retention levels, as well as improved pricing, the benefits of which were
moderated by a timing change in premium recognition for certain treaties in
1994. In 1993, Constitution's gross premiums increased 5 percent reflecting
continued expansion in the company's non-standard automobile segment.
At Coregis the combined ratio decreased 1.5 points and 1.0 point in 1994 and
1993, respectively. These declines resulted from improvements in both overall
loss experience and expenses in both periods. Gross premium volume in 1994
was even with 1993 as strong renewal retentions and new business growth in
selected programs were offset by the effects of reunderwriting initiatives
taken in 1993 and early 1994. Gross premiums in 1993 declined 2 percent from
1992 caused by competitive pressure primarily in one major program.
Crum & Forster Insurance had combined ratio improvement of 2.9 points for
1994 reflecting better management of underwriting and claims handling
expenses. The combined ratio decline of 10.2 points in 1993 resulted from
better loss experience including lower catastrophe losses. Gross written
premiums in 1994 were approximately equal to 1993, which showed a 5 percent
increase over 1992. These volumes reflect continuing strong renewal
retentions and expansion in the company's custom agent segment. In 1994 the
effects of this strategic penetration were offset by reduced volumes
resulting from the company's withdrawal from non-voluntary business and from
a large account.
At Industrial Indemnity the combined ratio dropped 7.2 points in 1994 and 6.4
points in 1993 reflecting significantly improved loss experience in the
company's workers compensation business. Gross premium volume declined 25
percent in 1994 and increased a modest 1 percent in 1993. In California, the
company's largest market, loss costs
49
have declined 30 percent in the past two years. This trend resulted in state
mandated rate reductions of a similar magnitude and a corresponding downward
pressure on premiums, although pricing margins remained adequate in 1993 and
1994. Volume in 1994 was also impacted by increased competition in the
California market in anticipation of the new open rating environment effective
January 1, 1995.
Viking's combined ratio improved 2.9 points in 1994 and 2.4 points in 1993
reflecting the benefits of corrective pricing and agency management actions
taken in 1992. Gross written premiums declined 11 percent and 20 percent in
1994 and 1993, respectively, as a result of the company's continuing focus on
improving profitability versus maintaining market share. This focus has
resulted in significant improvement in loss experience, the benefits of which
were somewhat moderated by increases in the expense ratio due to the lower
premium volume.
At Westchester Specialty Group gross premium volume declined 6 percent in
1994 and 1 percent in 1993 as the effects of continuing intense competitive
pressure on casualty prices and related exposure reductions were partially
offset by growth in profitable property business. Reflecting the
deteriorating market conditions for casualty business, the company has
increased its loss funding for these exposures to much more conservative
levels causing the combined ratio to increase 13.2 points in 1994 and 10.9
points in 1993.
Investment income for Talegen was $421 million in 1994 compared with $380
million in 1993 and $525 million in 1992. The increase in 1994 primarily
reflects a higher level of invested assets. The decrease in 1993 resulted
from the initial repositioning of the portfolio in 1992 in anticipation of
the Talegen restructuring and from a decline in interest rates. The 1992
repositioning and reinvestment in U. S. Treasuries shortened the duration of
fixed income securities to an average of approximately 3 years from 13 years.
Realized pre-tax capital gains in 1994 for Talegen totaled $13 million
compared with $88 million in 1993 and $516 million in 1992. The level of
capital gains in 1994 reflects normal investment activities coupled with
fewer opportunities to realize gains due to the impact of high interest rates
on bond portfolio values. The 1993 capital gains primarily resulted from the
Talegen insurance operating groups progress in realigning their investments
with the liabilities of each dedicated company following completion of the
restructuring. The 1992 level included $444 million associated with the
initial repositioning of the portfolio, as previously discussed. On an
after-tax basis, Talegen capital gains totaled $8 million in 1994, $57
million in 1993 and $48 million in 1992, excluding the impact of the initial
repositioning of the portfolio.
PROPERTY AND CASUALTY OPERATING TRENDS
The industry's profitability can be significantly affected by cyclical
competitive conditions as well as by volatile and unpredictable developments,
including changes in the propensity of courts to grant large awards,
fluctuations in interest rates and other changes in the investment
environment (which affect market prices of insurance companies' investments,
the income from those investments and inflationary pressures that may tend to
affect the size of losses), and judicial decisions affecting insurers'
liabilities. Talegen operating results have historically been influenced by
these industry trends, as well as by Talegen's exposure to uncollectible
reinsurance, which had been greater than most other insurers.
50
TALEGEN RESERVES
OVERVIEW
Losses from claims and related loss adjustment expenses comprise the majority
of costs from providing insurance products and, therefore, unpaid losses and
loss expenses are the largest liabilities on a property and casualty
insurer's balance sheet. Insurance companies utilize a variety of loss
trending and analysis techniques to estimate anticipated ultimate losses and
the timeframes when claims are likely to be reported and paid. In order to
moderate the potential impact of unusually severe or frequent losses,
insurers often cede (i.e., transfer) a portion of their gross policy premiums
to reinsurers in exchange for the reinsurer's agreement to share a portion of
the covered losses with the insurer. Although the ceding of insurance does
not discharge the original insurer from its primary liability to its
policyholder, the reinsurance company that accepts the risk assumes an
obligation to the original insurer. A contingent liability exists, however,
with respect to reinsurance ceded to the extent that any reinsuring company
might not be able to meet its obligations.
Over the policy period, as premiums are earned, a portion of the premiums are
set aside as gross reserves for incurred but not reported (IBNR) losses in
anticipation of claims which will be incurred. IBNR reserves also include
amounts to supplement case reserves, when established, to provide for
potential further loss development. In addition, gross reserves are also
established for internal and external loss adjustment expenses associated
with handling the claims inventory. When a claim is reported, case reserves
are established on the basis of all pertinent information available at the
time. Reinsurance recoverables on gross reserves are recorded for amounts
that are anticipated to be recovered from reinsurers and are determined in a
manner consistent with the liabilities associated with the reinsured
policies. Net reserves are gross reserves less anticipated reinsurance
recoverables on those reserves.
The following sections of the Talegen Reserves discussion provide further
details related to the reserving practices and the specific reserve levels of
the Insurance Companies within Talegen's insurance operating groups. Due to
the unique complexities and uncertainties related to asbestos-related,
hazardous waste and other latent or long-tail claims, additional information
regarding these claim categories is provided, although it is the policy of
Talegen not to disclose established case reserves on specific claims.
OVERALL RESERVES
The following table sets forth gross unpaid losses and loss expenses,
reinsurance recoverables on unpaid losses and loss expenses and the resultant
net unpaid losses and loss expenses for the Insurance Companies included in
each insurance operating group as of December 31, 1994 and 1993:
Unpaid Losses and Loss Expenses
Gross Reinsurance Net
(In millions) Reserves Recoverable Reserves
-----------------------------------------------------------------------------
December 31, 1994
Constitution Reinsurance $ 881 $ 200 $ 681
Coregis 995 271 724
Crum & Forster Insurance 2,941 768 2,173
Industrial Indemnity 1,445 188 1,257
The Resolution Group 1,680 983 697
Viking 97 - 97
Westchester Specialty Group 1,225 485 740
Ceded balances to affiliates (451) (451) -
-----------------------------------------------------------------------------
Total $8,813/1/ $2,444 $6,369/1/
=============================================================================
December 31, 1993
Constitution Reinsurance $ 883 $ 202 $ 681
Coregis 992 330 662
Crum & Forster Insurance 3,171 872 2,299
Industrial Indemnity 1,586 213 1,373
The Resolution Group 2,576 1,720 856
Viking 124 6 118
Westchester Specialty Group 1,272 512 760
Ceded balances to affiliates (920) (920) -
-----------------------------------------------------------------------------
Total $9,684 $2,935 $6,749
=============================================================================
/1/Balance excludes $53 million cessions to Ridge Re.
The overall decrease in gross reserves is primarily the result of actions
taken over the past several years to reduce exposures in underperforming and
non-strategic business segments. Reinsurance recoverables have decreased due
to the underlying reduction in gross reserves, increased collection of
51
recoverable balances and an increase in business retained by the Insurance
Companies. Gross and net reserves as of December 31, 1992 were $10,657
million and $6,869 million, respectively. Due to its mission of managing
run-off business, The Resolution Group had the most significant decrease in
overall gross and net reserves. In 1994, Insurance Companies within the
Westchester Specialty Group, The Resolution Group and the Crum & Forster
Insurance operating group strengthened net reserves by approximately $40
million, $33 million and $8 million, respectively, for development on 1993
and prior accident year reserves. Of these amounts, $20 million, $28 million
and $5 million, respectively, were ceded to Ridge Re. No material adjustments
were made to net reserves in 1993.
MONITORING OF INSURANCE
The insurance operating groups continually monitor the gross and net reserves
of their Insurance Companies for business written in both current and prior
years, and Talegen senior management reviews these reserves on a periodic
basis. In addition, these reserves are reviewed and certified on an annual
basis by an outside actuary appointed by the Insurance Companies. Overall
reserve levels are impacted primarily by the types and amounts of insurance
coverage currently being written and the trends developing from newly
reported claims and claims which have been paid and closed. Adjustments are
made to reserves in the period they can be reasonably estimated to reflect
evolving changes in loss development patterns and various other factors, such
as social and economic trends and known changes in judicial interpretation of
legal liability.
USE OF REINSURANCE AND MANAGEMENT OF REINSURANCE COLLECTION
Most of the Insurance Companies made significant use of reinsurance during
the 1970s and the early 1980s. Since that time, the Insurance Companies have
generally increased the portion of business they retain while reducing the
number of reinsurers used for their reinsurance contracts. Accordingly, in
the aggregate, net reserves as a percent of gross reserves increased from 65
percent as of December 31, 1992 to 72 percent as of December 31, 1994, and
the percent of written premiums ceded to reinsurers to gross written premiums
decreased from 21 percent in 1992 to 16 percent in 1994. Additionally, as of
December 31, 1994 the Insurance Companies had current and future reinsurance
recoverables due from approximately 700 reinsurers for all policy years.
However, in 1994 more than 70 percent of premiums ceded were placed with
approximately 30 reinsurers.
Talegen has a reinsurance security committee composed of senior management
who approve those reinsurers with whom Talegen will do business. Based upon
the review of financial condition and assessment of other available
information, the Insurance Companies maintain an allowance for uncollectible
amounts due from troubled reinsurers as reported in Note 13 to the
consolidated financial statements on Page 69. The balance of reinsurance
recoverable is considered to be valid and collectible.
The potential uncollectibility of ceded reinsurance is an industry-wide
issue. With respect to the management of recoveries due from reinsurers, the
Insurance Companies operate within common guidelines on the early
identification of potential collection problems and assign these cases to a
specialized unit with The Resolution Group staffed by "work-out" experts.
This unit aggressively pursues collection of reinsurance recoverables through
mediation, arbitration and, where necessary, litigation to enforce a
contractual right against reinsurers. Nevertheless, periodically, it becomes
necessary for management to adjust reserves for potential losses to reflect
their ongoing evaluation of developments which affect recoverability,
including increased damage awards and the severe financial difficulties that
some reinsurers are experiencing.
52
EFFECTS OF RESTRUCTURING ON RESERVES
In 1992, as part of the announced Talegen restructuring plan and related
balance sheet strengthening actions, reserves were strengthened by $880
million on a pre-tax basis. Talegen, after completing a detailed review of
its outstanding reinsurance recoverables, in the fourth quarter of 1992
wrote-off $516 million in reinsurance recoverables due from approximately 600
reinsurers against the allowance for doubtful reinsurance accounts (including
$174 million for paid reinsurance recoverables). Additionally, in conjunction
with obtaining the necessary regulatory approvals to consummate the
restructuring, XFSI agreed to provide excess of loss reinsurance protection
issued by Ridge Re, XFSI's wholly-owned, single purpose Bermuda reinsurance
company, which was established in 1992. Adjustments to the reserves in 1993
pursuant to the restructuring were not material.
ASBESTOS-RELATED, HAZARDOUS WASTE AND OTHER LATENT OR LONG-TAIL CLAIMS
Claims resulting from asbestos-related, hazardous waste, other latent and
other long-tail losses have provided unique challenges to the insurance
industry. The possibility that these claims would emerge was often not
recognized or contemplated at the time the policies were written, and
traditional actuarial reserving methodologies have not always been useful in
accurately estimating ultimate losses. Asbestos bodily injury claims were the
first type of such exposures to cause significant losses to the insurance
industry. Because case law for asbestos-related injuries is now reasonably
developed and the number of open claims has been declining, the remaining
exposure and related uncertainty to the Insurance Companies are also
decreasing. In addition to bodily injury claims, asbestos-in-building claims
have been brought against certain Insurance Companies of the Talegen
insurance operating groups seeking reimbursement for the expense of replacing
insulation material and other building components made of asbestos. The
Insurance Companies have generally contested coverage to the extent that the
product liability insurance does not cover replacement costs unless there has
been property damage, as defined in the policies, to the buildings in which
asbestos containing products were installed. Sufficient case law has not yet
been established to determine the extent to which the courts will interpret
the policies consistently with this position, and the theories put forth by
the courts have varied considerably to support the few payments made by
insurers to date for asbestos-in-building property damage claims.
Hazardous waste claims have been the second major type of such claims to
emerge and significantly impact the insurance industry. Hazardous waste
claims encompass costs for pollution clean-up, bodily injury and property
damage. Significant uncertainties exist with respect to estimating the
Insurance Companies' exposure to hazardous waste claims. The uncertainty
primarily results from lack of historical data, long delays in reporting
claims, difficulty in identifying potential claimants and complex legal and
coverage issues that have been further complicated by inconsistent
conclusions reached by the courts.
Other latent or long-tail exposures such as repetitive stress, lead paint and
surgical breast implants are the latest type of such liability to emerge.
These claim types also are not suitable for traditional actuarial reserving
techniques due to significant uncertainties as to how legal issues will
develop.
As judicial patterns emerge through the appellate process and remove
uncertainties related to asbestos bodily injury, asbestos-in-building,
hazardous waste and other latent or long-tail claims, additional liabilities
and reinsurance recoverables could arise.
53
Total reserves for asbestos bodily injury, asbestos-in-building, hazardous
waste and other latent or long-tail claims as of December 31, 1994 are as
follows:
Reserves/1/ by Claim Category as of December 31, 1994
----------------------------------------------------------------------------------
Asbestos Asbestos-in- Hazardous Other Latent
Bodily Injury Building Waste or Long-Tail Total
------------- ------------- ------------ ------------ -------------
(In millions) Gross Net Gross Net Gross Net Gross Net Gross Net
--------------------------------------------------------------------------------------------------------------------------
Constitution Reinsurance $ 66 $20 $ - $- $ 79 $ 32 $ - $ - $145 $ 52
Crum & Forster Insurance 58 40 - - 79 61 110 57 247 158
Coregis - - - - 2 2 - - 2 2
Industrial Indemnity - - - - - - - - - -
The Resolution Group 170 17 21 2 101 36 48 2 340 57
Viking - - - - - - - - - -
Westchester Specialty Group 38 11 45 1 34 21 9 1 126 34
--------------------------------------------------------------------------------------------------------------------------
Total $332 $88 $66 $3 $295 $152 $167 $60 $860 $303
==========================================================================================================================
/1/Included are case, IBNR and allocated loss adjustment expense reserves.
The vast majority of claims in the above areas have resulted from policies
covering corporate property and casualty insurance, thus insurance operating
groups whose Insurance Companies have not underwritten (or reinsured) this type
of business generally do not have these types of claims. Although Insurance
Companies within Coregis are currently underwriting certain commercial property
and casualty business, these companies did not underwrite any significant volume
of business prior to 1986 and thus have not had many asbestos bodily injury or
hazardous waste claims as most such claims for the insurance industry have
originated from accident years prior to 1986.
In 1985, Talegen established a stand-alone unit to centrally handle
asbestos-related, hazardous waste and certain other latent or long-tail
claims. The unit was established as a separate service company of Talegen in
January, 1993 and named Envision Claims Management Corporation (Envision).
Envision is currently engaged in working on claims for the Insurance
Companies within the Crum & Forster Insurance, Coregis, The Resolution Group
and Westchester Specialty Group insurance operating groups. The objectives of
Envision are to bring expertise to this highly specialized area, promote
consistency in claim administration and reserving practices, and judiciously
work through and close such claims on behalf of the Insurance Companies.
Since January 1, 1993, nearly twice as many claims have been closed by
Envision as have been opened, causing an overall 33 percent reduction in
total applicable claims outstanding during that period.
54
SIGNIFICANT MATTERS
The largest asbestos bodily injury claims have originated from policies
issued to Owens-Corning Fiberglas (OCF), who manufactured and distributed
insulation containing asbestos. Numerous claims alleging bodily injury
through exposure to asbestos were filed against OCF during the past two
decades. Over the past several years, loss and loss expense payments on
policies within The Resolution Group have aggregated $1,024 million and $24
million on a gross and net basis, respectively. Management of The Resolution
Group and Talegen believe that all significant losses have been paid on this
coverage. Of the approximately $1 billion in reinsurance believed to be
appropriately recoverable from these claims, $682 million has been collected
and $168 million has either been written-off or reserved through the
allowance for uncollectible reinsurance, resulting in a remaining net
recoverable balance of $150 million as of December 31, 1994. See discussion
of status of two separate lawsuits pertaining to reinsurance recoverable on
OCF claims, of which one has been substantially settled, in Note 18 of the
consolidated financial statements beginning on Page 79.
