Consolidated Statements of Income
Year ended December 31 (in millions, except per-share data) 1995 1994 1993
------ ------- ------
REVENUES
Sales $ 8,799 $ 7,853 $ 7,211
Service and rentals 6,804 6,229 5,954
Finance income 1,008 1,006 1,064
------- ------- ------
Total Revenues 16,611 15,088 14,229
------- ------- ------
COSTS AND EXPENSES
Cost of sales 4,962 4,653 4,098
Cost of service and rentals 3,437 3,016 2,986
Equipment financing interest 509 502 537
Research and development expenses 951 895 883
Selling, administrative and general expenses 4,770 4,394 4,477
Special charges, net - - 1,373
Other, net 135 114 155
------- ------- ------
Total Costs and Expenses 14,764 13,574 14,509
------- ------- ------
INCOME (LOSS) BEFORE INCOME TAXES, EQUITY INCOME AND
MINORITIES' INTERESTS 1,847 1,514 (280)
Income Taxes (Benefits) 615 595 (78)
Equity in Net Income of Unconsolidated Affiliates 132 88 87
Minorities' Interests in Earnings of Subsidiaries 190 213 78
------- ------- ------
INCOME (LOSS) FROM CONTINUING OPERATIONS 1,174 794 (193)
Discontinued Operations (1,646) - 67
------- ------- ------
NET INCOME (LOSS) $ (472) $ 794 $ (126)
======= ======= ======
PRIMARY EARNINGS (LOSS) PER SHARE
Continuing Operations $ 10.20 $ 6.73 $ (2.50)
Discontinued Operations (14.89) - .66
------- ------- ------
PRIMARY EARNINGS PER SHARE $ (4.69) $ 6.73 $ (1.84)
======= ======= ======
FULLY DILUTED EARNINGS (LOSS) PER SHARE
Continuing Operations $ 9.63 $ 6.44 $ (2.50)
Discontinued Operations (14.89) - .66
------- ------- ------
FULLY DILUTED EARNINGS PER SHARE $ (5.26) $ 6.44 $ (1.84)
======= ======= ======
The accompanying notes are an integral part of the consolidated financial statements.
[PHOTO]
Chuck Wessendorf
Clark Robson
Investor Relations
32
FINANCIAL REVIEW
Our Results of Operations and Financial Condition
SUMMARY OF TOTAL COMPANY RESULTS
In January 1996, we announced agreements to sell our remaining property and
casualty insurance units to investor groups led by Kohlberg Kravis Roberts
& Co. and existing management for consideration totaling $2.7 billion. We
expect the transactions will close in the middle of this year. As a result,
results from insurance operations are now accounted for as discontinued
operations and all prior periods have been restated. Therefore the Document
Processing business is the only component of Continuing Operations.
Document Processing revenues increased 10 percent to $16.6 billion in
1995, following an increase in revenues to $15.1 billion in 1994 from $14.2
billion in 1993.
The following table summarizes net income:
(In millions) 1995 1994 1993
---- ---- ----
Document Processing before
Special Items $ 1,076 $ 794 $ 580
Tax Benefits 98 - 40
Special Charges - - (813)
------- ----- -----
Continuing Operations 1,174 794 (193)
------- ----- -----
Discontinued Operations (1,646) - 67
------- ----- -----
Net Income (Loss) $ (472) $ 794 $(126)
======= ===== =====
Document Processing income in 1995 increased 36 percent to $1,076 million before
a $98 million gain from a reduction in the Brazilian tax rate, from $794 million
in 1994. Income increased 37 percent in 1994 from $580 million in 1993 before
special items. The 1993 special items included 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.
Fully diluted earnings per share for Continuing Operations, which now include
only the Document Processing business, increased 37 percent to $8.83 in 1995,
before the Brazilian tax gain, from $6.44 in 1994 which was a 33 percent
increase from $4.86 in
[PHOTO]
Pictured here is Charlene Stephens, Public Relations, and a graphic depicting
Continuing Operations Fully Diluted Earnings per Share before special items of
$8.83 for 1995, $6.44 for 1994 and $4.86 for 1993.
1993, before special items. The 1993 Continuing Operations earnings per share
reflect the impact of the additional 8.1 million shares issued through an equity
offering in June 1993.
Discontinued Operations had a loss of $1.646 billion in 1995 compared with
break-even results in 1994 and income of $67 million in 1993. The 1995 results
reflect fourth quarter after-tax charges of $1.546 billion as a result of the
insurance disengagement. These charges consist of a non-cash loss on the sales
of $978 million and $568 million primarily to cover additional insurance loss
reserves and all estimated future expenses associated with excess of loss
reinsurance coverage. Prior to the fourth quarter charges, insurance operations
had a $100 million loss in the 1995 full year. The 1993 results included a $62
million after-tax gain on the sale of The Van Kampen Merritt Companies, Inc.
(VKM).
33
The fully diluted loss per share for Discontinued Operations was $14.89,
compared with break-even in 1994, and income of $.66 in 1993.
The net loss in 1995 of $472 million compares with net income of $794 million
in 1994, and a net loss of $126 million in 1993. The fully diluted loss per
share of $5.26 in 1995 compares with earnings of $6.44 in 1994 and a net loss
of $1.84 per share in 1993.
DOCUMENT PROCESSING
UNDERLYING GROWTH
To understand the trends in the business, we believe that it is helpful to
adjust revenue and expense growth (except for ratios) to exclude the impact of
the changes in the translation of foreign currencies into U.S. dollars and
special items that distort the trends. We refer to this adjusted growth as
"underlying growth." The items that have been excluded from the discussion of
underlying growth are the 1993 charges for the Document Processing restructuring
program and the lawsuit settlements.
When compared with the major European currencies, the U.S. dollar was
approximately 10 percent weaker in 1995, 2 percent stronger in 1994 and 11
percent stronger in 1993. As a result, foreign currency translation had a
favorable impact of 3 percentage points on revenues in 1995, and
unfavorable impacts of 1 percentage point in 1994 and 4 percentage points
in 1993. We do not hedge foreign-currency denominated revenues to the
extent they do not represent cross-border cash flows.
REVENUES
The estimated components of underlying growth were as follows:
Underlying Growth
-------------------
1995 1994 1993
---- ---- ----
Total Revenues 7% 7% 3%
== == ==
Equipment Sales* 6 10 (1)
Non-equipment revenues 7 5 6
Supplies 9 11 11
Paper 39 4 (4)
Service 2 4 6
Rentals 1 (1) (6)
Document Outsourcing/Other 32 20 5
Finance Income (4) (4) 4
== == ==
* Only includes equipment sales to end-users
The decline in the growth in equipment sales, across most major product lines,
in 1995 principally reflects disruption in the U.S. sales force primarily caused
by the realignment of the field sales organization and
[PHOTO]
Pictured here is a graphic depicting Equipment Sales Growth of 6% in 1995, 10%
in 1994 and -1% in 1993; Non-Equipment Revenue Growth of 7% in 1995, 5% in 1994
and 6% in 1993; and Total Revenue Growth of 7% in 1995, 7% in 1994 and 3% in
1993.
34
changes in sales compensation plans. Modifications have been made to these
plans, sales force turnover has declined and we believe that the disruption will
have a declining impact going forward.
The growth 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.
Non-equipment revenues from supplies, paper, service, rentals, document
outsourcing and other revenues, and income from customer financing represented
67 percent of total revenues in 1995, 65 percent of total revenues in 1994 and
63 percent in 1993. These revenues 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 our
installed population of equipment, usage and pricing.
- - 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 significant improvement in the growth rate in 1995
is primarily due to higher prices, commencing in late 1994, after several years
of declining wholesale prices. Our strategy is to charge a spread over mill
wholesale prices.
- - Service revenues: The declining growth reflects the diversionary trend to
document outsourcing, rental plans and competitive pricing pressures.
- - 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 principally in the U.S.
toward cost-per-copy rental plans.
- - Document outsourcing, copy centers and other revenues: The growth in 1995 and
1994 reflected the trend of customers to focus on their core businesses and
outsource their document processing require-ments to Xerox. This trend, which
diverts revenue from equipment sales, service and finance income, can reduce
current period total revenues but increase revenues in future periods.
- - Finance income: The continuing decline in 1995 reflects lower interest rates
on financing contracts, the increasing customer preference for document out-
sourcing rather than purchase and finance and a stabilization in the percent of
customers who finance purchases through Xerox at approximately 80 percent of
equipment sales in the U.S. and 70 percent in Western Europe. Our strategy is to
charge a spread over our cost of borrowing.
Geographically, the underlying revenue growth rates were estimated as follows:
UNDERLYING GROWTH
-------------------
1995 1994 1993
- -------------------------------------------------------------
Total Revenues 7% 7% 3%
== == ==
United States 3 7 4
Rank Xerox 8 7 2
Other Areas 16 7 4
- -------------------------------------------------------------
United States revenues were 49 percent of total revenues. Revenues of Rank
Xerox Limited and related companies (Rank Xerox), which manufacture and market
our products in eastern hemisphere countries, were 33 percent of total revenues.
Revenues of Other Areas, which includes operations principally in Latin America
and Canada, were 18 percent of total revenues.
[PHOTO AND CAPTION]
Pictured here are Vicente Jose Felice, Adelia Maria Branco Cerqueira, Jorge
Pereira da Silva, and Sergio Nicola, Xerox of Brazil, with the caption
"Itau Bank, Sao Paulo, found a more productive way to produce checkbooks when
it adopted a Xerox solution based on a 4635MX printer connected in-line to a
checkbook maker. The automatic process saved the bank the costs of manual
production."
35
[PHOTO]
VIMAL GADHIA
Rank Xerox
Corporate Communications
The decline in U.S. revenue growth in 1995 principally reflects the disruption
in the sales force. The improving revenue growth in Rank Xerox and the Other
Areas in 1995 reflected good growth in black-and-white copiers and excellent
growth in enterprise printing products, attributable, in part, to improving
sales productivity and a strong economic environment in Brazil. In Mexico,
revenues declined significantly in 1995 due to currency and the continuing
economic disruption following devaluation of the Mexican peso in December 1994.
In 1995, revenues were approximately $1.4 billion in Brazil and $200 million in
Mexico compared with 1994 revenues of approximately $1 billion and $300 million,
respectively. 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.
For the major product categories, the underlying revenue growth rates were
estimated as follows:
Underlying Growth
-------------------
1995 1994 1993
---- ---- ----
Total Revenue 7% 7% 3%
== == ==
Enterprise Printing 17 20 18
Black and White Copiers 2 4 -
Paper and Other Products 14 3 (5)
== == ==
Revenues from enterprise printing, comprised of production publishing, color
copying and printing, data center printing and network printing, represented 25
percent of total document processing revenues in 1995, 22 percent in 1994 and 19
percent in 1993. Revenues from black-and-white copying represented 59 percent of
total document processing revenues in 1995, 63 percent in 1994 and 65 percent in
1993. The revenues from paper and other products were 16 percent of total
document processing revenues in 1995, 15 percent in 1994 and 16 percent in 1993.
Total revenues from the DocuTech family of production publishing products
reflected excellent growth to $1.4 billion in 1995 and $1.1 billion in 1994.
Revenues from color products grew 45 percent to approximately $600 million in
1995 from approximately $400 million in 1994, which in turn had almost doubled
over 1993 levels. Revenues from network and data center printing products had
good growth in both 1995 and 1994. We believe that the declining growth in
enterprise printing revenues during 1995 was the result of the U.S. sales force
disruption and weak economic environments in Canada and some European countries.
During the fourth quarter of 1995, we introduced the first two products in
the Document Centre Systems family, a new enterprise printing category. These
networked office products print, scan, fax and copy documents for work groups,
with all operations managed over the network from each user's personal computer
or on a walk-up basis.
The decline in black-and-white copying revenue growth in 1995 reflects the
slowdown in revenue growth in the U.S. Black-and-white copying revenues had good
growth in international markets. The other revenue growth in 1995 and 1994 and
the decline in 1993 were principally due to paper pricing.
PRODUCTIVITY INITIATIVES
In 1993, we announced a restructuring program to significantly reduce the cost
base and to improve productivity. Our objectives were to reduce our
36
worldwide work force by more than 10,000 employees and to close or consolidate a
number of facilities.
To date, the activities associated with the 1993 restructuring program have
reduced employment by 12,000 and achieved pre-tax cost savings of approxi-
mately $650 million in 1995 and $350 million in 1994. However, we have
reinvested a portion of these savings to re-engineer business processes, support
the expansion in growth markets, and mitigate anticipated continued pricing
pressures.
Employment declined by 2,400 from year-end 1994 to 85,200 employees at the end
of 1995; 4,400 reductions were due to restructuring program initiatives,
partially offset by the addition of 2,000 employees, principally to support the
document outsourcing business.
We are on track towards achieving our restructuring program objectives.
During 1994, we awarded a 10-year, $3.2 billion contract to Electronic Data
Systems Corp. (EDS) to operate our worldwide computer and telecommunications
network. Information management strategy and architecture and the development of
systems for re-engineered business processes were not outsourced.
Also in 1994, we signed a labor agreement with the principal union that
represents U.S. manufacturing employees. We believe that the contract has
enabled productivity, competitive advantages and progress towards achieving
benchmark unit manufacturing costs.
COSTS AND EXPENSES
The gross margins by revenue stream were as follows:
Gross Margins
------------------
1995 1994 1993
---- ---- ----
Total 46.4% 45.8% 46.4%
==== ==== ====
Sales 43.6 40.7 43.2
Service and Rentals 49.5 51.6 49.9
Finance Income 49.5 50.1 49.5
==== ==== ====
The 1995 improvement in sales gross margins was principally due to cost
reductions, favorable product and geographic mix, principally Brazil, partially
offset by pricing pressures. The declines in sales gross margins during 1994
were principally due to adverse currency, competitive pricing, unfavorable
product and channel mix and inventory adjustments partially offset by improved
productivity. In 1995, the
[PHOTO]
Pictured here is a graphic depicting Selling, Administrative and General
Expenses (Percent of Revenues) of 28.7% in 1995, 29.1% in 1994 and 31.5%
in 1993.
erosion in service and rentals gross margins was largely due to pricing
pressures and economics, partially offset by productivity improvements. The
service and rentals gross margin improvement during 1994 was principally due to
improved productivity and price increases partially offset by economic cost
increases and adverse currency.
Research and development (R&D) expense increased 6 percent in 1995 and 1
percent in 1994. We expect to increase our investment in technological
development in 1996 and over the longer term to maintain our premier position in
the rapidly changing document processing market. We strategically coordinate R&D
with Fuji Xerox. The R&D investment by Fuji Xerox was approximately $600 million
in 1995, bringing the total to approximately $1.5 billion.
37
Selling, administrative and general expenses (SAG) increased 6 percent in 1995
on an underlying basis, declined 1 percent in 1994, and were essentially
unchanged in 1993. SAG as a percent of revenues was 28.7 percent in 1995
compared with 29.1 percent in 1994 and 31.5 percent in 1993. The improvement in
the ratios is primarily due to improved productivity, partially offset by
investments in systems and in support of high-growth markets, principally
document outsourcing and our operations in Brazil, where the rate of inflation
exceeded pricing.
Other expenses, net, were $135 million in 1995, $114 million in 1994, and $155
million in 1993. The increase in Other expenses, net of $21 million in 1995
reflects higher interest expense and goodwill amortization, principally
resulting from our increased financial interest in Rank Xerox, and the non-
recurrence of one-time gains in 1994, partially offset by lower foreign currency
losses from balance sheet translation in our Brazilian operations. The decrease
in Other expenses, net of $41 million in 1994 primarily reflects lower foreign
currency losses in Brazil.
Our South American operations in general, and Brazil in particular, are
subject to hyperinflation, government-imposed price controls and currency
devaluation. By historical standards Brazilian exchange rates have been
relatively stable since the implementation of a new economic plan in mid-1994.