With respect to hazardous waste claims, the principal federal statute that
requires cleanup of environmental damage is the Comprehensive Environmental
Response, Compensation and Liability Act ("Superfund"), passed in 1980. It
imposes liabilities on "Potentially Responsible Parties," subjecting them to
liability for clean-up costs regardless of fault, time period and relative
contribution of pollutants. Superfund is subject to funding authorization
that expires in December 1995. The current administration has put forth a
proposal to reform Superfund that would create a government fund used to
clean up "National Priority Listed" sites that would be paid for through a
combination of retrospective and prospective taxes for primary insurers and a
retrospective tax for reinsurers. Because the 103rd Congress did not pass the
reform bill, and because there is new legislative leadership in both the
House and the Senate, it is not possible to predict what effect the future
legislative changes or reauthorization of Superfund will have on Talegen's
future results.
RANGE OF REASONABLY POSSIBLE LOSSES ON KNOWN CLAIMS
The following table compares the internal estimates of the range of ultimate
net losses that are considered reasonably possible for known asbestos bodily
injury, asbestos-in-building, hazardous waste and other latent or long-tail
claims to total net reserves for these claim categories as of December 31,
1994:
Range of Net Unpaid Loss and Allocated Loss Adjustment Expense Reserves
Compared to Total Net Reserves/1/ as of December 31, 1994
------------------------------------------------------------------------------------------
Range of Net Unpaid Loss and Allocated Loss Adjustment Expenses on Known Claims
-----------------------------------------------------------------------------------
Asbestos Asbestos-in- Hazardous Other Latent
Bodily Injury Building Waste or Long-Tail Total
------------- ------------ --------- ------------- ----------- Total Net
(In millions) Low High Low High Low High Low High Low High Reserves/1/
-------------------------------------------------------------------------------------------------------------------------------
Constitution Reinsurance $ 5 $20 $- $ - $10 $ 30 $ - $ - $ 15 $ 50 $ 52
Crum & Forster Insurance 20 40 - 3 10 70 40 80 70 193 158
The Resolution Group 10 20 2 4 2 80 - 5 14 109 57
Westchester Specialty Group 5 15 1 3 2 35 - 6 8 59 34
-------------------------------------------------------------------------------------------------------------------------------
Total $40 $95 $3 $10 $24 $215 $40 $91 $107 $411 $301
===============================================================================================================================
/1/Included are case, IBNR and allocated loss adjustment expense reserves. Total
excludes $2 million of reserves for hazardous waste claims for Coregis Insurance
Company, a subsidiary of the Coregis insurance operating group. Hazardous waste
exposures to Coregis are not significant primarily because 1986 was the first
year significant business volume was written in the Coregis Insurance Companies.
55
Because the above ranges have been estimated on a net basis, they do not
allow for uncollectible reinsurance. See discussion of the allowance for
doubtful reinsurance in Note 13 of the consolidated financial statements on
Page 69. Additionally, the above ranges exclude consideration of potential
Ridge Re contract recoveries, which provides aggregate excess of loss
protection over all loss and loss expense reserves and uncollectible
reinsurance reserves for 1992 and prior accident years. Cessions to Ridge Re,
while beneficial to Talegen, do not result in a benefit to the Insurance
segment or consolidated Xerox accounts. Based on information available to
them as of December 31, 1994, the insurance operating groups and Talegen do
not expect that liabilities associated with incurred asbestos bodily injury,
asbestos-in-building, hazardous waste and other latent or long-tail claims
will have a material adverse affect on their future liquidity or financial
position. However, given the complexity and lack of precision in estimating
the exposure, no assurance can be made as to the future potential impact of
such claims.
REGULATORY RESTRICTION
The assets of the Insurance Companies are highly regulated and are generally
restricted by regulatory authorities for use within the Insurance Company.
Accordingly, they are generally not available for general corporate purposes.
Restricted net assets of the Insurance Companies were $3.1 billion at
December 31, 1994, $3.2 billion at December 31, 1993 and $2.6 billion at
December 31, 1992.
RIDGE RE RELATED/OTHER
Operating results related to Ridge Re were insignificant in 1993 because the
Talegen insurers did not experience adverse reserve development during that
period. Accordingly, no losses were recorded in 1993 under Ridge Re's excess
of loss reinsurance contracts.
The Ridge Re related 1994 pre-tax underwriting loss was $53 million, based
upon loss cessions from three of the Talegen insurance operating groups (The
Resolution Group - $28 million, Westchester Specialty Group - $20 million,
and Crum & Forster Insurance - $5 million). The after-tax impact totaled $35
million in 1994.
Interest/Other charges on an after-tax basis were $151 million in 1994, $145
million in 1993 and $133 million in 1992. These charges primarily include net
interest expense.
DISCONTINUED OPERATIONS
Other Financial Services (OFS), which were discontinued in the fourth quarter
of 1993, had no after-tax income in 1994, $63 million in 1993, and a $39
million loss in 1992. Included in the 1993 income was a $62 million after-tax
gain from the completion of two sales. The 1992 loss includes $90 million of
adjustments, primarily for the partial write-down of goodwill. The net
investment in OFS was $232 million at December 31, 1994. The Company believes
that the liquidation of the remaining OFS units will not result in a net
loss.
In February 1993, the Company completed the sale of VKM for approximately
$360 million, which resulted in before- and after-tax gains of $101 million
and $62 million, respectively. In October 1993, the Company completed the
sale of Furman Selz for $99 million. The gain on the sale was immaterial. The
proceeds of the above sales were used to retire debt.
56
The sale of the business and assets of Shields, a Furman Selz subsidiary, and
Regent, a subsidiary of Shields, to Alliance Capital Management L. P. was
completed in March 1994. Under the terms of the Furman Selz sales agreement,
the sales proceeds yielded cash of approximately $60 million before
settlement of related liabilities.
General American Life Insurance Company and XFSI signed a definitive
agreement in January, 1995 for a wholly-owned subsidiary of General American
(New Owner) to acquire Xerox Life and related companies. Closing of the sale
is subject to the customary closing conditions and regulatory approvals, and
is targeted for the first half 1995. At closing, New Owner will rename the
Xerox Life companies. OakRe Life Insurance Company, an XFSI subsidiary formed
in 1994, will assume responsibility for existing Single Premium Deferred
Annuity (SPDA) policies issued by Xerox Life's Missouri and California
companies (Life Companies) via a reinsurance agreement (Agreement). The
Agreement includes a provision for the assumption (at their election) by the
Life Companies, of all of the SPDA policies at the end of their current rate
reset periods. A Novation Agreement with a New Owner affiliate provides for
the assumption of the liability under the Coinsurance Agreement for any SPDA
policies not so assumed by the Life Companies. Other policyholders (of
Immediate, Whole Life, and Variable annuities, as well as a minor amount of
SPDAs issued by Xerox Life New York) will continue to be the responsibility
of the New Owner. See Note 11 to the consolidated financial statements on
Page 64 for additional information.
The third-party financing and real-estate development and financing
operations that were discontinued in 1990 were unaffected by the IOFS
disengagement decisions. During 1994, several favorable developments occurred
including sales of real-estate and third-party assets and sale and run-off
activity, which reduced assets associated with these businesses by $272
million to a total of $547 million. Assigned debt was correspondingly reduced
by $193 million to $231 million. Management believes that the combination of
existing reserves together with run-off profits should adequately provide for
any credit losses or losses on disposition.
CONSOLIDATED DEFERRED TAX ASSET POSITION
As is common for companies with large property and casualty insurance
operations, the Company's domestic operations are in a net deferred tax asset
position. In recent years, domestic profitability has been adversely affected
by several non-recurring charges including the 1993 Document Processing
restructuring charge and litigation settlements; the 1992 IOFS restructuring
charges; the 1991 Document Processing work-force reduction provision; a
smaller 1991 provision associated with the closing of certain Talegen
locations; and, in 1990, by the charge associated with discontinuing the
Company's real-estate operations. These charges were incurred in conjunction
with the Company's ongoing efforts to exit from non-core businesses and to
position the Company for future profitable growth. In addition, the 1992
adoption of the new accounting standards for postretirement medical benefits
has also significantly contributed to the Company's domestic deferred tax
asset position. The Company has scheduled the timing of the reversal of its
deferred tax assets and, as further discussed in Note 17 to the consolidated
financial statements on Page 79, expects to realize the majority of these in
the ordinary course of future operations.
57
Notes to Consolidated Financial Statements
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.
Rank Xerox Limited, Rank Xerox Holding BV, Rank Xerox Investment Limited, R-X
Holdings Limited and their respective subsidiaries, and the other subsidiaries
jointly owned by the Company and The Rank Organisation Plc are referred to as
the Rank Xerox Companies. The accounts of the Rank Xerox Companies are included
for their fiscal years ended October 31. The accounts of the Latin American
subsidiaries are included for their fiscal years ended November 30.
Investments in which the Company has a 20 to 50 percent ownership interest
are accounted for on the equity method.
Earnings Per Share. Primary earnings per share are based on net income less
preferred stock dividend requirements divided by the average common shares
outstanding during the period and common equivalent shares related to
dilutive stock options, Xerox Canada Inc. exchangeable Class B stock and
incentive shares. Fully diluted earnings per share assume 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.
Goodwill. Goodwill represents the cost of acquired businesses in excess of
the net assets purchased and is amortized on a straight-line basis, generally
over 40 years. Goodwill is reported net of accumulated amortization and the
recoverability of the carrying value is evaluated on a periodic basis. During
1992, the Company recorded a $470 million write-down of goodwill in
connection with the restructuring of Insurance and Other Financial Services.
Significant Accounting Policies of Document Processing:
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 the Company's equipment sold to
customers and recognized ratably 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.
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. Buildings and equipment 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.
Classification of Commercial Paper and Bank Notes Payable. It is the
Company's policy to classify as long-term debt that portion of commercial
paper and bank notes payable that is intended to match fund finance
receivables due after one year to the extent that it has the ability under
its revolving credit agreements to refinance such commercial paper and notes
payable on a long-term basis. See Note 15 on Page 72.
Reclassifications. Certain prior year balances have been reclassified to
conform to the 1994 presentation.
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 as a separate component of shareholders' equity. The U.S. dollar is
used as the functional currency for the Company's subsidiaries, such as in
South America, which conduct their business in U.S. dollars or operate in
hyper-inflationary economies. A combination of current and historical
exchange rates are used in remeasuring the local currency transactions of
these subsidiaries and the resulting exchange adjustments are included in
income. Aggregate foreign currency losses were (in millions) $136, $174 and
$67 in 1994, 1993 and 1992, respectively, and are included in Other, net in
the consolidated statements of income.
58
Significant Accounting Policies of Insurance:
Revenue Recognition. Insurance premiums are generally earned pro rata over
the period the coverage is provided.
Deferred Policy Acquisition Costs. Property and casualty insurance policy
acquisition costs are deferred and recognized over the periods the related
premiums are earned. Anticipated investment income is considered in the
determination of the recovery of deferred policy acquisition costs.
Reinsurance. Reinsurance recoverable includes the balance due from
reinsurance companies for paid losses and loss expenses and the estimates of
the amount of unpaid losses and loss expenses that will be recovered from
reinsurers determined in a manner consistent with the liabilities associated
with the reinsured policies. The provision for uncollectible reinsurance is
determined based upon the review of the financial condition of the reinsurers
and assessment of other available information, as is further discussed in
Note 13 on Page 69.
Insurance Losses and Loss Expenses. Property and casualty insurance losses
and loss expenses are charged to expense as incurred. The reserve for unpaid
losses and loss expenses is determined on the basis of claim adjusters'
evaluations and other estimates, including those for incurred but not
reported (IBNR) losses and for salvage and subrogation recoveries. Overall
reserve levels are impacted primarily by the types and amounts of insurance
coverage currently being written, trends developing from newly reported
claims and claims which have been paid and closed. Talegen's insurance
operating groups continually monitor gross and net losses and loss expense
reserves of their insurance companies for business written in both the
current and prior years, and Talegen senior management reviews these reserves
on a periodic basis. Adjustments are made to reserves in the period in which
they can be reasonably estimated to reflect evolving changes in loss
development patterns and various other factors, such as social and economic
trends and judicial interpretation of legal liability. These reserves are not
recorded on a discounted basis.
Investments. The fixed maturity investments of Insurance operations are
considered to be investments available-for-sale because substantial portions of
these portfolios may be sold prior to maturity. Fixed maturity investments and
equity securities are valued at market. Unrealized gains and losses from the
revaluation of these securities are credited or charged to shareholders' equity.
Realized gains and losses on the sale of investments are determined on a
specific identification basis. A provision in the consolidated statement of
income is made only when the decline in the fair value of debt and equity
securities is other than temporary. Investment income is recorded when earned.
2. ACCOUNTING CHANGES
Commencing in 1994, Statement of Financial Accounting Standards (SFAS) No.
112 - "Employers' Accounting for Postemployment Benefits" - requires accrual
accounting for employee benefits that are paid between the termination of
active employment and retirement. SFAS No. 112 did not have an impact on
operating results as the applicable benefits are either routinely accrued or
are types of benefits not currently offered by the Company.
Effective January 1, 1994, the Company adopted SFAS No. 115 - "Accounting for
Certain Investments in Debt and Equity Securities," which is more fully
discussed in Note 12 on Page 66.
Effective December 31, 1994, the Company adopted SFAS No. 119 - "Disclosure
about Derivative Financial Instruments and Fair Value of Financial
Instruments." See Note 21 on Pages 83 through 85 for disclosures relating to
derivative financial instruments.
In 1992, the Company recorded an after-tax charge of $764 million for the
cumulative effect of accounting changes consisting of $606 million for SFAS
No. 106 - "Employers' Accounting for Postretirement Benefits Other Than
Pensions," and $158 million for SFAS No. 109 - "Accounting for Income Taxes."
59
DOCUMENT PROCESSING DISCLOSURES
3. 1993 SPECIAL CHARGES, NET
In 1993, the Company recorded special charges which aggregated $1,373 million
and included the following pre-tax amounts: $1,195 million related to a
restructuring of Document Processing operations and $278 million related to
litigation settlements. As a result of these charges, the Company's Document
Processing operations generated a net loss for 1993; accordingly, these
provisions had been partially offset by $100 million in reduced
performance-based employee profit sharing which had previously been accrued
and would have been paid based on profit before the special charges. As a
consequence, these special charges resulted in an after-tax charge of $813
million or $7.96 per share. The restructuring program and litigation
settlements are discussed below:
Document Processing Restructuring Program. The Document Processing
restructuring program announced in December 1993 is a worldwide action aimed
at significantly reducing the Company's cost base and at improving
productivity.
The $1,195 million provision consisted of the following: $843 million related
to severance pay and other employee separation benefits; $258 million related
to lease cancellation and other facilities rationalization and site
consolidation costs; and $94 million for the write-off or write-down of
various assets in certain non-strategic businesses the Company will exit and
other costs directly related to the restructuring program. Approximately 70
percent of this provision relates to the Company's domestic operations.
The $1,195 million pre-tax provision resulted in the Company recognizing $416
million in deferred tax benefits and reducing minorities' interests in
earnings of subsidiary companies by approximately $74 million. As a
consequence, the restructuring program resulted in an after-tax charge in
1993 of $705 million or $6.91 per share.
The Company anticipated, as a result of this restructuring program, to reduce
its worldwide Document Processing work force by more than 10,000 employees by
early 1996. In addition, the Company identified specific facilities to be
closed, which are publicly announced as local implementation plans are
finalized.
As of December 31, 1994, the activities associated with the restructuring
program are on track towards achieving the Company's objectives. The progress
of the restructuring program is included in the accompanying Financial Review
on Page 32.
During 1994, $430 million of net pre-tax charges were charged against the
restructuring reserve. Management believes the aggregate reserve balance of
$765 million at December 31, 1994 is adequate for the completion of the
restructuring program.
The consolidated balance sheets at December 31, 1994 and 1993 include $429
million and $395 million, respectively, of current liabilities and $260
million and $717 million, respectively, of non-current liabilities relating
to the pre-tax cash obligations associated with the restructuring action.
During 1994, actual savings approximated $350 million. The cost savings
resulting from this action are estimated to be approximately $700 million in
1995 and at higher amounts thereafter (These cost savings amounts are
unaudited). These savings are primarily the result of reduced compensation
expenses and occupancy costs. Partially offsetting these savings will be
expenses incurred in future years to reengineer various business processes,
such as the expansion of the use of technology in the customer order entry
and sales processing functions; investments in hardware and software and
related training to improve the efficiency of the Company's field service and
sales organizations; and training to expand the local capabilities of
technical service personnel. Additionally, some of these savings will be
reinvested in support of the Company's expansion into emerging markets and to
mitigate anticipated effects of continuing pressure on gross margins.
Litigation Settlements. In December 1993, the Company recorded a pre-tax
charge of $278 million towards the settlement of two outstanding lawsuits in
Texas. Of this charge, $256 million related to the settlement of an antitrust
suit against the Company and $22 million related to the settlement of claims
in connection with an alleged breach of contract. Net of income taxes, these
settlements reduced the Company's 1993 net income by $167 million or $1.63
per share.
60
4. FINANCE RECEIVABLES, NET
Finance receivables represent installment sales and sales-type leases
resulting from the marketing of the Company's business equipment products.
These receivables generally mature over two to five years and are generally
collateralized by a security interest in the underlying assets. The
components of finance receivables, net at December 31, 1994, 1993 and 1992
follow:
(In millions) 1994 1993 1992
-----------------------------------------------------------------
Gross receivables $12,135 $11,119 $10,826
Unearned income (2,074) (2,032) (2,194)
Unguaranteed residual values 206 165 142
Allowance for doubtful accounts (319) (300) (275)
-----------------------------------------------------------------
Finance receivables, net 9,948 8,952 8,499
Less current portion 3,910 3,358 3,162
-----------------------------------------------------------------
Amounts due after one year, net $ 6,038 $ 5,594 $ 5,337
=================================================================
Contractual maturities of the Company's gross finance receivables subsequent
to December 31, 1994 follow (in millions):
1995 1996 1997 1998 1999 Thereafter
--------------------------------------------------
$4,939 $3,242 $2,229 $1,207 $453 $65
==================================================
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.
5. INVENTORIES
The components of inventories at December 31, 1994, 1993 and 1992 follow:
(In millions) 1994 1993 1992
------------------------------------------------------------
Finished goods $1,458 $1,421 $1,508
Work in process 88 80 83
Raw materials 268 297 292
Equipment on operating leases, net 480 364 374
------------------------------------------------------------
Inventories $2,294 $2,162 $2,257
============================================================
Equipment on operating leases consists of the Company's business equipment
products which are rented to customers and are depreciated to estimated residual
value. Depreciable lives vary from two to four years. The Company's business
equipment operating lease terms vary, generally from one to 36 months.
Accumulated depreciation on equipment on operating leases for the three years
ended December 31, 1994 amounted to (in millions) $794, $692 and $697,
respectively. Minimum future rental revenues on the remaining non-cancelable
operating leases with original terms of one year or longer are (in millions):
1995 1996 1997 Thereafter
------------------------------------------------------
$335 $214 $122 $99
======================================================
Total contingent rentals, principally usage charges in excess of minimum
rentals for operating leases, for the three years ended December 31, 1994,
amounted to (in millions) $246, $274 and $290, respectively.
6. LAND, BUILDINGS AND EQUIPMENT, NET
The components of land, buildings and equipment at December 31, 1994, 1993
and 1992 follow:
Estimated
Useful Lives
(In millions) (Years) 1994 1993 1992
-----------------------------------------------------------------------------
Land $ 87 $ 83 $ 69
Buildings and building
equipment 20 to 40 876 824 788
Leasehold improvements Lease term 339 322 336
Plant machinery 4 to 12 1,843 1,732 1,558
Office furniture and
equipment 3 to 10 1,245 1,576 1,509
Other 3 to 20 139 171 172
Construction in progress 227 277 368
-----------------------------------------------------------------------------
Subtotal 4,756 4,985 4,800
Accumulated depreciation 2,648 2,766 2,650
-----------------------------------------------------------------------------
Land, buildings and equipment, net $2,108 $2,219 $2,150
=============================================================================
The Company leases certain land, buildings and equipment. Substantially all such
leases are accounted for as operating leases. Total rent expense under operating
leases for the three years ended December 31, 1994 amounted to (in millions)
$502, $538 and $554, respectively. Future minimum operating lease commitments
that have remaining non-cancelable lease terms in excess of one year at December
31, 1994 are as follows (in millions):
1995 1996 1997 1998 1999 Thereafter
-----------------------------------------------------------
$329 $219 $172 $145 $122 $567
===========================================================
In certain circumstances, the Company subleases space not currently required in
operations. Future minimum sublease income under leases with non-cancelable
terms in excess of one year amounted to $45 million at December 31, 1994.
61
7. INVESTMENTS IN AFFILIATES, AT EQUITY
Investments in corporate joint ventures and other companies in which the
Company has a 20 to 50 percent ownership interest at December 31, 1994, 1993
and 1992 follow:
(In millions) 1994 1993 1992
--------------------------------------------------------------------
Fuji Xerox $1,183 $1,004 $868
Other investments 95 90 89
--------------------------------------------------------------------
Investments in affiliates, at equity $1,278 $1,094 $957
====================================================================
Rank Xerox Limited, a consolidated subsidiary of the Company, owns 50 percent of
the outstanding stock of Fuji Xerox, a corporate joint venture with Fuji Photo
Co., Ltd. Fuji Xerox is headquartered in Tokyo and operates throughout the Far
East (except China) in the Document Processing business. Condensed financial
data of Fuji Xerox for its last three fiscal years follow:
(In millions) 1994 1993 1992
--------------------------------------------------------------------
Summary of Operations
Revenues $7,235 $6,259 $5,348
Costs and expenses 6,829 5,915 5,043
--------------------------------------------------------------------
Income before income taxes 406 344 305
Income taxes 235 195 183
--------------------------------------------------------------------
Net income $ 171 $ 149 $ 122
====================================================================
Rank Xerox' equity in net income $ 86 $ 75 $ 61
====================================================================
Xerox' equity in net income $ 57 $ 50 $ 41
====================================================================
Balance Sheet Data
Assets
Current assets $3,428 $3,175 $2,760
Non-current assets 3,038 2,573 2,355
--------------------------------------------------------------------
Total assets $6,466 $5,748 $5,115
====================================================================
Liabilities and shareholders'
equity
Current liabilities $2,567 $2,276 $2,100
Long-term debt 658 794 742
Other non-current liabilities 871 668 477
Shareholders' equity 2,370 2,010 1,796
--------------------------------------------------------------------
Total liabilities and
shareholders' equity $6,466 $5,748 $5,115
====================================================================
8. GEOGRAPHIC AREA DATA
Revenues and assets of the Rank Xerox Companies are substantially
attributable to European operations; their consolidated operations in Africa,
Asia and the Middle East together comprise less than one percent of the
Company's consolidated amounts. The Other Areas classification includes
operations principally in Latin America and Canada.
Intercompany revenues are generally based on manufacturing cost plus a markup
to recover other operating costs and to provide a profit margin to the
selling company.
The Insurance business conducts substantially all of its operations in the
United States. The revenues, net income and assets of the Company's Insurance
businesses are included in the accompanying consolidated statements of income
and consolidated balance sheets on Pages 28 and 38, respectively.
Geographic area data for the Company's Document Processing business follows:
Year ended December 31,
(In millions) 1994 1993 1992
--------------------------------------------------------------------
Revenues from unrelated entities:
United States $ 7,822 $ 7,238 $ 6,942
Rank Xerox Companies 4,633 4,479 4,911
Other Areas 2,633 2,512 2,445
--------------------------------------------------------------------
Total $15,088 $14,229 $14,298
====================================================================
Intercompany revenues:
United States $ 1,291 $ 1,104 $ 1,292
Rank Xerox Companies 262 216 264
Other Areas 362 353 353
--------------------------------------------------------------------
Total $ 1,915 $ 1,673 $ 1,909
====================================================================
Total revenues:
United States $ 9,113 $ 8,342 $ 8,234
Rank Xerox Companies 4,895 4,695 5,175
Other Areas 2,995 2,865 2,798
Less intercompany revenues (1,915) (1,673) (1,909)
--------------------------------------------------------------------
Total $15,088 $14,229 $14,298
====================================================================
Net income (before intercompany
eliminations):
United States $ 379 $ (371) $ 302
Rank Xerox Companies 218 (43) 72
Other Areas 250 190 185
--------------------------------------------------------------------
Total* $ 847 $ (224) $ 559
====================================================================
Net income (after intercompany
eliminations):
United States $ 386 $ (334) $ 301
Rank Xerox Companies 215 (47) 74
Other Areas 193 188 187
--------------------------------------------------------------------
Total* $ 794 $ (193) $ 562
====================================================================
Assets:
United States $ 9,133 $ 8,966 $ 8,095
Rank Xerox Companies 7,171 6,349 6,367
Other Areas 3,070 2,843 2,678
--------------------------------------------------------------------
Total $19,374 $18,158 $17,140
====================================================================
*The 1993 special charges reduced net income by $813 million. On a geographic
basis, this charge was incurred as follows (in millions): $605-United States;
$147-Rank Xerox Companies; and $61-Other Areas.
62
9. CONTRACT WITH ELECTRONIC DATA SYSTEMS
In June 1994, the Company awarded a contract to Electronic Data Systems Corp.
(EDS) to operate the Company's worldwide data processing and
telecommunications network. EDS has assumed responsibility for virtually all
of the Company's mainframe data processing, its computer network services and
telecommunications, and will provide maintenance and other support services
to the Company's active computer applications that support current internal
Xerox processes. The contract does not transfer to EDS responsibility for the
development of new data processing applications. As part of the contract, EDS
purchased, at approximately book value, substantially all of the Company's
information management assets for $150 million. Approximately 1,300 Xerox
employees have become employees of EDS during the second half of 1994.
The contract is for ten years and is valued at $3.2 billion. Minimum payments
due EDS under the contract for each of the next five years are as follows (in
millions):
1995 1996 1997 1998 1999
-------------------------------------------------------
$362 $349 $325 $289 $250
=======================================================
These minimum payments will be amended over time to reflect the transfer to
EDS of responsibility for the management of any new data processing
applications, certain inflationary effects and other changing business
conditions.
INSURANCE AND OTHER FINANCIAL SERVICES (IOFS) DISCLOSURES
10. RESTRUCTURING OF IOFS
In January 1993, the Company announced its intent to sell or otherwise
disengage from its IOFS businesses. Following the Company's decision to
disengage from IOFS, an after-tax charge of $778 million was recorded during
1992 of which $688 million related to Insurance and $90 million related to
Other Financial Services. The January 1993 announcement to exit the financial
services businesses is consistent with the strategy that began in 1990. As
more fully discussed in Note 11 on Page 65, in 1990 the Company discontinued
its real-estate development and third-party financing businesses.
Restructuring of Insurance Operations. As the initial step in the legal
restructuring of Talegen, its investment portfolio was repositioned during
1992 by shortening the duration of fixed income securities and reinvesting in
U.S. treasuries. As a result, realized capital gains of $444 million were
recognized during 1992 which were offset by a pre-tax restructuring provision
of the same amount. Also during 1992, an after-tax charge of $688 million was
recorded, which included $400 million for the partial write-down of goodwill
and $288 million for reserve strengthening. On a pre-tax basis the reserve
strengthening was $436 million. The combined effects of these charges
resulted in $880 million in pre-tax reserve strengthening at Talegen.
In connection with the 1992 charges, Xerox Financial Services, Inc. (XFSI), a
wholly-owned subsidiary of the Company, provided support to Talegen in the
form of $200 million in notes guaranteed by the Company.
During 1993, the insurance departments of all states in which the Talegen
insurance companies are domiciled approved the legal restructuring and
recapitalization of Talegen's insurance companies. With this approval, in
September 1993, Talegen established seven insurance operating groups as
independent legal entities that, in turn, own one or more independent
insurance companies. Each insurance company within the insurance operating
group maintains its own investment portfolio, loss reserves and capital.
63
In connection with the regulatory approvals, the Company, through XFSI,
provided additional capital support to Talegen. The capital consists of $235
million in cash and $100 million of XFSI promissory notes which are
guaranteed by the Company.
At December 31, 1994 and 1993, intercompany transactions aggregating
approximately $522 million and $645 million, respectively, have been included
as Insurance assets on the Company's consolidated balance sheet. The
corresponding obligations are included in Other Long-Term Debt and
Obligations in the consolidated balance sheets and represent funding
commitments by XFSI guaranteed by the Company.
XFSI has also agreed that support would be provided to Talegen in the form of
excess of loss reinsurance protection. Commencing in 1993, XFSI is obligated
to pay annual premium installments of $49 million each year, plus financing
charges thereon, for up to ten years, for coverage totaling $1,245 million,
net of 15 percent coinsurance. This reinsurance protection is provided to
Talegen through XFSI's single purpose, wholly-owned reinsurance company Ridge
Reinsurance Limited (Ridge Re), which was established in 1992. The XFSI
premium payments have been guaranteed by the Company.
XFSI may also be required, under certain circumstances, to purchase up to
$301 million in redeemable preferred stock of Ridge Re. XFSI has guaranteed
Ridge Re's obligations to Talegen.
The Talegen insurance companies and Ridge Re remain consolidated entities of
the Company's continuing operations.
Sale of Constitution Re Corporation. In December 1994, a definitive
agreement was reached for the sale of Constitution Re Corporation (CRC), one
of the seven insurance operating groups of Talegen, for approximately $410
million subject to closing adjustments, which is approximately the same as
book value. The sale is expected to close during the first half of 1995 and
is subject to regulatory approvals. Revenues for CRC during the years 1994,
1993 and 1992 were (in millions) $519, $496 and $375, respectively.
11. DISCONTINUED OPERATIONS
Other Financial Services. In 1993, the Company discontinued, for financial
reporting purposes, its Other Financial Services (OFS) segment, which was
composed of The Van Kampen Merritt Companies, Inc. (VKM), Furman Selz Holding
Corporation (Furman Selz) and Xerox Financial Services Life Insurance Company
(Xerox Life).
In February 1993, the Company sold VKM for approximately $360 million, which
resulted in pre- and after-tax gains of approximately $101 million and $62
million, respectively. The proceeds were used to retire debt.
In October 1993, the Company sold Furman Selz for $99 million and such
proceeds were also used to retire debt. The gain on the sale was immaterial.
The sales price did not include the proceeds from the sale of Shields Asset
Management, Inc., a former Furman Selz subsidiary, and Regent Investor
Services Incorporated, a subsidiary of Shields. This sale was completed in
March 1994 and resulted in additional cash of approximately $60 million
before settlement of related liabilities.
The disposition of Xerox Life will be accomplished through the sale of stock
and run-off. In January 1995, the Company executed a stock purchase agreement
with General American Life Insurance Company (General American) whereby a
subsidiary of General American will acquire the capital stock of the Xerox
Life operations and the Company's immediate, whole life and variable annuity
businesses. The purchase price is equal to $46 million plus an amount equal
to the capital and surplus transferred to the buyer. The sale is expected to
be consummated in the first half of 1995 and is subject to regulatory
approval.
OakRe Life Insurance Company, an XFSI subsidiary formed in 1994, will assume
responsibility for existing Xerox Life single premium deferred annuity (SPDA)
policies via a reinsurance agreement (Agreement). At December 31, 1994, such
policies approximated $3 billion of customer deposit contracts outstanding.
The Agreement includes a provision for the assumption (at its election) by
Xerox Life, which will be renamed under General American ownership (New
Owner), of all the SPDA policies at the end of their current reset periods,
which run for approximately five years. A Novation Agreement with a New Owner
affiliate provides for the assumption of the liability under the Agreement
for any SPDA policies not so assumed by
64
Xerox Life. New Owner will pay additional consideration upon renewal of the
SPDA policies.
OFS revenues for the three years ended December 31, 1994 were (in millions):
1994-$302; 1993-$544; and 1992-$702. Revenues include amounts of the
businesses through their effective sales dates. The net investment in OFS at
December 31, 1994 and 1993 is approximately $232 million and $244 million,
respectively. The Company believes that the liquidation of the remaining OFS
assets will not result in a net loss.
Real-Estate and Third-Party Financing. During the last four years, the
Company made substantial progress in disengaging from the real-estate and
third-party financing businesses that were discontinued in 1990. During the
three years ended December 31, 1994, the Company received net cash proceeds
of $1,191 million ($259 million in 1994, $291 million in 1993 and $641
million in 1992) from the sale of individual assets or of business units,
from several asset securitizations and from run-off collection activities.
The amounts received were consistent with the Company's estimates in the
disposal plan and were used primarily to retire debt.
In 1992, incremental tax benefits of $122 million were realized by the
Company. Rather than recording these tax benefits in income, the Company
increased pre-tax reserves related to discontinued businesses in view of weak
market conditions and continuing uncertainties in the domestic real-estate
and credit markets.
Substantially all of the remaining assets represent direct financing leases,
approximately $330 million (60 percent) represent passive lease receivables,
many with long-duration contractual maturities and unique tax attributes.
Accordingly, the Company expects that the wind-down of the portfolio will be
slower during 1995 and in future years, compared with prior years. The
Company believes that the liquidation of the remaining assets will not result
in a net loss.
Total Discontinued Operations. The consolidated financial statements have
been restated, as appropriate, to isolate the effect of the discontinued
operations. Assigned debt represents debt included in the Company's
consolidated balance sheets that has been assigned to the discontinued
businesses based on the relative amount of gross assets of the discontinued
operations. Proceeds from disposition of these businesses, along with their
results of operations during the phase-out period, are expected to be used to
repay such consolidated indebtedness. Assigned interest expense for the three
years ended December 31, 1994 was (in millions) $34, $76 and $133,
respectively.
Summarized information of discontinued operations for the three years ended
December 31, 1994 follows:
(In millions) 1994 1993 1992
-------------------------------------------------------------------
Summary of Operations
Real-Estate and Third-Party
Financing
Loss before income taxes $ - $ - $ (122)
Income tax benefits - - 122
-------------------------------------------------------------------
Net income - - -
-------------------------------------------------------------------
Other Financial Services
Income (loss) before income taxes - 106 (21)
Income (taxes) benefits - (43) (18)
-------------------------------------------------------------------
Net income (loss) - 63 (39)
===================================================================
Net income (loss) from
discontinued operations $ - $ 63 $ (39)
===================================================================
Balance Sheet Data
Assets
------
Real-Estate and Third-Party
Financing
Gross finance receivables $ 538 $ 841 $1,203
Unearned income and other 9 (22) (32)
-------------------------------------------------------------------
Investment, net 547 819 1,171
-------------------------------------------------------------------
Other Financial Services
Investments 3,604 3,832 3,766
Other assets, net 541 523 715
-------------------------------------------------------------------
OFS assets 4,145 4,355 4,481
-------------------------------------------------------------------
Investment in discontinued
operations $4,692 $5,174 $5,652
===================================================================
Liabilities
-----------
Other Financial Services
Policyholders' deposits $3,576 $3,716 $3,682
Other OFS liabilities 337 395 218
Assigned debt 281 474 1,058
-------------------------------------------------------------------
Discontinued operations liabilities $4,194 $4,585 $4,958
===================================================================
The investments caption primarily includes the fixed maturity securities owned
by Xerox Life. These investments had net unrealized losses of approximately $290
million at December 31, 1994. These investments are primarily composed of
mortgage-backed securities which do not, per se, have contractual maturities.