There can be no assurance this relative stability will continue.
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 $1,847 million in 1995 compared
with $1,514 million in 1994 and $1,093 million in 1993.
Excluding a $98 million gain from a reduction in the Brazilian statutory tax
rate in 1995, gains from statutory rate changes in 1993 and $813 million of
special charges in 1993, the effective tax rate was 39 percent in 1995 and 1994,
and 41 percent in 1993. The higher tax rate in 1993 was due to mix of oper-
Pictured here is a graphic depicting Document Processing Return on Assets of
18.5% in 1995, 16.1% in 1994 and 12.6% in 1993 before special items.
ations. We estimate that the impact of the lower Brazilian statutory tax rate
will result in a two percentage point decline in the effective tax rate in the
future.
Equity in Net Income of Unconsolidated Affiliates increased 50 percent to
$132 million in 1995 after remaining essentially unchanged at $88 million in
1994. The equity in the income of Fuji Xerox, the principal unconsolidated
affiliate, increased 41 percent in 1995 due to revenue growth in the Japanese
domestic market and the strengthening of the Japanese yen against the U.S.
dollar. The equity in the income of Fuji Xerox in 1994 reflected improved
operating results offset by a provision for an early retirement program.
Minorities' Interests in Earnings of Subsidiaries were $190 million in 1995
compared with $213 million in 1994 and $152 million, before the effect of
special items, in 1993. The 1995 decrease was due to our increased financial
interest in Rank Xerox, partially offset by excellent growth in Rank Xerox
income, reflecting good revenue growth and benefits from productivity. The 1994
increase was due to excellent growth in Rank Xerox income, reflecting strong
revenue growth as well as benefits from productivity.
INCOME
In 1995, Document Processing income of $1,076 million, before the Brazilian tax
gain, grew 36 percent compared with $794 million in 1994. 1994 income of $794
million grew 37 percent from $580 million before 1993 special items.
38
RETURN ON ASSETS
Improving Return on Assets (ROA) is an important focus throughout all levels of
the Document Processing organization, combining a focus on both asset turnover
and margin improvement. Excluding special items, the 1995 ROA was 18.5 percent
compared with 16.1 percent in 1994 and 12.6 percent in 1993.
The 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.
SPECIAL ITEMS
In the fourth quarter of 1993, $813 million after income taxes and minorities'
interests in earnings of subsidiaries was provided for the costs of a restruc-
turing program and lawsuit settlements.
In January 1994, we 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, $225 million of discount certificates were provided to members of
the plaintiff class for use as partial payment on future purchases of Xerox
products, and we agreed to sell service parts to independent service
organizations in the U.S., similar to the existing policy in Europe.
The discount certificates are available for use over a three-year period
that commenced in September 1994 and may be applied against the payment of
future purchases, excluding service, by our customers. Through 1995, $119
million of discount certificates were applied against purchases.
In 1995, we recognized a $98 million benefit from the favorable revaluation
of the deferred tax liability due to a change in the Brazilian statutory income
tax rate from 45 percent to 30 percent. In 1993, we 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.
Quarterly Analytical Earnings Per Share
We believe that the 1995 Continuing Operations results, before the gain from a
reduction in the Brazilian tax rate, are an appropriate basis for comparison
with future financial results. The following schedule summarizes the 1995
Continuing Operations revenues, income and Earnings Per Share computations,
before the gain from a reduction in the Brazilian tax rate, on a quarterly
basis.
First Second Third Fourth Full
(In millions, except per-share data, unaudited) Quarter Quarter Quarter Quarter Year
Revenues $3,770 $4,054 $4,027 $4,760 $16,611
Income $ 187 $ 254 $ 256 $ 477 $ 1,174
Gain from Brazilian tax rate reduction - - - 98 98
------ ------ ------ ------ -------
Income before gain from tax rate reduction $ 187 $ 254 $ 256 $ 379 $ 1,076
Primary Earnings per Share
Preferred dividends net of tax benefit $ (12) $ (11) $ (11) $ (11) $ (45)
Income available for common shareholders 175 243 245 368 1,031
Adjusted average shares outstanding 109.2 110.2 110.8 111.4 110.6
Primary Earnings per Share $ 1.60 $ 2.21 $ 2.21 $ 3.30 $ 9.32
Fully Diluted Earnings per Share
Preferred dividends net of tax benefit $ (3) $ (2) $ (1) $ (2) $ (8)
Income available for common shareholders 184 252 255 377 1,068
Adjusted average shares outstanding 119.9 120.7 121.5 121.8 121.0
Fully Diluted Earnings per Share $ 1.54 $ 2.09 $ 2.09 $ 3.11 $ 8.83
------ ------ ------ ------ -------
39
ADDITIONAL FINANCIAL INTEREST IN RANK XEROX
On February 28, 1995, we paid The Rank Organisation Plc (RO) (Pounds)620
million, or $972 million, for a 40 percent share of RO's financial interest in
Rank Xerox. The transaction increased our financial interest in Rank Xerox to
about 80 percent from 67 percent. The transaction resulted in goodwill of $574
million and a decline in minorities' interests in equity of subsidiaries of
approximately $400 million.
The transaction increased earnings per share and cash flow in 1995, and we
estimate that it will have a positive impact on earnings per share and cash flow
going forward. Minorities' interests in earnings of subsidiaries declined by
approximately 40 percent as a result of the transaction, which was partially
offset by an increase in interest expense related to the funding of the
transaction. The goodwill is amortized over 40 years, resulting in an annual
impact of $14 million, before and after taxes.
RANK XEROX AND LATIN AMERICAN FISCAL-YEAR CHANGE IN 1995
Effective January 1, 1995, we 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 occurred between the 1994 and 1995
fiscal years (the stub period) were accounted for as a direct charge to equity.
A loss of $21 million was charged to equity in the stub period, primarily due to
the currency devaluation and related economic dislocations in Mexico.
Excluding the Mexican devaluation and related economic dislocations, income
during the stub period was $4 million.
[PHOTO]
Pictured here are Josue Freitas and Miguel Brandtner, Xerox of Brazil, with
the caption "Pelotas University, Rio Grande do Sul, Brazil, dramatically
increased its production with the DocuTech Production Publisher, going from
4 to 40 books a year."
40
CONSOLIDATED BALANCE SHEETS
December 31 (in millions) 1995 1994
ASSETS
Cash $ 130 $ 35
Accounts Receivable, net 1,894 1,811
Finance Receivables, net 4,069 3,910
Inventories 2,646 2,294
Deferred Taxes and Other Current Assets 1,094 1,199
------- -------
Total Current Assets 9,833 9,249
Finance Receivables Due after One Year, net 6,406 6,038
Land, Buildings and Equipment, net 2,092 2,108
Investments in Affiliates, at Equity 1,328 1,278
Goodwill 627 66
Other Assets 873 635
Investment in Discontinued Operations 4,810 7,904
------- -------
TOTAL ASSETS $25,969 $27,278
======= =======
LIABILITIES AND EQUITY
Short-Term Debt and Current Portion of Long-Term Debt $ 3,265 $ 3,159
Accounts Payable 563 562
Accrued Compensation and Benefit Costs 731 709
Unearned Income 228 298
Other Current Liabilities 2,212 2,110
------- -------
Total Current Liabilities 6,999 6,838
Long-Term Debt 7,867 7,074
Postretirement Medical Benefits 1,018 1,006
Deferred Taxes and Other Liabilities 2,436 2,732
Discontinued Operations Liabilities - Policyholders' Deposits and Other 2,810 4,194
Deferred ESOP Benefits (547) (596)
Minorities' Interests in Equity of Subsidiaries 745 1,021
Preferred Stock 763 832
Common Shareholders' Equity 3,878 4,177
------- -------
TOTAL LIABILITIES AND EQUITY $25,969 $27,278
======= =======
Shares of common stock issued and outstanding at December 31, 1995 and 1994
were (in thousands) 108,343 and 105,993, respectively.
The accompanying notes are an integral part of the consolidated financial
statements.
[PHOTO]
SUE ANDERSON
Investor Services
41
CAPITAL RESOURCES AND LIQUIDITY
CAPITAL RESOURCES
Total debt, including ESOP and Discontinued Operations debt not shown
separately in our consolidated balance sheets, increased to $11,785 million at
December 31, 1995, from $10,939 million in 1994 and $10,084 million in 1993.
On a consolidated basis, the debt-to-capital ratio at December 31, 1995 was
71 percent compared with 67 percent in 1994 and 66 percent in 1993. The increase
over 1994 was primarily due to the $972 million paid for our increased financial
interest in Rank Xerox and growth in the financing of equipment sales.
For purposes of capital ratio analysis, total equity includes common
equity, preferred stock and minorities' interests in the equity of subsidiaries.
The following table summarizes the changes in total equity during 1995 and
1994:
Total Equity
----------------
(In millions) 1995 1994
------- ------
Balance as of January 1 $ 6,030 $5,882
Income from Continuing Operations 1,174 794
Loss from Discontinued Operations (1,646) -
Change in Unrealized Gains (Losses)
on Investment Securities 432 (439)
Shareholder Dividends Paid (389) (395)
Change in Minorities' Interests (276) 177
Exercise of Stock Options 137 92
All Other, net (76) (81)
------- ------
Balance as of December 31 $ 5,386 $6,030
======= ======
We manage the capital structure of our non-financing operations separately
from that of our more highly leveraged activities. The following table
summarizes the ratios of earnings to fixed charges and interest expense; and
debt, equity and total capital for our non-financing and financing activities
for the three-year period ended December 31, 1995:
(Dollars in millions) 1995 1994 1993
-------- ------- -------
NON-FINANCING:
Ratio of Earnings to
Fixed Charges 3.87x 3.59x 2.58x
======== ======= =======
Ratio of Earnings to
Interest Expense 5.35x 5.75x 4.10x
======== ======= =======
Debt $ 3,003 $2,651 $2,446
Equity 4,035 4,730 4,679
-------- ------- -------
Total Capital $ 7,038 $7,381 $7,125
========= ======= =======
Debt-to-Capital Ratio 42.7%* 35.9% 34.3%
========= ======= =======
FINANCING:
Debt $ 8,782 $8,288 $7,638
Equity 1,351 1,300 1,203
-------- -------- -------
Total Capital $10,133 $9,588 $8,841
======== ======== =======
Debt-to-Equity Ratio 6.5x 6.4x 6.4x
======== ======== =======
Ratio of Earnings to
Fixed Charges 1.71x 1.81x 1.78x
======== ======== =======
Ratio of Earnings to
Interest Expense 1.71x 1.81x 1.78x
======== ======== =======
/*/ 31.2 percent, on a pro forma basis, adjusted for anticipated receipt of
net proceeds from the announced sale of Talegen's remaining operating groups.
The 1995 debt-to-capital ratio for non-financing operations, including ESOP
debt and Discontinued Operations debt, increased as Document Processing cash
generation, net of shareholder dividends, and the proceeds from the sales of
Constitution Re Corporation, Viking Insurance Holdings, Inc. and the Xerox
Financial Services Life Insurance Company and related companies were more than
offset by the
[PHOTO]
Pictured here is David Cloyd, XSoft, with the caption "The new publishing
system incorporating XSoft's InConcert enables TV Guide to produce several dozen
editions simultaneously, managing the production process for the magazine's
features, program listings and advertisements. TV Guide needed a workflow
solution that could automate the processing of editorial tasks, as well as
provide quality control capabilities. InConcert's centralized management and
monitoring features prevent errors and allow system operators to track the
editorial assembly and compilation process - a cycle that encompasses more
than 10,000 tasks per week - across the company network. TV Guide has the
nation's largest magazine readership with a circulation of more than 13 million
readers."
42
[PHOTO]
JANAE TUCKER-TAYLOR (IN-FRONT)
ANGELA TUCKER-TAYLOR
Investor Relations
purchase of the increased financial interest in Rank Xerox and non-cash
charges in connection with the sales of the remaining Talegen units. The 1994
ratio of 35.9 percent increased from 34.3 percent at year-end 1993 as strong net
cash flow from Document Processing was more than offset by the impact of Talegen
business unit borrowings, unrealized insurance investment portfolio losses and
the redemption of preferred stock.
With respect to our financing activities, we match fund by arranging fixed-
rate liabilities with maturities similar to the underlying customer financing
assets. Our guideline debt-to-equity ratio for the financing activities is 6.5
to 1.
The following table summarizes the principal causes for changes in
consolidated indebtedness for the three-year period ended December 31, 1995:
(In millions) 1995 1994 1993
------- ------- -------
Total Debt/*/ as of January 1 $10,939 $10,084 $10,638
------- ------- -------
NON-FINANCING BUSINESSES:
Document Processing Operations (543) (989) (496)
Increased financial interest in
Rank Xerox 972 - -
Yen/$ Financing repayment - 116 -
ESOP (49) (45) (40)
Discontinued businesses (399) 605 (15)
------- ------- -------
Non-Financing (19) (313) (551)
FINANCING BUSINESSES, NET 494 650 210
------- ------- -------
Total Operations 475 337 (341)
------- ------- -------
Shareholder dividends 389 395 389
------- ------- -------
Equity issuance (redemption)
and other changes (18) 123 (602)
------- ------- -------
Total Debt* as of December 31 $11,785 $10,939 $10,084
======= ======= =======
/*/ Including Discontinued Operations
NON-FINANCING OPERATIONS
The following table summarizes 1995 and 1994, Document Processing non-
financing operations cash generation and borrowing:
Cash Generated/(Borrowed)
------------------------
(In millions) 1995 1994
-------------
DOCUMENT PROCESSING
NON-FINANCING:
Income $ 970 $ 565
Depreciation and Amortization 660 649
Restructuring Payments (331) (423)
Capital Expenditures (438) (389)
Assets Sold 90 220
Working Capital/Other (408) 367
-------------
$ 543 $ 989
=============
1995 cash generation of $543 million was $446 million below the 1994 level
as higher income and lower restructuring payments were more than offset by lower
sales of fixed assets (primarily related to the information management
outsourcing), higher capital spending, inventory growth including equipment on
operating lease, and 1994 profit sharing paid in 1995.
Discontinued businesses generated $399 million of cash in 1995 resulting
from proceeds from the sales of Constitution Re Corporation, Viking Insurance
Holdings, Inc. and the Xerox Financial Services Life Insurance Company and
related companies, partially offset by premium and interest payments to Ridge Re
and debt service requirements. This contrasts with $605 million of net borrowing
in 1994 resulting from higher debt service requirements and borrowing by Talegen
business units to retire intercompany debt and fund investment activities. Net
cash generation of $15 million in 1993 was mainly due to cash proceeds from the
1993 sales of VKM and Furman Selz Holding Corporation, partially offset by
Talegen restructuring requirements.
43
FINANCING BUSINESSES
Financing business debt grew by $494 million in 1995 or $156 million less
than in 1994 due to lower growth in equipment sales revenue and the effects of
translating foreign currencies into U.S. dollars. Financing debt growth of $650
million in 1994 was $440 million more than in 1993 due to accelerated growth in
equipment sales revenue and currency translation effects.
Debt related to discontinued third-party financing activities, which is
included in Financing Business debt, totaled $231 million in 1995 and 1994, and
$424 million in 1993. Portfolio run-off in 1995 was offset by timing differences
related to tax payments while the 1994 debt reduction reflects both asset sales
and run-off.
FUNDING PLANS FOR 1996
Non-financing debt levels will be significantly affected by proceeds from
the expected sales in 1996 of the remaining Talegen Holdings, Inc. (Talegen)
insurance operating groups for a total of $2.7 billion, including $1.4 billion
in cash partially offset by $0.6 billion of cash usage related to the funding of
intercompany accounts and transaction costs, and borrowing activity resulting
from the recently announced plan to repurchase up to $1 billion of our common
stock. Customer financing-related debt is planned to increase in line with 1996
sales activity.
We believe that we have adequate short-term credit facilities available to
fund day-to-day operations and have readily available access to the capital
markets to meet any longer-term financing requirements. Our domestic operations
have a $5.0 billion revolving credit agreement with a group of banks, which
expires in 2000. This facility is unused and available to provide back-up to our
commercial paper borrowings, which amounted to $2.8 billion and $2.4 billion at
December 31, 1995 and 1994, respectively. In addition, our foreign subsidiaries
have unused committed long-term lines of credit aggregating $1.7 billion, in
various currencies at prevailing interest rates, that are used to provide back-
up to short-term indebtedness.
At December 31, 1995, Xerox and XCC had domestic shelf capacity of $865
million and $1 billion, respectively. A $1 billion Euro-debt facility is
available to both Xerox and XCC of which $547 million remained unused at
December 31, 1995. In 1996, we intend to increase the size of the Euro facility
by $1 billion to further enhance our capital markets flexibility.
Decisions in 1996 regarding the size and timing of any new term debt
financing will be made based on cash flows, match funding needs, refinancing
requirements and capital market conditions.
[PHOTO]
Pictured here is a Xerox 5614 convenience copier with the caption
"The Xerox 5614 convenience copier is a "green machine" that lets the user
exercise environmental responsibility without paying a cost penalty. It features
customer-settable Power Saver, low noise, reduced ozone emissions, returnable
copy and toner cartridges, recyclable packaging and design suitable for
remanufacturing. Customers can return both their used copy and toner cartridges,
which will then recycle, reuse or remanufacture to new-product standards.
This Xerox cartridge remanufacturing and reuse initiative reduced the amount
of material entering the waste stream in 1995 by more than 1,100 tons. Customers
have shown their strong acceptance of the program, returning nearly 60 percent
of all cartridges in 1995."
44
HEDGING INSTRUMENTS
We have entered into certain financial instruments to manage interest rate
and foreign currency exposures. These instruments are held solely for hedging
purposes and include interest rate swap agreements, forward foreign exchange
contracts and foreign currency swap agreements. We have 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. We do not enter into derivative instrument transactions for trading
purposes.
Currency derivatives are primarily arranged in conjunction with
underlying transactions that give rise to foreign currency-denominated payables
and receivables: for example, an option to buy foreign currency to settle the
importation of goods from suppliers, or a forward foreign-exchange contract to
fix the rate at which a dividend will be paid by a foreign subsidiary. In
addition, when cost-effective, currency derivatives are also used to hedge
balance sheet exposures in hyperinflationary economies.
We do not hedge foreign currency-denominated revenues of our 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, we "lock 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. We refer to the
effect of these conservative practices as "match funding" customer financing
assets. This practice effectively eliminates the risk of a major decline in
interest margins resulting from adverse changes in the interest rate
environment. Conversely, this practice does effectively eliminate the
opportunity to materially increase margins when interest rates are declining.
More specifically, pay fixed-rate and receive variable-rate swaps are
typically used in place of more expensive fixed-rate debt. 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 from time to time to
transform longer-term fixed-rate debt into commercial paper-based rate
obligations. The transactions performed within each of these three categories
enable the cost effective management of interest rate exposures. The potential
[PHOTO]
Pictured here is Mel Peel, Xerox
Business Services, UK, with the caption "A Dun & Bradstreet unit in the U.S.
develops market intelligence reports for European customers on Monday and
Tuesday and transmits them electronically on Thursday to the Document Technology
Centre at Rank Xerox Mitcheldean. Personalized reports are printed on Friday and
mailed to 16 countries. Documents Direct, our network document service,
eliminates shipping costs and gets the reports on customers' desks at least
three days earlier than previously."
45
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year ended December 31 (in millions) 1995 1994 1993
---- ---- ----
CASH FLOWS FROM OPERATING ACTIVITIES
Income (Loss) from Continuing Operations $1,174 $ 794 $ (193)
Adjustments required to reconcile income (loss) to cash flows
from operating activities:
Depreciation and amortization 660 649 629
Provision for special charges - - 1,373
Provisions for doubtful accounts 308 252 250
Provision for postretirement medical benefits 40 54 70
Charges against 1993 restructuring reserve (331) (423) -
Minorities' interests in earnings of subsidiaries 190 213 78
Undistributed equity in income of affiliated companies (90) (54) (51)
Increase in inventory (604) (472) (228)
Increase in finance receivables (774) (937) (993)
(Increase) decrease in accounts receivable (173) (266) 134
Increase (decrease) in accounts payable and accrued
compensation and benefit costs 179 205 (65)
Net change in current and deferred income taxes 263 258 (359)
Other, net (243) 204 (32)
------ ----- ------
Total 599 477 613
------ ----- ------
CASH FLOWS FROM INVESTING ACTIVITIES
Cost of additions to land, buildings and equipment (438) (389) (470)
Proceeds from sales of land, buildings and equipment 90 220 41
Proceeds from sale of Constitution Re and Viking 526 - -
Purchase of additional interest in Rank Xerox (972) - -
------ ----- ------
Total (794) (169) (429)
------ ----- ------
CASH FLOWS FROM FINANCING ACTIVITIES
Net change in debt 766 550 215
Yen financing repayment - (116) -
Dividends on common and preferred stock (389) (395) (389)
Proceeds from sale of common stock 139 90 665
Redemption of preferred stock (69) (245) (6)
Dividends to minority shareholders (86) (97) (105)
Proceeds received from (returned to) minority shareholders 20 (32) 12
------ ----- ------
Total 381 (245) 392
------ ----- ------
EFFECT OF EXCHANGE RATE CHANGES ON CASH (5) (78) (34)
------ ----- ------
CASH PROVIDED (USED) BY CONTINUING OPERATIONS 181 (15) 542
CASH USED BY DISCONTINUED OPERATIONS (86) (18) (476)
------ ----- ------
INCREASE (DECREASE) IN CASH 95 (33) 66
CASH AT BEGINNING OF YEAR 35 68 2
------ ----- ------
CASH AT END OF YEAR $ 130 $ 35 $ 68
====== ===== ======
The accompanying notes are an integral part of the consolidated financial
statements.
46
risk attendant to this strategy is the performance of the swap counterparty. We
address 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, and including the impact of our hedging
activities, weighted average interest rates for 1995, 1994 and 1993 approximated
6.5 percent, 7.2 percent and 8.3 percent, respectively.
Our currency and interest rate hedging are typically unaffected by changes
in market conditions as forward contracts, options and swaps are normally held
to maturity consistent with our objective to lock in currency rates and interest
rate spreads on the underlying transactions.
[PHOTO]
Pictured here is Gabor Gagyor, Rank Xerox, Hungary, with the caption
"Hungarian mobile telephone customers get their bills much faster since Westel
900 switched to the Xerox DocuPrint to print its high volume of personalized
invoices. The payoff for Westel? A very measurable impact on cash flow."
LIQUIDITY
Our primary sources of liquidity are cash generated from operations and
borrowings. The consolidated statements of cash flows detailing changes in our
cash balances are on Page 46.
Operating activities, including growth in finance receivables, and after
$331 million of restructuring payments in 1995 and $423 in 1994, generated
positive cash flows of $599 million, $477 million and $613 million in 1995, 1994
and 1993, respectively.
Investing activities, including proceeds from the sales of Constitution Re
Corporation and Viking Insurance Holdings, Inc. and a $972 million payment to
The Rank Organisation Plc, which increased our financial interest in Rank Xerox
from 67 percent to 80 percent, resulted in net cash usage of $794 million in
1995 compared with $169 million and $429 million in 1994 and 1993, respectively.
The lower level of investing usage in 1994 versus the prior year was primarily
due to higher fixed asset sales in 1994 resulting from the information
management outsourcing initiative.
Financing activities generated $381 million of pos- itive cash flow in 1995
compared with $245 million of cash usage in 1994 and $392 million of generation
in 1993. Financing cash flows include $766 million, $550 million and $215
million of net borrowing in 1995, 1994 and 1993, respectively, excluding foreign
currency translation effects and other adjustments. Financing usage in 1994
included repayment of a 1984 yen-denominated financing for $116 million and $184
million used to redeem 8.25 percent preferred stock. Financing generation in
1993 included net proceeds of $580 million from a public offering of common
stock.
Overall, Continuing Operations generated net cash of $181 million in 1995,
used $15 million in 1994, and generated $542 million in 1993.
Discontinued Operations used $86 million in 1995, $18 million in 1994, and
$476 million in 1993.
The combined cash flows of Continuing and Discontinued Operations resulted
in a $95 million increase in cash balances in 1995, a $33 million decrease in
1994, and a $66 million increase in 1993.
47
Insurance and Other Financial Services
In January 1993, we announced our decision to concentrate on the core
Document Processing business and our intent to sell or otherwise disengage from
the Insurance and Other Financial Services (IOFS) businesses, which is
consistent with the strategy that began in 1990. In 1993, we discontinued our
Other Financial Services (OFS) business, which included the sale of The Van
Kampen Merritt Companies, Inc. and Furman Selz Holding Corporation. During 1995,
we sold Xerox Financial Services Life Insurance Company and related companies,
which was part of OFS. Also in 1995, we sold two Talegen Holdings, Inc.
(Talegen) insurance operating groups, Constitution Re Corporation (CRC) and
Viking Insurance Holdings, Inc. (Viking), which are included in the
"Dispositioned" insurance line of the Insurance operating results. At year-end
1995, our "Remaining" insurance operating companies consisted of Coregis Group,
Inc. (Coregis), Crum & Forster Holdings, Inc. (CFI), Industrial Indemnity
Holdings, Inc. (II), Westchester Specialty Group, Inc. (Westchester), The
Resolution Group, Inc. (TRG), and three insurance-related service companies. In
January 1996, we announced that we had discontinued the Insurance business as a
result of the agreements to sell the Remaining insurance companies to investor
groups led by Kohlberg Kravis Roberts & Co. (KKR) and existing management.
Status of Insurance
In 1993, Talegen completed a restructuring that established and capitalized
seven insurance operating groups as independent legal entities: CRC, Coregis,
CFI, II, Viking, Westchester and TRG. The insurance segment now includes
Talegen, a holding company of four property-casualty insurance operating groups
and three insurance-related service companies; TRG, a former Talegen company,
primarily involved in run-off activities and collection of reinsurance; Ridge
Reinsurance Limited (Ridge Re) and that portion of the Xerox Financial Services,
Inc. (XFSI) headquarters costs and interest expense associated with the
insurance business activities.
In connection with the restructuring of Talegen completed in 1993, XFSI
agreed that support would be provided in the form of aggregate excess of loss
reinsurance. This reinsurance protection is provided through XFSI's single
purpose, wholly-owned reinsurance company Ridge Re, established in 1992. XFSI is
obligated to pay annual premium installments of $49 million, plus finance
charges, for 10 years, for coverage totaling $1,245 million, net of 15 percent
coinsurance. A total of seven annual premium installments remain to be paid as
of December 31, 1995. Xerox has guaranteed the payment by XFSI of all such
premiums. Xerox has also guaranteed Ridge Re's performance under a $400 million
letter of credit facility required to provide security with respect to aggregate
excess of loss reinsurance obligations under contracts with the Remaining
Talegen insurance companies, TRG and Dispositioned companies.
XFSI may also be required, under certain circumstances, to purchase over
time additional redeemable preferred shares up to a maximum of $301 million. In
addition, XFSI has guaranteed to the Talegen insurance companies that Ridge Re
will meet all of its financial obligations under the foregoing excess of loss
reinsurance issued to them.
Sale of Talegen Insurance Companies
In April 1995, CRC, one of the seven insurance operating groups of Talegen,
was sold to EXOR America Inc. for a purchase price of $421 million in cash. In
July 1995, Viking, another of the seven insurance operating groups of Talegen,
was sold to Guaranty National Corporation for approximately $103 million in cash
plus future upward price adjustments based on loss reserve development. Both
transactions approximated book value. The proceeds of both transactions were
primarily used to retire debt.
48
In January 1996, we announced agreements to sell all of our Remaining
insurance units to investor groups led by KKR and senior management of the
Remaining companies. The sales, expected to close in the middle of this year,
will consist of two concurrent transactions with proceeds totaling $2.7 billion,
including the assumption of Talegen debt.
For the four Talegen insurance operating units (Coregis, CFI, II and
Westchester) and insurance-related service companies, Xerox will receive
approximately $1.25-$1.3 billion in cash, $450-$500 million in preferred stock
in a new company formed by the KKR group and the assumption of debt (which
amounted to $372 million at December 31, 1995).
For TRG, the unit that manages Talegen's run-off business, Xerox will
receive approximately $150 million in cash and $462 million in performance-based
instruments issued by another company formed by the KKR group.
The transactions are subject to customary closing conditions, including
buyer financing and regulatory approvals. In connection with the announced
sales, we recorded a fourth quarter $1,546 million after-tax charge. As a result
of the sales of the Talegen units, the insurance segment has been classified as
a discontinued operation for all periods presented.
XFSI will continue to provide support in the form of aggregate excess of
loss reinsurance agreements issued by Ridge Re and the guarantee of Ridge Re's
performance under such agreements. In addition to our guarantee of payment of
premiums under such agreements and the $400 million letter of credit facility,
Xerox will guaranty Ridge Re's payment and performance obligations under such
agreements.
Operating Results
Full year results are summarized below:
Insurance Income Summary
-------------------------
(In millions) 1995 1994 1993
-------------------------
Talegen Remaining Companies
and TRG $ 146 $ 138 $126
Talegen Dispositioned Companies (3) 48 44
Cessions to Ridge Re (85) (35) -
Interest/Other (158) (151) (166)
------- ----- ----
Total before Fourth
Quarter Charges (100) - 4
Fourth Quarter Charges:
Increased Talegen and
TRG Reserves (176) - -
Ridge Re Related and
Other Accruals (392) - -
------- ----- ----
Net Loss from Operations (668) - 4
Fourth Quarter Charge -
Loss on Sale (978) - -
------- ----- ----
Total Insurance $(1,646) $ - $ 4
======= ===== ====
Insurance Results Before Fourth Quarter Charges
Talegen Remaining companies and TRG after-tax income totaled $146 million
in 1995, compared with $138 million in 1994 and $126 million in 1993. The
improving trend of the Remaining companies and TRG results reflects improved
underwriting, higher investment income and higher capital gains (1995 compared
with 1994), partially offset by higher interest expense related to the $425
million in debt issued in the fourth quarter of 1994. The decline in Talegen
Dispositioned companies income primarily reflects the absence of income in 1995
due to the sales of CRC and Viking. Cessions to Ridge Re totaled $85 million
after-tax in 1995, compared with $35 million in 1994. Interest and other charges
on an after-tax basis were $158 million in 1995, compared with $151 million in
1994 and $166 million in 1993. These charges primarily include net interest
expense.
Fourth Quarter Charges - Talegen and TRG Sales to KKR
In connection with the Talegen and TRG sales, we recorded fourth quarter
after-tax charges of $1,546 million in 1995 consisting of a non-cash loss on the
sales
49
of $978 million, including a goodwill write-off of $245 million, reserve
strengthening at the Talegen insurance groups and TRG of $176 million and Ridge
Re related and other accruals of $392 million to cover all estimated future
expenses associated with the excess of loss reinsurance coverage to Talegen and
TRG.
Talegen and TRG Reserves
Losses from claims and related loss adjustment expenses (LAE) comprise the
majority of costs from providing insurance products. Therefore, unpaid losses
and loss expenses are generally the largest liability on a property and casualty
insurer's balance sheet. In order to moderate the potential financial impact of
unusually severe or frequent losses, insurers often cede (i.e., transfer)
through reinsurance mechanisms 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. The ceding insurer retains a contingent liability with respect
to reinsurance ceded to the extent that any reinsuring company might not be able
to meet its obligations.