Contractual maturities of the gross finance receivables at December 31, 1994
follow (in millions):
1995 1996 1997 1998 1999 Thereafter
------------------------------------------------------------
$64 $70 $42 $30 $30 $302
============================================================
65
12. INVESTMENTS AND INVESTMENT INCOME
Effective January 1, 1994, the Company adopted SFAS No. 115 - "Accounting for
Certain Investments in Debt and Equity Securities." The effect of this
statement on the Company is to require fair value accounting for investments
in debt securities, which the Company does not plan to hold to maturity. Any
adjustments are charged or credited to common shareholders' equity. At
adoption, there was no effect on common shareholders' equity. In 1993, the
fixed maturity investments were accounted for on a lower of cost or market
basis, whereby any aggregate excess of cost over fair value was directly
charged to common shareholders' equity and any market value appreciation was
only recognized to the extent it did not exceed aggregate cost.
Equity securities were, and continue to be, valued at fair value, with
unrealized gains and losses from the revaluation credited or charged to
common shareholders' equity. Short-term investments are carried at cost,
which approximates market.
The components of Insurance's investment portfolios at December 31, 1994
follow:
Gross Gross
Amortized Unrealized Unrealized Fair
(In millions) Cost Gains Losses Value
----------------------------------------------------------------------------------------------------------------------------------
Fixed maturities
Bonds
United States Government and government agencies and authorities $5,655 $ 3 $332 $5,326
States, municipalities and political subdivisions 1,277 3 61 1,219
Public utilities 20 - 3 17
All other corporate bonds 307 - 24 283
Mortgage-backed securities 389 - 20 369
----------------------------------------------------------------------------------------------------------------------------------
Total fixed maturities 7,648 6 440 7,214
----------------------------------------------------------------------------------------------------------------------------------
Equity securities
Common stocks
Public utilities 24 - 2 22
Banks, trusts and insurance companies 19 1 1 19
Industrial, miscellaneous and all other 124 10 7 127
----------------------------------------------------------------------------------------------------------------------------------
Total equity securities 167 11 10 168
----------------------------------------------------------------------------------------------------------------------------------
Short-term investments 1,002 - - 1,002
----------------------------------------------------------------------------------------------------------------------------------
Investments available-for-sale $8,817 $17 $450 $8,384
==================================================================================================================================
The components of Insurance's investment portfolios at December 31, 1993
follow:
Fixed maturities
Bonds
United States Government and government agencies and authorities $5,421 $18 $ 34 $5,405
States, municipalities and political subdivisions 656 19 10 665
All other corporate bonds 291 4 2 293
Mortgage-backed securities 118 - - 118
----------------------------------------------------------------------------------------------------------------------------------
Total fixed maturities 6,486 41 46 6,481
----------------------------------------------------------------------------------------------------------------------------------
Equity securities
Common stocks
Public utilities 20 8 6 22
Banks, trusts and insurance companies 16 2 1 17
Industrial, miscellaneous and all other 103 15 4 114
----------------------------------------------------------------------------------------------------------------------------------
Total equity securities 139 25 11 153
----------------------------------------------------------------------------------------------------------------------------------
Short-term investments 1,710 - - 1,710
----------------------------------------------------------------------------------------------------------------------------------
Investments available-for-sale $8,335 $66 $ 57 $8,344
==================================================================================================================================
66
In general, these investments are limited by state insurance regulations for
use within the Company's insurance operations, and therefore are not
available to the Company for general corporate purposes. The Company is not
exposed to any significant concentration of credit risk within the portfolio.
At December 31, 1994, approximately 98 percent of the fixed maturity
investments are investment grade securities.
Securities carried at (in millions) $1,207, $1,275 and $1,279 at December 31,
1994, 1993 and 1992, respectively, were deposited with governmental
authorities or designated custodial banks as required by laws affecting
insurers.
The amortized cost and fair value of the fixed maturity investments at
December 31, 1994, by contractual maturity, follow:
Amortized Fair
(In millions) Cost Value
-------------------------------------------------------------------
Contractual maturity
Within one year $1,161 $1,143
After one year but within five 4,676 4,354
After five years but within ten 685 646
After ten years 737 702
-------------------------------------------------------------------
Subtotal 7,259 6,845
Mortgage-backed securities 389 369
-------------------------------------------------------------------
Total fixed maturities $7,648 $7,214
===================================================================
Expected maturities will differ from contractual maturities because borrowers
may have the right to call or prepay obligations with or without call or
prepayment penalties, and changing interest rates, tax considerations and other
factors may result in portfolio sales prior to maturity.
The components of investment and other income for the three years ended
December 31, 1994 follow:
(In millions) 1994 1993 1992
---------------------------------------------------------------
Interest on fixed maturities $370 $352 $491
Dividends on equity securities 5 4 10
Interest on short-term investments 48 26 38
---------------------------------------------------------------
Investment income 423 382 539
Other 14 19 13
---------------------------------------------------------------
Investment and other income $437 $401 $552
===============================================================
The components of net pre-tax realized capital gains for the three years
ended December 31, 1994 follow:
(In millions) 1994 1993 1992
---------------------------------------------------------------
Fixed maturities:
Gross gains $ 7 $122 $536
Gross losses (5) (46) (34)
Equity securities 9 13 37
Real-estate 1 (1) (23)
---------------------------------------------------------------
Net realized capital gains $ 12 $ 88 $516
===============================================================
The Company's financial statements include unrealized gains (losses), net of
applicable income taxes, of investment securities as a separate component of
common shareholders' equity; changes for the three years ended December 31,
1994 follow:
(In millions) 1994 1993 1992
---------------------------------------------------------------
Change in gross unrealized
gains (losses) $(442) $ 4 $(33)
Deferred income taxes (benefits) (3) 4 (7)
---------------------------------------------------------------
Change in net unrealized gains
(losses) of investment securities $(439) $ - $(26)
===============================================================
See Note 17 on Page 79 for a discussion of the deferred tax associated with
the 1994 unrealized losses.
67
13. INSURANCE OPERATIONS
Information related to earned and unearned revenues of the Company's
insurance operations for the three years ended December 31, 1994 follows:
(In millions) 1994 1993 1992
------------------------------------------------------------------
Premiums Written
Direct $2,179 $2,370 $2,395
Assumed 611 645 604
Ceded (445) (558) (652)
------------------------------------------------------------------
Net premiums written $2,345 $2,457 $2,347
==================================================================
Premiums Earned
Direct $2,156 $2,366 $2,465
Assumed 630 636 568
Ceded (474) (594) (707)
------------------------------------------------------------------
Net premiums earned $2,312 $2,408 $2,326
==================================================================
Unearned Income
Unearned premiums $1,033 $1,024 $1,011
Unearned other 33 53 62
------------------------------------------------------------------
Unearned income $1,066 $1,077 $1,073
==================================================================
Premiums written represent new or renewal insurance business originated in each
respective year. Approximately 26 percent of net premiums written annually
represent insurance assumed from other insurance companies under various
reinsurance arrangements. Premiums earned represents that portion of premiums
written which are recognized as revenue in the respective reporting periods.
Unearned premiums represent the portion of premiums written that is applicable
to the unexpired terms of policies in force.
Activity related to unpaid losses and loss expenses for the three years ended
December 31, 1994 follows:
(In millions) 1994 1993 1992
------------------------------------------------------------------
Unpaid Losses and Loss
Expenses
Gross unpaid losses and loss
expenses, January 1 $9,684 $10,657 $10,481
Reinsurance recoverable 2,935 3,788 4,102
------------------------------------------------------------------
Net unpaid losses and loss
expenses, January 1 6,749 6,869 6,379
Incurred related to:
Current year accident losses 1,748 1,795 1,838
Prior years accident losses 11 (12) 892
Other adjustments, net 10 53 (5)
------------------------------------------------------------------
Total incurred 1,769 1,836 2,725
------------------------------------------------------------------
Paid related to:
Current year accident losses 486 495 477
Prior years accident losses 1,541 1,294 1,830
Other adjustments, net 36 23 11
------------------------------------------------------------------
Total paid 2,063 1,812 2,318
------------------------------------------------------------------
Other adjustments (37) (144) 83
------------------------------------------------------------------
Net unpaid losses and loss
expenses, December 31 6,418 6,749 6,869
Reinsurance recoverable 2,444 2,935 3,788
------------------------------------------------------------------
Gross unpaid losses and loss
expenses, December 31 $8,862 $9,684 $10,657
==================================================================
Ceded losses and loss expenses $ (441) $ (283) $ (695)
==================================================================
As more fully discussed in Note 10 on Page 63, in 1992, $880 million of
incurred losses related to prior accident years pertained to balance sheet
strengthening actions undertaken as part of the IOFS restructuring.
Estimation of reserves for asbestos-related, hazardous waste and other latent
or long-tail related claims provides unique challenges to the insurance
industry and the Company. The possibility that these claims would emerge was
often not recognized or contemplated at the time the policies were written,
and traditional actuarial reserving methodologies have not always been useful
in accurately estimating ultimate losses. Asbestos-related claims were the
first type of such exposures to cause significant losses to the insurance
industry. Because case law for asbestos-related injuries is now reasonably
developed and the number of open claims has been declining, the remaining
exposure and related uncertainty to the Company are also decreasing.
Hazardous waste claims have been the second major class of such claims to
emerge and significantly impact the insurance industry. Hazardous waste
claims
68
encompass costs for pollution clean up, bodily injury and property damage.
Significant uncertainties exist with respect to estimating the insurance
companies' exposure to hazardous waste claims. The uncertainty primarily results
from lack of historical data, long delays in reporting claims, difficulty in
identifying potential claimants and complex legal and coverage issues that have
been further complicated by inconsistent conclusions reached by the courts.
Other latent or long-tail exposures such as repetitive stress, lead paint and
breast implants are the latest type of such liability to emerge. These claim
types are also not suitable for traditional actuarial reserving techniques due
to significant uncertainties as to how legal issues will develop. As judicial
patterns emerge through the appellate process and remove uncertainties related
to asbestos bodily injury, asbestos-in-building, hazardous waste and other
latent or long-tail claims, additional liabilities and reinsurance recoverables
could arise.
At December 31, 1994, total gross and net unpaid losses and loss expense
reserves related to these claims included in the preceding table were $860
million and $303 million, respectively. Discussion of the activity in the
unpaid losses and loss expenses associated with these claims as well as their
potential effect on the future liquidity and financial position of the
Insurance operating groups is more fully discussed in the Financial Review
beginning on Page 53.
A summary of information related to acquisition costs and other expenses of
insurance underwriting operations for the three years ended December 31, 1994
follows:
(In millions) 1994 1993 1992
--------------------------------------------------------------------
Insurance Acquisition Costs and
Other Insurance Operating
Expenses
Amortization of deferred policy
acquisition costs $471 $527 $559
Other acquisition costs 264 216 213
Other operating expenses 42 42 185
--------------------------------------------------------------------
Insurance acquisition costs and
other insurance operating
expenses $777 $785 $957
====================================================================
Deferred Policy Acquisition Costs $197 $191 $182
====================================================================
Reinsurance Ceded. The Company reinsures, in the ordinary course of business,
certain risks with other insurance companies. These arrangements provide the
means for greater diversification of business and serve to limit the net loss
potential on unusually severe or frequent losses. Although the ceding of
insurance risk does not discharge the original insurer from its primary
liability to its policyholder, the reinsurance company that accepted the risk
assumes an obligation to the original insurer. A contingent liability exists,
however, with respect to reinsurance ceded to the extent that any reinsuring
company might not be able to meet the obligations assumed under reinsurance
agreements.
In 1993, the Company adopted SFAS No. 113 - "Accounting and Reporting for
Reinsurance of Short-Duration and Long-Duration Contracts." This new standard
eliminated the prior practice by insurance companies of reporting assets and
liabilities relating to reinsured contracts net of the effects of
reinsurance. The Company's consolidated balance sheets include all amounts on
a gross basis with regard to ceded reinsurance. As permitted by SFAS No. 113,
the Company will continue to record insurance premiums earned net of ceded
premiums, and insurance losses and loss expenses net of reinsurance
recoveries.
The components of the Company's reinsurance recoverable and prepaid
reinsurance premiums at December 31, 1994, 1993 and 1992 follow:
(In millions) 1994 1993 1992
--------------------------------------------------------------------
Reinsurance Recoverable
Reinsurance receivable on
paid losses $ 674 $ 905 $ 475
Allowance for doubtful reinsurance
accounts on paid losses (2) (5) (30)
--------------------------------------------------------------------
Net reinsurance receivable on
paid losses 672 900 445
Reinsurance recoverable on unpaid
losses and loss expenses 2,444 2,935 3,788
--------------------------------------------------------------------
Total reinsurance recoverable $3,116 $3,835 $4,233
====================================================================
Prepaid reinsurance premiums $ 163 $ 187 $ 223
====================================================================
In addition, the Company has provided reserves for doubtful reinsurance on
ceded unpaid losses, which is included in the unpaid losses and loss
expenses, of (in millions) $228, $245 and $342 at December 31, 1994, 1993 and
1992, respectively.
69
The Company actively monitors and evaluates the financial condition of its
reinsurers and prepares estimates of the uncollectible amounts due from
troubled reinsurers. These estimates focus upon financial data and other
available information such as ongoing rehabilitation and liquidation
proceedings. In addition to the reinsurers' ability to pay claims, from time
to time disputes arise over amounts and reinsurance coverage. The Company
pursues its remedies in these cases and recognizes the impact of developments
in these situations in its consolidated financial statements. The balance of
reinsurance recoverable is considered to be valid and collectible. The
Company also has a reinsurance security committee composed of senior officers
who approve those reinsurers with whom the Company will do business. Based
upon the review of financial condition and assessment of other available
information, an allowance for doubtful reinsurance accounts is established.
Talegen made significant use of reinsurance during the 1970s and early 1980s.
Since that time, Talegen has generally increased the portion of business they
retain while reducing the number of reinsurers used for their reinsurance
contracts. Accordingly, in the aggregate, net reserves as a percent of gross
reserves increased to 72 percent as of December 31, 1994, from 65 percent as
of December 31, 1992, and the percent of ceded premiums written to gross
premiums written decreased to 16 percent in 1994 from 21 percent in 1992.
Additionally, as of December 31, 1994, Talegen had current and future
reinsurance recoverables due from approximately 700 reinsurers on all paid
and unpaid losses. However, in 1994, 70 percent of premiums ceded were placed
with approximately 30 reinsurers. The reinsurance placed in the 1970s and
early 1980s has reduced the current net unpaid losses and loss expenses
related to hazardous waste and asbestos-related claims, since the majority of
such open claims have been made against policies issued in those years.
Statutory Information. Statutory information for the Company's insurance
subsidiaries for the three years ended December 31, 1994 follows:
(In millions) 1994 1993 1992
-----------------------------------------------------------------------
Restricted net assets $3,064 $3,215 $2,634
=======================================================================
Statutory net income (loss) $ 266 $ 243 $ (477)
=======================================================================
Statutory policyholders' surplus $2,310 $2,232 $1,622
=======================================================================
The Company's insurance subsidiaries are restricted by insurance laws as to the
amount of dividends they may pay without the approval of regulatory authorities.
There are additional restrictions regarding the amount of loans and advances
that Talegen's subsidiaries may make to Talegen. These restrictions indirectly
limit the payment of dividends and the making of loans and advances by Talegen,
through XFSI, to the Company.
Generally accepted accounting principles differ in certain respects from the
statutory accounting practices prescribed or permitted by insurance
regulatory authorities for the Company's insurance subsidiaries. Prescribed
statutory accounting practices include a variety of publications of the
National Association of Insurance Commissioners, as well as state laws,
regulations and general administrative rules. Permitted statutory accounting
practices encompass all accounting practices not so prescribed. The effect on
statutory policyholders' surplus of permitted practices is not significant.
The principal differences between statutory policyholders' surplus and
shareholders' equity, determined in accordance with generally accepted
accounting principles, relate to deferred federal income taxes, certain
reinsurance recoverables and provisions, goodwill and deferred policy
acquisition costs that are not considered assets for statutory purposes.
Resolution Credit Services Corporation (RCSC). In 1985, the Company
discontinued the operations of RCSC (formerly Industrial Indemnity Financial
Corporation), a unit of Talegen that was in the financial guarantee and
contract surety businesses. The phase-out period will be lengthy due to the
long-term nature of the outstanding financial guarantees. At December 31,
1994, there were contingent liabilities of approximately $381 million, which
represents the aggregate par value, net of reinsurance of $216 million, of
the guarantee contracts in force, but before consideration of approximately
$247 million of collateral that was pledged under the contracts; at December
31, 1993, these amounts were (in millions) $598 and $455. Approximately 75
percent of these contingent liabilities expire prior to the year 2000.
Reserves for anticipated future losses, loss expenses and other costs of
disposition are approximately $52 million at December 31, 1994.
70
CONSOLIDATED DISCLOSURES
14. INDUSTRY SEGMENT DATA
The consolidated industry segment data portrays the operating results and
assets for the Company's two industry segments.
Document Processing consists of the worldwide development, manufacturing,
marketing, financing and servicing of document processing products and
services. This segment also includes Xerox corporate headquarters. The
Document Processing business is unitary from both a company and a customer
perspective in that the marketing, financing and servicing of the Company's
products represent an integrated document services solution. The Company's
Insurance business includes Talegen, Ridge Re and Insurance headquarters.
Income from continuing operations for the Insurance segment includes assigned
interest expense.
General expenses include all costs not directly associated with segment
revenues. For Document Processing, general expenses primarily include
corporate overhead, foreign currency exchange losses and interest expense not
associated with the financing of the Company's products. For Insurance,
general expenses primarily represent interest and Insurance headquarters
costs. Interest expense is assigned based on the amount of underlying debt
incurred in connection with the acquisition and financing of the Insurance
entities.
A reconciliation of assets to the consolidated balance sheet follows:
(In millions) 1994 1993 1992
-----------------------------------------------------------------------
Assets of continuing operations $33,893 $33,576 $32,619
Assets of discontinued operations 4,692 5,174 5,652
-----------------------------------------------------------------------
Total consolidated assets $38,585 $38,750 $38,271
=======================================================================
Due to allocation methodologies and other operating conditions, the industry
segment data may not be representative of operating profits or assets if the
segments were independent companies. Data for segment capital expenditures,
depreciation and amortization are included in the consolidated statements of
cash flows on Pages 40 and 41.