Reserve provisions are established by the insurer to provide for the
estimated level of claim payments that will be made under the policies it
writes. Over the policy period, as premiums are earned, a portion of the
premiums are set aside as gross loss reserves for incurred but not reported
(IBNR) losses. IBNR reserves also include amounts to supplement case reserves,
when established, to provide for further loss development. In addition, gross
reserves are established for internal and external (i.e., allocated) LAE
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
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.
Reinsurance
Talegen has a reinsurance security committee composed of senior management
who approve those reinsurers to whom the Remaining insurance companies cede
business, and the criteria under which such approvals are granted have become
increasingly restrictive over the past several years.
The potential uncollectibility of ceded reinsurance is an industry-wide
issue. With respect to the management of recoveries due from reinsurers, the
Remaining insurance companies operate within common guidelines for the early
identification of potential collection problems and assign these cases to a
specialized unit within TRG staffed by "work-out" experts. This unit
aggressively pursues collection of reinsurance recoverables through mediation,
arbitration and, where necessary, litigation to enforce the Remaining insurance
companies contractual right against reinsurers. Nevertheless, periodically, it
becomes necessary for management to adjust estimates of potential losses to
reflect their ongoing evaluation of developments that affect recoverability,
including the financial difficulties that some reinsurers can experience. Based
upon the review of financial condition and assessment of other available
information, the Remaining insurance companies maintain an allowance for
uncollectible amounts due from reinsurers. The remaining balance of reinsurance
recoverable is considered to be valid and collectible.
Latent Exposures
Claims resulting from asbestos-related, environmental and other latent
exposures have provided unique challenges to the insurance industry. The
possibility that these claims would emerge was often not contemplated at the
time the policies were written, and traditional actuarial reserving
methodologies have not
50
been useful in accurately estimating ultimate losses. Beginning in 1994 and
continuing in 1995, Talegen and certain other companies within the insurance
industry developed analytical methods to provide estimates of ultimate losses
for such exposures.
Asbestos-related claims, which began to emerge in the 1970s, were the first
type of latent exposure to cause significant losses to the insurance industry.
In addition to bodily injury claims, asbestos-in-buildings claims have been
tendered to certain of the Remaining insurance companies seeking reimbursement
for the expense of replacing insulation material and other building components
containing asbestos. At this point, sufficient time has elapsed for case law to
become reasonably well developed in the asbestos bodily injury claims area. Case
law is not as well developed in the asbestos-in-buildings claim area.
Environmental claims were the second major type of such claims to emerge
and significantly impact the insurance industry. Environmental claims have
generally been defined by the insurance industry as loss or potential loss
related to the alleged contamination of a site from operations on the sites,
from waste disposal or from other causes. Inconsistent federal and state case
law and uncertainty with respect to Superfund reform have compounded the
industry's difficulties in adequately assessing these complex exposures.
Other latent exposures include claims such as repetitive stress, chemical
exposure and surgical breast implants, as well as other exposures where the
possibility of such claims arising was not contemplated when the policies were
written.
As judicial patterns emerge through the appellate process and remove
uncertainties surrounding asbestos-related, environmental and other latent
exposures, additional liabilities and reinsurance recoverables could arise. Due
to the unique complexities and uncertanties related to latent exposure claims,
additional information regarding these exposures is provided, although it is the
policy of Talegen not to disclose established case reserves on specific claims.
Reserves For The Remaining Insurance Companies
Gross and net unpaid losses and loss expenses for the Remaining insurance
companies as of December 31, 1995 and 1994, in total and for each latent
exposure area are summarized in the following table:
Unpaid Losses and Loss Expenses For The Remaining Insurance Companies
Gross Net
(In millions) Reserves Reserves
-------- --------
DECEMBER 31, 1995
In Total $8,478 $5,648
====== ======
Latent exposure areas/1/:
Asbestos bodily injury $ 493 $ 224
Asbestos-in-buildings 63 2
Environmental 530 253
Other latent exposures 155 46
------ ------
Total $1,241 $ 525
====== ======
DECEMBER 31, 1994
In Total $7,835 $5,591
====== ======
Latent exposure areas/1/:
Asbestos bodily injury $ 266 $ 68
Asbestos-in-buildings 66 3
Environmental 391 127
Other latent exposures 178 60
------ ------
Total $ 901 $ 258
====== ======
/1/ Included are case, IBNR and allocated LAE reserves. Ridge Re recoverable
balances are not included in net reserves because the Ridge Re contract is an
aggregate excess of loss contract covering all lines of business for the
Insurance Companies.
In the fourth quarter of 1995, gross unpaid loss and loss expense reserves
for the Remaining insurance companies and XFSI were strengthened by $690
million. After consideration of $349 million ceded to Ridge Re and $70 million
ceded to other reinsurers, net unpaid losses and loss expenses were strengthened
by a total of $271 million on a pre-tax basis. While cessions to Ridge Re are
beneficial to Talegen, they do not result in a benefit to the consolidated Xerox
accounts. Before consideration of Ridge Re, the net strengthening was comprised
of an addition of $310 million to latent exposure reserves, $255 million to
non-latent exposure reserves and $55 million to uncollectible reinsurance
reserves.
In 1995, prior to the strengthening discussed above and exclusive of a
settlement between Monsanto Company and Talegen, the Remaining insurance
51
companies strengthened 1994 and prior accident year net reserves by $151
million, including a $64 million strengthening of uncollectible reinsurance
reserves. Those strengthening actions resulted in a cession to Ridge Re of $120
million.
Latent Exposure Reserves
Prior to 1995, the Remaining insurance companies established case and IBNR
reserves for asbestos bodily injury and environmental exposures for claims that
had been reported. Under that reserving methodology, the IBNR reserves were
established primarily to cover adverse development on known claims. Case
reserves have been, and continue to be, determined by a specialized claim and
legal staff. Beginning in the summer of 1994 and continuing through 1995,
Talegen developed methods of analysis and gathered additional data to support
IBNR reserves estimates for asbestos bodily injury and environmental claims.
During 1995, the methods of analysis were evaluated by internal and external
actuarial and claims professionals knowledgeable in the latent exposure field.
The following table identifies low and high estimates of the range of potential
unpaid costs of asbestos bodily injury and environmental exposures at December
31, 1995:
Low and High Estimates of Gross and Net Unpaid Loss and Allocated LAE
Compared To Carried Reserves of The Remaining Insurance Companies
As of December 31, 1995
------------------------------------------------------------------
Estimated Values
------------------------------------------------------
Asbestos Bodily Injury Environmental/2/ Total
---------------------- ---------------- ------------ Carried
(In millions) Low High Low High Low High Reserves/2/
------------------------------------------------------------------
Gross Reserves $424 $846 $251 $1,072 $675 $1,918 $875
Reinsurance/1/ 272 576 71 599 343 1,175 406
---- ---- ---- ------ ---- ------ ----
Net Reserves $152 $270 $180 $ 473 $332 $ 743 $469
==== ==== ==== ====== ==== ====== ====
/1/ The values presented do not include provisions for uncollectible
reinsurance.
/2/ Estimated values and carried reserve information exclude amounts associated
with policies expressly written for environmental exposures. As of December
31, 1995, gross and net reserves associated with these exposures are $148
million and $8 million, respectively.
At December 31, 1995, Talegen and the Remaining insurance companies do not
expect that liabilities associated with incurred asbestos bodily injury and
environmental claims will have a material adverse effect on their future
liquidity or financial position. With respect to asbestos-in-buildings and other
latent exposures, because of the relatively low amount of cumulative net loss
and allocated LAE payments, the reserves established for identified claims and
the relatively low number of open claims, Talegen and the Remaining insurance
companies also do not expect that liabilities associated with incurred claims in
these latent exposure areas will have a material adverse affect on their future
liquidity or financial position. However, given the complexity of coverage and
other legal issues, and the significant assumptions used in estimating such
exposures, actual results could significantly differ from our current estimates.
Discontinued Operations - Other Financial Services and Third-Party and
Real-Estate
Other Financial Services (OFS), which were discontinued in the fourth
quarter of 1993, had no after-tax income in the full year 1995 and 1994. The net
investment in OFS was $169 million and $232 million at December 31, 1995 and
1994, respectively.
52
We currently believe that the liquidation of the remaining OFS units will not
result in a net loss.
The sale of the business and assets of Shields, a former 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.
On June 1, 1995, XFSI completed the sale of Xerox Financial Services Life
Insurance Company and related companies (Xerox Life Companies) to a subsidiary
of General American Life Insurance Company. After the sale, the Xerox Life
Companies names were changed to replace the name "Xerox" in the corporate titles
with the name "Cova" (Cova Companies). OakRe Life Insurance Company (OakRe), an
XFSI subsidiary formed in 1994, has assumed responsibility for existing Single
Premium Deferred Annuity (SPDA) policies issued by Xerox Life's Missouri and
California companies via coinsurance agreements (Coinsurance Agreements). The
Coinsurance Agreements include a provision for the assumption (at their
election) by the Cova Companies, of all of the SPDA policies at the end of their
current rate reset periods. A Novation Agreement with an affiliate of the new
owner provides for the assumption of the liability under the Coinsurance
Agreements for any SPDA policies not so assumed by the Cova 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 Cova Companies.
As a result of the Coinsurance Agreements, at December 31, 1995, OakRe
retained approximately $2.5 billion of investment portfolio assets (transferred
from the Xerox Life Companies) and liabilities related to the reinsured SPDA
policies. Interest rates on these policies are fixed and were established upon
issuance of the respective policies. Substantially all of these policies will
reach their rate reset periods within the next five years and will be assumed
under the Agreements as described above. At December 31, 1995, the "maturities"
of OakRe's assets and liabilities were not fully matched as the Xerox Life
Companies' portfolio was designed to recognize that policy renewals extended
liability "maturities," thereby permitting investments of somewhat longer
average duration. OakRe's practice is to selectively improve this match over
time as market conditions allow. As of December 31, 1995, we estimate that
"maturities" are effectively matched for approximately 60% of ultimate policy
liabilities.
In connection with the aforementioned sale, XFSI established a $500 million
letter of credit and line of credit with a group of banks to support OakRe's
coinsurance obligations. The term of this letter of credit is five years and it
is unused and available at December 31, 1995. Upon a drawing under the letter of
credit, XFSI has the option to cover the drawing in cash or to draw upon the
credit line.
In January 1996, we announced an agreement to sell the remaining portion of
First Quadrant Corp., an asset management subsidiary of Talegen, to Affiliated
Managers Group, Inc. This transaction is expected to close in the first quarter,
1996 and is subject to regulatory approvals and customary closing conditions.
During 1995, sales of real-estate and third-party assets and run-off
activity reduced assets associated with these businesses by $58 million to a
total of $489 million. Assigned debt totaled $231 million at year-end 1995
unchanged from the year-end 1994 level. The 1995 debt activity primarily
includes an increase related to a tax payment made in 1995 as a result of the
1994 sale of a portion of the direct financing lease portfolio, fully offset by
debt reductions from the run-off of assets. We believe that the combination of
existing reserves together with run-off profits should adequately provide for
any credit losses or losses on disposition.
53
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars In Millions, Except Per-Share Data and Unless Otherwise Indicated)
1 Summary Of Significant
Accounting Policies
Basis Of Consolidation. The consolidated financial statements include the
accounts of Xerox Corporation and all majority-owned subsidiaries (the Company).
All significant intercompany accounts and transactions have been eliminated.
Rank Xerox Limited, Rank Xerox Holding BV, Rank Xerox Investment Limited, R-X
Holdings Limited and their respective subsidiaries, and the other subsidiaries
owned by the Company and The Rank Organisation Plc are referred to as the Rank
Xerox Companies.
Investments in which the Company has a 20 to 50 percent ownership interest
are accounted for on the equity method.
Effective January 1, 1995, the Company changed the reporting periods of the
Rank Xerox Companies and Latin American operations from fiscal years ending
October 31 and November 30, respectively, to a calendar year ending December 31.
The results of these operations during the period between the end of the 1994
fiscal year and the beginning of the new calendar year (the stub period)
amounted to a loss of $21. The loss was charged to retained earnings to avoid
reporting more than 12 months results of operations in one year. Accordingly,
1995 worldwide operations include the results for all consolidated subsidiaries
beginning January 1, 1995. The cash activity for the stub period is included in
Other, net in the consolidated statement of cash flows.
Discontinued Operations. In January 1993, the Company announced its intent
to sell or otherwise disengage from its Insurance and Other Financial Services
businesses, which is consistent with the strategy that began in 1990. A formal
plan for the disposal of Other Financial Services was adopted in 1993, at which
time the Other Financial Services businesses were accounted for as discontinued
operations. The Insurance business, which now consists of Talegen Holdings, Inc.
(Talegen), The Resolution Group, Inc. (TRG), Ridge Reinsurance Limited and
headquarters costs and interest expense associated with the insurance activities
of Xerox Financial Services, Inc., remained a continuing operation of the
Company at that time.
During 1995, two of the seven operating groups of Talegen were sold. In
January 1996, the Company announced separate agreements to sell all of the
remaining insurance units of Talegen and TRG to investor groups led by Kohlberg
Kravis Roberts & Co. and existing management. The sales are subject to customary
closing conditions, including buyer financing and regulatory approvals. As a
result, the Insurance businesses have been accounted for as a discontinued
operation and all prior periods have been restated. See Note 9 on Page 60 for
additional information.
The announced sale agreements, on closing, effectively complete the Company's
strategy to exit financial services.
Business Segment Information. As a result of the decision to sell its
Insurance operations, the Company now operates in a single industry segment that
consists of the worldwide development, manufacturing, marketing, financing and
servicing of document processing products and services. This 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.
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 and Xerox Canada Inc. exchangeable Class B stock. 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.
Use Of Estimates. The preparation of financial statements in accordance with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements, and the reported amounts of revenue and expenses during the
reporting period. Actual results could differ from those estimates.
54
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.
Accumulated amortization at December 31, 1995 and 1994 was $25 and $22,
respectively.
[PHOTO]
GARY KABURECK
Corporate Accounting Services
Accounting Changes. In March 1995, the Financial Accounting Standards Board
(FASB) issued Statement of Financial Accounting Standards (SFAS) No. 121 -
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of." Commencing in 1996, SFAS No. 121 requires companies to review
assets for possible impairment and provides guidelines for recognition of
impairment losses related to long-lived assets, certain intangibles and assets
to be disposed of. The impact of the adoption of SFAS No. 121 will be
immaterial.
In October 1995, the FASB issued SFAS No. 123 - "Accounting for Stock-Based
Compensation." As allowable by SFAS No. 123, the Company will not recognize
compensation cost for stock-based employee compensation arrangements, but
rather, commencing in 1996, will disclose in the notes to the consolidated
financial statements the impact on net income and earnings per share as if the
fair value based compensation cost had been recognized.
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 are
recognized over the term of the contracts. Sales of equipment subject to the
Company's operating leases to third-party lease finance companies are recorded
as sales at the time the equipment is accepted by the third-party.
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
agreement to refinance such commercial paper and notes payable on a long-term
basis. See Note 10 on Page 64.
55
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, primarily those in Latin
America, which conduct their business in U.S. dollars or operate in
hyperinflationary 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 $18, $136 and $174 in 1995, 1994 and
1993, respectively, and are included in Other, net in the consolidated
statements of income. As more fully discussed in the accompanying Financial
Review on Page 38 within the discussion of Other expenses, net, the decline in
currency losses in 1995 from prior years is primarily due to the relative
stabilization of exchange rates in Brazil commencing after July 1, 1994.