Consolidated
Document Continuing
(In millions) Processing Insurance Operations
--------------------------------------------------------------------------------------------------------------------------------
1994 Revenues from unaffiliated customers $15,088 $ 2,749 $17,837
======= ======= =======
Operating profit $ 1,811 $ 153 $ 1,964
General expenses, net 297 197 494
------- ------- -------
Income (loss) before income taxes, equity income and minorities' interests 1,514 (44) 1,470
Income taxes (benefits) 595 (44) 551
Equity in net income of unconsolidated affiliates 88 - 88
Minorities' interests in earnings of subsidiaries 213 - 213
------- ------- -------
Income from continuing operations $ 794 $ - $ 794
======= ======= =======
Assets $19,374 $14,519 $33,893
======= ======= =======
===============================================================================================================================
1993 Revenues from unaffiliated customers $14,229 $ 2,809 $17,038
======= ======= =======
Operating profit $ 23 $ 179 $ 202
General expenses, net 303 213 516
------- ------- -------
Income (loss) before income taxes, equity income and minorities' interests (280) (34) (314)
Income taxes (benefits) (78) (38) (116)
Equity in net income of unconsolidated affiliates 87 - 87
Minorities' interests in earnings of subsidiaries 78 - 78
------- ------- -------
Income (loss) from continuing operations $ (193) $ 4 $ (189)
======= ======= =======
Assets $18,158 $15,418 $33,576
======= ======= =======
===============================================================================================================================
1992 Revenues from unaffiliated customers $14,298 $ 2,878 $17,176
======= ======= =======
Operating profit (loss) $ 1,393 $ (797) $ 596
General expenses, net 270 215 485
------- ------- -------
Income (loss) before income taxes, equity income and minorities' interests 1,123 (1,012) 111
Income taxes (benefits) 493 (233) 260
Equity in net income of unconsolidated affiliates 81 - 81
Minorities' interests in earnings of subsidiaries 149 - 149
------- ------- -------
Income (loss) from continuing operations $ 562 $ (779) $ (217)
======= ======= =======
Assets $17,140 $15,479 $32,619
======= ======= =======
===============================================================================================================================
71
15. DEBT
Short-Term Debt. Short-term borrowings data of the Company at December 31,
1994 and 1993 follow:
Weighted average
interest rates
(In millions) at December 31, 1994 1994 1993
--------------------------------------------------------------------
Bank notes payable 6.29% $ 235 $ 399
Foreign commercial paper 5.90 1,024 708
--------------------------------------------------------------------
Total short-term debt 1,259 1,107
Current maturities of
long-term debt 1,900 1,591
--------------------------------------------------------------------
Total $3,159 $2,698
====================================================================
Bank 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, 1994 and 1993 follows:
Weighted average
interest rates at
(In millions) December 31, 1994 1994 1993
---------------------------------------------------------------------------
U.S. Operations:
Xerox Corporation (parent company)
Guaranteed ESOP notes
due 1999-2004 7.69% $ 596 $ 641
Notes due 1994 - - 200
Notes due 1995 8.75 150 150
Notes due 1996 8.38 100 100
Notes due 1997 9.63 200 200
Notes due 1999 6.93 738 250
Notes due 2000 9.75 200 200
Notes due 2001 7.39 62 -
Notes due 2002 8.13 200 200
Notes due 2004 7.17 225 200
Notes due 2006 8.09 45 -
Debentures due 1995 9.25 200 200
Debentures due 2000 9.63 100 100
Other debt due 1994-2014 8.51 97 201
Capital lease obligations 5.48 7 7
---------------------------------------------------------------------------
Subtotal 2,920 2,649
---------------------------------------------------------------------------
Xerox Financial Services, Inc. (XFSI)
Xerox Credit Corporation
Notes due 1994 - - 439
Notes due 1995 6.83 400 400
Notes due 1996 6.73 670 250
Notes due 1997 6.08 347 50
Notes due 1999 10.00 150 400
Floating rate notes due 2048 5.86 61 61
Other debt due 1996-1997 10.00 19 18
---------------------------------------------------------------------------
Subtotal 1,647 1,618
Other XFSI debt
XFSI Notes due 1994-1996 8.25 310 470
Talegen Notes due 1995-2010 6.94 425 -
---------------------------------------------------------------------------
Subtotal 2,382 2,088
---------------------------------------------------------------------------
Total U.S. operations $5,302 $4,737
---------------------------------------------------------------------------
Weighted average
interest rates at
(In millions) December 31, 1994 1994 1993
---------------------------------------------------------------------------
International Operations:
International marketing subsidiaries
Various obligations, payable in:
Pounds sterling due 1994-1999 7.02% $ 314 $ 293
U.S. dollars due 1994-1999 7.73 220 32
Other currencies due 1994-1999 6.78 60 147
Capital lease obligations 8.97 14 25
---------------------------------------------------------------------------
Subtotal 608 497
---------------------------------------------------------------------------
International finance subsidiaries
Various obligations, payable in:
Canadian dollars due 1995-2007 10.71 265 273
Dutch guilders due 1994-1999 8.00 187 133
French francs due 1994-1998 8.00 76 82
German marks due 1995-1999 7.00 297 260
Pounds sterling due 1994-1997 8.00 39 11
Swiss francs due 1997-1998 6.00 96 79
Italian lira due 1995 9.00 81 -
Other currencies due 1994-1998 8.00 254 297
---------------------------------------------------------------------------
Subtotal 1,295 1,135
---------------------------------------------------------------------------
Total international operations 1,903 1,632
---------------------------------------------------------------------------
Other borrowings deemed
long-term 2,475 2,608
---------------------------------------------------------------------------
Subtotal 9,680 8,977
Less current maturities 1,900 1,591
---------------------------------------------------------------------------
Total long-term debt $7,780 $7,386
===========================================================================
Consolidated Long-Term Debt Maturities. Payments due on long-term debt for the
next five years are (in millions):
1995 1996 1997 1998 1999 Thereafter
-----------------------------------------------------
$1,900 $1,447 $1,048 $317 $1,085 $1,408
=====================================================
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 the Company has the intent to refinance them on a long-term
basis, and the ability to do so under its revolving credit agreements.
72
Certain of the Company's debt agreements allow the Company 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.
Lines of Credit. The Company's domestic operations have three revolving
credit agreements totaling $5.0 billion with groups of banks, of which $1.3
billion expires in December 1995 and the remainder in 1999. These agreements
are unused and are available to back the Company's domestic commercial paper
borrowings, which amounted to $2.4 billion and $2.3 billion at December 31,
1994 and 1993, respectively. In addition, the Company's foreign subsidiaries
had unused committed long-term lines of credit aggregating $2.0 billion in
various currencies at prevailing interest rates.
Matched Funding of Finance Receivables and Indebtedness. The Company employs a
matched funding policy for customer financing assets and related liabilities.
Under this policy, the interest and currency characteristics of the indebtedness
are matched to the interest and currency characteristics of the finance
receivables. At December 31, 1994, these operations had approximately $10.2
billion of net finance receivables, which will service approximately $8.3
billion of assigned short- and long-term debt, including $0.3 billion of debt
assigned to discontinued third-party financing businesses.
Interest. Including amounts relating to debt assigned to discontinued
operations, interest paid by the Company on its short- and long-term debt
amounted to (in millions) $757, $860 and $945, respectively, for each of the
three years ended December 31, 1994.
Total Short- and Long-Term Debt. The Company's short- and long-term debt at
December 31, 1994, 1993 and 1992 is reflected in the consolidated balance
sheets as follows:
(In millions) 1994 1993 1992
--------------------------------------------------------------------------
Short-term debt and current portion
of long-term debt $ 3,159 $ 2,698 $ 2,533
Long-term debt 5,494 5,157 4,950
Notes payable 425 - -
Discontinued operations liabilities -
policyholders' deposits and other 281 474 1,058
Other long-term debt and obligations 1,580 1,755 2,097
--------------------------------------------------------------------------
Total debt $10,939 $10,084 $10,638
==========================================================================
A summary of changes in consolidated indebtedness for the three years ended
December 31, 1994 follows:
(In millions) 1994 1993 1992
--------------------------------------------------------------------------
Increase (decrease) in short-term
debt, net $ (146) $ (451) $ 154
Proceeds from long-term debt 2,483 1,866 2,184
Principal payments on
long-term debt (1,555) (1,784) (1,572)
--------------------------------------------------------------------------
Total $ 782 $ (369) $ 766
==========================================================================
73
16. EMPLOYEE BENEFIT PLANS
Retirement Income Guarantee Plan (RIGP). Approximately 48,000 salaried and
union employees participate in the Company's RIGP plans. The RIGP plans are
defined benefit plans, which provide employees with the greater of (i) the
benefit calculated under a highest average pay and years of service formula,
(ii) the benefit calculated under a formula that provides for the
accumulation of salary and interest credits during an employee's work life,
or (iii) the individual account balance from the Company's prior defined
contribution plan (Transitional Retirement Accounts or TRA).
At December 31, 1994, these domestic plans accounted for approximately 63
percent of the Company's total pension assets and were invested primarily as
follows: domestic and international equity securities - 64 percent;
fixed-income investments - 32 percent; and real estate - 4 percent. No plan
assets are invested in the stock of the Company.
The RIGP plans are in compliance with the minimum funding standards of the
Employee Retirement Income Security Act of 1974 (ERISA).
The transition asset and prior service cost are amortized over 15 years.
Pension costs are determined using assumptions as of the beginning of the
year while the funded status is determined using assumptions as of the end of
the year. The assumptions used in the accounting for the U.S. defined benefit
plans were as follows:
1994 1993 1992
-------------------------------------------------------------------
Assumed discount rates 8.75% 7.75% 8.50%
Assumed rates for compensation
increases 5.75% 5.25% 6.00%
Expected return on plan assets 9.50% 9.50% 9.50%
===================================================================
The Company's discount rate considers, among other items, the aggregate effects
of a relatively young work force and, because pension benefits are settled at
retirement, the absence of retirees receiving pension benefits from plan assets.
Accordingly, the duration of the Company's pension obligation tends to be
relatively longer in comparison to other companies.
Other Plans. Several U.S. subsidiaries, including Talegen, have separate
tax-qualified pension plans that are funded in accordance with ERISA. The
Company also maintains various supplemental executive retirement plans
(SERPs) that are not tax-qualified and are unfunded.
The Company sponsors numerous pension plans for its international operating
units in Europe, Canada and Latin America, which generally provide pay- and
service-related benefits. Plan benefits are provided through a combination of
funded trusteed arrangements or through book reserves. Rank Xerox' pension
plan in the United Kingdom is the largest international plan and accounts for
approximately 23 percent of the Company's total pension assets at December
31, 1994. It is primarily invested in marketable equity securities.
A reconciliation of the funded status of the Company's retirement plans to
the amounts accrued in the Company's consolidated balance sheets at December
31, 1994 and 1993 follows:
1994 1993
---------------------------------- -----------------------------------
Over- Under- Non- Over- Under- Non-
(In millions) funded funded funded Total funded funded funded Total
---------------------------------------------------------------------------------------------------------------------------------
Accumulated benefit obligation $4,545 $103 $ 210 $4,858 $4,541 $103 $ 181 $4,825
Effect of projected compensation increases 396 28 40 464 358 33 59 450
---------------------------------------------------------------------------------------------------------------------------------
Projected benefit obligation (PBO) 4,941 131 250 5,322 4,899 136 240 5,275
Plan assets at fair value 5,241 90 - 5,331 5,226 85 - 5,311
---------------------------------------------------------------------------------------------------------------------------------
Excess (deficit) of plan assets over PBO 300 (41) (250) 9 327 (51) (240) 36
Items not yet reflected in the financial statements:
Unamortized transition obligations (assets) (172) 28 14 (130) (184) 26 16 (142)
Unrecognized prior service cost 54 - (12) 42 67 - 2 69
Unrecognized net (gain) loss 86 (25) 18 79 1 (12) 23 12
---------------------------------------------------------------------------------------------------------------------------------
Prepaid (accrued) pension cost recognized
in the consolidated balance sheets at
December 31 $ 268 $(38) $(230) $ - $ 211 $(37) $(199) $ (25)
=================================================================================================================================
74
Financial Information. The Company's disclosures about the funded status and
components of pension cost are in accordance with U.S. accounting principles.
Such principles recognize the long-term nature of pension plan obligations
and the need to make assumptions about events many years into the future. In
any year there may be significant differences between a plan's actual
experience and its actuarially assumed experience. Such differences are
deferred and do not generally affect current net pension cost. The objective
of deferring such differences is to allow actuarial gains and losses an
opportunity to offset over time. These deferrals are included in the captions
unrecognized net loss and net amortization and deferrals in the accompanying
tables. Due to variations in investment results, the effect of revising
actuarial assumptions and actual plan experience which differs from assumed
experience, certain of the Company's plans may be classified as overfunded in
one year and underfunded in another year. Under ERISA and other laws, the
excess assets of overfunded plans are not available to fund deficits in other
plans.
The non-funded plans are the SERPs and the Rank Xerox pension plans in
Germany and Austria. For tax reasons, these plans are most efficiently and
customarily funded on a pay-as-you-go basis.
The components of pension cost for the three years ended December 31, 1994
follow:
(In millions) 1994 1993 1992
-------------------------------------------------------------------
Defined benefit plans
Service cost $ 150 $ 153 $ 156
-------------------------------------------------------------------
Interest cost - change in PBO due to:
Passage of time 177 165 149
Net investment income (loss)
allocated to TRA accounts (45) 538 245
-------------------------------------------------------------------
Subtotal 132 703 394
-------------------------------------------------------------------
Net investment (income) loss on:
TRA assets 45 (538) (245)
Other plan assets (101) (420) (70)
-------------------------------------------------------------------
Subtotal (56) (958) (315)
-------------------------------------------------------------------
Net amortization and deferrals (144) 209 (143)
-------------------------------------------------------------------
Settlement and curtailment gains (12) (8) (4)
-------------------------------------------------------------------
Defined benefit plans
- net pension cost 70 99 88
Defined contribution plan
- pension cost 16 22 21
-------------------------------------------------------------------
Total pension cost $ 86 $ 121 $ 109
===================================================================
Pension cost in 1994 was lower than in prior years because of the reduction
of the Document Processing work force in connection with the restructuring
actions announced in December 1993. Plan assets consist of both defined
benefit plan assets and assets legally allocated to the TRA accounts. The
combined investment results of the assets are shown above in the net
investment income caption. To the extent investment results relate to TRA,
such results are credited to these accounts as a component of interest cost.
The TRA account assets were $3.0 billion and $3.2 billion at December 31,
1994 and 1993, respectively. Because a substantial portion of plan assets are
TRA-related and therefore are equal to TRA-related liabilities, the Company's
pension plans' funding surplus tends to be less than that of comparable
companies.
Other Postretirement Benefits. The primary plan for U.S. Document Processing
salaried employees retiring on or after January 1, 1995 provides retirees an
annual allowance that can be used to purchase medical and other benefits. The
allowance available to each eligible employee is partially service related
and, for financial accounting purposes, is projected to increase at an annual
rate of 7.5 percent until it reaches the plan's annual coverage of
approximately 2.5 times the 1992 level, the inception year of this plan.
The Company's Document Processing operations also have other postretirement
benefit plans that cover employees retiring prior to January 1, 1995, certain
grandfathered employees and certain union employees. These other plans are
generally indemnity arrangements that provide varying levels of benefit
coverage. The medical inflation assumption for these plans is 10.5 percent in
1994 and declines to 6.75 percent in 2002 and thereafter. A one percentage
point increase in the medical inflation assumptions would increase the
service and interest cost for these plans by $5 million and the accumulated
postretirement benefit obligation by $58 million.
75
The discount rate used to determine the funded status was 8.75 percent at
December 31, 1994, 7.5 percent at December 31, 1993, and 8.5 percent at
December 31, 1992.
A reconciliation of the financial status of the plans as of December 31, 1994
follows:
(In millions) 1994 1993 1992
---------------------------------------------------------------------
Accumulated Postretirement
Benefit Obligation:
Retirees $ 490 $ 507 $ 502
Fully eligible employees 209 256 266
Other employees 252 350 339
---------------------------------------------------------------------
Total 951 1,113 1,107
Unrecognized net gain (loss) 104 (48) (70)
Unrecognized prior service cost 61 46 -
---------------------------------------------------------------------
Accrued cost recognized in the
consolidated balance sheets $1,116 $1,111 $1,037
=====================================================================
Document Processing $1,006 $ 997 $ 927
=====================================================================
Insurance $ 110 $ 114 $ 110
=====================================================================
The components of postretirement benefit cost for the three years ended
December 31, 1994 follow:
(In millions) 1994 1993 1992
---------------------------------------------------------------------
Service cost $ 27 $ 33 $ 28
Interest cost 69 81 74
Net amortization (4) (2) -
Settlement gain (25) - -
---------------------------------------------------------------------
Total $ 67 $ 112 $ 102
=====================================================================
These plans are most efficiently and customarily funded on a pay-as-you-go
basis.
Employee Stock Ownership Plan (ESOP) Benefits. In 1989, the Company
established an ESOP and sold to it ten million shares of Series B Convertible
Preferred Stock, (Convertible Preferred) of the Company for a purchase price
of $785 million. The Convertible Preferred has a $1 par value, 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. Because
the ESOP borrowings are guaranteed by the Company, they are included in debt
on the Company's consolidated balance sheets. A corresponding amount
classified as Deferred ESOP Benefits represents the Company's commitment to
future compensation expense related to the ESOP benefits.
The ESOP will repay its borrowings from dividends on the Convertible
Preferred and from Company contributions. The ESOP's debt service is
structured such that the Company's 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 the Company's
Document Processing employees are eligible to participate in the ESOP.
Information relating to the ESOP and the Company for the three years ended
December 31, 1994 follows:
(In millions) 1994 1993 1992
---------------------------------------------------------------------
Interest on ESOP borrowings $ 49 $ 52 $ 55
=====================================================================
Dividends declared on Convertible
Preferred Stock $ 61 $ 62 $ 62
=====================================================================
Cash contribution to the ESOP $ 32 $ 30 $ 32
=====================================================================
Compensation expense $ 32 $ 31 $ 33
=====================================================================
ESOP costs are recognized by the Company based on the amount committed to be
contributed to the ESOP plus related trustee, finance and other charges.
76
17. 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, 1994 consists of the following:
Consolidated Document Processing Insurance
--------------------------- -------------------------- ------------------------
(In millions) 1994 1993 1992 1994 1993 1992 1994 1993 1992
----------------------------------------------------------------------------------------------------------------------------------
Domestic income (loss) $ 669 $(533) $(405) $ 713 $(499) $ 607 $(44) $(34) $(1,012)
Foreign income 801 219 516 801 219 516 - - -
----------------------------------------------------------------------------------------------------------------------------------
Income (loss) before income taxes $1,470 $(314) $ 111 $1,514 $(280) $1,123 $(44) $(34) $(1,012)
==================================================================================================================================
Provisions for income taxes from continuing operations for the three years
ended December 31, 1994 consist of the following:
Consolidated Document Processing Insurance
--------------------------- -------------------------- ------------------------
(In millions) 1994 1993 1992 1994 1993 1992 1994 1993 1992
----------------------------------------------------------------------------------------------------------------------------------
Federal income taxes
Current $ 90 $ 133 $ 38 $ 160 $ 182 $ 175 $(70) $(49) $ (137)
Deferred 141 (313) (9) 100 (337) 73 41 24 (82)
Foreign income taxes
Current 88 87 99 88 87 99 - - -
Deferred 182 (3) 84 182 (3) 84 - - -
State income taxes
Current 31 29 34 46 42 48 (15) (13) (14)
Deferred 19 (49) 14 19 (49) 14 - - -
----------------------------------------------------------------------------------------------------------------------------------
Income taxes (benefits) $ 551 $(116) $ 260 $ 595 $ (78) $ 493 $(44) $(38) $ (233)
==================================================================================================================================
Deferred provisions for income tax expense (benefit) from continuing
operations for the three years ended December 31, 1994 result from the
following items:
Consolidated Document Processing Insurance
--------------------------- -------------------------- ------------------------
(In millions) 1994 1993 1992 1994 1993 1992 1994 1993 1992
----------------------------------------------------------------------------------------------------------------------------------
Installment sales and leases $ 118 $ 18 $ 59 $ 118 $ 18 $ 59 $ - $ - $ -
Depreciation 9 73 38 9 73 38 - - -
Discount on unpaid losses 27 4 (38) - - - 27 4 (38)
Restructuring, litigation settlements
and reorganization reserves 211 (515) 34 211 (515) 34 - - -
Effect of tax rate changes on
deferred tax assets and liabilities - (58) - - (40) - - (18) -
Postretirement medical benefits (2) (23) (26) (4) (25) (23) 2 2 (3)
Tax credit carryforwards (56) 53 (53) (56) - - - 53 (53)
Unrecoverable reinsurance (9) (4) 12 - - - (9) (4) 12
Pension (9) 7 4 (9) 7 4 - - -
Other 53 80 59 32 93 59 21 (13) -
----------------------------------------------------------------------------------------------------------------------------------
Total $ 342 $(365) $ 89 $ 301 $(389) $ 171 $ 41 $ 24 $ (82)
==================================================================================================================================
77
A reconciliation from the U.S. Federal statutory income tax rate to the
effective income tax rate for continuing operations for the three years ended
December 31, 1994 follows:
Consolidated Document Processing Insurance
--------------------------- -------------------------- --------------------------
(In millions) 1994 1993 1992 1994 1993 1992 1994 1993 1992
------------------------------------------------------------------------------------------------------------------------------------
U.S. Federal statutory income tax rate 35.0% (35.0)% 34.0% 35.0% (35.0)% 34.0% (35.0)% (35.0)% (34.0)%
Foreign earnings and dividends taxed
at different rates 2.2 15.6 29.3 2.1 17.5 2.9 - - -
Amortization and write-down of intangibles .2 2.3 151.3 - - - 8.0 21.4 14.2
Tax-exempt income (1.8) (4.7) (33.7) (.7) (3.8) (.7) (40.0) (12.9) (2.8)
Effect of tax rate changes on deferred
tax assets and liabilities - (18.5) - - (14.3) - - (53.1) -
State taxes 2.1 (4.1) 36.8 2.7 (1.6) 3.6 (22.6) (25.2) (.9)
Other (.2) 7.5 16.5 .2 9.3 4.1 (11.0) (7.0) .5
------------------------------------------------------------------------------------------------------------------------------------
Effective income tax rate 37.5% (36.9)% 234.2% 39.3% (27.9)% 43.9% (100.6)% (111.8)% (23.0)%
====================================================================================================================================
The Document Processing 1994 effective tax rate of 39.3 percent is 2 percentage
points higher than the 1993 Document Processing tax rate before considering the
effects of the 1993 restructuring charge and litigation settlements. This higher
1994 rate is primarily caused by the deferred tax rate benefits which only
occurred in 1993 and which is partially offset by the increased tax benefits in
1994 associated with the mix of operations and ESOP dividends.
The 1994 consolidated effective tax rate of 37.5 percent is 2.6 percentage
points higher than the 1993 consolidated effective tax rate before
considering the 1993 restructuring charge and litigation settlements. This
higher 1994 rate is primarily caused by the Document Processing and Insurance
deferred tax rate benefits which only occurred in 1993 and which is partially
offset by the increased Document Processing tax benefits in 1994 associated
with the mix of operations, ESOP dividends and tax benefits associated with
Insurance tax-exempt investment income.
The 1993 Document Processing restructuring charge and the deferred tax rate
benefits principally contributed to the 271.1 percentage point decrease in
the consolidated effective tax rate for 1993.
On a consolidated basis, including the effects of discontinued operations,
the Company paid a total of (in millions) $163, $197 and $157 in income taxes
to federal, foreign and state income-taxing authorities in 1994, 1993 and
1992, respectively.
Total income tax expense (benefit) for the three years ended December 31,
1994 was allocated as follows:
(In millions) 1994 1993 1992
--------------------------------------------------------------------------
Income from Document Processing
continuing operations $595 $ (78) $ 493
Income from Insurance
continuing operations (44) (38) (233)
Discontinued operations (91) 43 (17)
Common shareholders' equity* (19) (33) (33)
--------------------------------------------------------------------------
Total $441 $(106) $ 210
==========================================================================
*For dividends paid on shares held by the ESOP; cumulative translation
adjustments; and unrealized gains and losses on investment securities.
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, 1994 was approximately $3.3 billion. These earnings have been
substantially reinvested and the Company does 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.
78
The tax effects of temporary differences that give rise to significant
portions of the deferred taxes at December 31, 1994 and 1993 follows:
(In millions) 1994 1993
--------------------------------------------------------------------
Tax effect of future tax deductions:
Document Processing:
Depreciation $ 469 $ 532
Postretirement medical benefits 388 385
Restructuring reserves 342 556
Other operating reserves 290 258
Deferred intercompany profit 116 96
Allowance for doubtful accounts 83 79
Deferred compensation 134 142
Tax credit carryforwards 56 -
Other 118 144
Insurance:
Tax basis discount on unpaid losses 483 510
Unrealized investment losses 152 4
Unearned premiums 50 49
Postretirement medical benefits 34 35
Unrecoverable reinsurance 45 36
Severance and leasehold provisions 16 20
Other 119 97
--------------------------------------------------------------------
Subtotal 2,895 2,943
Less: Valuation allowance (286) (134)
--------------------------------------------------------------------
Total $ 2,609 $ 2,809
====================================================================
Tax effect of future taxable income:
Document Processing:
Installment sales and leases $(1,262) $(1,214)
Leverage leases (41) (80)
Deferred income (155) (97)
Other (117) (126)
Insurance:
Deferred policy acquisition costs (78) (76)
Other (67) (51)
--------------------------------------------------------------------
Total $(1,720) $(1,644)
====================================================================
The above Document Processing amounts are classified in the balance sheets in
accordance with the asset or liability to which they relate. Document Processing
current deferred tax assets at December 31, 1994, 1993 and 1992 amounted to (in
millions) $709, $711 and $477, respectively.
The $286 million valuation allowance at December 31, 1994 applies to deferred
tax assets that may expire unused before the Company can utilize them. The
$152 million increase in the valuation allowance during 1994 relates to net
unrealized losses on investment securities recorded in common shareholders'
equity.
After consideration of the valuation allowance, the Company concludes 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, 1994, Document Processing has tax credit carryforwards for
federal income tax purposes of $56 million which are available to offset
future federal taxable income indefinitely.
18. LITIGATION
Document Processing. 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.
On April 15, 1994, another case was filed in the United States District Court
for the Northern District of California by 21 different ISOs from 12 states.
Plaintiffs in these actions claim damages (to be trebled) to their individual
businesses resulting from essentially the same alleged violations of law at
issue in the antitrust class action in Texas, which was settled by the
Company during 1994. In one of the cases damages are unspecified and in the
other damages in excess of $10 million are sought. In addition, injunctive
relief is sought in both actions. Claims for individual lost profits of ISOs
who were not named parties were not included in the class action. The two
actions have been consolidated for pretrial proceedings in the District of
Kansas. The Company has since filed a motion for leave to assert numerous
counterclaims against the plaintiffs alleging patent and copyright
infringement. Discovery is in its early stages. The Company denies any
wrongdoing and intends to vigorously defend these actions.
Insurance. On September 15, 1992, International Surplus Lines Insurance
Company, which has since been merged into International Insurance Company
(International Insurance), a subsidiary of Talegen, filed a complaint in the
United States District Court for the Southern District of Ohio, Eastern
District, in Columbus, Ohio against certain underwriting syndicates at
Lloyd's of London and other foreign reinsurance companies. The complaint
seeks a declaratory judgment that the defendants are obligated to reimburse
International Insurance under
79
various reinsurance contracts for approximately $255 million in payments made or
to be made to Owens-Corning Fiberglas (OCF) for asbestos-related losses. In an
Opinion and Order dated September 27, 1994, International Insurance's motion for
summary judgment was granted. The court ruled that International Insurance's
payment of OCF's losses, based on the determination that the manufacture, sale
and distribution of products containing asbestos constituted a single
occurrence, was reasonable and therefore binding on International Insurance's
reinsurers. The defendants filed motions for reconsideration of the September 27
order. In order to avoid the expense of further litigation and possible appeals,
International Insurance has executed settlement agreements with most of the
defendants in the action. The recovery pursuant to the settlement agreements
approximates the recorded reinsurance recoverable balance after consideration
for amounts written-off for uncollectible reinsurance in prior years. Settlement
discussions with the remaining defendants are continuing and are expected to
result in additional executed settlement agreements with some or all defendants.
As of January 30, 1995, approximately $29.5 million is outstanding with these
remaining reinsurers. The litigation is currently stayed by agreement of the
parties pending the current discussions to settle the litigation in its
entirety.
In another OCF matter, on December 13, 1993, a complaint was filed in the
United States District Court for the District of New Jersey against The North
River Insurance Company (North River), a subsidiary of Talegen, by certain
foreign insurance companies and underwriting syndicates at Lloyd's of London
seeking to recover certain sums paid, and to avoid certain sums to be paid,
by them to North River under various reinsurance contracts. Such sums relate
to approximately $106 million in defense expense costs North River paid under
insurance policies it issued for asbestos bodily injury coverage to OCF; the
payments resulted from a decision rendered in favor of OCF in a binding
arbitration. The reinsurers allege that North River misrepresented and
withheld certain facts surrounding the decision and breached certain duties
to its reinsurers. A motion by North River to dismiss the complaint for lack
of subject matter jurisdiction is pending. As part of the Talegen
restructuring, International Insurance has assumed the rights and obligations
with respect to these reinsurance contracts. International believes it is
entitled to the full payment of these reinsurance recoverables and will
vigorously defend the foregoing action and denies any wrongdoing.
On June 20, 1991, an amended complaint was filed in an action brought by
Monsanto Company pending in the 71st District Court of Harrison County,
Texas, against Crum and Forster, Inc., which has since been renamed Talegen
Holdings, Inc. and four of its insurance subsidiaries. The action was
commenced in November 1989. The amended complaint alleged breach of the duty
of good faith and fair dealing and violations of the Texas Insurance Code.
Plaintiff sought approximately $16.4 million in actual damages plus interest
and attorneys' fees, subject to trebling, and punitive damages of $300
million. In early 1992, a verdict was rendered against Talegen and its
subsidiaries by the jury. The Court of Appeals of the Sixth Appellate
District of Texas affirmed the judgment. As of December 31, 1994, the
judgment against Talegen and its subsidiaries amounted to approximately $91
million, including accrued interest. On March 2, 1995, the parties entered
into settlement agreements pursuant to which Talegen and its subsidiaries
have made a cash payment to Monsanto in the amount of $34 million.
Farm & Home Savings Association (Farm & Home) filed a lawsuit in the United
States District Court for the Western District of Missouri, Southwest Division
alleging that under an agreement previously entered into by certain Talegen
insurance companies (Insurance Companies) with Farm & Home (Indemnification
Agreement), the Insurance Companies are required to defend and indemnify Farm &
Home from actual and punitive damage claims being made against Farm & Home
relating to the Brio superfund site (Brio). The Indemnification Agreement had
been entered into in connection with the settlement of disputes between Farm &
Home and the Insurance Companies regarding policies issued to Farm & Home during
the time it was developing the Southbend subdivision in Friendswood, Texas
(Southbend), which is close to Brio. Under the Indemnification Agreement, the
Insurance Companies are required to indemnify Farm & Home only as to claims
asserted by current or former residents of Southbend itself, or persons whose
injuries are alleged to have been incurred as a direct consequence of exposure
to allegedly hazardous
80
substances within Southbend emanating from the Brio site. Farm & Home alleges
that the Indemnification Agreement covers claims for injuries arising elsewhere
than Southbend. The Insurance Companies deny any liability to Farm & Home and
intend to continue to vigorously contest coverage under the Indemnification
Agreement for injuries not related to Southbend. Cross motions for summary
judgment in the action are pending.
In a number of lawsuits pending against Farm & Home in the District Courts of
Harris County, Texas, plaintiffs seek both actual and punitive damages
allegedly relating to injuries arising out of the hazardous substances at
Brio. The Insurance Companies have been defending these cases under a
reservation of rights because it is unclear whether the claims fall under the
coverage of either the policies or the Indemnification Agreement. In one of
the pending cases, the court dismissed claims brought by plaintiffs who were
unable to demonstrate a pertinent nexus to the Southbend subdivision.
19. PREFERRED STOCK
The Company has 23.5 million authorized shares of cumulative preferred stock, $1
par value. Two series of preferred stock are currently outstanding and are
described below.
Redeemable Preferred Stock. The Company's series of Ten-Year Preferred Stock
has an annual dividend rate of $3.6875 and is subject to redemption by the
Company through a sinking fund. The mandatory sinking fund for this series is
designed to retire 20 percent of the issue in each of the five years
beginning on April 1, 1994. Also, the Company has the non-cumulative option
to increase the annual sinking fund payments by an amount up to 100 percent
of the mandatory payment. During 1994, 1 million shares were redeemed at the
sinking fund redemption price of $50 per share. A total of 1.5 million shares
of this series, with a recorded value of $75 million, is outstanding.
Dividends amounted to $7 million in 1994 and $9 million in 1993 and 1992.
Shares issued under this series are non-voting, have cumulative dividends, a
sinking fund redemption price of $50 per share and a $50 per share liquidation
preference over the Company's common stock.
The Company's former series of Twenty-Year Preferred Stock was redeemed in
1994 for $184 million, including a premium of $11 million. Dividends amounted
to $5 million in 1994 and $14 million in 1993 and 1992.
Convertible Preferred Stock. As more fully described in Note 16 on Page 76,
the Company sold, for $785 million, 10 million shares of its new Series B
Convertible Preferred Stock (ESOP shares) in 1989 in connection with the
establishment of its ESOP. At December 31, 1994, 9.7 million of these shares
remain outstanding. As employees with vested ESOP shares leave the Company,
these shares are redeemed by the Company. The Company has the option to
settle such redemptions with either shares of common stock or cash.
Preferred Stock Purchase Rights. The Company has a shareholder rights plan
designed to deter coercive or unfair takeover tactics and to prevent a person
or persons from gaining control of the Company without offering a fair price
to all shareholders.
Under the terms of the plan, one preferred stock purchase right (Right)
accompanies each share of outstanding common stock. Each Right entitles the
holder to purchase from the Company one one-hundredth of a new series of
preferred stock at an exercise price of $225.
Within the time limits and under the circumstances specified in the plan, the
Rights entitle the holder to acquire common stock of the Company, the
surviving company in a business combination or the purchaser of the Company's
assets, having a value of two times the exercise price.
The Rights may be redeemed prior to becoming exercisable by action of the
Board of Directors at a redemption price of $.05 per right. The Rights expire in
April 1997.
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 the Company's common
stock.