2 Acquisition
On February 28, 1995, the Company paid The Rank Organisation Plc (RO)
(Pounds)620 million, or approximately $972, for 40 percent of RO's financial
interest in the Rank Xerox Companies. The transaction increased the Company's
financial interest in the Rank Xerox Companies to 80 percent from 67 percent.
The Company's additional interest in the operating results of the Rank Xerox
Companies is included in the consolidated statement of income from the date of
acquisition. Based on the allocation of the purchase price, this transaction
resulted in goodwill of $574 (including transaction costs), a decline in
minorities' interests in equity of subsidiaries of approximately $400 and an
increase in long-term debt of $972.
3 1993 Special Charges, Net
In 1993, the Company recorded special charges which aggregated $1,373 and
included the following pre-tax amounts: $1,195 related to a restructuring of
operations and $278 related to litigation settlements, partially offset by $100
in reduced performance-based employee profit sharing. These special charges
resulted in an after-tax charge of $813 or $7.96 per share.
The 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 pre-tax provision consisted of the following: $843 related to
severance pay and other employee separation benefits; $258 related to lease
cancellation and other facilities rationalization and site consolidation costs;
and $94 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 related to
the Company's domestic operations.
The Company's objectives were to reduce its worldwide work force by more than
10,000 employees and to close or consolidate a number of facilities.
[PHOTO]
ALLEN VASAN
Executive
Assistant
Operations
56
A summary of the original reserve and charges through December 31, 1995
follows:
1995 1994 1993
---- ---- ----
Net charges to
restructuring reserve $370* $430 $ -
==== ==== ======
Reserve balance:
Current $298 $429 $ 395
Non-current 97 336 800
---- ---- ------
Total reserve balance $395 $765 $1,195
==== ==== ======
* Includes $30 charged to the reserve during the stub period.
Management believes that the aggregate reserve balance of $395 at December 31,
1995 is adequate for completion of the restructuring program.
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 typically
collateralized by a security interest in the underlying assets. The components
of finance receivables, net at December 31, 1995, 1994 and 1993 follow:
1995 1994 1993
---- ---- -----
Gross receivables $12,721 $12,135 $11,119
Unearned income (2,207) (2,074) (2,032)
Unguaranteed residual values 283 206 165
Allowance for doubtful accounts (322) (319) (300)
------- ------- -------
Finance receivables, net 10,475 9,948 8,952
Less current portion 4,069 3,910 3,358
------- ------- -------
Amounts due after one year, net $ 6,406 $ 6,038 $ 5,594
======= ======= =======
Contractual maturities of the Company's gross finance receivables subsequent to
December 31, 1995 follow:
1996 1997 1998 1999 2000 Thereafter
---- ---- ---- ---- ---- ----------
$5,138 $ 3,427 $ 2,338 $ 1,284 $ 459 $ 75
====== ======= ======= ======= ===== =====
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.
[PHOTO]
Rita Overal
Rank Xerox, UK
5 Inventories
The components of inventories at December 31, 1995, 1994 and 1993 follow:
1995 1994 1993
---- ---- ----
Finished goods $1,642 $1,458 $1,421
Work in process 88 88 80
Raw materials 289 268 297
Equipment on operating leases, net 627 480 364
------ ------ ------
Inventories $2,646 $2,294 $2,162
====== ====== ======
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 12 to 36 months.
Accumulated depreciation on equipment on operating leases for the years ended
December 31, 1995, 1994 and 1993 amounted to $1,065, $824 and $790,
respectively. Minimum future rental revenues on the remaining non-cancelable
operating leases with original terms of one year or longer are:
1996 1997 1998 Thereafter
---- ---- ---- ----------
$439 $206 $107 $43
==== ==== ==== ===
Total contingent rentals, principally usage charges in excess of minimum
allowances relating to operating leases, for the years ended December 31, 1995,
1994 and 1993 amounted to $190, $197 and $217, respectively.
57
6 Land, Buildings And Equipment, Net
The components of land, buildings and equipment at December 31, 1995, 1994
and 1993 follow:
Estimated
Useful Lives
(Years) 1995 1994 1993
------------ ---- ---- ----
Land $ 85 $ 87 $ 83
Buildings and building
equipment 20 to 40 941 876 824
Leasehold improvements Lease term 344 339 322
Plant machinery 4 to 12 1,892 1,843 1,732
Office furniture and
equipment 3 to 10 1,157 1,245 1,576
Other 3 to 20 199 139 171
Construction in progress 231 227 277
------ ------ ------
Subtotal 4,849 4,756 4,985
Less accumulated depreciation 2,757 2,648 2,766
------ ------ ------
Land, buildings and equipment, net $2,092 $2,108 $2,219
====== ====== ======
The Company leases certain land, buildings and equipment, substantially all of
which are accounted for as operating leases. Total rent expense under operating
leases for the years ended December 31, 1995, 1994 and 1993 amounted to $425,
$502 and $538, respectively. Future minimum operating lease commitments that
have remaining non-cancelable lease terms in excess of one year at December 31,
1995 follow:
1996 1997 1998 1999 2000 Thereafter
---- ---- ---- ---- ---- ----------
$344 $230 $179 $140 $111 $475
==== ==== ==== ==== ==== ====
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 $56 at December 31, 1995.
In 1994, the Company awarded a contract to Electronic Data Systems Corp. (EDS)
to operate the Company's worldwide data processing and telecommunications
network. Minimum payments due EDS under the contract for each of the next five
years follow:
1996 1997 1998 1999 2000
---- ---- ---- ---- ----
$349 $325 $289 $250 $222
==== ==== ==== ==== ====
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.
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, 1995, 1994 and
1993 follow:
1995 1994 1993
---- ---- ----
Fuji Xerox $1,223 $1,183 $1,004
Other investments 105 95 90
------ ------ ------
Investments in affiliates, at equity $1,328 $1,278 $1,094
====== ====== ======
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 Film Co., Ltd. Fuji Xerox is headquartered in Tokyo and operates
throughout the Far East (except China). Condensed financial data of Fuji Xerox
for its last three fiscal years follow:
1995 1994 1993
---- ---- ----
SUMMARY OF OPERATIONS
Revenues $8,500 $7,235 $6,259
Costs and expenses 7,989 6,829 5,915
------ ------ ------
Income before income taxes 511 406 344
Income taxes 287 235 195
------ ------ ------
Net income $ 224 $ 171 $ 149
====== ====== ======
Rank Xerox' equity in net income $ 112 $ 86 $ 75
====== ====== ======
Xerox' equity in net income $ 88 $ 57 $ 50
====== ====== ======
BALANCE SHEET DATA
ASSETS
Current assets $3,518 $3,428 $3,175
Non-current assets 3,085 3,038 2,573
------ ------ ------
Total assets $6,603 $6,466 $5,748
====== ====== ======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities $2,675 $2,567 $2,276
Long-term debt 594 658 794
Other non-current liabilities 884 871 668
Shareholders' equity 2,450 2,370 2,010
------ ------ ------
Total liabilities and
shareholders' equity $6,603 $6,466 $5,748
====== ====== ======
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 two percent of the
Company's consolidated amounts. The Other Areas classification includes
operations principally in Latin America and Canada.
58
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.
Geographic area data for the Company's continuing operations follow:
Year ended December 31,
1995 1994 1993
------- ------- -------
Revenues from unrelated entities:
United States $ 8,068 $ 7,822 $ 7,238
Rank Xerox Companies 5,496 4,633 4,479
Other Areas 3,047 2,633 2,512
------- ------- -------
Total $16,611 $15,088 $14,229
======= ======= =======
Intercompany revenues:
United States $ 1,376 $ 1,291 $ 1,104
Rank Xerox Companies 226 262 216
Other Areas 463 362 353
------- ------- -------
Total $ 2,065 $ 1,915 $ 1,673
======= ======= =======
Total revenues:
United States $ 9,444 $ 9,113 $ 8,342
Rank Xerox Companies 5,722 4,895 4,695
Other Areas 3,510 2,995 2,865
Less intercompany revenues (2,065) (1,915) (1,673)
------- ------- -------
Total $16,611 $15,088 $14,229
======= ======= =======
Net income (loss) (before
intercompany eliminations):
United States $ 288 $ 379 $ (371)
Rank Xerox Companies 409 218 (43)
Other Areas 446 250 190
------- ------- -------
Total* $ 1,143 $ 847 $ (224)
======= ======= =======
Net income (loss) (after
intercompany eliminations):
United States $ 418 $ 386 $ (334)
Rank Xerox Companies 408 215 (47)
Other Areas 348 193 188
------- ------- -------
Total* $ 1,174 $ 794 $ (193)
======= ======= =======
Assets:
United States $ 9,876 $ 9,133 $ 8,966
Rank Xerox Companies 7,566 7,171 6,349
Other Areas 3,717 3,070 2,843
------- ------- -------
Subtotal 21,159 19,374 18,158
Investment in
discontinued operations 4,810 7,904 8,841
------- ------- -------
Total $25,969 $27,278 $26,999
======= ======= =======
* The 1993 special charges reduced net income by $813. On a geographic basis,
this charge was incurred as follows: $605-United States; $147-Rank Xerox
Companies; and $61-Other Areas.
[PHOTO]
DAVID LEANING
Rank Xerox
Accounting
9 Discontinued Operations
In January 1993, the Company announced its intent to sell or otherwise
disengage from its Insurance and Other Financial Services (IOFS) businesses,
which is consistent with the strategy that began in 1990. As more fully
discussed below and in the accompanying Financial Review on Page 48 within the
section entitled Sale of Talegen Insurance Companies, the Company has
discontinued its Insurance business as a result of the announced sales of the
remaining Talegen insurance operating groups and The Resolution Group, Inc.
(TRG). In 1993, the Company discontinued its Other Financial Services businesses
and in 1990 discontinued its Real-Estate and Third-Party Financing businesses.
Insurance. The Insurance segment includes Talegen Holdings, Inc. (Talegen), a
holding company with originally seven property-casualty insurance operating
groups; TRG; Ridge Reinsurance Limited (Ridge Re); and headquarters costs and
interest expense associated with the insurance activities of Xerox Financial
Services, Inc. (XFSI). In 1993, Talegen completed a restructuring which
established and capitalized seven insurance operating groups as independent
legal entities: Constitution Re Corporation (CRC), Coregis, Crum & Forster
Insurance, Industrial Indemnity, TRG, Viking Insurance Holdings, Inc. (Viking)
and Westchester Specialty Group. TRG is the unit that manages Talegen's run-off
businesses.
59
In connection with the restructuring of Talegen, XFSI agreed that support
would be provided in the form of aggregate excess of loss reinsurance. This
reinsurance protection is provided through XFSI's single purpose, wholly-owned
reinsurance company Ridge Re, which was established in 1992. Commencing in 1993,
XFSI is obligated to pay annual premium installments of $49, plus finance
charges, for 10 years, for coverage totaling $1,245, net of 15 percent
coinsurance. The XFSI premium payments have been guaranteed by the Company. The
Company has also guaranteed Ridge Re's performance under a $400 letter of credit
facility required to provide security with respect to aggregate excess of loss
reinsurance obligations.
XFSI may also be required, under certain circumstances, to purchase up to $301
in redeemable preferred stock of Ridge Re. In addition, 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.
[PHOTO]
MARTIN DURRIG
Rank Xerox
Sale of Talegen Insurance Operating Groups. In April 1995, CRC, one of the seven
insurance operating groups of Talegen, was sold to EXOR America Inc. for a
purchase price of $421 in cash, which approximated book value.
In July 1995, Viking, another of the seven insurance operating groups of
Talegen, was sold to Guaranty National Corporation for approximately $103 in
cash plus future upward price adjustments based on loss reserve development. The
transaction approximated book value.
The proceeds of both transactions were used to retire debt. Collectively, CRC
and Viking had $680 of revenue in 1994, the last full year of ownership by the
Company.
In January 1996, the Company announced separate agreements to sell all of the
remaining insurance operating groups of Talegen and TRG, for approximately $2.7
billion to investor groups (the Buyer) led by Kohlberg Kravis Roberts & Co. and
existing management. The transactions will consist of $1,400-$1,450 in cash,
$450-$500 in preferred stock, $462 in a performance-based instrument and the
assumption of debt, which amounted to $372 at December 31, 1995. The agreements,
which are expected to close mid-1996, are subject to customary closing
conditions, including buyer financing and regulatory approvals.
The Company will receive $450-$500 in face value of twenty-year Trust
Originated Preferred Securities (TOPrS) in connection with the sale of the
remaining Talegen units other than TRG. TOPrS are a tax-deductible preferred
stock issued by a trust established by the Buyer's holding company. Dividends on
the TOPrS may be deferred with a concurrent increase in the value of the TOPrS
for the first seven years. Subsequently, dividends must be paid in cash. The
TOPrS may be redeemed from the Company at face value, plus accrued dividends,
before maturity and the Company can sell the TOPrS after one year. The TOPrS
mature in 20 years and will pay a dividend rate equal to 499 basis points over
the published long-term Applicable Federal Rate at the date of closing. At
December 31, 1995, the TOPrS dividend rate would have been 11.20 percent.
The Company will participate in the future cash flows of TRG via a
performance-based instrument carried at $462. The recovery of this instrument is
dependent upon the sufficiency of TRG's available cash flows, as defined. Based
on current forecasts at December 31, 1995, the Company expects to realize $462
for this instrument. However, ultimate realization may be greater or less than
this amount.
60
The Company will continue to provide support in the form of aggregate excess
of loss reinsurance to the Talegen units through Ridge Re. In addition, XFSI is
obligated to pay the seven remaining premium installments of $49 plus finance
charges. In addition to its guarantee of payment of premiums under such
agreements and the $400 letter of credit facility, the Company will guarantee,
upon closing, that Ridge Re will meet all of its payment and performance
obligations under the foregoing excess of loss reinsurance agreements. At
December 31, 1995, Ridge Re has accrued approximately $750 of the $1,245 excess
of loss reinsurance coverage estimated to be required based on actuarial
projections.
In connection with the announced sale, the Company recorded a $1,546 loss on
disposal of the remaining Talegen insurance operating groups and TRG. The loss
on disposal, recorded in the fourth quarter of 1995, is composed of the
following:
Loss on sale $ 978
Increased Talegen and TRG reserves, net of
income tax benefit of $95 176
Ridge Re related and other accruals,
net of tax benefit of $195 392
------
Total after-tax loss $1,546
======
As a result of these sales, the Insurance businesses have been classified as
discontinued operations for all periods presented.
Insurance Financial Information. Summarized operating results of Insurance
for the three years ended December 31, 1995 follow:
1995 1994 1993
------- ------ ------
Revenues $ 2,352 $2,749 $2,809
======= ====== ======
Net income (loss) from
operations* $ (668) $ -- $ 4
Loss on disposal (978)
------- ------ ------
Income (loss) from Insurance $(1,646) $ -- $ 4
======= ====== ======
* The 1995 amount includes $568 of after-tax reserves recorded during the fourth
quarter.
The net assets at December 31, 1995, 1994 and 1993 of the Insurance businesses
included in the Company's consolidated balance sheets as discontinued operations
are summarized as follows:
1995 1994 1993
------- ------- -------
Insurance Assets
Investments $ 7,871 $ 8,384 $ 8,344
Reinsurance recoverable 2,616 3,063 3,835
Premiums and other receivables 1,191 1,276 1,443
Deferred taxes and other assets 1,450 1,743 1,796
------- ------- -------
Total Insurance assets $13,128 $14,466 $15,418
------- ------- -------
Insurance Liabilities
Unpaid losses and loss expenses $ 8,761 $ 8,809 $ 9,684
Unearned income 859 1,066 1,077
Notes payable 372 425 --
Other liabilities 1,513 954 990
------- ------- -------
Total Insurance liabilities 11,505 11,254 11,751
------- ------- -------
Investment in Insurance, net $ 1,623 $ 3,212 $ 3,667
======= ======= =======
At December 31, 1995 and 1994, intercompany transactions aggregating
approximately $465 and $522, respectively, have been included as assets in
Investment in Discontinued Operations in the consolidated balance sheets. The
corresponding obligations are included in Deferred Taxes and Other Liabilities
in the consolidated balance sheets and represent funding commitments by XFSI
guaranteed by the Company. Substantially all of these funding commitments will
be paid at the time the Talegen sale is completed.