81
20. COMMON SHAREHOLDERS' EQUITY
The components of common shareholders' equity and the changes therein for the
three years ended December 31, 1994 follow:
Net Unrealized
Common Stock Additional Gain (Loss) on
(Dollars in millions, except per-share data. -------------- Paid-In Retained Investment Translation
Shares in thousands.) Shares Amount Capital Earnings Securities Adjustments Total
---------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1991 92,846 $ 94 $ 539 $4,605 $ 32 $(130) $ 5,140
Stock option and incentive plans 1,885 2 111 113
Xerox Canada Inc. exchangeable stock 266
Convertible securities 69
Net loss (1,020) (1,020)
Cash dividends declared
Common stock ($3.00 per share) (288) (288)
Preferred stock (See Note 19 on Page 81) (85) (85)
Tax benefits on ESOP dividends 70 70
Net unrealized loss on investment securities (26) (26)
Translation adjustments - net of minority
shareholders' interests of $9 (29) (29)
---------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1992 95,066 96 650 3,282 6 (159) 3,875
Issuance of common stock, net of issuance costs 8,050 8 571 579
Stock option and incentive plans 861 1 57 58
Xerox Canada Inc. exchangeable stock 65 1 34 3 38
Convertible securities 80
Net loss (126) (126)
Cash dividends declared
Common stock ($3.00 per share) (304) (304)
Preferred stock (See Note 19 on Page 81) (85) (85)
Tax benefits on ESOP dividends 23 23
Translation adjustments - net of minority
shareholders' interests of $(24) (86) (86)
---------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1993 104,122 106 1,312 2,793 6 (245) 3,972
Stock option and incentive plans 1,056 1 94 (3) 92
Xerox Canada Inc. exchangeable stock 653
Convertible securities 162
Net income 794 794
Cash dividends declared
Common stock ($3.00 per share) (322) (322)
Preferred stock (See Note 19 on Page 81) (73) (73)
Tax benefits on ESOP dividends 19 19
Call premium on preferred stock
(See Note 19 on Page 81) (11) (11)
Net unrealized loss on investment securities (439) (439)
Translation adjustments - net of minority
shareholders' interests of $93 145 145
---------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1994 105,993 $107 $1,406 $3,197 $(433) $(100) $4,177
=================================================================================================================================
Common Stock. The Company has 350 million authorized shares of common stock, $1
par value. At December 31, 1994 and 1993, 3.9 and 5.0 million shares,
respectively, were reserved for issuance of common stock under the Company's
incentive compensation plan. In addition, at December 31, 1994, 0.9 million
common shares were reserved for the conversion of $53 million of convertible
debt and 9.7 million common shares were reserved for conversion of ESOP-related
Convertible Preferred Stock.
In June 1993, the Company completed a public offering of 8.05 million shares
of its common stock in the U.S. and abroad, at a price of $74.25 per share.
The proceeds of the offering, after deducting underwriting commissions, were
approximately $580 million or $72.10 per newly issued share, and were used to
retire commercial paper.
Stock Option and Long-Term Incentive Plans. The Company has a long-term
incentive plan whereby eligible employees may be granted incentive stock
options, nonqualified stock options, incentive stock rights, stock
appreciation rights (SARs) and performance unit rights. Subject to vesting
and other requirements, SARs and performance unit rights are typically paid
in cash, and stock options and incentive stock rights are settled with newly
issued shares of the
82
Company's common stock. Substantially all long-term incentive compensation plan
awards in recent years have been in the form of nonqualified stock options,
performance units and incentive stock rights. Eligible employees typically
receive equal amounts of options and performance units. Stock options normally
vest in two years and normally expire five years from the date of grant. Because
the exercise price of the options is equal to the market value of the Company's
common stock on the date of grant, option awards do not result in a charge to
expense. The value of each performance unit is typically based upon the Document
Processing level of return on assets during the year in which granted.
Performance units ratably vest in the three years after the year awarded. At
December 31, 1994 and 1993, 2.8 million shares were available for grant of
options or rights. The following table provides information relating to the
status of, and changes in, options granted during the current or prior years:
1994 1993
------------------ ------------------
Average Average
Stock Option Stock Option
(Options in thousands) Options Price Options Price
---------------------------------------------------------------------------
Outstanding at January 1 3,210 $75 3,116 $66
Granted 1,168 98 1,087 82
Canceled (51) 87 (25) 81
Exercised (1,032) 72 (756) 55
Surrendered for SARs (53) 51 (212) 55
------ -----
Outstanding at December 31 3,242 $84 3,210 $75
====== =====
Exercisable at
December 31, 1994 1,319
===========================================
Becoming exercisable in 1995 1,486
===========================================
Xerox Canada Inc. Exchangeable Class B Stock. In 1989 the shareholders of Xerox
Canada Inc. (XCI), a then 79 percent-owned subsidiary of the Company, approved a
restructuring plan which, among other provisions, amended the provisions of
XCI's Common Shares. The XCI Common Shares had previously been owned by public
shareholders and represented the 21 percent of XCI not owned by the Company. As
a result of the approved restructuring plan, in 1989 a majority of the XCI
public shareholders became owners of XCI's new Non-Voting Exchangeable Class B
Shares (Exchangeable Shares) with a right to exchange three Exchangeable Shares
for one share of the common stock of the Company. In 1993, the remaining XCI
public shareholder entered into the restructuring plan. As a result, the
Company's shareholders' equity was increased by $38 million. The Company has
reserved 0.6 million shares of the Company's common stock for purposes of this
exchange.
21. FINANCIAL INSTRUMENTS
Derivative Financial Instruments. Certain financial instruments with
off-balance-sheet risk have been entered into by the Company to manage its
interest rate and foreign currency exposures. These instruments are held
solely for hedging purposes and include interest rate swap agreements,
forward-foreign exchange contracts and foreign currency swap agreements. The
Company does not enter into derivative instrument transactions for trading or
other speculative purposes.
The Company typically enters into simple, unleveraged derivative transactions
which, by their nature, have low credit and market risk. The Company's
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. Based upon its ongoing evaluation of
the replacement cost of its derivatives transactions and counterparty
creditworthiness, the Company considers the risk of credit default
significantly affecting its financial position or results of operations to be
remote.
The Company utilizes numerous counterparties to ensure that there are no
significant concentrations of credit risk with any individual counterparty or
groups of counterparties.
The Company employs the use of hedges to reduce the risks that rapidly
changing market conditions may have on the underlying transactions.
Typically, the Company's 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 spreads related to underlying transactions.
None of the Company's hedging activities involve exchange traded instruments.
Interest Rate Swaps. The Company enters 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.
The Company follows 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
83
maturity terms of outstanding debt, the Company "locks in" an interest spread by
arranging fixed-rate interest obligations with similar maturities as the
underlying assets. Additionally, customer financing assets are consistently
funded with liabilities denominated in the same currency. The Company refers to
the effect of these conservative practices as "match funding" its customer
financing assets.
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. Occasionally, pay variable/receive fixed interest rate swaps are
used to transform term fixed rate debt into variable rate obligations. The
transactions performed within each of these three categories enable the
Company to cost-effectively manage its interest rate exposures. During 1994,
the average notional amount of an interest rate swap agreement was $20
million.
At December 31, 1994 and 1993, the total notional amounts of these
transactions are summarized, based on contract maturity, as follows:
(In millions) 1994 1993
----------------------------------------------------------------
Commercial paper/bank borrowings $1,171 $1,627
Medium-term debt 2,193 2,294
Long-term debt 1,615 1,374
----------------------------------------------------------------
Total $4,979 $5,295
================================================================
For the three years ended December 31, 1994, no interest rate swap agreements
had been terminated prior to maturity.
The aggregate amounts of interest rate swaps by maturity date and type at
December 31, 1994 and 1993 are as follows:
(Dollars In millions) 1994 1995 1996-1998 1999-2006 Total
----------------------------------------------------------------------------------------------------------------------------------
1994 Pay fixed/receive variable $ - $ 1,071 $ 1,802 $ 925 $ 3,798
Pay variable/receive variable - 100 325 274 699
Pay variable/receive fixed - - 66 416 482
----------------------------------------------------------------------------------------------------------------------------------
$ - $ 1,171 $ 2,193 $ 1,615 $ 4,979
----------------------------------------------------------------------------------------------------------------------------------
Memo:
Interest rate paid - 6.41% 6.58% 7.61% 6.72%
Interest rate received - 5.44% 5.69% 6.93% 6.02%
==================================================================================================================================
1993 Pay fixed/receive variable $ 1,402 $ 1,002 $ 1,085 $ 758 $ 4,247
Pay variable/receive variable 225 100 50 - 375
Pay variable/receive fixed - - 87 586 673
----------------------------------------------------------------------------------------------------------------------------------
$ 1,627 $ 1,102 $ 1,222 $ 1,344 $ 5,295
----------------------------------------------------------------------------------------------------------------------------------
Memo:
Interest rate paid 6.80% 6.12% 6.59% 7.03% 6.65%
Interest rate received 4.10% 4.51% 5.22% 5.33% 4.75%
==================================================================================================================================
Forward-Foreign Exchange Contracts. The Company utilizes forward-foreign
exchange contracts to hedge against the potentially adverse impacts of foreign
currency fluctuations on foreign currency denominated receivables and payables
and firm foreign currency commitments. 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, 1994 and
1993, the Company had outstanding (in millions) $1,476 and $1,185, respectively,
of forward-foreign exchange contracts. Of the outstanding contracts at December
31, 1994, the largest single currency represented was the Japanese yen.
Contracts denominated in Japanese yen, French francs, Mexican pesos, Swiss
francs, U.S. dollars, Italian lira and Austrian schillings accounted for over 75
percent of the Company's forward-foreign exchange contracts. Gains and losses on
contracts that hedge foreign currency denominated receivables and payables are
reported currently in income and are included in Other, net in the consolidated
statements of income. Gains and losses on contracts that hedge firm commitments
are deferred and subsequently recognized as part of the cost of the underlying
transaction, such as inventory. At December 31, 1994, deferred gains and
deferred losses amounted to $5 million and $9 million, respectively.
During 1994, the average notional amount of a forward-foreign exchange
contract amounted to $5 million.
84
Foreign Currency Swap Agreements. The Company has in the past also entered
into several foreign currency and related interest rate swap agreements,
whereby the Company issues foreign currency denominated debt and swaps the
proceeds with a counterparty. In return, the Company receives either U.S.
dollars or a second foreign currency. This effectively denominates the debt
of the Company in the currency received from the counterparty. 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, 1993, $216 million of
foreign currency swap agreements was outstanding. No foreign currency swap
agreements were outstanding at December 31, 1994.
Guarantees. Although the Company has earnings support agreements with
certain subsidiaries, the Company generally does not guarantee the debt of
subsidiary companies. The primary exceptions relate to XFSI-related
indebtedness to Talegen and Ridge Re which is more fully discussed in Note 10
on Page 63 and the guarantee of $181 million of indebtedness of the Company's
Latin American subsidiaries. The Company has guaranteed and effectively
assumed the borrowings of its ESOP.
Fair Value of Financial Instruments. The estimated fair values of the
Company's financial instruments at December 31, 1994 and 1993 were as
follows:
1994 1993
----------------- -----------------
Carrying Fair Carrying Fair
(In millions) Amount Value Amount Value
------------------------------------------------------------------------
Cash $ 56 $ 56 $ 86 $ 86
Accounts receivable, net 1,811 1,811 1,613 1,613
Investments
available-for-sale 8,384 8,384 8,344 8,344
Short-term debt 1,259 1,259 1,107 1,107
Long-term debt 9,680 9,872 8,977 9,390
Interest rate swap
agreements - (10) - (63)
Forward-foreign exchange
contracts - (7) - 10
========================================================================
The fair value amounts for cash, accounts receivables, net, short-term
investments and short-term debt approximate carrying amounts due to the short
maturities of these instruments. The fair value of longer-term investments is
based on closing bid prices for exchange traded securities or on bid quotations
received from securities dealers.
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 the Company
for debt of the same remaining maturities. The difference between the fair
value and the carrying value represents the theoretical net premium the
Company would have to pay to retire all debt at such date. The Company has no
plans to retire significant portions of its long-term debt prior to scheduled
maturity. Under SFAS No. 107, the Company is not required to determine the
fair value of its finance receivables, the match funding of which is the
source of much of the Company's interest rate swap activity.
The fair values for interest rate swap agreements and forward-foreign
exchange contracts were based on quotes from brokers, and represent amounts
the Company would receive (pay) to terminate/replace these contracts. The
Company has no present plans to terminate/replace significant portions of
these contracts.
22. SUBSEQUENT EVENT
On February 28, 1995, the Company paid The Rank Organisation Plc (RO)
(Pounds)620 million, or approximately $970 million, for a 40 percent interest in
RO's financial interest in the Rank Xerox Companies. The transaction increased
the Company's financial interest in the Rank Xerox Companies to approximately 80
percent from 67 percent. The transaction will result in goodwill of
approximately $570 million and a decline in minorities' interests in equity of
subsidiaries of approximately $400 million.
85
Quarterly Results of Operations
(Unaudited)
First Second Third Fourth
(In millions, except per-share data) Quarter Quarter Quarter Quarter Full Year
==============================================================
1994
----
Document Processing revenues $3,271 $3,584 $3,636 $4,597 $15,088
Insurance revenues 683 704 662 700 2,749
------ ------ ------ ------ -------
Total revenues 3,954 4,288 4,298 5,297 17,837
Total costs and expenses 3,710 3,984 3,963 4,722 16,379
Realized capital gains (losses) 7 2 4 (1) 12
------ ------ ------ ------ -------
Income before income taxes,
equity income and minorities' interests 251 306 339 574 1,470
Income taxes 95 116 128 212 551
Equity in net income of unconsolidated affiliates 5 33 25 25 88
Minorities' interests in earnings of subsidiaries 32 55 50 76 213
------ ------ ------ ------ -------
Income from continuing operations 129 168 186 311 794
Discontinued operations - - - - -
------ ------ ------ ------ -------
Net income $ 129 $ 168 $ 186 $ 311 $ 794
====== ====== ====== ====== =======
Primary earnings per share/1/
Continuing operations $ 1.05 $ 1.31 $ 1.61 $ 2.76 $ 6.73
Discontinued operations - - - - -
------ ------ ------ ------ -------
Primary earnings per share $ 1.05 $ 1.31 $ 1.61 $ 2.76 $ 6.73
====== ====== ====== ====== =======
Fully diluted earnings per share/1/
Continuing operations $ 1.03 $ 1.28 $ 1.53 $ 2.60 $ 6.44
Discontinued operations - - - - -
------ ------ ------ ------ -------
Fully diluted earnings per share $ 1.03 $ 1.28 $ 1.53 $ 2.60 $ 6.44
====== ====== ====== ====== =======
==============================================================
1993
----
Document Processing revenues $3,225 $3,434 $3,493 $4,077 $14,229
Insurance revenues 678 688 722 721 2,809
------ ------ ------ ------ -------
Total revenues 3,903 4,122 4,215 4,798 17,038
Total costs and expenses 3,708 3,957 4,028 5,747 17,440
Realized capital gains 5 16 50 17 88
------ ------ ------ ------ -------
Income (loss) before income taxes,
equity income and minorities' interests 200 181 237 (932) (314)
Income taxes (benefits) 67 75 54 (312) (116)
Equity in net income of unconsolidated affiliates 3 33 27 24 87
Minorities' interests in earnings (losses)
of subsidiaries 24 37 37 (20) 78
------ ------ ------ ------ -------
Income (loss) from continuing operations 112 102 173 (576) (189)
Discontinued operations 77 10 (23) (1) 63
------ ------ ------ ------ -------
Net income (loss)/2/ $ 189 $ 112 $ 150 $ (577) $ (126)
====== ====== ====== ====== =======
Primary earnings (loss) per share/1/
Continuing operations $ .99 $ .86 $ 1.50 $(5.62) $ (2.46)
Discontinued operations .78 .10 (.22) (.01) .62
------ ------ ------ ------ -------
Primary earnings per share $ 1.77 $ .96 $ 1.28 $(5.63) $ (1.84)
====== ====== ====== ====== =======
Fully diluted earnings (loss) per share/1/
Continuing operations $ .96 $ .86 $ 1.43 $(5.85) $ (2.46)
Discontinued operations .71 .08 (.20) (.01) .62
------ ------ ------ ------ -------
Fully diluted earnings per share $ 1.67 $ .94 $ 1.23 $(5.86) $ (1.84)
====== ====== ====== ====== =======
==============================================================
/1/ Quarterly primary and fully diluted earnings per share may differ from full
year amounts because of changes in the number of shares outstanding during
the year.
/2/ Net income for the 1993 fourth quarter includes $813 million in after-tax
special charges related to restructuring actions and litigation settlements
which are more fully described in Note 3 on Page 60.
86
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
Peat Marwick 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/ Paul A. Allaire
Paul A. Allaire
Chairman of the Board and
Chief Executive Officer
/s/ Barry D. Romeril
Barry D. Romeril
Executive Vice President 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, 1994 and 1993, and the related
consolidated statements of income and cash flows for each of the years in the
three-year period ended December 31, 1994. 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 28,
38, 40, 41, and 58-85 present fairly, in all material respects, the financial
position of Xerox Corporation and consolidated subsidiaries as of December
31, 1994 and 1993, and the results of their operations and their cash flows
for each of the years in the three-year period ended December 31, 1994, in
conformity with generally accepted accounting principles.
As discussed in Note 2, the Company changed its methods of accounting for
income taxes and postretirement benefits other than pensions in 1992.