[PHOTO]
TAMMY POWER
Olympic Document Printing Specialist
61
The Investments caption consists mainly of short-term investments as shown
below. At December 31, 1995, approximately 97 percent of the fixed maturity
investments are investment grade securities. The amortized cost and fair value
of the investment portfolio at December 31, 1995 follow:
Amortized Fair
Cost Value
------ ------
Fixed maturities $1,035 $1,035
Equity securities 8 7
Short-term investments 6,829 6,829
------ ------
Total investments $7,872 $7,871
====== ======
Activity related to unpaid losses and loss expenses for the three years ended
December 31, 1995 follows:
1995 1994 1993
------ ------ -------
UNPAID LOSSES AND LOSS EXPENSES
Gross unpaid losses and loss
expenses, January 1 $8,809 $9,684 $10,657
Reinsurance recoverable 2,391 2,935 3,788
------ ------ -------
Net unpaid losses and loss
expenses, January 1 6,418 6,749 6,869
------ ------ -------
Incurred related to:
Current year accident losses 1,461 1,748 1,795
Prior year accident losses 570 21 41
------ ------ -------
Total incurred 2,031 1,769 1,836
------ ------ -------
Paid related to:
Current year accident losses 427 486 495
Prior year accident losses 1,203 1,577 1,317
------ ------ -------
Total paid 1,630 2,063 1,812
------ ------ -------
Sale of CRC and Viking (769) -- --
------ ------ -------
Other adjustments 421 (37) (144)
------ ------ -------
Net unpaid losses and loss
expenses, December 31 6,471 6,418 6,749
Reinsurance recoverable 2,290 2,391 2,935
------ ------ -------
Gross unpaid losses and loss
expenses, December 31 $8,761 $8,809 $ 9,684
====== ====== =======
The increase in 1995 incurred prior year accident losses compared to prior
years relates to reserve strengthening which was either identified by the
Company or negotiated in conjunction with the sale of Talegen. This includes the
recording of future Ridge Re loss development.
Other Financial Services. In 1993, the Company discontinued its Other
Financial Services (OFS) segment, which was composed of The Van Kampen Merritt
Companies, Inc. (VKM), Furman Selz Holding Corporation (Furman Selz), Xerox
Financial Services Life Insurance Company (Xerox Life) and First Quadrant Corp.
In 1993, the Company sold VKM for approximately $360, which resulted in pre-
and after-tax gains of approximately $101 and $62, respectively. The proceeds
were used to retire debt.
Also in 1993, the Company sold Furman Selz for $99 and the proceeds were used
to retire debt. The gain on the sale was immaterial.
On June 1, 1995, the Company completed the sale of Xerox Life for
approximately $104 before settlement costs and capital funding of OakRe Life
Insurance Company (OakRe), a single-purpose XFSI subsidiary formed in 1994.
OakRe assumed responsibility for the Single Premium Deferred Annuity (SPDA)
policies issued by Xerox Life's Missouri and California companies via
coinsurance agreements. As a result of these coinsurance agreements, at December
31, 1995, the Company has retained on its consolidated balance sheet
approximately $2.5 billion of investment portfolio assets and reinsurance
reserves related to its former SPDA policies. These amounts will decrease
through the year 2000 as the SPDA policies are either terminated by the
policyholder or renewed and transferred to the buyer.
In connection with the aforementioned sale, XFSI established a $500 letter of
credit and line of credit with a group of banks to support OakRe's coinsurance
obligations. The term of this letter of credit is five years and it is unused
and available at December 31, 1995. Upon a drawing under the letter of credit,
XFSI has the option to cover the drawing in cash or to draw upon the credit
line.
In January 1996, the Company announced an agreement to sell the remaining
portion of First Quadrant Corp. This transaction is expected to close in the
first quarter of 1996 and is subject to regulatory approvals and customary
closing conditions.
62
[PHOTO]
LINDA YOSHINO
Business Strategy & Planning
Real-Estate And Third-Party Financing. During the last five 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, 1995, the Company received net cash proceeds of $614
($64 in 1995, $259 in 1994 and $291 in 1993) from the sale of individual assets
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.
The remaining assets primarily represent direct financing leases, 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 1996
and in future years, as it was in 1995, compared with prior years.
Total Discontinued Operations. The consolidated financial statements have
been restated, as appropriate, to segregate the effect of the discontinued
operations. Debt has been assigned to discontinued operations based on
historical levels assigned to the businesses when they were continuing
operations adjusted for subsequent paydowns. Interest expense thereon is
primarily determined based on annual average domestic borrowing costs of the
Company. Assigned interest expense for the discontinued businesses for the years
ended December 31, 1995, 1994 and 1993 was $255, $246 and $291, respectively.
Summarized information of discontinued operations for the three years ended
December 31, 1995 follows:
1995 1994 1993
------- ------ ------
SUMMARY OF OPERATIONS
Income (loss) before income taxes $(1,025) $ (44) $ (29)
Income tax benefits 357 44 34
Gain (loss) on disposal (978) -- 62
------- ------ ------
Net income (loss) $(1,646) $ -- $ 67
======= ====== ======
BALANCE SHEET DATA
ASSETS
- ------
INSURANCE
Investment, net $ 1,623 $3,212 $3,667
------- ------ ------
OTHER FINANCIAL SERVICES
Investments 2,508 3,604 3,832
Other assets, net 190 541 523
------- ------ ------
OFS assets 2,698 4,145 4,355
------- ------ ------
REAL-ESTATE AND THIRD-
PARTY FINANCING
Gross finance receivables 472 538 841
Unearned income and other 17 9 (22)
------- ------ ------
Investment, net 489 547 819
------- ------ ------
Investment in
Discontinued Operations $ 4,810 $7,904 $8,841
======= ======= ======
LIABILITIES
- -----------
OFS policyholders' deposits $ 2,528 $3,576 $3,716
Other OFS liabilities 1 337 395
Assigned debt 281 281 474
------- ------ ------
Discontinued Operations Liabilities $ 2,810 $4,194 $4,585
======= ====== ======
At December 31, 1995 and 1994, approximately $2.3 billion and $2.6 billion,
respectively, of third-party indebtedness assigned to the Company's Insurance
operations is included in the consolidated balance sheet caption Long-Term Debt.
The Company's net investment in discontinued operations is approximately
$2,000 and $3,710 at December 31, 1995 and 1994, respectively. The Company
believes that the liquidation of the remaining net discontinued assets will not
result in a net loss.
63
10 Debt
Short-Term Debt. Short-term borrowings data of the Company at December 31,
1995 and 1994 follow:
Weighted average
interest rates at
December 31, 1995 1995 1994
----------------- ------ ------
Bank notes payable 7.72% $ 884 $ 235
Foreign commercial paper -- -- 1,024
------ -------
Total short-term debt 884 1,259
Current maturities of
long-term debt 2,381 1,900
------ ------
Total $3,265 $3,159
====== ======
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, 1995 and 1994 follows:
Weighted average
interest rates at
December 31, 1995 1995 1994
----- ------ ------
U.S. OPERATIONS:
XEROX CORPORATION (PARENT COMPANY)
Guaranteed ESOP notes due 1999-2004 7.62% $ 547 $ 596
Notes due 1995 -- -- 350
Notes due 1996 8.77 420 100
Notes due 1997 9.63 200 200
Notes due 1999 5.21 484 738
Notes due 2000 7.33 600 300
Notes due 2001 7.39 62 62
Notes due 2002 8.13 200 200
Notes due 2004 7.15 200 225
Notes due 2005 7.15 50 --
Notes due 2006 -- -- 45
Notes due 2007 7.38 25 --
Other debt due 1995-2014 8.24 97 97
Capital lease obligations 5.60 5 7
------ ------
Subtotal 2,890 2,920
------ ------
XEROX FINANCIAL SERVICES, INC. (XFSI)
XEROX CREDIT CORPORATION
Notes due 1995 -- -- 400
Notes due 1996 8.39 850 670
Notes due 1997 5.75 677 347
Notes due 1998 6.50 220 --
Notes due 1999 10.00 150 150
Notes due 2000 7.13 303 --
Floating rate notes due 2048 5.80 61 61
Other debt due 1996 10.00 18 19
----- -----
Subtotal 2,279 1,647
OTHER XFSI DEBT
XFSI Notes due 1995-1996 9.05 135 310
----- -----
Subtotal 2,414 1,957
----- -----
TOTAL U.S. OPERATIONS $5,304 $ 4,877
----- -----
Weighted average
interest rates at
December 31, 1995 1995 1994
----- ----- -----
INTERNATIONAL OPERATIONS:
INTERNATIONAL MARKETING AND
FINANCE SUBSIDIARIES
Various obligations, payable in:
Canadian dollars due 1995-2007 10.68% $ 263 $ 265
Dutch guilders due 1995-1999 6.48 216 187
French francs due 1995-1998 7.79 76 76
German marks due 1995-1999 6.60 280 297
Pounds sterling due 1995-1997 7.69 283 353
Swiss francs due 1995-1999 5.50 81 96
Italian lira due 1995-1997 11.08 99 81
U.S. dollars due 1995-1999 6.56 268 220
Other currencies due 1995-1999 8.22 363 314
Capital lease obligations 8.94 9 14
----- -----
TOTAL INTERNATIONAL OPERATIONS 1,938 1,903
----- -----
OTHER BORROWINGS DEEMED
LONG-TERM 3,287 2,475
----- -----
Subtotal 10,529 9,255
Less current maturities 2,381 1,900
----- -----
TOTAL LONG-TERM DEBT $8,148 $7,355
===== =====
Consolidated Long-Term Debt Maturities. Payments due on long-term
debt for the next five years follow:
1996 1997 1998 1999 2000 Thereafter
---- ---- ---- ---- ---- ----------
$2,381 $1,431 $ 543 $1,076 $ 704 $1,107
====== ====== ====== ====== ====== ======
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
agreement.
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.
64
Lines Of Credit. The Company's domestic operations have a revolving credit
agreement totaling $5.0 billion with a group of banks, which expires in 2000.
This agreement is unused and is available to back the Company's domestic
commercial paper borrowings, which amounted to $2.8 billion and $2.4 billion at
December 31, 1995 and 1994, respectively. In addition, the Company's foreign
subsidiaries had unused committed long-term lines of credit aggregating $1.7
billion in various currencies at prevailing interest rates that are used to back
short-term indebtedness.
[PHOTO]
NAVIN CHHEDA
North American
Capital Markets
Match Funding Of Finance Receivables And Indebtedness. The Company employs a
match funding policy for customer financing assets and related liabilities.
Under this policy, which is more fully discussed in the accompanying Financial
Review on Page 45, the interest and currency characteristics of the indebtedness
are, in most cases, matched to the interest and currency characteristics of the
finance receivables. At December 31, 1995, these operations had approximately
$10.7 billion of net finance receivables, which will service approximately $8.8
billion of assigned short- and long-term debt, including $0.3 billion of debt
assigned to discontinued third-party financing businesses.
Guarantees. At December 31, 1995, the Company has guaranteed $506 of
indebtedness of its Latin American subsidiaries and the borrowings of its ESOP.
Interest. Including amounts relating to debt assigned to discontinued
operations, interest paid by the Company on its short- and long-term debt
amounted to $705, $751 and $860, respectively, for the years ended December 31,
1995, 1994 and 1993.
Total Short-And Long-Term Debt. The Company's total indebtedness, excluding
the direct indebtedness of Talegen, at December 31, 1995 and 1994 is reflected
in the consolidated balance sheet captions as follows:
1995 1994
------- -------
Short-term debt and current portion
of long-term debt 3,265 $ 3,159
Long-term debt 7,867 7,074
Discontinued operations liabilities --
policyholders' deposits and other 281 281
------- -------
Total debt $11,413 $10,514
======= =======
A summary of changes in consolidated indebtedness for the three years ended
December 31, 1995 follows:
1995 1994 1993
------- ------- -------
Increase (decrease) in short-term
debt, net $ 94 $ (146) $ (451)
Proceeds from long-term debt 3,169 2,058 1,866
Principal payments on
long-term debt (2,497) (1,555) (1,784)
------- ------- -------
Subtotal 766 357 (369)
Less discontinued operations -- (193) (584)
------- ------- -------
Total change in debt of
continuing operations $ 766 $ 550 $ 215
======= ======= =======
11 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.
65
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. The Company utilizes numerous counterparties to ensure
that there are no significant concentrations of credit risk with any individual
counterparty or groups of counterparties. Based upon its ongoing evaluation of
the replacement cost of its derivative 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 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 maturity terms of outstanding debt, the Company "locks in" an
interest spread by arranging fixed-rate interest obligations with maturities
similar to 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. This practice effectively eliminates the risk of
a major decline in interest margins resulting from adverse changes in the
interest rate environment. Conversely, this practice does effectively eliminate
the opportunity to materially increase margins when interest rates are
declining.
The aggregate notional amounts of interest rate swaps by maturity date and
type at December 31, 1995 and 1994 follow:
1995 1996 1997-1999 2000-2007 Total
------ ------- ------- ------- ------
1995 Pay fixed/receive variable $ -- $ 1,466 $3,244 $ 291 $5,001
Pay variable/receive variable -- 150 625 273 1,048
Pay variable/receive fixed -- 168 37 830 1,035
------ ------- ------- ------- ------
Total $ -- $ 1,784 $3,906 $1,394 $7,084
====== ======= ======= ======= ======
Memo:
Interest rate paid -- 6.61% 6.83% 6.71% 6.75%
Interest rate received -- 6.69% 5.94% 7.08% 6.35%
====== ======= ======= ======= ======
1994 Pay fixed/receive variable $1,071 $ 1,137 $1,390 $ 200 $3,798
Pay variable/receive variable 100 150 175 274 699
Pay variable/receive fixed -- 31 35 416 482
------ ------- ------- ------- ------
Total $1,171 $ 1,318 $1,600 $ 890 $4,979
====== ======= ======= ======= ======
Memo:
Interest rate paid 6.41% 6.78% 7.41% 7.28% 6.72%
Interest rate received 5.44% 5.60% 6.07% 7.06% 6.02%
====== ====== ======= ======= ======
66
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 cost-effective management of interest rate
exposures. During 1995, the average notional amount of an interest rate swap
agreement was $23.
At December 31, 1995 and 1994, the total notional amounts of these
transactions, based on contract maturity, follow:
1995 1994
------ ------
Commercial paper/bank borrowings $1,784 $1,171
Medium-term debt 3,906 2,193
Long-term debt 1,394 1,615
------ ------
Total $7,084 $4,979
====== ======
For the three years ended December 31, 1995, no interest rate swap agreements
were terminated prior to maturity.
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, 1995 and
1994, the Company had outstanding forward-foreign exchange contracts of $1,474
and $1,476, respectively. Of the outstanding contracts at December 31, 1995, the
largest single currency represented was the Japanese yen. Contracts denominated
in Japanese yen, Pounds sterling, French francs, Italian lira, German
deutschmarks and Swiss francs 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, 1995, deferred losses amounted to $32. During
1995, the average notional amount of a forward-foreign exchange contract
amounted to $6.
[PHOTO]
RUTH BOSCO
Corporate
Accounting
Services
Foreign Currency Swap Agreements. During 1995, the Company entered into a
foreign currency and related interest rate swap agreement, whereby the Company
issued foreign currency denominated debt and swapped the proceeds with a
counterparty. In return, the Company received and effectively denominated the
debt in U.S. dollars. 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, 1995, a $53 foreign currency and related interest rate swap agreement was
outstanding.
67
Fair Value Of Financial Instruments. The estimated fair values of the Company's
financial instruments at December 31, 1995 and 1994 follow:
1995 1994
---------------- -----------------
Carrying Fair Carrying Fair
Amount Value Amount Value
-------- ------ -------- ------
Cash $ 130 $ 130 $ 35 $ 35
Accounts receivable, net 1,894 1,894 1,811 1,811
Short-term debt 884 884 1,259 1,259
Long-term debt 10,529 10,864 9,255 9,458
Interest rate and currency
swap agreements -- (73) -- (10)
Forward-foreign exchange
contracts -- (29) -- (7)
The fair value amounts for Cash, Accounts receivable, net and Short-term debt
approximate carrying amounts due to the short maturities of these instruments.
The fair value of long-term debt was estimated based on quoted market prices
for these or similar issues or on the current rates offered to 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. 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 calculated by the Company based on market conditions at year-end
and supplemented with quotes from brokers. They 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.
12 Employee Benefit Plans
Retirement Income Guarantee Plan (RIGP). Approximately 51,000 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, 1995, these domestic plans accounted for approximately 65
percent of the Company's total pension assets and were invested as follows:
domestic and international equity securities -69 percent; fixed-income
investments -28 percent; and real estate -3 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
follow:
1995 1994 1993
---- ---- ----
Assumed discount rates 7.25% 8.75% 7.75%
Assumed rates for compensation
increases 4.25 5.75 5.25
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. Changes in the assumed
discount rates and rates of compensation increases primarily reflect changes in
the underlying rates of long-term inflation.
Other Plans. The Company 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
68
benefits. Plan benefits are provided through a combination of funded trusteed
arrangements or through book reserves. The Rank Xerox pension plan in the United
Kingdom is the largest international plan and accounted for approximately 22
percent of the Company's total pension assets at December 31, 1995. It is
primarily invested in marketable equity securities.
[PHOTO]
LOLITA WHITE
Xerox United Way Campaign
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 gain (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.
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,
1995 and 1994 follows:
1995 1994
------------------------------------- -------------------------------------
Over- Under- Non- Over- Under- Non-
funded funded funded Total funded funded funded Total
------ ------ ------ ----- ------ ------ ------ -----
Accumulated benefit obligation $5,066 $ 41 $ 240 $5,347 $4,559 $ 17 $ 210 $4,786
Effect of projected compensation
increases 440 37 53 530 418 4 40 462
------ ------ ------ ----- ------ ------ ------ -----
Projected benefit obligation (PBO) 5,506 78 293 5,877 4,977 21 250 5,248
Plan assets at fair value 5,830 38 -- 5,868 5,263 12 -- 5,275
------ ------ ------ ----- ------ ------ ------ -----
Excess (deficit) of plan assets over PBO 324 (40) (293) (9) 286 (9) (250) 27
Items not yet reflected in the financial
statements:
Unamortized transition obligations
(assets) (137) 19 12 (106) (154) 3 14 (137)
Unrecognized prior service cost 48 -- (12) 36 54 -- (12) 42
Unrecognized net (gain) loss 49 (14) 31 66 55 6 18 79
------ ------ ------ ----- ------ ------ ------ -----
Prepaid (accrued) pension cost recognized
in the consolidated balance sheets at
December 31 $ 284 $(35) $(262) $ (13) $ 241 $ -- $ (230) $ 11
====== ====== ====== ===== ====== ====== ====== =====
69
The components of pension cost for the three years ended December 31, 1995
follow:
1995 1994 1993
----- ----- -----
DEFINED BENEFIT PLANS
Service cost $ 143 $ 150 $ 149
----- ----- -----
Interest cost--change in PBO
due to:
Passage of time 186 171 159
Net investment income (loss)
allocated to TRA accounts 624 (45) 538
----- ----- -----
Subtotal 810 126 697
----- ----- -----
Net investment (income) loss on:
TRA assets (624) 45 (538)
Other plan assets (372) (96) (412)
----- ----- -----
Subtotal (996) (51) (950)
----- ----- -----
Net amortization and deferrals 120 (144) 205
----- ----- -----
Settlement and curtailment gains (32) (12) (4)
----- ----- -----
DEFINED BENEFIT PLANS
--net pension cost 45 69 97
DEFINED CONTRIBUTION PLAN
--pension cost 13 13 22
----- ----- -----
Total pension cost $ 58 $ 82 $ 119
===== ===== =====
Pension cost in 1995 and 1994 was lower than in prior years because of the
reduction of the 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 $3.4
billion and $3.0 billion at December 31, 1995 and 1994, respectively. Because a
substantial portion of plan assets are TRA-related and 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. 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 maximum coverage of approximately 2.5 times
the 1992 level, the inception year of this plan.
The Company also has other postretirement benefit plans that cover employees
retiring prior to January 1, 1995 and certain grandfathered employees. These
other plans are generally indemnity arrangements that provide varying levels of
benefit coverage. The medical inflation assumption for these plans is 8.50
percent in 1995 and declines to 5.25 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 $6 and the accumulated
postretirement benefit obligation by $57.
The discount rate used to determine the funded status was 7.25 percent at
December 31, 1995, 8.75 percent at December 31, 1994 and 7.50 percent at
December 31, 1993.
[PHOTO]
BILL MECK
Xerox Foundation
70
A reconciliation of the financial status of the plans as of December 31 follows:
1995 1994 1993
------ ------ ------
Accumulated Postretirement
Benefit Obligation:
Retirees $ 506 $ 470 $ 471
Fully eligible employees 251 205 249
Other employees 219 247 339
------ ------ ------
Total 976 922 1,059
Unrecognized net gain (loss) 42 84 (62)
------ ------ ------
Accrued cost recognized in the
consolidated balance sheets $1,018 $1,006 $ 997
====== ====== ======
The components of postretirement benefit cost for the three years ended
December 31, 1995 follow:
1995 1994 1993
------ ------ ------
Service cost $ 19 $ 27 $ 28
Interest cost 70 66 73
Net amortization (4) -- --
Settlement gain (8) (25) --
------ ------ ------
Total $ 77 $ 68 $ 101
====== ====== ======
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. 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 in 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 employees are eligible to participate in the
ESOP.
Information relating to the ESOP and the Company for the three years ended
December 31, 1995 follows:
1995 1994 1993
------ ------ ------
Interest on ESOP borrowings $ 45 $ 49 $ 52
====== ====== ======
Dividends declared on Convertible
Preferred Stock $ 59 $ 61 $ 62
====== ====== ======
Cash contribution to the ESOP $ 34 $ 32 $ 30
====== ====== ======
Compensation expense $ 35 $ 32 $ 31
====== ====== ======
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.
13 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, 1995 consists of the following:
1995 1994 1993
------ ------ ------
Domestic income (loss) $ 747 $ 713 $(499)
Foreign income 1,100 801 219
------ ------ -----
Income (loss) before income taxes $1,847 $1,514 $(280)
====== ====== =====
Provisions for income taxes (benefits) from continuing operations for the
three years ended December 31, 1995 consist of the following:
1995 1994 1993
------ ------ ------
Federal income taxes
Current $ 285 $ 160 $ 182
Deferred (21) 100 (337)
Foreign income taxes
Current 178 88 87
Deferred 110 182 (3)
State income taxes
Current 57 46 42
Deferred 6 19 (49)
----- ----- -----
Income taxes (benefits) $ 615 $ 595 $ (78)
===== ===== =====
71
A reconciliation of the U.S. Federal statutory income tax rate to the
effective income tax rate for continuing operations for the three years ended
December 31, 1995 follows:
1995 1994 1993
------ ------ ------
U.S. Federal statutory income
tax rate 35.0% 35.0% (35.0)%
Foreign earnings and dividends
taxed at different rates 2.2 2.1 17.5
Goodwill amortization .3 -- --
Tax-exempt income (.6) (.7) (3.8)
Effect of tax rate changes on
deferred tax assets and
liabilities (5.3) -- (14.3)
State taxes 2.2 2.7 (1.6)
Change in valuation allowance
for deferred tax assets (.8) -- --
Other .3 .2 9.3
---- ---- ----
Effective income tax rate 33.3% 39.3% (27.9)%
==== ==== ====
The 1995 effective tax rate of 33.3 percent is 6 percentage points lower than
the 1994 rate. This lower 1995 rate is primarily caused by a decrease in
Brazilian corporate tax rates, which created a deferred tax benefit. This
benefit increased 1995 fourth quarter and full year net income by $98. Excluding
the Brazilian tax benefit, the 1995 effective tax rate was 38.6 percent.
The 1994 effective tax rate of 39.3 percent is 2 percentage points higher than
the 1993 tax rate before considering the effects of the 1993 restructuring
charge and litigation settlements. This higher 1994 rate is primarily caused by
deferred tax rate benefits, which only occurred in 1993, and is partially offset
by the increased tax benefits in 1994 associated with the mix of operations and
ESOP dividends.
On a consolidated basis, including the effects of dis-continued operations,
the Company paid a total of $182, $163 and $197 in income taxes to federal,
foreign and state income-taxing authorities in 1995, 1994 and 1993,
respectively.
Total income tax expense (benefit) for the three years ended December 31, 1995
was allocated as follows:
1995 1994 1993
------ ------ ------
Income from continuing operations $ 615 $ 595 $ (78)
Discontinued operations (374) (135) 5
Common shareholders' equity* (15) (19) (33)
----- ----- -----
Total $ 226 $ 441 $(106)
===== ===== =====
* 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, 1995
was approximately $3.4 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.
The tax effects of temporary differences that give rise to significant
portions of the deferred taxes at December 31, 1995 and 1994 follow:
1995 1994
------ ------
Tax effect of future tax deductions:
Depreciation $ 537 $ 469
Postretirement medical benefits 393 388
Restructuring reserves 194 342
Other operating reserves 337 290
Deferred intercompany profit 109 116
Allowance for doubtful accounts 73 83
Deferred compensation 132 134
Tax credit carryforwards 101 56
Research and development 87 --
Other 75 118
------ ------
Subtotal 2,038 1,996
Less valuation allowance 20 34
------ ------
Total $ 2,018 $ 1,962
====== ======
Tax effect of future taxable income:
Installment sales and leases $(1,309) $(1,262)
Leverage leases (35) (41)
Deferred income (146) (155)
Other (189) (117)
------ ------
Total $(1,679) $(1,575)
====== ======
The above amounts are classified as current or long-term in the consolidated
balance sheets in accordance with the asset or liability to which they relate.
Current deferred tax assets at December 31, 1995, 1994 and 1993 amounted to
$608, $709 and $711, respectively.
The $20 valuation allowance at December 31, 1995 applies to deferred tax
assets that may expire unused before the Company can utilize them. After
consideration of the valuation allowance, the Company concludes that it is more
likely than not that the deferred tax assets will be realized
72
in the ordinary course of operations based on scheduling of deferred tax
liabilities and income from operating activities.
At December 31, 1995, the Company has tax credit carryforwards for federal
income tax purposes of $40 which are available to offset future federal income
taxes through 2000 and of $61 which are available to offset future federal
income taxes indefinitely.
14 Litigation
Continuing Operations. 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. Claims for individual lost profits of ISOs who were not named
parties were not included in that class action. In one of the pending cases
damages are unspecified and in the other damages in excess of $10 are sought. In
addition, injunctive relief is sought in both actions. The two actions have been
consolidated for pretrial proceedings in the District of Kansas. The Company has
asserted counter-claims against certain of the plaintiffs alleging patent and
copyright infringement, misappropriation of Xerox trade secrets, conversion and
unfair competition and/or false advertising. On December 11, 1995, the District
Court issued a preliminary injunction against the parent company of the Kansas
City and St. Louis ISOs for copyright infringement. The Company denies any
wrongdoing and intends to vigorously defend these actions and pursue its
counterclaims.
Discontinued Operations. Farm & Home Savings Association (Farm & Home) and
certain Talegen insurance companies (Insurance Companies) entered into an
agreement (Indemnification Agreement) under which the Insurance Companies are
required to defend and indemnify Farm & Home from certain actual and punitive
damage claims being made against Farm & Home relating to the Brio superfund site
(Brio). In a number of lawsuits pending against Farm & Home in the District
Courts of Harris County, Texas, several hundred 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 certain of the
claims fall under the coverage of either the policies or the Indemnification
Agreement. The Insurance Companies have been successful in having some claims
dismissed which were brought by plaintiffs who were unable to demonstrate a
pertinent nexus to the Southbend subdivision. However, there are numerous
plaintiffs who do have a nexus to the Southbend subdivision. The Insurance
Companies have been in settlement discussions with respect to claims brought by
plaintiffs who have or had a pertinent nexus to the Southbend subdivision. If
not settled, one or more of these cases can be expected to be tried in 1996.
- --------------------------------------------------------------------------------
[PHOTO]
Pictured here is a banner with the caption "Xerox ColorgrafX Systems produce
big, bold, beautiful color like these banners. Using front-end software to
produce final prints directly from a digital file, ColorgrafX printers eliminate
the intermediate steps associated with traditional methods, reducing turnaround
time and costs. Applications include point-of-sale displays, backlit signs,
trade show graphics, posters, billboards, backdrops for photography film and
video and window displays."
73
15 Preferred Stock
The Company has 22.5 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 per share 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 each of 1995 and 1994, 1 million shares were redeemed
at the sinking fund redemption price of $50 per share. A total of 0.5 million
shares of this series, with a recorded value of $25, is outstanding. Dividends
amounted to $3 in 1995; $7 in 1994; and $9 in 1993.
Shares issued under this series are non-voting, have cumulative dividends and
have 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, including a premium of $11. Dividends amounted to $5 in 1994 and
$14 in 1993.
Convertible Preferred Stock. As more fully described in Note 12 on Page 71,
the Company sold, for $785, 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, 1995, 9.4 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.
[PHOTO]
JENNIFER POWELL
Rank Xerox
Corporate Communications
74
16 Common Shareholders' Equity
The components of common shareholders' equity and the changes therein for
the three years ended December 31, 1995 follow:
Net Unrealized
Common Stock Additional Gain (Loss) on
------------------- Paid-In Retained Investment Translation
(Shares in thousands) Shares Amount Capital Earnings Securities Adjustments Total
------- ------ ------- -------- ---------- ----------- -----
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 15 on
Page 74) (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 15 on
Page 74) (73) (73)
Tax benefits on ESOP dividends 19 19
Call premium on preferred stock
(See Note 15 on Page 74) (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
Stock option and incentive plans 1,654 2 146 (11) 137
Xerox Canada Inc. exchangeable stock 455
Convertible securities 241
Net loss (472) (472)
Net loss during stub period (21) (21)
Cash dividends declared
Common stock ($3.00 per share) (327) (327)
Preferred stock (See Note 15 on
Page 74) (62) (62)
Tax benefits on ESOP dividends 17 17
Net unrealized gain on investment
securities 432 432
Translation adjustments--net of
minority shareholders'
interests of $17 (3) (3)
------- ------ ------- -------- ---------- ----------- ------
BALANCE AT DECEMBER 31, 1995 108,343 $ 109 $1,552 $2,321 $ (1) $(103) $3,878
======= ====== ======= ======== ========== =========== ======
75
Common Stock. The Company has 350 million authorized shares of common stock,
$1 par value. At December 31, 1995 and 1994, 2.6 and 3.9 million shares,
respectively, were reserved for issuance under the Company's incentive
compensation plans. In addition, at December 31, 1995, 0.9 million common shares
were reserved for the conversion of $53 of convertible debt and 9.4 million
common shares were reserved for conversion of ESOP-related Convertible Preferred
Stock.