/s/ KPMG Peat Marwick LLP
KPMG Peat Marwick LLP
Stamford, Connecticut
January 31, 1995, except as to Notes 18 and 22,
which are as of March 2, 1995
87
Nine Years in Review
(Dollars in millions, except per-share data) 1994 1993 1992 1991 1990
--------------------------------------------
Per-Share Data
--------------
Earnings (loss) from continuing operations
Primary $ 6.73 $ (2.46) $ (2.91) $ 3.74 $ 5.56
Fully diluted 6.44 (2.46) (2.91) 3.71 5.31
Dividends declared 3.00 3.00 3.00 3.00 3.00
--------------------------------------------
Operations
----------
Revenues
Document Processing $15,088 $14,229 $14,298 $ 13,438 $13,210
Insurance 2,749 2,809 2,878 3,299 3,890
Total Revenues 17,837 17,038 17,176 16,737 17,100
Research and development expenses 895 883 922 890 848
Income (loss) from Document Processing operations 794 (193) 562 436 599
Income (loss) from Insurance operations - 4 (779) 2 11
Income (loss) from continuing operations 794 (189) (217) 438 610
Net income (loss) 794 (126) (1,020) 454 243
--------------------------------------------
Financial Position
------------------
Accounts and finance receivables, net $11,759 $10,565 $10,250 $ 8,952 $ 8,016
Inventories 2,294 2,162 2,257 2,091 2,148
Land, buildings and equipment, net 2,108 2,219 2,150 1,950 1,851
Total Document Processing assets 19,374 18,158 17,140 15,178 14,421
Total Insurance assets 14,519 15,418 15,479 15,552 14,579
Investment in Discontinued Operations 4,692 5,174 5,652 5,972 6,664
Total assets 38,585 38,750 38,271 36,702 35,664
Consolidated capitalization
Short-term debt 3,159 2,698 2,533 2,038 1,828
Long-term debt 7,780 7,386 8,105 7,825 8,726
Total debt 10,939 10,084 10,638 9,863 10,554
Deferred ESOP benefits (596) (641) (681) (720) (756)
Minorities' interests in equity of subsidiaries 1,021 844 885 818 832
Preferred stock 832 1,066 1,072 1,078 1,081
Common shareholders' equity 4,177 3,972 3,875 5,140 5,051
Total capitalization 16,373 15,325 15,789 16,179 16,762
--------------------------------------------
Selected Data and Ratios
------------------------
Common shareholders of record at year-end 56,414 65,820 68,877 71,213 74,994
Book value per common share/1/ $ 38.86 $ 37.69 $ 40.19 $ 54.43 $ 53.73
Year-end common share market price $ 99.00 $ 88.13 $ 79.25 $ 68.50 $ 35.50
Document Processing Information
Employees at year-end 87,600 97,000 99,300 100,900 99,000
Working capital $ 2,411 $ 2,357 $ 2,578 $ 2,282 $ 2,537
Current ratio 1.4 1.4 1.5 1.5 1.6
Additions to land, buildings and equipment $ 389 $ 470 $ 582 $ 467 $ 405
Depreciation on land, buildings and equipment $ 446 $ 437 $ 418 $ 397 $ 372
--------------------------------------------
* Data that conforms with the 1994 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.
88
Nine Years in Review
(Dollars in millions, except per-share data) 1989 1988 1987 1986
------------------------------------
Per-Share Data
--------------
Earnings (loss) from continuing operations
Primary $ 5.94 $ 2.91 $ 4.93 $ 4.04
Fully diluted 5.82 2.91 4.89 4.02
Dividends declared 3.00 3.00 3.00 3.00
------------------------------------
Operations
----------
Revenues
Document Processing $ 12,095 $11,354 $10,537 $ 9,493
Insurance 4,033 4,060 3,758 3,136
Total Revenues 16,128 15,414 14,295 12,629
Research and development expenses 809 794 722 650
Income (loss) from Document Processing operations 488 148 353 316
Income (loss) from Insurance operations 154 181 188 129
Income (loss) from continuing operations 642 329 541 445
Net income (loss) 704 388 578 465
------------------------------------
Financial Position
------------------
Accounts and finance receivables, net $ 7,272 $ 6,109 $ 4,948 $ 3,887
Inventories 2,413 2,558 2,286 2,459
Land, buildings and equipment, net 1,781 1,803 1,639 1,491
Total Document Processing assets 13,488 12,415 * *
Total Insurance assets 14,864 13,036 * *
Investment in Discontinued Operations 6,063 4,406 * *
Total assets 34,415 29,857 * *
Consolidated capitalization
Short-term debt 1,482 1,174 * *
Long-term debt 9,247 6,675 * *
Total debt 10,729 7,849 5,771 4,343
Deferred ESOP benefits (785) - - -
Minorities' interests in equity of subsidiaries 157 806 655 565
Preferred stock 1,081 296 442 442
Common shareholders' equity 5,035 5,371 5,105 4,687
Total capitalization 16,775 14,322 11,973 10,037
------------------------------------
Selected Data and Ratios
------------------------
Common shareholders of record at year-end 78,876 84,864 86,388 90,437
Book value per common share/1/ $ 53.59 $ 52.22 $ 51.00 $ 48.00
Year-end common share market price $ 57.25 $ 58.38 $ 56.63 $ 60.00
Document Processing Information
Employees at year-end 99,000 100,00 99,200 100,400
Working capital * * * *
Current ratio * * * *
Additions to land, buildings and equipment $ 390 $ 418 $ 347 $ 328
Depreciation on land, buildings and equipment $ 370 $ 369 $ 320 $ 283
------------------------------------
Dividends and Stock Prices
(Unaudited)
CONSECUTIVE DIVIDENDS PAID TO SHAREHOLDERS
During 1994, dividends paid to the Company's common stock shareholders totalled
$3.00 per share, unchanged from 1993 and 1992. Xerox has declared dividends to
its shareholders for 65 consecutive years and has paid consecutive quarterly
dividends since 1948.
The Company's Board of Directors, at its February 6, 1995 meeting, declared
dividends on Xerox common stock and two issues of preferred stock, all unchanged
from previous quarterly payments. They are payable April 1 to shareholders of
record March 3. The common stock dividend is 75 cents per share. Payments on the
$3.6875 Ten-Year Sinking Fund Preferred are $0.921875 per share. Payments on the
Series B Convertible Preferred, which was issued in July 1989 in connection with
the formation of a Xerox Employee Stock Ownership Plan, are $1.5625 per share.
XEROX COMMON STOCK PRICES AND DIVIDENDS
New York Stock Exchange First Second Third Fourth
Composite Prices Quarter Quarter Quarter Quarter
------------------------------------------------------------------
1994 High $103 1/4 $104 3/4 $109 3/8 $112 3/4
Low 87 3/4 93 7/8 97 91 1/2
Dividends Paid .75 .75 .75 .75
1993 High $ 88 7/8 $ 83 1/2 $ 80 1/8 $ 90
Low 79 1/4 71 1/2 70 1/8 69 7/8
Dividends Paid .75 .75 .75 .75
------------------------------------------------------------------
XEROX $3.6875 TEN-YEAR SINKING FUND
PREFERRED STOCK PRICES AND DIVIDENDS
New York Stock Exchange First Second Third Fourth
Composite Prices Quarter Quarter Quarter Quarter
------------------------------------------------------------------
1994 High $54 $55 1/2 $ 55 $ 54
Low 50 1/2 50 1/2 50 50
Dividends Paid .921875 .921875 .921875 .921875
1993 High $ 56 $ 56 $ 54 $ 54
Low 50 52 52 51
Dividends Paid .921875 .921875 .921875 .921875
------------------------------------------------------------------
89
Officers
--------------------------------------------------------------------------------
PAUL A. ALLAIRE
Chairman of the Board and
Chief Executive Officer
Chairman of the Executive
Committee
A. BARRY RAND
Executive Vice President,
Operations
BARRY D. ROMERIL
Executive Vice President
and Chief Financial Officer
STUART B. ROSS
Executive Vice President
Chairman and Chief Executive
Officer, Xerox Financial
Services, Inc.
PETER VAN CUYLENBURG
Executive Vice President,
Operations
WILLIAM F. BUEHLER
Senior Vice President and
Chief Staff Officer
ALLAN E. DUGAN
Senior Vice President,
Corporate Strategic Services
JULIUS L. MARCUS
Senior Vice President,
Strategic Relationships
MARK B. MYERS
Senior Vice President,
Corporate Research and
Technology
DAVID R. MYERSCOUGH
Senior Vice President,
Corporate Business Strategy
RICHARD S. PAUL
Senior Vice President and
General Counsel
LEONARD VICKERS
Senior Vice President,
Corporate Strategic Development
and Communications
PATRICIA C. BARRON
Vice President
President, Xerox Engineering
Systems
RICHARD S. BARTON
Vice President
President, U.S. Customer
Operations
JOHN SEELY BROWN
Vice President and Chief Scientist
CHARLES E. BUCHHEIT
Vice President
Vice President, Business Integration,
Xerox Production Systems
RONALD B. CAMPBELL, JR.
Vice President,
Special Programs
DAVID T. ERWIN
Vice President
Vice President, Strategy
and Integration,
Office Document Products
J. MICHAEL FARREN*
Vice President,
External Affairs
EUNICE M. FILTER
Vice President, Treasurer
and Secretary
PHILIP D. FISHBACH
Vice President and Controller
Directors
--------------------------------------------------------------------------------
VERNON E. JORDAN, JR. /3/, /5/
Partner Akin, Gump, Strauss, Hauer & Feld, L.L.P. Attorneys-at-Law
Washington, D.C.
RALPH S. LARSEN /2/, /3/
Chairman and Chief Executive Officer Johnson & Johnson
New Brunswick, New Jersey
PAUL A. ALLAIRE /1/
Chairman of the Board and Chief Executive Officer
Chairman, Executive Committee Xerox Corporation
Stamford, Connecticut
THOMAS C. THEOBALD /1/, /3/, /4/
Partner
William Blair
Capital Management
Chicago, Illinois
YOTARO KOBAYASHI
Chairman and Chief Executive Officer Fuji Xerox Co., Ltd.
Tokyo, Japan
N.J. NICHOLAS, JR. /1/, /2/, /4/
Investor
New York, New York
/1/ Member of the Executive Committee
/2/ Member of the Audit Committee
/3/ Member of the Executive Compensation and Benefits Committee
/4/ Member of the Finance Committee
/5/ Member of the Nominating Committee
90
--------------------------------------------------------------------------------
MAURICE F. HOLMES
Vice President and Chief Engineer
CHARLES P. HOLT
Vice President,
Joseph C. Wilson Center for Research and Technology
JAMES H. LESKO
Vice President
President, Office Document
Systems
ROGER E. LEVIEN
Vice President,
Technology and Market
Development
JOHN A. LOPIANO
Vice President
President, Xerox Production Systems
PATRICK J. MARTIN
Vice President
President, Office Document
Products
ALAN R. MONAHAN
Vice President,
Manufacturing Support
HECTOR J. MOTRONI
Vice President,
Quality and Organizational Effectiveness
ANNE M. MULCAHY
Vice President,
Human Resources
COLIN J. O'BRIEN
Vice President,
Systems Strategy and
Business Development
RUSSELL Y. OKASAKO
Vice President, Taxes
CARLOS PASCUAL*
Vice President
President, Americas
Customer Operations
WILBUR I. PITTMAN
Vice President,
Marketing Business Process
NORMAN E. RICKARD, JR.
Vice President
President, Xerox Business
Services
RONALD E. RIDER
Vice President,
Digital Imaging Technology
Center
BRIAN E. STERN
Vice President
President, Personal Document Products
PATRICIA M. WALLINGTON
Vice President and
Chief Information Officer
MYRA R. DRUCKER
Assistant Treasurer
DANIEL S. MARCHIBRODA
Assistant Controller
GEORGE R. ROTH
Assistant Treasurer
MARTIN S. WAGNER
Assistant Secretary
*New officer since last report
--------------------------------------------------------------------------------
HILMAR KOPPER /4/, /5/
Spokesman of the Board of Managing Directors Deutsche Bank AG
Frankfurt, Germany
MARTHA R. SEGER /2/, /4/
Distinguished Visiting Professor of Finance Central Michigan University
Mount Pleasant, Michigan
B. R. INMAN /2/, /5/
Investor
Austin, Texas
JOHN D. MACOMBER /2/, /3/
Principal JDM Investment Group
Washington, D.C.
JOAN GANZ COONEY /2/, /5/
Chairman, Executive Committee
Children's Television Workshop
New York, New York
JOHN E. PEPPER /3/, /5/
President Procter & Gamble Company
Cincinnati, Ohio
(Not Pictured)
ROBERT A. BECK /3/, /4/
Chairman Emeritus
The Prudential Insurance
Company of America
Newark, New Jersey
/1/ Member of the Executive Committee
/2/ Member of the Audit Committee
/3/ Member of the Executive Compensation and Benefits Committee
/4/ Member of the Finance Committee
/5/ Member of the Nominating Committee
91
General Information
COMMON AND PREFERRED STOCK
TRANSFER AGENT AND REGISTRAR
The First National Bank of Boston
P.O. Box 9156
Boston, MA 02205-9156
(800) 828-6396
STOCKS LISTED AND TRADED
Xerox common stock (XRX) was listed on the New York Stock Exchange in 1961 and
on the Chicago Stock Exchange in 1990. It is also traded on the Boston,
Cincinnati, Pacific Coast and Philadelphia exchanges and in London, Basel,
Berne, Geneva, Lausanne and Zurich.
The $3.6875 Ten-Year Sinking Fund Preferred stock was issued in February
1988 in conjunction with the redemption of the $5.45 Cumulative Preferred stock.
It is listed on the New York Stock Exchange.
DIVIDEND PAYMENT DATES
Traditionally paid on the first of January, April, July and October to
shareholders of record on the first Friday of December, March, June and
September.
DIVIDEND REINVESTMENT PLAN
The Automatic Dividend Reinvestment and Stock Purchase Plan affords any
shareholder of record of Xerox common or preferred stock the opportunity to buy
Xerox common shares automatically at the current market price with cash
dividends and without service fees or brokerage commissions. Plan participants
can also purchase additional common shares at the market price through voluntary
cash payments. A Plan brochure is available from The First National Bank of
Boston, P.O. Box 9156, Boston, MA 02205-9156, (800) 828-6396.
INVESTOR SERVICES
Questions about stock certificates, address changes, or other shareholder
matters should be addressed to: The First National Bank of Boston, Investor
Services, P.O. Box 9155, Boston, MA 02205-9155, (800) 828-6396.
Other information concerning notes and debentures issued by the Company is
available from Corporate Treasury at (203) 968-4596.
NOTES AND DEBENTURES
TRUSTEE, REGISTRAR AND PAYING AGENT FOR
9.20% NOTES DUE 1999
8 3/4% NOTES DUE 1995
Trustee:
Chemical Bank
55 Water Street
New York, NY 10041
(212) 820-5164
Registrar and Paying Agent:
The First National Bank of Boston
P.O. Box 9156 (Registrar)
P.O. Box 9155 (Paying Agent)
Boston, MA 02205
(800) 828-6396
TRUSTEE, REGISTRAR AND PAYING AGENT FOR
9 1/4% DEBENTURES DUE 2000
9 5/8% DEBENTURES DUE 2000
PAYING AGENT FOR 8 3/8% NOTES DUE 1996
Bankers Trust Company
280 Park Avenue
New York, NY 10015
(212) 250-6000
TRUSTEE, REGISTRAR AND PAYING AGENT FOR
9 3/4% NOTES DUE 2000
9 5/8% NOTES DUE 1997
Trustee:
BankAmerica National Trust Company
2 Rector Street
New York, NY 10006
(212) 978-5033
Registrar and Paying Agent:
The First National Bank of Boston
P.O. Box 9156 (Registrar)
P.O. Box 9155 (Paying Agent)
Boston, MA 02205
(800) 828-6396
TRUSTEE, REGISTRAR AND PAYING AGENT FOR
8 1/8% NOTES DUE 2002
7.15% NOTES DUE 2004
Trustee:
Citibank, N.A.
111 Wall Street
New York, NY 10043
(800) 422-2066
Registrar and Paying Agent:
The First National Bank of Boston
P.O. Box 9156 (Registrar)
P.O. Box 9155 (Paying Agent)
Boston, MA 02205
(800) 828-6396
OTHER INFORMATION
ANNUAL MEETING
Shareholders are invited to attend our annual meeting, which will be held at
10:00 a.m. Thursday, May 18, 1995 at The Rittenhouse,
210 West Rittenhouse Square, Philadelphia, Pennsylvania. By April 6, 1995,
proxy material will be sent to Xerox shareholders of record as of March 29,
1995.
INVESTOR INFORMATION
Annual Reports and Forms 10-K and 10-Q, which are filed with the Securities
and Exchange Commission, are available from Investor Services, (800)
828-6396.
Quarterly earnings are expected to be announced on April 27, July 31, and
October 26, 1995. On the day of the earnings release, a comprehensive report,
including the press release, financial summaries and the income statements are
available through any of the following options: by Internet (use Mosaic or a
worldwide web client to access http://www.xerox.com/ and select "Financial
Information for Investors"); by fax (call 800-463-6840 and follow instructions
to key in your fax number from your touch-tone phone); or by mail (call Investor
Services at 800-828-6396).
ADDITIONAL INFORMATION
The Company can also provide information that may be of general interest to
investors. Information on The Xerox Foundation and the Community Involvement
Program is available from The Xerox Foundation information line, (203) 968-3333.
Information on affirmative action, equal employment opportunity activities and
balanced work force is available from Marcia Matthews, Manager, Corporate Work
Force Diversity, (716) 423-2039. Copies of the Company's Environment, Health and
Safety Progress Report are available from Xerox Safety Services at (800) 828-
6571.
Students and teachers requesting information are invited to call the
Company's Public Information line, (716) 423-4828.
Convention Blanks for Talegen Holdings, Inc., can be obtained directly
from Talegen, (206) 654-2636.
Investor Relations
Members of the financial community and institutional investors seeking
additional information on the Company are invited to contact Clark K. Robson,
Director of Investor Relations (Internet address: CKR.sthq@xerox.com) or Charles
K. Wessendorf, Manager of Investor Relations (Internet address:
CKW.sthq@xerox.com), at (203) 968-4406.
Auditors
KPMG Peat Marwick LLP
Certified Public Accountants
Stamford Square, 3001 Summer Street
Stamford, CT 06905
(203) 356-9800
92