In January 1996, the Board of Directors approved a three-for-one stock split
of the Company's common stock, subject to shareholder approval of an increase in
the number of authorized shares from 350 million shares to 1,050 million shares.
Given shareholder approval, this action will become effective shortly after the
1996 annual shareholders' meeting.
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 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 or
treasury shares of the Company's common stock. Substantially all long-term
incentive compensation plan awards in recent years have been in the form of non-
qualified stock options, performance units and incentive stock rights. Eligible
employees typically receive equal amounts of options and performance units.
Stock options granted prior to December 31, 1995, normally vest in two years and
normally expire five years from the date of grant. Stock options granted
subsequent to December 31, 1995, will vest in three years and will expire eight
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
[PHOTO]
SAM LEE
Office of the General Counsel
76
based upon the 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, 1995 and 1994, 3.7 and 4.3 million shares, respectively, were
available for grant of options or rights. The following table provides
information relating to the status of, and changes in, options granted:
1995 1994
--------------- ---------------
Average Average
Stock Option Stock Option
(Options in thousands) Options Price Options Price
------- ------ ------- ------
Outstanding at January 1 3,242 $ 84 3,210 $75
Granted 1,836 110 1,168 98
Canceled (76) 101 (51) 87
Exercised (1,364) 79 (1,032) 72
Surrendered for SARs (40) 47 (53) 51
------ -----
Outstanding at December 31 3,598 100 3,242 84
====== =====
Exercisable at
December 31, 1995 1,195
======
Becoming exercisable in 1996 1,275
======
During 1995, Xerox Canada Inc. established an executive rights plan, which
grants participants at the executive level rights to acquire the Company's
common stock at the participants' option. The vesting, expiration, and exercise
price of each right are the same as stock options in the Company's long-term
incentive plans. No rights were granted or exercised under this plan during
1995.
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, amend- ed 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. At December 31,
1995, the Company has reserved 1.3 million shares of the Company's common stock
for purposes of this exchange.
- --------------------------------------------------------------------------------
[PHOTO]
Pictured here are three ribbons with the words "1995 Major Awards Honors."
THE SECRETARY OF THE U. S. DEPARTMENT OF LABOR'S OPPORTUNITY 2000 AWARD TO XEROX
FOR MULTIFACETED AFFIRMATIVE ACTION AND DIVERSITY PROGRAMS
THE DEPARTMENT OF LABOR'S FIRST PERKINS/DOLE GLASS CEILING AWARD TO XEROX FOR
SUCCESSFUL RECRUITMENT AND DEVELOPMENT OF MINORITIES AND WOMEN AND FOR EXPANDING
POLICIES AND PRACTICES IN ORDER TO REMOVE BARRIERS FACED BY MINORITIES AND WOMEN
MONEY MAGAZINE NAMED XEROX TOPS AMONG LARGE U.S. COMPANIES WITH THE BEST
BENEFITS
HISPANIC MAGAZINE, HONORED XEROX ON "HISPANIC 100" LIST OF COMPANIES THAT
PROVIDE THE MOST OPPORTUNITIES FOR HISPANICS
WORKING MOTHER MAGAZINE HONOR TO XEROX FOR COMMITMENT TO WORKING MOTHERS
ASAHI SHIMBUN FOUNDATION, CORPORATE CITIZENSHIP AWARD TO FUJI XEROX
JAPAN MINISTER FOR INTERNATIONAL TRADE AND INDUSTRY, AWARD TO FUJI XEROX FOR
WORKING ENVIRONMENT
NATIONAL QUALITY AWARD, XEROX URUGUAY
QUALITY SCOTLAND BUSINESS EXCELLENCE AWARD,
RANK XEROX (SCOTLAND)
NATIONAL QUALITY AWARD IN PORTUGAL TO RANK XEROX IN 1995. THIS 1994 EXCELLENCE
AWARD WAS THE FIRST TO BE PRESENTED IN PORTUGAL
NATIONAL WILDLIFE FEDERATION, CORPORATE CONSERVATION COUNCIL ENVIRONMENTAL
ACHIEVEMENT AWARD TO XEROX CORPORATION
GERMAN BLUE ANGEL ENVIRONMENTAL LABEL AWARD TO RANK XEROX FOR THE XEROX 5614
AND 5352 COPIERS
U.S. ENVIRONMENTAL PROTECTION AGENCY - STRATOSPHERIC OZONE PROTECTION AWARD TO
XEROX FOR EXEMPLARY EFFORTS TO PROTECT THE OZONE LAYER
FRENCH NATIONAL AGENCY OF ENVIRONMENT AND ENERGY MANAGEMENT, MARQUE RETOUR
AWARD TO RANK XEROX FRANCE
ALL-JAPAN INVITATIONAL QC CIRCLE CONVENTION GOLD AWARD TO FUJI XEROX
USA WEEKEND NATIONAL 'MAKE A DIFFERENCE DAY' AWARD TO A ROCHESTER-BASED GROUP
OF XEROX EMPLOYEE VOLUNTEERS WHO COLLECTED SEVERAL TRACTOR TRAILER-LOADS OF
NEARLY NEW ITEMS THAT WERE SOLD FOR NICKLES AND DIMES AT "THE FRIENDSHIP BARGAIN
BAZAAR" TO RESIDENTS OF ONE OF ROCHESTER'S NEEDIEST COMMUNITIES
77
Quarterly Results of Operations
(Unaudited)
First Second Third Fourth
(In millions, except per-share data) Quarter Quarter Quarter Quarter Full Year
------- ------- ------- ------- ---------
1995
Revenues $3,770 $4,054 $4,027 $ 4,760 $16,611
Costs and expenses 3,403 3,642 3,612 4,107 14,764
------ ------ ------ ------- -------
Income before income taxes,
equity income and minorities' interests 367 412 415 653 1,847
Income taxes 142 160 160 153 615
Equity in net income of unconsolidated affiliates 13 51 38 30 132
Minorities' interests in earnings of subsidiaries 51 49 37 53 190
------ ------ ------ ------- -------
Income from continuing operations 187 254 256 477 1,174
Discontinued operations (40) (16) (20) (1,570) (1,646)
------ ------ ------ ------- -------
Net income (loss) $ 147 $ 238 $ 236 $(1,093) $ (472)
====== ====== ====== ======= =======
Primary earnings (loss) per share
Continuing operations $ 1.60 $ 2.21 $ 2.21 $ 4.18 $ 10.20
Discontinued operations (.37) (.14) (.18) (14.20) (14.89)
------ ------ ------ ------- -------
Primary earnings per share $ 1.23 $ 2.07 $ 2.03 $(10.02) $ (4.69)
====== ====== ====== ======= =======
Fully diluted earnings (loss) per share/1/
Continuing operations $ 1.54 $ 2.09 $ 2.09 $ 3.91 $ 9.63
Discontinued operations (.34) (.13) (.16) (14.20) (14.89)
------ ------ ------ ------- -------
Fully diluted earnings per share $ 1.20 $ 1.96 $ 1.93 $(10.29) $ (5.26)
====== ====== ====== ======= =======
1994
Revenues $3,271 $3,584 $3,636 $ 4,597 $15,088
Costs and expenses 3,009 3,274 3,290 4,001 13,574
------ ------ ------ ------- -------
Income before income taxes,
equity income and minorities' interests 262 310 346 596 1,514
Income taxes 104 121 136 234 595
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 131 167 185 311 794
Discontinued operations (2) 1 1 - -
------ ------ ------ ------- -------
Net income $ 129 $ 168 $ 186 $ 311 $ 794
====== ====== ====== ======= =======
Primary earnings (loss) per share
Continuing operations $ 1.07 $ 1.30 $ 1.60 $ 2.76 $ 6.73
Discontinued operations (.02) .01 .01 - -
------ ------ ------ ------- -------
Primary earnings per share $ 1.05 $ 1.31 $ 1.61 $ 2.76 $ 6.73
====== ====== ====== ======= =======
Fully diluted earnings (loss) per share
Continuing operations $ 1.04 $ 1.27 $ 1.53 $ 2.60 $ 6.44
Discontinued operations (.01) .01 - - -
------ ------ ------ ------- -------
Fully diluted earnings per share $ 1.03 $ 1.28 $ 1.53 $ 2.60 $ 6.44
====== ====== ====== ======= =======
/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.
78
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 inter-
nal 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, 1995 and 1994, and the related
consolidated statements of income and cash flows for each of the years in the
three-year period ended December 31, 1995. 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 32,
41, 46, and 54-77 present fairly, in all material respects, the financial
position of Xerox Corporation and consolidated subsidiaries as of December 31,
1995 and 1994, and the results of their operations and their cash flows for each
of the years in the three-year period ended December 31, 1995, in conformity
with generally accepted accounting principles.
/s/ KPMG PEAT MARWICK LLP
KPMG PEAT MARWICK LLP
Stamford, Connecticut
January 24, 1996
79
Ten Years In Review
(Dollars in millions, except
per-share data) 1995 1994 1993 1992 1991
Per-Share Data
Earnings (loss) from continuing
operations
Primary $ 10.20 $ 6.73 $ (2.50) $ 5.21 $ 3.72
Fully diluted 9.63 6.44 (2.50) 5.21 3.69
Dividends declared 3.00 3.00 3.00 3.00 3.00
Operations
Revenues $16,611 $15,088 $14,229 $14,298 $ 13,438
Research and development expenses 951 895 883 922 890
Income (loss) from continuing
operations 1,174 794 (193) 562 436
Net income (loss) (472) 794 (126) (1,020) 454
Financial Position
Accounts and finance
receivables, net $12,369 $11,759 $10,565 $10,250 $ 8,952
Inventories 2,646 2,294 2,162 2,257 2,091
Land, buildings and equipment,
net 2,092 2,108 2,219 2,150 1,950
Investment in discontinued
operations 4,810 7,904 8,841 8,652 9,164
Total assets 25,969 27,278 26,999 25,792 24,342
Consolidated capitalization
Short-term debt 3,265 3,159 2,698 2,533 2,038
Long-term debt 8,148 7,355 7,386 8,105 7,825
Total debt 11,413 10,514 10,084 10,638 9,863
Deferred ESOP benefits (547) (596) (641) (681) (720)
Minorities' interests in
equity of subsidiaries 745 1,021 844 885 818
Preferred stock 763 832 1,066 1,072 1,078
Common shareholders' equity 3,878 4,177 3,972 3,875 5,140
Total capitalization 16,252 15,948 15,325 15,789 16,179
Selected Data and Ratios
Common shareholders of record at
year-end 54,262 56,414 65,820 68,877 71,213
Book value per common share/1/ $ 35.48 $ 38.86 $ 37.69 $ 40.19 $ 54.43
Year-end common share market
price $137.00 $ 99.00 $ 88.13 $ 79.25 $ 68.50
Employees at year-end 85,200 87,600 97,000 99,300 100,900
Working capital $ 2,834 $ 2,411 $ 2,357 $ 2,578 $ 2,282
Current ratio 1.4 1.4 1.4 1.5 1.5
Additions to land, buildings and
equipment $ 438 $ 389 $ 470 $ 582 $ 467
Depreciation on land, buildings
and equipment $ 376 $ 446 $ 437 $ 418 $ 397
* Data that conforms with the 1995 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.
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Ten Years In Review
(Dollars in millions, except
per-share data) 1990 1989 1988 1987 1986
Per-Share Data
Earnings (loss) from continuing
operations
Primary $ 5.44 $ 4.39 $ 1.13 $ 3.06 $ 2.73
Fully diluted 5.21 4.36 1.13 3.05 2.73
Dividends declared 3.00 3.00 3.00 3.00 3.00
Operations
Revenues $13,210 $12,095 $ 11,354 $10,537 $ 9,493
Research and development expenses 848 809 794 722 650
Income (loss) from continuing
operations 599 488 148 353 316
Net income (loss) 243 704 388 578 465
Financial Position
Accounts and finance
receivables, net $ 8,016 $ 7,272 $ 6,109 $ 4,948 $ 3,887
Inventories 2,148 2,413 2,558 2,286 2,459
Land, buildings and equipment,
net 1,851 1,781 1,803 1,639 1,491
Investment in discontinued
operations 9,695 * * * *
Total assets 24,116 * * * *
Consolidated capitalization
Short-term debt 1,828 1,482 1,174 * *
Long-term debt 8,726 9,247 6,675 * *
Total debt 10,554 10,729 7,849 5,771 4,343
Deferred ESOP benefits (756) (785) - - -
Minorities' interests in
equity of subsidiaries 832 715 806 655 565
Preferred stock 1,081 1,081 296 442 442
Common shareholders' equity 5,051 5,035 5,371 5,105 4,687
Total capitalization 16,762 16,775 14,322 11,973 10,037
Selected Data and Ratios
Common shareholders of record at
year-end 74,994 78,876 84,864 86,388 90,437
Book value per common share/1/ $ 53.73 $ 53.59 $ 52.22 $ 51.00 $ 48.00
Year-end common share market
price $ 35.50 $ 57.25 $ 58.38 $ 56.63 $ 60.00
Employees at year-end 99,000 99,000 100,000 99,200 100,400
Working capital $ 2,537 * * * *
Current ratio 1.6 * * * *
Additions to land, buildings and
equipment $ 405 $ 390 $ 418 $ 347 $ 328
Depreciation on land, buildings
and equipment $ 372 $ 370 $ 369 $ 320 $ 283
* Data that conforms with the 1995 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.
Dividends And Stock Prices
Consecutive Dividends Paid To Shareholders
During 1995, dividends paid to the Company's common stock shareholders totaled
$3.00 per share, unchanged from 1994 and 1993. Xerox has declared dividends to
its shareholders for 66 consecutive years and has paid consecutive quarterly
dividends since 1948.
The Company's Board of Directors, at a special meeting held January 23, 1996,
declared dividends on Xerox common stock at an increased rate of $.87 per share,
a 16 percent increase from the prior quarterly rate of $.75 per share. At its
February 5, 1996 meeting, the Board declared dividends on the Company's two
issues of preferred stock, unchanged from previous quarterly payments. 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. All of these dividends are payable April 1 to shareholders of
record March 1.
At its January 23 meeting, the Board of Directors also approved a three-for-
one stock split and an increase in the authorized number of common shares to
1.05 billion from 350 million, subject to shareholder approval at the May 16,
1996 Annual Meeting of Shareholders. If approved by the shareholders, the
effective date of the split will be shortly after the Annual Meeting and the
annualized dividend on each share of stock will then be $1.16.
On April 1, 1996, the Company will redeem all outstanding shares of the
$3.6875 Ten-Year Sinking Fund Preferred stock at a price of $50. Dividends on
the stock will cease to accrue on April 1. Notices of redemption were mailed to
holders of the stock on February 26, 1996.
XEROX COMMON STOCK PRICES AND DIVIDENDS
New York Stock Exchange First Second Third Fourth
Composite Prices Quarter Quarter Quarter Quarter
- --------------------------------------------------------------------------
1995 High $120 1/2 $125 7/8 $134 3/4 $144 5/8
Low 96 1/2 109 3/4 109 3/4 126
Dividends Paid .75 .75 .75 .75
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
- --------------------------------------------------------------------------
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
- -------------------------------------------------------------------------
1995 High $ 54 1/2 $ 54 $ 54 $ 56
Low 49 49 49 1/2 50
Dividends Paid .921875 .921875 .921875 .921875
1994 High $ 54 $ 55 1/2 $ 55 $ 54
Low 50 1/2 50 1/2 50 50
Dividends Paid .921875 .921875 .921875 .921875
- -------------------------------------------------------------------------
Stock Listed And Traded
Xerox common stock (XRX) is listed on the New York Stock Exchange and the
Chicago Stock Exchange. It is also traded on the Boston, Cincinnati, Pacific
Coast and Philadelphia exchanges and in London, Basel, Berne, Geneva, Lausanne
and Zurich.
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